The Profitability&Credit Risk Pasha, R.&Abdalla, S.

A Accepted Date1/12/2023

The Profitability and Credit Risk of the

Egyptian Banking Sector:
Do Financial Technology Entrants
have an Impact?
:‫الربحية والمخاطر االئتمانية للقطاع المصرفي المصري‬
‫هل للشركات الناشئة في مجال التكنولوجيا المالية تأثير؟‬

Dr. Rania Pasha * Shaza Ayman Abdalla**

Business Department, Faculty The Hongkong and Shanghai
of Business Administration, Banking Corporation (HSBC),
Economics and Political Egypt
Science, The British University
in Egypt, Cairo, Egypt

Abstract:
This paper examines the impact of fintech on the profitability and
credit risk of 20 banks in Egypt for the period from 2017 to 2021.
ROA and ROE are used to measure profitability in addition to Z-
score as a measure of credit risk. Moreover, new fintech indicators
are employed in this study, as measured by the growth in fintech
funding volume, growth in the number of fintech startups, and
growth in the number of fintech funding deals. Fintech has
demonstrated its impact on the profitability and level of credit risk
in banks in different countries. Nevertheless, to the authors’
knowledge, the impact of fintech startups on the profitability and
credit risk level of the banking industry has not been examined
before in Egypt. Since Egypt's fintech sector has recently
experienced rapid growth, it becomes inevitable to examine its
impact on one of the vital industries in the Egyptian economy -
banking industry. Our findings support the significant impact of
the examined fintech measures on bank profitability, but not on
bank credit risk.
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‫;‪Keywords: Bank Profitability; Bank Credit Risk; Fintech‬‬

‫‪Egypt; Fintech Startups.‬‬
‫المستخلص‪:‬‬
‫بنكا‬
‫تتناول هذه الدراسة تأثير التكنولوجيا المالية على الربحية ومخاطر االئتمان لـ ‪ً ٢٠‬‬
‫في مصر للفترة من ‪ ٢٠١٧‬إلى ‪ .٢٠٢١‬ويتم استخدام العائد على االستثمار والعائد‬
‫على حقوق المساهمين لقياس الربحية باإلضافة إلى ‪ Z-score‬كمقياس لمخاطر‬
‫االئتمان‪ .‬يتم استخدام مقاييس جديدة للتكنولوجيا المالية في هذه الدراسة‪ ،‬مقاسة بالنمو‬
‫في حجم تمويل التكنولوجيا المالية‪ ،‬والنمو في عدد الشركات الناشئة في مجال‬
‫التكنولوجيا المالية‪ ،‬والنمو في عدد صفقات تمويل التكنولوجيا المالية‪ .‬لقد أثبتت‬
‫التكنولوجيا المالية تأثيرها على الربحية ومستوى مخاطر االئتمان في البنوك في مختلف‬
‫البلدان ‪ .‬ومع ذلك‪ ،‬وعلى حد علم الباحثين‪ ،‬لم يتم دراسة تأثير الشركات الناشئة في‬
‫مجال التكنولوجيا المالية على الربحية ومستوى مخاطر االئتمان في القطاع المصرفي‬
‫موا‬
‫مؤخر ن ً‬
‫ًا‬ ‫نظر ألن قطاع التكنولوجيا المالية في مصر شهد‬
‫من قبل في مصر‪ .‬و ًا‬
‫يعا‪ ،‬فقد أصبح من الضرورة دراسة تأثيره على إحدى القطاعات الحيوية في‬ ‫سر ً‬
‫االقتصاد المصري ‪ -‬القطاع المصرفي‪ .‬تدعم النتائج التي توصلت إليها هذه الدراسة‬
‫التأثير الكبير لمقاييس التكنولوجيا المالية على ربحية البنوك‪ ،‬وعدم تأثيرها على‬
‫مخاطر االئتمان المصرفي‪.‬‬
‫الكلــمات المفتــاحية‪ :‬ربحية البنك؛ مخاطر االئتمان للبنوك؛ التكنولوجيا المالية؛‬
‫مصر؛ شركات التكنولوجيا المالية الناشئة‪.‬‬

