WORLD BANK REIMBURSABLE TECHNICAL ASSISTANCE. Egyptian National Postal Organization

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized WORLD BANK REIMBURSABLE TECHNICAL ASSISTANCE Egyptian National Postal Organization POSTAL FINANCIAL SERVICES AND ACCESS TO FINANCE Public Disclosure Authorized FINAL REPORT August 2007 WORLD BANK 1

2 Foreword This Note is being delivered pursuant to the agreement (Agreement) between the Ministry of Communications and Information Technology of the Arab Republic of Egypt (MCIT) and the World Bank (Bank) for the provision by the Bank of reimbursable technical assistance (RTA) to MCIT and certain of its affiliates. One of those affiliates is the Egyptian National Postal Organization (ENPO). The Agreement was signed in June

3 Postal Financial Services and Access to Finance This Note aims at providing Egypt Post with a strategic framework to develop its postal financial services in the wider context of the Government s sector policy relative to improving access to finance and financial inclusion. Introduction 1. Overview of postal financial services 1.1. Legal, regulatory, and institutional background 1.2. Current offering of services 1.3. Retail network and computerization / interconnection 1.4. Revenues generated by the postal financial 2. Review of the Government's policy regarding the financial sector, and the opportunities for ENPO 2.1. Access to finance by households 2.2. Access to finance by microenterprises 2.3. The payments system 2.4. Other opportunities 3. A SWOT analysis of Egypt Post s postal financial services 3.1. SWOT 3.2. First conclusions 4. International benchmark and success stories 4.1. Postal financial services and financial inclusion 4.2. Brazil, India, China, Namibia, Sri Lanka 5. Strategic development: options Annexes Bibliography 3

4 Executive Summary ENPO is an organization employing 48,000 staff and operating a network of more than 9,000 access points (of which 3,500 post offices, 6,500 agencies, of which 1,500 are currently active). A commercial entity with management autonomy, ENPO is primarily a provider of basic financial services. Other services are mail (regular and express), parcels and Government services. Postal financial services, with three main business lines (savings, payments and giro services) and 15 million savings accounts, generate around 50% to 60% of ENPO s total revenue, and occupy an estimated 15% of ENPO s staff. Although available accounting and financial information are limited, it seems that postal financial services are operated at a profit. A remarkable feature of the postal financial service is its popularity and spread across a large part of low-income households. In addition, postal financial services accounts and deposits have grown at a fast pace over the past few years. Between 2003 and 2005 according to ENPO, the number of postal savings accounts increased by 22%, while deposits surged by 43%, and revenues (interest and fees) increased by 50%. According to the Central Bank, postal savings deposits increased by 325% between 2000 and 2006, while total domestic savings increased only by 120% (Table 1). Table 1: Savings trends in Egypt, (Source: Central Bank) %total %total %total %total %total %total %total Savings with the banking system % % % % % % % n/n-1 % 12.6% 16.2% 17.9% 12.7% 13.1% 11.6% Net sales of investment certificates % % % % % % % 12.7% 11.5% 12.7% 9.0% -2.8% 8.9% Post office savings deposits % % % % % % % 28.7% 29.1% 28.7% 24.6% 25.0% 28.0% TOTAL % 16.1% 17.7% 12.9% 11.7% 12.5% At a time when the Government put a priority in increasing access to finance, the potential for further development of postal financial services seems significant given the limited access of Egyptian households to basic financial services, not to mention access of small and medium enterprises to those services. The banking sector is at the verge of major changes with the foreseen development of the contractual savings, insurance, funds management and mortgage markets, as well as the deepening of the capital markets. In order to seize these opportunities, a few prerequisite have been identified. While the legal and regulatory framework (applying to ENPO) enables more than restricts ENPO in the development of basic financial services, there might be adjustments needed to insure level-playing field competition with other players in the market. ENPO will also need to strengthen its capacity, both in terms of human resources, information systems and equipment, to allow for successful product diversification and a migration to card-based services. The institutional set-up will depend on the strategic approach. International benchmark shows that the creation of a separate postbank, as a subsidiary of the Post and/or with private sector equity participation, is a common trend. Such a scenario is predominant 4

5 when the intention is to expand activities beyond the traditional scope of savings collection and money transfers, and move towards credit activities. A distinct postbank would fall under the banking regulation rules. Alternatively postal financial service can remain a business unit within the Post, and grow through a strategic partnerships with one or a few banking, financial or retail institutions. The Post then becomes a platform of service delivery. For ENPO which is currently in a transition phase from an administration-type of organization, moving towards a corporate-type of organization, the strategic option will play as an accelerator of change (in case the Government decides for a drastic move towards bancarization) or as a consolidator of incremental reform (in case the Government opts for a progressive approach, potentially using alternative approach to grab the business opportunities of growth, but likely avoiding social tensions within the organization). In any case, moving forward the postal financial services agenda will call for (i) a review of the legal, regulatory and institutional set-up, (ii) building capacity in the network and assessing the return on investments, (iii) rapidly identifying the postal financial services as a business unit within the organization and assess its contribution to profit, as well as (iv) getting a better understanding of the cost structure so as to enable ENPO to be in a strong position during negotiations of service level agreement. 5

