• Nadim Samna

By expanding distribution, banks will grasp the potential of one of the 10 fastest-growing markets

Updated: Nov 2, 2019

Egypt offers an enormous potential for banking services favored by 1) a large adult population reaching 60 Mn people, with less than 20% declare having a bank account, 2) encouraging GDP growth predictions of 5% for 2018 by the World Bank and 3) a set of deep ongoing reforms orchestrated by the Central Bank of Egypt. These are the main reasons for Egypt being one the fastest growing markets for banking services.

According to the World Bank, only 14.6% of Adult Egyptians declared having an account in a financial institution. Only 25% of bank accounts are considered active.

When looking at the growth potential of the Egyptian market, one realizes that the 41 banks operating in Egypt are competing for a very small portion of the banking pie and ignoring the largest part of it.

Banking branches and ATMs, backed by digital channels should allow banks to grab the growth potential of the Egyptian market

While digital is certainly key to developing the distribution of banking services at low operational costs, it remains more convenient for low value added operations. Physical branches are certainly more effective in reaching and educating unbanked customers for using financial services. Branches are also vital to developing banking revenues from existing customers.

We, at Stratexis, believe that customer relationship management is the main lever to develop the banking industry, for both mature and emerging markets. Studies show that banks’ customers need face to face relationships to build trust with their bank, especially for high value added operations such as mortgages requests or large deposits. Indeed, after more than 10 years of activity, pure digital banks are still not able to become the primary banks for most of their clients because they cannot offer face to face advices and relationships.

“Physical branches remain an important pillar of the banking distribution strategy”

Developing digital channels is crucial to controlling operational costs. Internet and mobile banking are much more convenient to complete low value added banking operations at lower cost. Setting an ambitious target in terms of % of banking operations through digital channels will free work hours for teams in branches to focus on acquiring new customers and concentrate on high value added operations.

Egypt represents a distinctive banking market

Each country has its own banking landscape due to differences in regulations, demographics, average income, political regime, etc…. Egypt is truly unique as few countries present similar characteristics. This is reflected by banks’ distribution strategy, revealed by the standard models used for branches opened in Egypt. The distribution model has an important impact on customers’ experience. To provide some references, major differences can be described by comparing Egypt to other markets.

For example, a European visitor discovering Egypt will probably be surprised by the crowded banks' branches and subsequent long waiting hours to process cash operations, extremely rare in Europe. He/She will also notice an important number of banking brands unevenly distributed between Cairo and other cities. The customer experience of this visitor would be rather unpleasant, particularly in branches where a glass is separating clients from tellers.

On the other hand, a businessman used to African markets will consider crowded branches and cash operations very common. One will, however, be surprised by such spacious branches where he/she can find much more employees than he/she is used to. African banking distribution focuses on reaching a maximum geographical coverage, consequently small 3-to-4-employee banking branches are quite common.

Banks in Egypt need to increase their distribution channels

Banking branches and ATMs are closely linked, they form the physical structure of banking distribution networks. Thus, the number of branches and ATMs for 100.00 adults are used as the main distribution indicators. We shall use these 2 indicators to compare Egypt to other banking markets, measuring distribution needs for Egypt and identifying development strategies of other markets.

When compared to mature markets in Europe, we find that Egypt has 8 times less branches and 7 times less ATMs than EU countries, even though banks in Europe already have been closing branches after achieving full penetration and reaching almost a 100% banking rate. The Netherlands, for example, had around 3998 branches in 2002 and only 2040 by the end of 2015.

Goldman Sachs’ Next11 markets present similar characteristics as Egypt. They are composed of emerging markets – Except for South Korea - with large populations and interesting GDP growth perspectives.

The first finding is that banks, in the majority of Next11 markets, rely on ATMs more than branches to develop their distribution strategy. They probably anticipated closing branches once they achieved penetration as banks did in Europe.

The second finding is that banks in Egypt are not the best in class in terms of distribution density. Only Vietnam has slightly lower branch density than Egypt but 75% higher density for ATMs. Only Bangladesh and Pakistan have lower ATM densities than Egypt. This shows how much banks in Egypt are lagging behind in terms of investments in their distribution network.

Now let’s compare Egypt to another North African emerging economy: Morocco. According to the World Bank, Morocco was already at a 39% banking rate in 2011 while Egypt was at 15% in 2014. This gap, which Egyptian financial regulators dream to bridge, could be mainly explained by the number of physical banks’ branches in each country. Indeed, the largest Moroccan bank AttijariWafa (which just expanded into Egypt), has 3,194 branches in Morocco alone. National Bank of Egypt, with almost the same market share in Egypt as AttijariWafa has in Morocco, has less than 400 branches in Egypt, or 8 times less branches, for two and half times the population.