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1. Introduction
Fintech has received global attention as it is seen as one of the
technologies that is expected to revolutionize the banking industry
(Wonglimpiyarat, 2017). Therefore, governments and central
banks around the world have paid attention to fintech as they
created policies and regulations to support the development of
fintech firms. Similarly, the Central Bank of Egypt is initiating an
investment vehicle with capital of EGP 1 billion to fund and
support Fintech and Fintech-enabled startups (FinTech Egypt,
2022). This investment vehicle is implemented through the
investment arms of some commercial banks in Egypt. The
objectives of the investment vehicle are to increase investment in
fintech entrants that are in the early stage, promote digital
transformation to increase financial inclusion, and activate the
fintech industry in the market. Moreover, the investment vehicle
aims to support innovative banking and financial services and to
make Egypt a regional hub for the fintech industry (FinTech
Egypt, 2022). The Central Bank of Egypt acknowledges that
promoting innovation is essential to transform Egypt’s financial
and banking landscape.
In addition, Egypt is rated second in the MENA area in
terms of the number of fintech funding deals, accounting for 23%
of all MENA fintech funding deals. Furthermore, Egypt ranks
second in the MENA area in share of fintech funding volume,
accounting for 21% of total funding in the region. In the previous
two years, there has been a significant increase in the number of
fintech firms operating in Egypt. Egypt now boasts approximately
112 Fintech and Fintech-enabled firms, as well as 18 ecosystem
facilitators (Central Bank of Egypt, 2022a).
Moreover, according to the Central Bank of Egypt
(2022b), Egypt is ranked the fourth African top country in fintech
investments. The fintech industry has grown from just two firms
in 2014 to 112 startups by 2021 as illustrated in Figure 1.1. Almost
70% of Egypt's fintech entrants are in the final stage, which means
their solutions are now in the market; as a result, this reflects the

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rapid rise of new companies in recent years (Central Bank of

Egypt, 2022a). On the other side, 30% of fintech startups are in
the planning stage, including those still working on advanced
concepts and those with a prototype. Moreover, according to
Central Bank of Egypt (2022a) and as illustrated in Figure 1.2, the
majority of fintech firms engage in the payments and remittance
industry, accounting for 34 startups which represents 30% of total
startups. Therefore, payments and remittances are Egypt's major
fintech sector. As a result, banks in Egypt should reconsider their
competitive advantage in order to adapt to the new
innovative market. According to Jaki and Marin (2019), the
progress of information technology and the stresses associated
with rivalry that fintech companies create affects bank stability.

Figure 1.1 Evolution of Fintech Startups over years in Egypt

(Central bank of Egypt, 2022a)

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Figure 1.2 Number of Fintech Startups in each sub-sector in

Egypt (Central Bank of Egypt, 2022a)

Researchers have long been interested in topics such as

bank profitability and credit risk; thus, several researchers
investigated both internal and external factors that influence bank
profitability (Al-Qudah & Jaradat, 2013; Ahmad & Matemilola,
2013; Petria et al., 2015; and Abobakr, 2018). Although the
fintech industry is expanding globally and their presence puts
competitive pressure on the banking system, these new
technological advancement factors have not been thoroughly
discussed in the literature, particularly in Egypt. Investigating this
relationship can help Egypt build a stronger banking system that
can increase profitability and reduce credit risk.
A number of recent studies investigated the impact of
fintech on bank profitability and credit risk. Those studies took
place in both developed and developing countries. However, to
the best of the researcher's knowledge, no studies in Egypt
specifically addressed the influence of fintech firms on bank
profitability and credit risk. Studies that have addressed the
fintech topic in Egypt to date examined its impact on other
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dependent variables, such as El-Gohary (2019), who examined

the influence of fintech on the facilitation of e-government
services, and Hussein (2020), who discussed the impact of fintech
on financial inclusion in Egypt.
Furthermore, the fintech measures employed in this study
were not previously used by Egyptian researchers. Accordingly,
this study is conducted to fulfill the existing gap regarding the lack
of studies in Egypt. Hence, the study examines the impact of
fintech firms on bank profitability and credit risk in Egypt for the
period 2017-2021. This is achieved by examining:
• The impact of the growth in fintech funding volume on
bank profitability and credit risk
• The impact of the growth in the number of fintech
startups on bank profitability and credit risk
• The impact of the growth in the number of fintech
funding deals on bank profitability and credit risk