6 1. Overview of postal financial services This section covers the legal, regulatory, and institutional background of the postal financial services, a set of texts that are relatively old (1970 and 1982) but considered as liberal by the Authorities. Then this section provides a rapid description of the postal financial services (postal savings, current accounts / giro accounts, payments, international money transfers), followed by a description of the retail network and its state of automation and interconnexion. The last section deals with an analysis of the revenues generated by the postal financial services Legal, regulatory, and institutional background The main features pertaining to postal financial services are laid in the law 16/1970 on postal system: State guarantee on current accounts of the postal cheques services (art.14) and of savings accounts (art. 17). Specific disposition relative to the Investment Bank (art.20) Mail and correspondence relative to the savings activities are exempted of stamps and fees (art.21) 1 Fees for issuing certificates, duplicates, photocopies and cashing are capped at LE 5 (art.22) Revenues from the savings activities are to be separated from the revenues generated by the postal services in ENPO s accounts (art.27) Those features are completed by the ones laid in law 19/1982 relative to the establishment of ENPO: Some tax exemptions (art.9) Tariffs are submitted by the board of directors for approval by the Minister of Communication, and in case the latter sets them below ENPO s proposal, the Government has to compensate for the difference (art.10) ENPO can establish joint-stock companies, including partnerships (art.15) Investing the savings funds within the framework of the investment and economic plan of the Government (art. 16.3) Following the rules of unified accounting system (art.25.3) The institutional set-up of ENPO is set in law 19/1982, as well as its statute. The organizational chart, attached in Annex 2, is a work in progress. In the current chart, the postal financial services are handled by different department: At the operational level, the department for financial portfolio and investment affairs is in charge of operating the financial services and managing the postal savings assets, in connection with the department of postal areas affairs which is running the network of post offices and agencies At the strategic level, the department for strategic planning is identifying opportunities and advising on strategic development objectives The department for economic affairs and business development, formulates 1 Most postal organizations ceased to allow transport and distribution of postal financial services-related mail for free, in an effort to track all operational costs as close to reality as possible. 6

7 business strategies and assesses new market opportunities for each business activity and each service, conducts a complete financial analysis for each service, district and office, and works closely with the department of marketing and customer relations to run market studies and develop new products and services to better fit the evolving demand At the follow up and feed back level, the department of service development monitors that the life cycle of each service is up and running, and maintained. Overall this framework is considered more enabling than restrictive by ENPO. However, the State guarantee on postal savings, maintained after January 2006 despite the fact that postal savings are no more channeled towards NIB, may raise a potential issue of level playing competition with the other commercial banks which do not benefit of such a protective safety net. Equally tax exemptions may be questioned by competitors if they benefit specifically ENPO Current offering of services The main services offered at the postal counter are the savings accounts, giro accounts (including payments and pensions), and in a lesser extent, remittances. 2 Postal savings The postal savings fund serves 15 million savings account clients in 2006 (up from 6 million in 1997), about 30% of the adult population. It is the only formal institution in Egypt offering a savings product to small savers, with a low minimum deposit. The initial deposit requirement is as low as EGP 10. By contrast, banks require a minimum of EGP 1,000; and several banks require EGP 10,000 or more and proof of regular income. On the other hand, the Postal Savings Fund limits balances to EGP 300,000 (tax exemption purpose). According to the market analysis run by Logic for ENPO, 35% of ENPO s savings books holders live in the Delta region and 15% in the Upper Egypt (where there is limited or no alternative formal channel of savings mobilization. The rest is divided between Cairo (39%) and Alexandria (10%). More than 80% of the holders belong to the lowest income brackets. About 65% of the accounts carry a deposit of less than LE 4,000. Savings deposits show continued, stable growth (Table 2 and 3) despite being regarded as an antiquated service and having no product differentiation or market-oriented management. Number of accounts increased by 9% in 2004, and 12% in 2005, while deposits increased by an annual average of 24% over the period, as well as interest and fees. Table 2: Post Office Savings Deposits, (Source: Central Bank) MnsLE Postal savings 10,670 13,727 17,720 22,800 28,404 35,506 45,

8 Table 3: Postal savings ( ) (Source: ENPO) Accounts Deposits (MnsLE) Interest (MnsLE) Fees (MnsLE) ,000 22,963 2, ,000 28,493 2, Postal savings activities generate 50 to 70% of the revenues of the Egypt Post. 13,400 35,508 3, Funds are channeled into the National Investment Bank (NIB) 3. In 2006, a Government decision allowed ENPO to manage directly new savings (the stock of deposits remains with NIB) 4, but this was reverted in 2007 to the original NIB s scheme. Overall postal financial services are operated with limited management and information systems, and no clearly defined marketing and management targets. Pilot projects are underway to provide computerized services linked with cashless payment instruments (smart cards, ATMs, EFT, POS). Payments and Current accounts Postal payments are a traditional service provided by ENPO. The range of payments services extends from postal money orders to postal cheque and giro services to modern payment instruments (credit and debit bank cards, and credit and debit accounts on a pilot basis). The volume of ordinary domestic postal money orders is limited and decreasing, with small average amounts (90% of domestic transfers are below LE 1,000, and 94% of customers spend less than LE 500 per year on money transfers 5 ). ENPO processes about 40 million disbursements for pensions 6 and social security. ENPO distributes about 70% of total pensions; the two other channels are Naser Bank and the Pension Department. The bulk of these disbursements is paid out in cash at post offices, a small part into postal savings accounts, and another part into newly introduced payment accounts (with ATM card). ENPO also processes more than 10 million payments for utility bills, subscriptions, etc. This volume is close to the volume of payments (9.9 million cheques) processed by the banking sector in The postal cheque clearing house in Cairo was computerized in 2002, but the other four or five clearing houses clear cheques manually (paper-based). In this context, the small but efficient postal giro service appears to be valuable. It maintains nearly 10,000 accounts for public sector entities (e.g., municipalities, hospitals, utilities) and settled about 60,000 (high-value) giro transfers in Settlement of these payments takes NIB is a fund under the Ministry of the Economy that finances public infrastructure and social security Asset management 4 Part of these assets was invested in the equity bought by ENPO in the third mobile operator, Etissalat. 5 Logic study, In the Logic study, 34% of pensions are paid to beneficiaries in the Delta region, 29% in Cairo, 24% in Upper Egypt, and 13% in Alexandria. 7 Aggregate value of LE 267 billion, and average value of LE 27,000.S 8