Banks in Egypt have been developing ATMs more than local branches

Given that Egyptian banks need to accelerate their branch openings and to heavily increase their investments in distribution, a first step would be to make an assessment of the banking distribution in recent years.

Between 2005 and 2015, the number of branches increased by 50%, while ATMs increased by more than 400%. Growth in branch openings was closely linked to GDP growth which was very dynamic until the financial crisis in 2008. Political unrest after 2011 put branch openings on hold until 2015. During the last 10 years, banks in Egypt seem to have favored in ATMs over branches, especially after 2011.

Several reasons explain why banks were so cautious in opening new branches

In addition to recent political events and subsequent economic slowdown, several technical reasons hindered investments in distribution networks. They are the result of the combination of 3 factors: Geographical, regulatory and internal.

First, we will cover geographical reasons. Greater Cairo and Alexandria are largely covered by banking branches. The problem mainly concerns smaller cities, especially in Upper Egypt, where long distances to the main branches (all located in Cairo) make supervision difficult and cash distribution and collection very expensive.

Banks need to collect bank notes from branches, count and transfer them to a Central Bank of Egypt (CBE) branch. To supply their branches, banks need to collect bank notes from the Central Bank. So, the distance between the nearest location of the CBE and surrounding branches highly impacts costs and risk. We easily predict that opening new central bank branches outside Cairo and Alexandria will encourage banks to open more regional branches. Cash operations would be cheaper and less risky because of shorter distances to cover.

Changes within banks operating in Egypt must be made to facilitate geographical expansion. For instance, finding talent outside of Cairo and Alexandria is challenging; this could be partly overcome by introducing regional mobility programs where employees can move to other cities in exchange of promotions and better benefits.

Of course, a regional distribution strategy must be aligned with a global strategy, which can be very tricky. The management team of Stratexis already advised several international banks on defining their distribution strategy and confirming alignment within a global strategy. One key indicator is the geographical concentration ratio, number of branches divided by the number of cities served. Stratexis compared the number of branches of banks operating in Egypt to their geographical concentration ratio. The results of this study will be presented in a standalone article to explain the 4 categories of a geographical distribution strategy.

Regarding regulatory reasons, we already mentioned opening CBE branches outside greater Cairo and Alexandria. Other reforms are also needed to boost development of branches . CBE should also reduce capital requirements to allow smaller branch models and streamline the validation process for each new branch.

"A mutual understanding between central and commercial banks would inevitably lead to a more efficient process"

Internally, banks should develop new models for distribution facilities that would favor geographical coverage and client acquisition. Each facility should have its own standard business case presenting revenues and cost projections based on targets in terms of deposits, loans, number of clients, number of cards, etc. These targets will be used to define objectives for all employees including the operational workforce. Giving commercial targets to tellers in terms of client acquisitions and product distribution, will boost commercial results. Increasing the functional versatility of employees will lead to better commercial results.

Once the facility is running, targets would be confirmed by automatic dashboards and regular monitoring. This kind of governance will require a learning curve that banks should be prepared to face before they become more efficient. Thanks to our business development department, Stratexis developed in-depth models and frameworks to accurately take network expansion decisions.

Other than branches and ATMs, it is important to expand distribution through partnerships with local businesses.

"In Africa, you can cash out your money transfer in almost any small shop, it is not possible in Egypt"

This strategy will reduce capital expenditures required to cover large zones. In addition to heavily relying on ATMs as the comparison with other countries illustrates as the right strategy, branch sizes and formats need to be adapted to fit into various locations. A secured commercial mall will require a branch with a large self-service area, whereas small towns in extended areas will require small banking hubs with a large itinerant workforce.

A dedicated department is required to streamline the complete process from looking for potential locations to monitoring all costs until the actual commercial launch. This will eventually lead to increasing annual volume of branches openings and accelerating the learning curve.

Physical and digital distribution go hand in hand

As distribution is a key development axis for all banks, it must be aligned with the defined strategy and adapted to the needs of each bank. Some banks have taken the lead in developing an advanced distribution strategy while others should seize their opportunity to catch up.

The necessity for accelerating network expansion will become a priority for banks once they focus more on households than on corporates. You can read our point of view on this topic on how banks can learn from telecom operators to better serve individual customers as they present higher banking revenues potential for the coming years.

In this article we focused more on physical distribution channels. Digital must not be disregarded, it currently represents a top priority, with dedicated teams in almost all banks. As digital is the answer to keeping operational costs under control, the strategy for both digital and physical distribution channels must be steered in parallel.

Moreover, banking distribution is a vast subject. To cover the other aspects of distribution, we shall continue to share our insights in a series of articles dedicated to distribution strategies.


Nadim Samna

Managing Partner

#Egypt #Digitalbanking #Digital #Retailbanking #Businessdevelopment #Distribution

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