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2. Literature Review
Authors address the topic of 'fintech' in two ways in the literature.
The first refers to fintech as "firms," which are mostly firms and
startups that use advanced technology to provide financial
services (Fintech Regulatory Aspects Working Group, 2019).
Fintech is described as "companies or representatives of
companies that combine financial services with innovative
software technology" by Dorfleitner et al. (2017). However, such
a definition is thought to be insufficient since it excludes
incumbents that constantly utilise technology to improve financial
services, hence incumbents can be termed "fintech firms."
Fintech firms provide services such as loan and saving,
payment processing, investment management, financial
consulting, and insurance. Fintech companies, according to
Navaretti et al. (2017), offer services similar to banks but more
efficiently due to advanced technology. Banks, for example,
provide loans; similarly, some fintech companies use
crowdsourcing to transform client money into investments and
loans. As a result, Navaretti et al. (2017) argue that fintech firms
are distinct from banks because they are new to the financial
sector and coexist with established banks. It has become
globally accepted that fintech firms are not yet direct competitors
to banks. The difference is that clients perceive fintech firms'
products to be more convenient.
According to the second stream of literature addressing
fintech, fintech is about applying the latest technology; in other
words, it is about employing the latest technology to upgrade and
improve financial services (Thakor, 2020). For example,
traditional banks might use artificial intelligence or machine
learning to improve their financial services. Fintech is defined as
"technology based financial innovations, that can result in new
business models, applications, processes or products associated
with a material effect on financial markets and institutions and on
the provision of service" (Basel Committee on Banking
Supervision, 2018).

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2.1 Fintech and Bank Profitability

Li et al. (2017) studied the impact of funding fintech startups on
the share prices of retail banks. The study measures fintech
startups in terms of funding volume and number of funding deals,
while covering a sample of 47 incumbents US retail banks for the
period 2010-2016. The findings show a positive association
between fintech funding growth rate and the ratio of bank deals to
stock prices. The study reveals symmetry between fintech and
traditional banking; nevertheless, the results on the sector level
are insignificant and show diverse relationships. However,
according to Li et al. (2017), the results of the study are spurious
as the fintech industry is new and the study timeframe is short.
Kou et al. (2021) assess European bank investments in
fintech. Sensitivity analysis was conducted by considering six
distinct cases. The study outlines the most crucial fintech-based
investment opportunities that could help banks perform better.
The results show that fintech enhances the financial performance
of European banks through enhancing the competitive advantage
of banks. The study identifies ‘competitive advantage’ as the most
crucial determinant of fintech.
In addition, Haddad and Hornuf (2021) investigates the
effect of fintech firms on financial institution profitability and the
likelihood of default. The study sample composed of banks of 87
countries and 12,549 fintech startups, covering the period from
2005 to 2018. To test the hypotheses, Haddad and Hornuf (2021)
used the two-step Generalized Method of Moments (GMM)
system dynamic panel estimator. The findings indicate that
fintech formations reduce variations in banks’ stock returns.
Accordingly, the findings of the study designate that financial
institutions should monitor the growth of fintech startups as they
positively affect the performance of financial institutions as well
as the sector as a whole.
Moreover, Chhaidar et al. (2021) examines the impact of
fintech investments on banks’ financial performance, while
exploring whether bank size impact the performance in the
context of digitisation. The study employs the Fully Modified
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Ordinary Least Squares (FMOLS) model, using a sample of 23

banks in Europe spanning the years 2010 to 2019. According to
the findings of the study, fintech is favourably and significantly
related to bank profitability, demonstrating that the larger the
banks' digital involvement, the better their financial performance.
According to Chhaidar et al. (2021), bank size is a moderator
factor in determining the impact of fintech on profitability.
Therefore, major financial institutions gain more from fintech
investments as it improves their profitability.
Furthermore, Wonglimpiyarat (2017) studies fintech and
its transition in the banking industry. The study is concerned with
the e-payment services in Thailand and the sample consists of five
main banks in Thailand while using the case study approach.
Wonglimpiyarat (2017) claims that fintechs positively affect the
efficiency of banks’ financial services and that non-financial
institutions are expected to speed up fintech innovation that will
let them compete with banks, resulting in a negative relationship.
Moreover, Meng et al. (2020) states that the competition between
banks and fintechs leads to an industrial competition effect that
will encourage banks to offer better and improved services to the
economy.
Additionally, Chen et al. (2017) investigates the transition
of banks in China from traditional banking to mobile internet
finance. The research focuses on the impact of fintech
development in areas such as internet in smartphones and tablets,
big data, cloud services, blockchain technology, and engines of
search on the financial industry. It is concluded that the
development of fintech results in drastic alterations to the
financial industry and it is estimated that fintech will knock over
banks, forcing them to adopt a new business model to upgrade
services they offer. This research employs a case investigation to
analyze and contrast Citibank and the Industrial and Commercial
Bank of China (ICBC). Finally, the report suggests an “aeroplane
mode” for Citibank in reference to their new directions, and an
“electric vehicle mode” for ICBC in response to the significant
technological transformation and upgrade. Moreover, Chen et al.
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(2017) expects that ‘technology power’ will be the main notion