9 days. This differs from cheque payments that may take several days or weeks depending on the banks and clearinghouses, and the distances involved. Theoretically, it is possible to transfer money from postal giro to bank accounts and vice versa. In view of the plans to introduce more advanced payments services, links between ENPO and the banking sector will have to be established. The joint venture Giro-Nil which uses Banque Misr and CIB to process utility bills is a step in this direction. It aims at providing a nationwide inter-bank infrastructure, through which bill processing, salary and pension processing can be handled on a fully automated basis, without involving any cash payments. 8 After a slow preparation process, Giro-Nil is said to be ready for roll-out in the next few weeks. International money transfers Through its postal savings passbooks and bilateral agreements with the postal administrations in the Middle East, ENPO used to provide a handy remittance product for the large group of Egyptian workers in the Middle East. The remittance product exposed to a variety of operational, currency exchange risk, and regulatory risks disappeared and no substitutes have been engineered. ENPO entered an agreement with Western Union, but it is difficult to assess what this partnership is bringing to ENPO s customers. With nearly 5 million Egyptians living abroad and the increasing size of the remittance flow (USD 5 billion in 2006, Table 4), international money transfers are a key, short-term opportunity for ENPO to improve and expand its financial services. ENPO's challenge will not be a stand-alone product, like Western Union, but a product whereby remittances can be captured in postal savings accounts, and /or the new postal payment accounts linked to a debit card. Table 4: Remittances of Egyptians working abroad ( ) (Source: Central Bank) US$ Mns 2001/ / / / /06 Total remittances Of which USA Saudi A. 2, ,963 1, ,000 1, ,330 1, ,034 1, Overall the offering of financial services by ENPO is narrow, basic and simple. It does not look at cross-selling nor is market or customer-oriented. ENPO has benefited of a comfortable remuneration scheme for the postal savings, and was never challenged (by the market or by its Board) to initiate market-oriented actions with a view to increase market share and performance. What transpires from the Logic analysis is that customers use postal financial services for their accessibility (low transaction fees) and security, more than for the quality of service or adaptation to their specific needs. A cost analysis would need to be rapidly run so as to analyze current profitability of the three main lines of services, but also to adjust some tariffs vis-à-vis competition. 8 The World Bank consultant did not access strategic documents or business plan related to Giro Nil. 9

10 1.3. Retail network and computerization / interconnection The postal network consists of 3,500 post offices and 6,500 agencies, of which 1,500 are actually active. Currently 600 post offices are connected via dial-up, and a plan to connect the other 2,900 via dial-up ISDN (128 kbps) is underway. In the middle term, the interconnection will be upgraded progressively to increase the speed and reliability. Three main core applications are rolled out or planned to be so, on the infrastructure: (i) counter automation with integrated applications for postal financial services, Government services, postal services, and social services; (ii) ERP to allow an integration of the backoffice and front-office systems; (iii) a data center that will provide monitoring of the operating network. Those plans will be progressively implemented as ENPO staff will need to be trained, and the absorption capacity may be slow. While comparatively more extended than the commercial banks branches (see Table 9), the postal retail network is suffering from a lack of adequate information system and postal staff s ability to manage their customers portfolio in a market-oriented way is limited if not inexistent. It is critical that ENPO builds rapidly its customer basis and database. ENPO also needs to determine how these customers are spread amongst post offices, and which 20% of post offices generate 80% of revenues (according to the Pareto s principle which is a relevant benchmark for postal networks). In other words, if physical accessibility provides a significant advantage to ENPO today, this edge will not suffice when other competitive retail banks will look at extending their own access Revenues generated by the postal financial services The accounting standards applied by ENPO are those used for the public sector in Egypt, and defer from international accounting ones. It is difficult to access reliable and consistent accounting and financial information. The amounts and number discussed in this paragraph are mostly second-hand and were difficult to use for a thorough comparative analysis. 9 Comments based on data provided by ENPO, 2007 Total revenues by ENPO have increased substantially in the period of (Table 5), financial services being the main engine. In the past 5 years, revenues have increased by 15% to 20% on an annual average. During that period, revenues derived from postal financial services have increased annually by 25% on average, and they represented 63% of the total revenues in 2005, versus 47% in Revenues derived from postal services have increased annually by 7% on average, and they represented 33% of the total revenues in 2005, versus 48% in Alternative sources of information on financial and accounting result provided different numbers: Assessment of the current situation and recommendations for the modernization of the management systems of Egypt Post (2005, European Commission); Transformation Action Group TAG-), 2005; Integrated postal reform and development plan - Egypt, UPU,

11 Table 5: Revenue and net result (Source: ENPO, 2007) financial services 158,984, ,465, ,111, ,040, ,308,518 %growth 30.5% 33.6% 24.2% 17.8% %total revenue 46.7% 52.6% 58.6% 61.4% 62.9% postal services 162,577, ,296, ,978, ,695, ,706,253 %growth 1.7% 2.2% 12.3% 11.6% %total revenue 47.8% 41.9% 35.7% 33.8% 32.9% print shop 18,875,690 21,788,643 26,646,998 26,774,392 27,293,819 %growth 15.4% 22.3% 0.5% 1.9% %total revenue 5.5% 5.5% 5.6% 4.8% 4.2% total revenues 340,436, ,550, ,736, ,510, ,308, % 19.8% 18.6% 15.0% net result 44,505,378 64,788, ,275, ,500, ,938, % 57.9% 32.5% 10.7% The bulk of postal financial revenues (64%) are coming from interest earned on the savings deposits (Table 6). 44% of the revenues generated by postal services come from terminal dues (on which ENPO has no control), 22% from registered mail, and 15% on domestic standard mail. Overall, ENPO s revenues rely heavily on one product: the postal savings. Table 6: Revenue structure of postal financial services (Source: ENPO, 2007) 2005 financial services 405,308,518 savings accounts 64% 259,397,452 checking accounts 5% 20,265,426 postal checks 1% 4,053,085 internal transfers (gvt) 4% 16,212,341 external transfers 0% - money transfers 1% 4,053,085 pensions 13% 52,690,107 savings plans 12% 48,637,022 Another source of information (2005 TAG presentation), similar trends are shown (Table 7). Table 7: Revenue (Source: TAG, ENPO, 2005) 1999/ / / / /04 Postal services 129,966, ,761, ,479, ,577, ,523,561 N/N-1 % 4.5% 2.0% 0.8% 2.8% % total 44% 42% 37% 31% 27% Financial services 129,149, ,961, ,437, ,685, ,212,210 N/N-1 % 16.1% 29.7% 38.2% 22.9% % total 43% 46% 52% 59% 62% Express services 18,281,757 18,584,299 18,034,112 19,835,309 25,199,355 N/N-1 % 1.7% -3.0% 10.0% 27.0% % total 6% 6% 5% 4% 5% Retail services 2,524,455 2,455,573 2,613,060 1,673,227 3,001,441 N/N-1 % -2.7% 6.4% -36.0% 79.4% % total 1% 1% 1% 0% 1% Printing services 18,216,211 18,875,690 21,788,634 26,880,159 27,024,759 N/N-1 % 3.6% 15.4% 23.4% 0.5% % total 6% 6% 6% 6% 5% TOTAL 298,138, ,638, ,352, ,651, ,961, % 15.3% 21.7% 15.8% 11

