Suspension of debit cards use in foreign currency: implications and opportunities

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In an attempt to control the currency crunch as a result of the multiple devaluations that were adopted, the Central Bank of Egypt (CBE) has ordered banks operating in Egypt to suspend withdrawals from debit cards in foreign currency. Effective since last October, all debit card holders have been informed by their banks that they would be only allowed to make transactions in Egyptian pound (EGP). This decision came after Moody’s downgraded Egypt’s credit rating to Caa1, one among a series of downgrades that went from B2 in 2020 to B3 last February.

The reason behind Moody’s new rating is the scarcity of Egypt’s foreign exchange reserves, which, according to IMF Director Kristalina Georgieva, must be increased; otherwise, another devaluation would be necessary. But why has CBE imposed this restriction specifically on debit cards?

Debit, prepaid, or credit cards?

Banks offer three types of payment cards: debit, prepaid, and credit cards. Debit cards give users access to instant withdrawal and depositing of limitless amount of money. Before the suspension, holders of these cards could make international payments from their EGP accounts, for which the bank would deduct the amount in foreign currency (e.g. USD) according to the exchange rate on the day of payment.

In contrast, prepaid cards are issued independently of a bank account, and the holder is responsible for depositing the amount of money that would be used in a transaction. With more control from the bank’s side, credit cards set a ceiling for payment, to be regulated according to each bank’s policy, and accordingly, the bank lends to customers the amount that they request, to be reimbursed in due time, or else, fines and an added interest rate would be applied.

Exception to the rule

Offering more flexibility, debit cards are predominantly used by bank customers in Egypt. The CBE reported that debit card withdrawals amounted to EGP 23.837787 million in 2022, in contrast to only EGP 5.001167 from credit cards. The problem, as indicated by CBE, is that some users make foreign currency withdrawals from abroad without leaving the country. Consequently, some of them would trade the amount withdrawn in the black market, hence contributing to a further surge in the value of the EGP exchange rate.

Although there have been speculations about the importance of such a restriction, economists believe that this decision should have been made a long time ago. A senior economist at the CBE, who requested anonymity, deemed this restriction indispensable. “This step is complementary to the series of devaluations that were adopted. There must be a way to preserve USD reserves in banks. We are already in a very critical phase that can be discouraging for many investors. The recent downgrading made by Moody’s only adds to the difficulty of the situation,” he argued.

He also added that many customers might have misused the flexibility that debit cards offer by withdrawing large amounts in foreign currency under the pretext that they are abroad when they haven’t, in fact, left the country.

Nevertheless, in response to recurrent complaints from Egyptians abroad, the CBE provided exceptions that aim at facilitating their transactions abroad. According to the new decision, customers can request from their respective banks that the restrictions on their cards be lifted, without submitting any further documents.

Once they return, they will have up to 90 days to visit the bank so as to provide a detailed itinerary of their travel dates in order for the bank to make sure that the card was only used abroad during that period. Failing to abide by this rule would result in the bank sending customers’ information to the Egyptian Credit Bureau (I-Score), such that they would not be allowed to have a card issued in their name.

Credit card users will have a ceiling of up to $250, provided that they are abroad. In light of this exception, some banks offer larger limits for their users. Banque Misr, for instance, allows larger purchasing limits for customers, ranging from $500 for platinum users to $2000 and $4000 for signature/world and world elites account holders.

According to Tarek Mohsen, Credit Controller at a private bank in Egypt, there will be “new offers for opening bank accounts in foreign currencies with a decreased minimum deposit required for an account to be opened.”

Mohsen believes that such offers can help entrepreneurs and young investors balance their needs amid the new restrictions. “This procedure is essential during this critical phase that the economy is going through. Having limited reserves of USD in our bank made it tough for us to the point that we were unable to expand our investment pool,” he asserted. Moreover, many customers were so concerned that they did not even spend some time inquiring about alternatives. “We are aware that it might be detrimental for SMEs and startups to keep their business going; however, we are currently considering launching small-scaled investment loans for small businesses so they can compensate for their losses.

The impact on tech firms and startups

As there has been no indication of when such restrictions would be lifted, some sectors struggled since the implementation of this regulation. Small to medium-sized tech firms are among the most affected sectors. With their work involving purchasing and renewing licenses of software programs or importing equipment via debit card, tech companies were left unable to survive in the short term, let alone within the coming months.

According to an article published by Alternative Policy Solutions (APS), companies in the tech sector spend roughly $84 million per year using debit cards. Some of them use debit cards to make monthly payments of up to $7000.

Additionally, many startups, which have already gone slightly stagnant due to the currency devaluation, may be unable to survive under the new procedure. This is partly because they depend on debit cards to avoid additional charges and beat time constraints when resorting to conventional channels of bank transfers.

A CEO of a startup specializing in robotics and is located in Egypt, who requested anonymity, expressed his concern in this regard. “We used to purchase licenses of software that we install in robots via debit cards. Unfortunately, we have not been able to find any competent developers in this area in Egypt, which leaves us with no alternatives” he said.

Moreover, instant payment provided his business with more room for importing the gadgets needed for his equipment. “With debit cards, we used to pay for spectrometers and sensors that are needed for optimizing the functioning of robots. Now, I feel that we are in a deadlock. I am aware of the importance of this decision for the economy, but I believe some exceptions should have been made for businesses. This is a disruption of our activities,” he contended.

Without debit cards, a large number of startups would no longer be able to buy services or programs needed for their operations. Many of them have fostered partnerships and built credibility with stakeholders, and being unable to meet the payments’ requirements might undermine their credibility.

For others, the decision did not interfere with their activities, as Nouran Ghannam, CEO of Stllr Network highlighted. “We operate in KSA and UAE. Luckily, we don’t need debits or foreign currencies to function,” she said.

On the individual level

Many university students pursuing their studies abroad face difficulties in receiving money from their parents after the new decision. Dareen Emad, a third-year student at the University of Sussex, explained her dismay about having to wait for the monthly transfers from her parents instead of receiving instant direct deposits from her father’s card.

“My partial scholarship requires me to pay for tuition fees, and I used to rely on the cash that my parents transfer to my account on a weekly basis to cover my daily expenses and compensate for the ongoing price spikes in the UK. In light of the new situation, I will have to wait for monthly transfers that take a long time,” she noted. This is also the concern of Irene Rafik, whose son studies in the US. Irene said that she now struggles to get cash in USD to send to him.

Alternatives and the way forward

Some SMEs have considered opening virtual accounts, or even opening a new account in a foreign bank, in which case payments would be made through the bank’s branches overseas.
Nonetheless, this option can only work for companies, whose capital would be capacious enough to externalize its activities, or rather relocate abroad while making its Egyptian premises only branches that are extensions of the main office abroad.

Local payment services such as Meeza card, Paymob, and Vodafone Cash, among other payment tools, provide users with alternatives to make their payments in EGP. On whether or not this restriction is expected to be lifted soon, the CBE’s senior economist indicated that this heavily depends on the amount of reserves, mainly gained through FDI, that the bank secures. “Once things get back to order, this restriction could gradually be lifted,” he concluded.

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