for banks in the future.
Moreover, Ibrahim (2018) studies the effect of financial
technology on the financial performance of commercial banks in
Kenya. Financial technology was measured by the number of
transactions through internet banking and mobile banking. The
regression results reveal a significant positive effect of fintech on
the financial performance of banks. In addition, the study
recommends that commercial banks should continue investing in
financial technology.
Furthermore, Phan et al. (2020) examines the influence of
financial technology firms on bank performance in the Indonesian
market as Indonesia witnesses an impressive growth in fintech.
The sample consists of 41 banks excluding unlisted banks.
Fintech firms are measured as the number of fintech firms
founded each year over the period 1998 to 2017. The number of
fintech firms founded averages 7 per year. Also, bank
performance was measured using return on equity, return on
assets, and net interest margin. A two-step generalized method of
moments (GMM) system dynamic panel estimator is used to test
the null hypothesis that fintech firms negatively affects banks’
performance. Finally, the results support the null hypothesis
proving that fintech firms are negatively impacting bank
performance. Moreover, robustness tests and additional tests are
applied, such as effects of the Global Financial Crisis, sensitivity
to bank characteristics, and the use of alternative estimators to test
the hypothesis and the results remained the same.
In addition, Marlina (2020) analyzes the effect of financial
technology on banking profitability regarding banks listed in the
Indonesian stock exchange. Financial institutions in the banking
industry are affected by the presence of fintech companies. The
study analyzes the differences in performance of 43 listed banks
using ROA, NIM and operational expenses, and operating income
before and after the cooperation with fintech firms for the period
2014-2018. However, 9 banks only cooperate with fintech firms.
The results of the study reveal that there is no difference in the
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profitability of banks before and after cooperating with fintech

firms.
Additionally, a study conducted in Kenya examines the
impact of financial technologies on the financial performance of
tier two banks (Mokaya, 2020). Financial technology was
addressed in terms of online banking, mobile banking, and
automated teller machines. The study adopted the descriptive
causal research design method and the sample composed of 9 tier
two banks in Kenya. A multiple regression model was used to
establish the relationship between mobile banking, online
banking, and ATM banking on the ROA of the tier two banks. The
result shows that financial technology has a positive impact on the
performance of tier two banks in Kenya. Therefore, Mokaya
(2020) recommends that commercial banks shall adopt financial
innovations as it positively affects their performance.
Moreover, Abu Karsh and Abufara (2020) studies the
impact of fintech firms on traditional banking industry. The
procedure used in the study is to examine previous research that
have identified whether fintech firms are growing due to
availability of digital technology and to examine if there has been
negative impact on financial performance of banks. Kenyan and
Lithuanian banking sectors is the sample of the study. Results
show that banks’ profitability changes when there are fintech
firms in the country and when banks adopt financial technology
into their activities. However, from statistical analysis, results
reveal that fintech has an insignificant relationship on profitability
of the banking sector.
Furthermore, Monika et al. (2021) studies the impact of
fintech development on profitability of state-owned and private
Islamic banks in Indonesia. The study uses ROA as the
profitability measure and data accumulations of peer-to-peer
lending transactions as measure of fintech. Also, panel data
analysis was used on 10 Sharia commercial banks for the period
from 2017 to 2019. Monika et al. (2021) claims that the
development of fintech has a negative effect on the profitability