12 In these data, although they differ from the previous table in absolute value, (i) the relative and growing importance of postal financial services revenues (vis-à-vis total revenues) and (ii) the strong average growth of those revenues are confirmed TAG report disaggregates the Financial Services in 10 itemized postal financial services (Table 8, p.11): Government services, pensions, postal cheques, internal transfers, external money transfers, instant money transfers, Treasury increase, pension cards, phone bill payments, and savings. Based on this data, Savings represent in average 70% of total Financial Services revenues, and 43% of total revenues in the year 2003/04. There are two other significant services contributing to the Financial Services revenues, but their contribution has no common relative importance compared to the Savings: Government services represent between 26% (in 1999/00) down to 16% (2003/04) of Financial Services revenues, and Pensions represent 12% in 2003/04. The TAG data account in a inconsistent way for the Pensions revenues: they are tacked only from year 2002/03, suggesting that payments of pensions by ENPO either started that year, or started to be remunerated by the Ministry of Finance that year, or that the accounting of revenues from Pensions payment started only that year. While representing only 1% of Financial Services revenues, Postal cheques have grown at a fast rate, and by 25% in the last year of the period under review (2003/04). The other items in the TAG report are difficult to interpret: some year, there is no revenue accounted for them, or their evolution is very erratic. When comparing the two sets of data (ENPO 2007, TAG 2005), total revenues show a strong increase of 22% in between the last year of the period under review by TAG, and the 2005 data provided by ENPO in February 2007: 2003/04 (TAG): Total revenues : LE 529 million Financial revenues : LE 330 million 2005/06 (ENPO) : Total revenues : LE 644 million Financial revenues : LE 405 million 12

13 Table 8: Financial Services revenues (source: TAG, ENPO, 2005) Financial services Government services 33,471,060 36,333,746 44,259,327 48,416,908 53,090,023 N/N-1 % 8.6% 21.8% 9.4% 9.7% % sub-total (without Savings) 87% 86% 86% 80% 52% % total 26% 24% 23% 18% 16% Pensions ,007,587 38,817,803 N/N-1 % % % sub-total (without Savings) 5% 38% % total 1% 12% Postal checks 1,352,739 1,753,804 2,056,804 2,068,784 2,590,453 N/N-1 % 29.6% 17.3% 0.6% 25.2% % sub-total (without Savings) 4% 4% 4% 3% 3% % total 1% 1% 1% 1% 1% Internal transfers 3,465,992 4,255,923 4,991,068 6,989,155 8,024,868 N/N-1 % 22.8% 17.3% 40.0% 14.8% % sub-total (without Savings) 9% 10% 10% 12% 8% % total 3% 3% 3% 3% 2% External money transfers 65,359 73,947 59,042 26,673 33,282 N/N-1 % 13.1% -20.2% -54.8% 24.8% % sub-total (without Savings) 0% 0% 0% 0% 0% % total 0% 0% 0% 0% 0% Instant money transfers ,100 4,065 N/N-1 % 93.6% % sub-total (without Savings) 0% 0% % total 0% 0% Treasury increase 2, N/N-1 % -66.9% -1.7% -21.3% -15.7% % sub-total (without Savings) 0% 0% 0% 0% 0% % total 0% 0% 0% 0% 0% Pension card 6,548 3, N/N-1 % -50.4% % sub-total (without Savings) 0% 0% 0% % total 0% 0% 0% Phone bill payments ,620 N/N-1 % % sub-total (without Savings) 0% % total 0% Sub-total 38,364,010 42,421,436 51,366,993 60,511, ,565,210 N/N-1 % 10.6% 21.1% 17.8% 69.5% % total 30% 28% 26% 23% 31% Savings 90,785, ,539, ,070, ,173, ,647,000 N/N-1 % 18.5% 33.0% 45.5% 9.4% % total 70% 72% 74% 77% 69% Total 129,149, ,961, ,437, ,685, ,212,210 An attempt to comment on profitability From a profitability perspective, postal financial services, and the postal savings in particular, seem very high. In this paragraph, we look first at interest rates, and then make an limited attempt of cost accounting analysis with a view to confirm the assumption that postal financial services, and postal savings in particular (which represents 70% of financial revenues) are very profitable. The Central Bank time serie for postal savings deposits shows rates that went from 11% (about 2 points above bank rates on 3-month deposit) in 2000 to 9.5% since March 2006 (3.5 points above bank rates). Comparing Savings deposits and revenues in Table 3 (p.6), gives average interest of 8% to 9%. According to the UPU report, the spread between interest received and paid to the savings account holder is 0.35%. While those numbers do not perfectly match, they give a sense that the margins earned on postal savings is less 13

