How have Egyptian consumers and businesses managed to remain resilient amid soaring prices? The Egyptian consumer has shown great resilience under the pressures that accompanied the float of the EGP and high inflation. What has been driving this resilience and what patterns are we witnessing — and what concerns should be monitored?

We gathered key players in Egypt’s consumer finance sector during this year’s Enterprise Finance Forum — including Boston Consulting Group London Managing Director and Partner Michal Panowicz, MNT-Halan founder and CEO Mounir Nakhla, and Valu CEO Walid Hassouna — to discuss how players in the sector and Egyptian consumers are handling inflation and whether banks and non-banking financial institutions (NBFIs) are developing sustainable business models.

Setting the stage: This year has been a rather eventful one — from the 200 bps interest rate hike in February and the subsequent 600 bps hike in March, the Ras El Hekma agreement, to the float of the EGP. MNT-Halan started out the year with a strong performance in the first quarter, then saw a really slow second quarter, but 3Q was kinder to the market, with the firm seeing improved sales and installment collections, Nakhla said. Valu experienced a similar challenge after seeing tremendous growth in 2023.

How did that translate into customer spending? Customers became more conservative in their purchases after the Ras El Hekma agreement, knowing that even though products were available, interest rates were bound to decrease sooner or later, Hassouna said.

What about the global landscape at large? The state of global interest rate conditions push us to think about what regulators and the government can do to boost competitiveness and growth, Panowicz said. He pointed to the ability of NBFIs and independent players to innovate, expand financing access to customers, and anticipate risks to avoid negative impacts on the sector's credibility. Regulatory interventions tend to take a long-term view of shaping the sector rather than reacting to short-term fluctuations, he continued.

“In Egypt, people calculate the real cost of the loan. They understand how much they are paying in admin fees, in interest, and in everything else, and they actually compare the price of the product they are buying in cash or if they buy them through Valu or MNT-Halan,” Hassouna said. After years of relying on instant credit approval, players are now focusing on unique and innovative products, relying on analysis of consumer behavior to meet needs, and ensuring a seamless experience amid competition from 42 companies.

MNT-Halan has a different approach, it focuses on providing a comprehensive solution for consumers by offering one service after another, working to satisfy the needs of different consumer profiles, Nakhla said. The company’s entry into money market funds also represents a significant development, as it helps shift overall consumer behavior, Nakhla continued, saying that this — along with incorporating entertainment features on the app — will be a game-changer, as it will enable the company to develop a social network, Nakhla said. “The environment we operate in is full of challenges and we have to be smart. We need to be fast and as data-driven as possible.”.

The impact of rising rates and the devaluation: What happened on the ground was that liquidity was sucked from the market and when the exchange rate stabilized at EGP 60 to the USD, traders and retailers immediately wanted to liquidate inventory and goods they had purchased at exchange rates of EGP 65-74, Nakhla said. Meanwhile, consumers saw the real value of these goods at around EGP 50 to the USD, which created some market stagnation during 2Q 2024, Nakhla added.

But a rebound quickly followed: Despite a generally inflationary environment, business activity resumed, and the economy rebounded, with retailers being able to clear their stock, gain more cash flow, and pay off their installments, and consumers also became more comfortable with carrying out their repayments, he added. The volume of non-performing loans (NPLs) increased but remained at a non-alarming level.

So, what’s the real concern in terms of default rates? Credit losses are at an acceptable level as long as the business still looks exciting and very attractive, according to Nakhla. In lending, you will face both good and bad credit, so NPLs shouldn’t be the main factor to focus on in your business at any given moment, Hassouna said.

Managing NPLs in the long term involves managing every step of the lending value chain and then deploying modern tools, according to Panowicz, who said that this will rely on two main elements — responsibly injecting more money and relying on machine learning to better and more dynamically identify customers when onboarding them.

If the macroeconomic picture returns to normal, most players in the sector will be able to make additional profits, as they will be able to reduce or reverse some of their provisions, Hassouna concluded. Nakhla agreed, noting that companies are already looking at risk-adjusted returns, and balancing risks across the product mix is essential to reaching that point. “I think we just need to be more stringent in our scoring models and acceptance rates. Credit is quite simple — if you get the right people through the door, the people are more likely to pay,” Nakhla said, stressing the need to evaluate two things: customers’ ability to pay and willingness to pay.

Let’s talk expansion: Expanding in such an environment requires having the right mix of products, as some products are inherently riskier. If a company is giving clients cash loans or credit to buy a mobile phone that they resell for cash, that’s a higher-risk product — but if you have a diverse list of products, you can hedge against the risks, Hassouna said. He added that clients receiving cash loans for electronics account for only 30% of Valu’s business, compared to 85% three years ago. “As we grow our appetite for higher-risk customers and our approval rates move up, what happens is that our turn-in-applications go up in a way that is not proportional to our risk appetite, but in fact, three or four times higher. So, you end up gaining more low-risk customers, despite the short-term risk," he said.

What needs to change in leasing? Leasing services need to be offered to consumers, rather than be limited to SMEs, Hassouna said, adding that opening the market up to consumers would provide more products that are already in demand — competition is currently limited between leasing companies and corporate banks. “Leasing is still doing very well… but there are issues with funding and not catering for consumers. Solve that, and leasing services will do very well in the market,” he concluded.

And on the regulatory front: While the CBE has tightened regulations on banks’ financing of leasing companies to limit the risks associated with the activity — setting a cap on the total credit facilities and investments in securitization portfolios for leasing companies at 5% of the bank’s total loan and credit facilities portfolio — the Financial Regulatory Authority has taken on the burden of market growth by focusing as much as possible on crowdfunding or attempting to amend current regulations for money market funds and fixed-income funds to enable them to acquire unrated bonds.

Correction: We originally incorrectly attributed to Walid Hassouna's comments about leasing to Mounir Nakhla. The story has been amended.