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of state-owned Islamic banks and a positive effect on profitability

of private Islamic banks.
In addition, the influence of fintech firms on bank’s
profitability in China is recently examined by Lv et al. (2022).
The study theoretically expounds on how fintech impacts banks’
financial operations. Then, for the period 2011-2020, they
developed the Error Correction Model (ECM) and integrated it
with the Granger causal link test. The results of the study reveal
that bank’s profitability measured using ROE grows in connection
with fintech advancement, growth in bank assets, the increase in
net interest margin, cost control, and reduction in credit risks
(non-performing loans). According to Lv et al. (2022), fintechs
and banks’ profitability has a ‘U’ shaped relationship meaning
that in the initial stage, fintechs negatively impact banks’
profitability, then the advantages of fintech gradually increases
which increases the profitability of banks in the middle and later
stages.
Regarding Egypt, El Gohary (2019) studies the impact of
financial technology including e-payment services, ways of
payment, bills e-payment and bank accounts with e-government
on facilitating e-government services in Egypt. Facilitating e-
government services is addressed in terms of accessibility,
availability, responsiveness, and efficiency. A survey was
conducted on 400 respondents in Egypt in order to determine
which fintech service can affect any of the dimensions of e-
government facilitation. Results show that bank accounts with e-
government have no effect on facilitating e-government services,
while the remaining items prove to have an effect on some
dimensions and have no effect on others.
Moreover, Hussein (2020) investigates the impact of
financial technology on financial inclusion in Egypt. The study
examines the readiness of the Egyptian government to promote
financial technology and new technologies to achieve financial
inclusion. According to Hussein (2020), the Egyptian government
shall pay more attention to enhance financial literacy to achieve
financial inclusion. This could be achieved by filling the supply
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and demand gap through different players such as banks and

fintech startups that have the power to introduce innovative
services to meet needs. The research sample size is 9,084
individuals surveyed from Egypt, United Arab Emirates, Kenya,
Jordan, Saudi Arabia, Kuwait, Bahrain, Tanzania, and Ethiopia.
Findings reveal that fintech has a robust influence on financial
inclusion.
Consequently, several studies in the finance literature
examine the impact of fintech on Banks’ financial performance in
various international markets. Most of the studies state the
significant impact of fintech on banks’ profitability. Nevertheless,
the results are inconsistent in terms of the direction of the
relationship.
2.2 Fintech and Credit Risk
There are few studies that examine the impact of fintech on banks’
credit risk. According to Shen and Guo (2015), the advancement
of fintech leads to alteration in the bank model of business and
operation; thus, banks’ risk-taking activities will tend to increase.
The study was conducted on 36 commercial banks in China for
the period 2003-2013. Shen and Guo (2015) argue that the
influence of fintech advancement on banks’ risky deals represents
a ‘U’ shaped relationship, meaning that risk-taking behavior will
first decrease and then increase.
According to Wang and Wu (2018), fintech aggravates the
systemic risk of the banking industry to some extent. The study
examines the influence of fintech mechanism on the systemic risk
of the banking industry in China, also the influence degree is
empirically tested. In addition, Qiu et al. (2018) studies the impact
of fintech on traditional banking behavior in China. The study
demonstrates that the development of fintech has altered the
financial framework and risk attitude of banks. Banks' willingness
to take risks has increased as profits have declined and
competition has increased. Nevertheless, this impact indicates that
banks risk management levels significantly improved.
Further studies examine the relationship between fintech
and bank risk-taking. Liu et al. (2020) studies the impact of
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fintech on commercial banks’ risk-taking in China. The study uses

a multivariate panel regression model on a panel data of 130
commercial banks from 2007 to 2017. Fintech is measured using
Fintech Index that they developed using text mining technology.
The results show that the relationship between fintech and bank
risk-taking represents a ‘U’ shape relationship, first rises then
falls. At the early stage of fintech development, fintech increases
commercial banks risk-taking. However, as the technology
matures, fintech reduces management costs and enhances risk
control which then leads to decrease in the banks’ risk-taking
level.
Moreover, Pierri and Timmer (2020) claims that the
advancement of fintech improves the information asymmetry of
banks, strengthens the stability of their systems, and advances the
risk management levels of the bank. Furthermore, Deng et al.
(2021) studies the impact of fintech on banking risk-taking in
China. The study was conducted on 155 small and medium-sized
banks for the period 2011-2016 and the study used a benchmark
regression model. The results showed that the development of
fintech has significantly reduced the level of bank-risk taking.
Furthermore, Liu (2021) studies fintech and systemic risk
in commercial banks of China. The study examined both small
and medium sized banks. It concluded that fintechs play a less
significant role in the systemic risk transfer of Chinese state
banks. On the other hand, Haddad and Hornuf (2021) examined
the influence of fintech firms on banks’ financial performance and
level of credit risk. The study was conducted on eighty-seven
markets for the period 2005-2018. The research found that fintech
startups reduce the financial firms' vulnerability to systemic risk.
Therefore, it is recommended that banks shall closely monitor the
development of fintech startups as they improve financial
stability. Accordingly, previous research indicates that fintech has
a significant impact on bank credit risk, particularly in the short
term. However, there is disagreement in terms of the direction of
this impact.