14 than 1%, which may be considered relatively small. This contradicts a priori with the sense that postal savings are very profitable and provides for the main source of profitability of ENPO. From an operational and accounting standpoint, the analysis takes yet a different shape. Postal financial services are offered in the 3,500 post offices, of which 2,500 are in rural areas. International benchmarks tell us that a majority of operations done in the rural post offices are dedicated to postal financial services. According to ENPO information, salaries of staff working on the savings activities represent about LE 16 to 20 millions (to compare with LE 259 million revenues). Even by adding a part of the salary of staff working in the post office (reportedly 22,000 staff work in post office for a total cost of LE 307 million; we choose to allocate 5,000 in rural areas, that is a cost of LE 70 million) and salaries of 1,650 dedicated to postal financial services production center (LE 20 millions) 10 of them, a rapid calculation on salary expenses for staff dedicated to postal financial services confirms the impression of the strong profitability of this activity: LE 100 millions of staff costs, versus LE 259 millions of revenues. It is difficult to conclude this paragraph with a clear explanation of what makes postal savings apparently so profitable. For the rest of the financial services (representing 30% of financial revenues), an additional analysis would be required to compared the unit cost of operations and the tariffs charges to the customers. Overall, the relative importance of the postal financial service in ENPO is growing, but at 60% of total revenues, there is no critical dependency of ENPO on this line of business. More importantly, ENPO would need to understand more precisely the importance of the financial services contribution the Organization s profitability. This calls for more systematic data collection at each level of the operation value chain, together with some form of auditing and control of the data collected to insure consistency across the Organization as well as reliability. 10 Total salaries in 2005: LE 606 million, for 48,774 employees. Average salary: LE 12,380. Multiplied by 1,650 = LE 20 million. 14

15 2. Review of the Government's policy regarding the financial sector and the opportunities for ENPO The Government s reform program relative to the financial sector is laid out in the Financial Sector Reform Program for The Program aims at improving the soundness of the financial sector and fostering an enabling environment for the emergence of an efficient, increasingly private-led financial system that serves Egypt s development and growth objectives. The five pillars of the Program are: (i) reforming the banking sector, (ii) restructuring the insurance sector, (iii) deepening the capital markets, (iv) developing a well-functioning mortgage market, and (v) activating other financial institutions and services. The Program is underpinned by significant improvements to the legal, regulatory, and supervisory framework across the bank and non-bank financial institutions, with the aim of enhancing competition, improving financial intermediation, fostering more efficient mobilization of savings, and ensuring systemic soundness. An integral component of the strategy is to promote the quality of information and market discipline by upgrading financial institutions accounting, auditing, and reporting to international standards. This section of the note will focus on three main areas of specific relevance for ENPO within the framework of the Government s policy relative to the financial sector. This section will draw primarily on the World Bank report on Access to finance and economic growth in Egypt Access to finance by households The access to finance agenda cuts across pillars 1 and 5 of the Financial Sector Reform Program. The Government acknowledges that few Egyptian households use any kind of formal financial services. Most common is postal savings, roughly twice as prevalent as bank savings among the illiterate and those who can read and write but have no formal education (Table 9). Table 9: Household use of financial services by education level in Egypt (%) Formal savings Of which: - Deposits and savings account - Post Office Illiterate Can read and write 5.2 Primary school 6.3 Secondary school Source: Egyptian household survey of income and expenditure (2005) Above secondary University degree Graduate degree 22.2 The banking sector is not catering to the low income households. The commercial banks have so far targeted a limited segment of households for deposit mobilization and other financial services. Up to the 5 th section ( above secondary ) of the population as divided in the Household survey, ENPO is the first channel of financial inclusion. Yet these populations (from illiterate up to above secondary ) remain vastly outside of any form of formal savings scheme Access to finance and economic growth in Egypt, World Bank, draft

16 The bank branch network is relatively small 12 with a total of 2,900 branches in It is characterized by a high a concentration in urban areas, especially in Cairo and Alexandria; the number of branches per 100,000 people is about 80% higher for urban areas than rural. This compares with 3,500 post offices throughout the country, including 2,800 in the Upper Egypt and Delta regions, where commercial banks are virtually absent. Table 10: Number of access points for financial services (2000) Post offices Banks Insurers Stockbrokers Greater Cairo < 50 < 150 Alexandria < 30 < 50 Port Said < 20 < 10 Sinai < 20 < 10 Rural and remote areas 2,440 2, < 20 < 20 TOTAL 3, ,273 < 140 < 240 Source: Egyptian Banking Company for Technological Development (2000); ENPO, post offices in A key feature of the supply side of retail banking is the physical proximity of a bank or postal branch. Studies show that urban households located within 15mn of a bank branch are 14% more likely to have formal savings and investments, and rural households are 22% more likely to have access to financing, and those close to a postal branch are 10% more likely. Without having clearly analyzed the causal effect, those different elements can explain that postal savings comprise a substantially larger share of the financial assets if rural households than urban (26% versus 12%). With its extensive network and relatively high interest rates offered on the postal savings books, the comparative advantage of the postal financial services is significant. However this strength is likely to show a relative decreasing importance if other retail banks start scoping profitability to catering to middle- and low-income households, and if quality of postal service is not preserved or improved. Be ENPO staff more market oriented, the increase of market share should de a lowhanging fruit given the very low level of bancarization amongst the traditional customer basis of the Organization. Enlarging its customer basis and developing a customer database would then provide ENPO with a valuable marketing advantage to start cross-selling consumer finance and micro-credit products to households. As ENPO can not issue or grant loans directly, it would need to partner with a microfinance institution. Next section review in more details the supply side of the microfinance industry in Egypt, and provides for some general directions as to what next steps could be considered for ENPO. 12 Egypt has fewer bank branches and automatic teller machines (ATMs) per capita than other countries in the region and other countries with similar per capita income. 16

17 2.2. Access to finance by microenterprises While no formal aggregate estimates are available, it is estimated that the outreach of the microfinance industry, which includes both retail consumer finance and micro credit loans (corporate finance), in Egypt covers only about 10% of potential borrowers. 13 Microfinance services aim at low income groups operating small-scale incomegeneration activities and businesses. The commercial banks often perceive them as unbankable, due to their lack of collateral, small loan sizes, and low potential for repayment. This forces many microentrepreneurs to resort to borrowing from moneylenders at exorbitant interest rates, or participating in local rotating savings and credit circles, all informal financial services being often costly, risky, and inconvenient. Linkages between commercial banks and microfinance can take various forms (Box 1.) Box 1 In 2005, the Government adopted the National strategy for microfinance (2005) which addresses the legal, regulatory, and institutional barriers hindering microfinance activities. In particular, the strategy highlights the potential of public-private partnership between ENPO and private banks to distribute micro-loans to a wider scale of clients through the 3,600 branch offices in Egypt. 13 The microenterpreneurs population is estimated at 2 million in 2006, accounting for 94% of establishments. 17

18 Which partner? Four main banks are engaged in microfinance: National Bank for Development (NBD), Banque du Caire, Banque Misr, and Principal Bank for Development and Agricultural Credit (PBDAC). Those banks either extend credit using their own resources, or in managing loans on behalf of donors or on behalf of the Social Development Fund (SDF). Besides those four banks, NGOs are active in the sector: USAID, Swiss Fund, CIDA, Danida, GTZ, etc. Would ENPO decide to engage into the distribution of microloans, it may favors to work with the banking sector rather than the NGOs to ensure sustainability and long term development objectives on a level playing field environment. ENPO (or any one of its subsidiaries to be established to serve microfinance or retail consumer finance activities), would need to choose between one of the licensed banks on an exclusive basis,, or get into a private-public partnership with anyone of the banks developing a strategy for microfinance. What kind of partnership ENPO is likely to opt for a distribution function (versus a lending function.) and will then have to negotiate a partnership, on an exclusive or on a non-exclusive basis, with one or several banks. Alternatively ENPO can establish a joint stock (or several) with strategic partners, in the areas of microfinance (including retail consumer finance). The joint stock companies would make a strategic alliance or an exclusive agreement with one or more of the banks to grant credit to the customers, and would contract ENPO to act as a distribution channel to their activities The payments system Cash, cheques, and large-value interbank transfers are the basic means of making payments in Egypt, with cash the major instrument for individuals and cheques primarily used in commercial transactions as well as in some governmental payments. ENPO s role in the payment system for small amounts is major. ENPO processes about 40 million disbursements for pensions and social security, and an additional 10 million payments for utility bills, subscriptions, etc. This compares with the 10 million or so cheques processed by the banking sector in From a strategic standpoint, there are four key elements for the short-term of ENPO development: (i) the continuation of the modernization of its internal clearing house and the possibility to be directly linked the national cheque-clearing system 14, (ii) the rollingout of card based payment instruments especially for the government employees salaries and pensions and through linking all electronic governmental services to ENPO payment gateway 15, (iii) the rolling out of instant, domestic and foreign, remittance transfer using different electronic platforms to reduce the unit cost and give more access to the different 14 A feasibility study (covering the legal, regulatory, institutional prerequisites, and the cost-benefits) could be done. 15 In 2005, Egypt counted about 1,900 ATMs, 24,000 POS devices. In 2004, 750,000 credit cards and 2,1 million debit cards. 18

19 financial services, and (iv) promoting the Giro concept through the partnership with Misr and CIB under the Giro Nil initiative, for bill payments, remittances, salaries and direct debit Other opportunities A few areas of development need to be taken into consideration by the Government of Egypt. ENPO could play a role in the medium to long term in those realms of potential development, notably as a distributing platform: The promotion of capital market: strongly supported by the Governments in its financial sector reform program, the securities industry may well develop soon with strong Government support. ENPO could be a distribution platform to allow wider access of the Egyptian households to the capital market. Postal operators like La Poste, India Post or China Post have long been a channel of distribution for securities The contractual savings and investment industry also shows potential for growth in Egypt provided that the insurance sector continues its restructuring, funds management is professionalized, a local asset management industry is developed, and the pension reform is accelerated. Again, there are several international examples of postal operators who have been involved in the distribution schemes of contractual savings and investment instruments that answer best their customers needs. The mortgage finance market may also develop in the near future in Egypt. The prerequisites to this reform agenda are equally important: strengthening of the regulatory and institutional framework, streamlining of the property registration procedures, transforming of Egyptian Mortgage Refinance Company (EMRC) into a securitization company, and develop targeted housing subsidies. To help improve access to home ownership by lower-income households, the Government has in the past provided a range of interest-rate subsidies focused on delivering finished housing units mainly in new urban areas,. These programs have been moderately successful. The Government is currently formulating proposals for a more efficient and targeted social housing program. A pilot project with an upfront downpayment, cash-subsidy scheme managed by the Guarantee Subsidy Fund (GSF) may start soon. ENPO could gather more information on those various initiatives, and develop an institutional communication campaign where it would present itself as a key player for the multi-dimensional access to finance agenda led by the Government. In all those areas of potential growth, the legal and regulatory prerequisites for ENPO to play a role, whether as a direct distributor, or in a partnership, would be the first level of feasibility study. The insurance products could also be included in the offering of ENPO. Those products are typically classified between life insurance and non-life insurance (fire, home, health, vehicle, travel, etc.), the latter being hardly developed in Egypt at this moment. The 19

20 insurance sector in Egypt is concentrated between four large publicly owned companies 16, while new foreign entrants are experiencing a fast growth. The success of the new foreign entrants into the insurance sector is mainly driven by product innovation, mainly in investment-linked life products and efficient distribution (bancassurance), for which ENPO could be looked at as a strategic partner. The domestic and international remittance could also positively complete the product offering of ENPO. Remittance products such as money orders, electronic fund transfers, stored value cards, and mobile financial services are options that ENPO should explore systematically, including in the context of a strategic partnership. The foreign currency (as one stop shop) would complete the product portfolio and allow ENPO to cross-sell its products to an expanding customer basis. The foreign exchange, in its retail dimension, is a highly competitive segment though. ENPO s advantage would be its (physical) outreach. A number of opportunities exist for ENPO, which should opt for one or several based on a systematic SWOT analysis: market attractiveness (size and growth of market, demand, degree of competitive intensity, market concentration, technology changes, etc.) and relative strengths of ENPO in this context (access to customer base and reach, ability to leverage skills and brand, etc.) 16 Misr Insurance, Arab Contractors, El Chark Insurance 20

21 3. A SWOT analysis of Egypt Post s postal financial services In this section, a summary of the strengths, weaknesses, opportunities and threats, covered in Sections 1 and 2 of this Note, are presented in the table below SWOT Strengths Dense network of 9,000 access points (60% run through agencies) including in rural areas Large number of accounts, experience in mass payments Affordable services - low commissions and minimum deposits, accessible to all High volume of transactions: 40 million semi-cashless transactions per year (money orders, pensions, and electricity bills) (as compared to 12 million cheque payments transactions by the banks); operates an efficient nation-wide postal giro circuit for some 10,000 public entities Good reputation Gaining customers trust State guarantee and tax exemption on savings deposits Recently empowered with (limited) asset management and investment autonomy Financially profitable and no history of defaulting in payments to depositors Not subject to central bank reserve requirements Diversified customer segments Weaknesses Need for network and applications upgrade Poor service quality Large number of dormant accounts Lack of management flexibility, corporate culture (civil service culture) Narrow, fragmented range of products and services Poor accounting and cost allocation systems, high inefficiencies Regulatory environment unclear Lack of marketing, banking and technology skills Not connected to clearing houses Potential internal clashes between post and provider of postal financial services, because of conflicting missions Problems with overstaffing and low productivity Opportunities Retail payments, and micro- and consumption credit are undeveloped but show fast growth rate Diversification of products and services, such as credit transfers (salaries) to personal accounts or chip card technologies Utilize existing client database to cross sell new products In the short term, the postal network could capture much more of the international remittances market if modern marketing, ICT, and alliances are applied; this could also be the basis for new savings and payments products Synergies are possible when the postal network modernizes with implementation of ICT, Internet access, and a platform for e-government and e-commerce (fulfillment) Private sector banks are keen to expand their position in the growing retail market, through an alliance ENPO Private sector microfinance institutions need strengthening and could benefit from alliance or partnerships with ENPO Security and mortgage sectors in development, with opportunities for ENPO to come as a distribution partner Threats Postal reform strategy has not been determined; Government working on it Significant investment required to improve post office infrastructure, technology, security and staff capability Political interference and labour relations may affect process of reform Upfront costs and low rate of return on investment New competition in the horizon - retail banks starting to target middle- and lowincome households Interest rates on managed funds may be lower than the one once served by NIB Low spread by NIB 21

22 3.2. First conclusions The Post Office has 50% of market shares in terms of savings accounts, albeit dealing with only 7% of deposits, and handled 22 million payment transactions in 2002 (compared to 8 million by the banks). The continued growth in postal savings balances and, hence, interest margin income have made ENPO a profitable organization, in spite of its declining mail volumes and heavily regulated pricing. With fewer than three mail items per capita posted per year, Egypt's mail demand is low and, given the market condition, is unlikely to increase much in the medium to long-term. 17 Although there is a fairly stable outlook for a continued positive cash flow generated through growing postal savings and increasingly cost-efficient postal payments, the risks to which this revenue stream is exposed vary from volatility in the financial markets (interest rates, emerging competition, technology scams) and difficulties faced by ENPO in managing a growing asset; to the accelerated decline of postal mail volume. The risks are difficult to assess and to manage particularly because market and management information systems of ENPO are still under development. In parallel, the recognition of a growing demand for microfinance is leading policymakers to pay more attention to the financial inclusion agenda, while commercial banks and financial institutions at large start realizing the potential of catering to middle and low-income households. This opens a real opportunity for ENPO to allow access to its network, and position itself as a financial service partner to one or more of these banks and financial institutions. Elsewhere in the world, postal operators have constructed some partnerships with banks and insurance companies with more or less success. The next section is looking at those experiences and proposes a number of recommendations for ENPO. 17 There is limited bulk-mail market development (bank account statements, public utility bills, etc.) and, should demand ever evolve, postal services would be pitted against increasingly available alternative communications. Also, the prospects for mail volume growth from direct marketing and e-commerce are limited in the short to medium term. Demand for courier, express, parcel, and international mail is concentrated in the business sections of Cairo and Alexandria. These types of mail service have been formally opened to the private sector (e.g., UPS, DHL, FedEx, and TNT), and de facto liberalization has occurred through a large number of other private operators. 22

23 4. International benchmark and success stories The question of how best to use and develop postal networks for expanding access to financial services is an important question for policy makers not only Egypt, but also in many other countries Postal financial services and financial inclusion: a worldwide perspective Today, the majority of people in developing countries are excluded from access to basic financial services. The goal of promoting financial inclusion has moved higher up the policy agenda in many countries, supported by new evidence that increased access to financial services can promote faster economic growth and also reduce poverty and income inequality. 18 In many developing countries, postal networks offer several basic financial services, such as money transfers, savings accounts mobilization, and payments. Moreover, postal networks have widespread coverage even in rural areas which the formal financial sector usually does not directly reach. In sheer scale alone, there are almost twice as many post offices and postal agencies (500,000) as commercial bank branches (275,000) in the developing world. 19 However this postal infrastructure, a heavy sunk cost for its owner (usually the Government) that carries over heavy fixed recurrent cost (staff compensation), sometimes represents an important fiscal burden and is rarely profitable. Hence better leveraging the postal network may be a mean to two complementary objectives: to improve financial inclusion, and to improve postal infrastructure sustainability. Postal networks vary considerably by region. In addition to geographical penetration, the range and types of postal financial services offered also differ considerably by region, as well as the institutional and legal structure through which postal financial services are offered (Table 11 and Annex 1). Although they are offered through the postal network, postal financial services are not necessarily provided by the post office. In some cases, the postal bank and the post office are one legal entity; in others, the postal bank is a separate legal entity which may be either publicly or privately owned. In the latter case, the postal network provides the financial products of the bank on an agency basis, which may be exclusive or non-exclusive. While deposit taking is normally regulated by the central bank or a national financial regulator, postal deposit-taking functions are sometimes regulated by the postal ministry and therefore not subject to standard banking requirements. 18 Beck, Thorsten, Demirguc-Kunt, Asli and Levine, Ross E. (2004), "Finance, Inequality, and Poverty: Cross-Country Evidence" (June 2004). World Bank Policy Research Working Paper No Report and Discussion paper The role of postal networks in expanding access to financial services,

24 Table 11: Different institutional permutations for postal financial services Ownership of postal network (infrastructure) Public Private May be provided by the post office (e.g. India or Yemen) or by a Public separate entity, which may use other distribution channels (e.g. Romania, Sri Lanka, Uganda). Ownership of the postal financial services Private (Source: AccessFinance Newsletter, March 2006) Agency model may be exclusive to one provider or multiple (Brazil, UK, Malaysia). Not common in developing countries outside of eastern Europe. Japan Post planned in 2007 May be an agency model or may rely on other distribution as well. A rapid overview of postal financial services throughout the world allows points at some preliminary conclusions. 20 While there is no clear correlation between the institutional arrangements for the offering of postal financial services and their scale of outreach, separating the legal entity providing financial services (the postal bank) from the post office (the postal network) has been commonly implement in an effort to improve transparency, accountability and performance. While the postal bank continues to use the postal network for distributing its products as before, this separation calls for the appointment of distinct boards of directors and separate management and accounting functions for the postal bank and post office, which usually translates into improved professionalization and market orientation. The development and efficient delivery of financial services will also require specialized training of postal personnel at the management level, since most postal executives lack either the experience or qualifications to direct the transformation of the postal entity into a postal bank. In addition, the implementation of adequate accounting and data processing systems along with the electronic interconnecting of postal outlets are all prerequisites for the efficient management and accountability of the financial services system overall. Such a reform process may entail some front-end investments (to ensure adequate capacity in the postal bank) and financial support (to ensure that liquidity and solvency ratios are met). A detailed business plan should always be prepared to help the decision process. While country experience with postal financial services has differed in nature and outcome, some major lessons learned from successful postal finance programs include: In general, the offering of financial services and the operation of the postal network should be accomplished by separate legal entities, with the regulation and supervision of postal banks falling under the national bank regulator. Public postal banks should concentrate on developing and offering financial products which are not being offered by the private sector and avoid offering similar products to similar markets. 20 AccessFinance no.16 - Postal financial services and financial inclusion, D. Porteous, I. Huynh, February

25 To date, successful examples of granting retail credit through public postal networks are few in number. For this reason, it is better for the postal network to perform a payment collection function for other specialized credit providers, such as microfinance entities or banks. Most importantly, to use postal financial services effectively as a tool for greater financial access, policy makers must integrate the enhancement of postal financial services into the total project of postal reform. Postal networks are certainly not panaceas for addressing financial exclusion in developing countries but, if their role is carefully considered and well executed, they can play a significant role in promoting financial inclusion International experiences (Brazil, China, India) Brazil: an exclusive partnership between Correios and Bradesco, through a tender process. Banco Postal is a brand launched in 2002, through which the Brazilian Post Office (ECT) renders services as a correspondent bank in partnership with Bradesco. With Correios network of 5,400 full fledged post offices, 1,500 franchised and 5,300 remote/rural post offices, Banco Postal is present in more than 4,800 cities of Brazil, with 5,500 branches in 2006, and aims at serving the low income population, especially in 1,700 cities where there is no other financial institution. Reportedly 3 million of new accounts were created, and a third of the customers have taken out loans. The policy objective pursued by the Government was to improve access to finance to the 40 millions unbanked Brazilians. The legal and regulatory framework was hence adapted to create the correspondent banks, set under a lighter regulatory supervision framework of the Central Bank. Correios proceeded with a call for tender with three main criteria: access fee to the postal network, fee per transaction in the network, and interest rate carried by the bank accounts. Two private and one public banks made an offer, Bradesco was selected with an access fee negotiated at US$ 1,6 billion, for a contract that will terminate in A large investment in technology was prepared to upgrade the post office and allow them to operate on line (telecommunication, RISC servers, counter peripherals, software, training), for a total of US$60 million over a 2 year period. This allowed developing in parallel other services such as internet access, address database, digital certification, hybrid mail, and e-commerce services. The range of services covers checking account, savings account, pension payment, deposit, withdrawal, balance inquiry, credit cards, bill payments, credit, and overdraft. The monthly fee on the bank accounts is minimal (US$ 1), and the customer is offered 14 transactions free per month (4 balance inquiries, 4 withdrawals, 4 statements, 2 money transfers). The Banco Postal is a small entity with its headquarter in Brasilia, with 8 executives, 11 regional managers and 150 local managers (following the Bradesco s regional organization). 25

26 From Bradesco standpoint, the interest in partnering with Correios aimed at consolidating the basis of its customer s pyramid as illustrated in Fig. 1. Two main reasons have been identified in the progressive interest of commercial banks to target the unbanked : (i) the unbanked is not a population of higher risk, hence higher cost to manage, (ii) some of them may end up stepping up along the ladder and using the more traditional retail services (with higher margins for the bank). Fig. 1: Bradesco strategic interest in partnering with Correios Today the two partners have reached 18 million customers who previously had no access to finance. China: The creation of a full-fledge savings bank, wholly owned by the China Post, and under the supervision of the Central Bank On December 31 st last year, the Central Bank of the Republic of China (CBRC) approved the business commencement of the China Postal Savings Bank (CPSB). China Postal Group was hence allowed to establish the China Postal Savings Bank Co. Ltd. as its wholly-owned subsidiary. CBRC also approved the new bank s articles of association. The establishment of the postal savings bank is seen as a significant progress achieved in the China banking reform, and a milestone for the development of China s postal savings system. The new postal savings bank will operate on the basis of the existing postal system and network. Stringent internal controls and risk management system have been set up, together with an improved corporate governance structure, and practice market-oriented business management. The major business line for the new bank is to improve the financial services to urban and rural areas with its systematic advantages, focus on retail and fee-based activities. 26