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As a result of the prior literature and as far as

the researchers' knowledge, there is a dearth of studies undertaken
in Egypt addressing the effect of fintech startups on bank
profitability. Moreover, few studies have been conducted to
examine the relationship between fintech and bank credit risk in
developed countries. On the other hand, to the best of the
researchers' knowledge, no study examined the relationship
between fintech and bank credit risk in an emerging market such
as Egypt. As a result, studying the influence of fintech on bank
profitability and credit risk in Egypt is both practically and
theoretically important.

3. Hypotheses Development
Technology evolves with time, and the characteristics of
industries and products change as a result (Utterback & Afuah,
1997). For example, according to Cannon and Summers (2014),
the hotel and taxi businesses transformed in response to the
creation of online peer-to-peer platforms such as Airbnb and
Uber. The same concept is used in the banking industry, where
fintech entrants provide services similar to banks such as peer-to-
peer lending and other services. As a result, it is expected that the
banking industry would undergo a digital transformation as a
result of fintech firms, which are regarded new entrants to the
business (Yan et al., 2015; and Wang et al., 2015). The findings
of prior studies, as illustrated in the literature review section,
show that fintech entrants have a significant impact on bank
profitability and credit risk in several developed and developing
markets, excluding Egypt. To explain the relationship between
fintech startups and banks, researchers use two theories: consumer
theory and disruptive innovation theory.
3.1 Consumer Theory
According to Aaker and Keller (1990), consumer theory
explains that new services (such as those provided by fintech
firms) that are used in conjunction with an old service will be a
complement to the old service. On the other hand, new services
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that meet the same consumer demand will replace old services
(such as those provided by banks). As a result, while the services
supplied by fintech firms might benefit existing traditional banks
in one situation, they would have a negative influence on bank
performance in the other.
3.2 Disruptive Innovation Theory
According to Christensen (1997), the disruptive
innovation theory asserts that new market entrants that employ
new technology to provide more accessible and cost-effective
services to clients increase competition and disrupt the industry.
Thus, the financial structure and risk behavior of banks would
change in response to the new competition. Consequently, the
impact of fintech entrants on banks financial and risk performance
would differ based on the banks response to the new competition.
Based on the two theories, the link between the
performance of banks and fintech firms can be described in three
cases: substitution effect, complementary effect, and no effect (Li
et al., 2017). In the substitution effect, fintech firms are seen as
substitutions to retail banks due to the firms’ efficiency and
quality of services. Fintech firms use cutting-edge technology to
provide their services, as opposed to traditional banks, which
continue to rely on outdated technology and are unable to
incorporate innovative technologies rapidly (Laven & Bruggink,
2016). Fintech firms' efficiency in financial services applies to a
variety of financial services, including lending, quick payments,
investment and financial service advice, and asset management
services (Villeroy de Galhau, 2016). In addition, fintech entrants
have higher quality service than traditional banks as they have
several methods to evaluate risk other than the credit score.
Therefore, fintech firms can substitute traditional banks which
could result in a negative impact on bank performance.
On the other hand, the complementary effect claims that
fintech firms are complements to traditional banks. The reason
behind this is that banks attempt to incorporate fintech firms’
services into their operations by outsourcing the service, joint
partnerships, or acquiring fintech startups (Juengerkes, 2016).
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Therefore, banks are taking advantage of the fintech startups and

benefiting from them, not disrupting them. In addition, banks’
level of risk taking would increase as the profit of banks erodes
and competition increases (Qiu et al., 2018). As a result, fintech
entrants would benefit bank profitability and risk management.
Finally, the no effect relationship between bank
performance and fintech startups suggests that fintech companies
will create a new channel in the market, attracting clients who do
not already deal with banks (Demos, 2016). For example, riskier
startup companies seeking funding are more inclined to work with
fintech firms than banks. Because fintech firms are small
compared to large banks, it is difficult to discover a fintech firm
that is a direct competitor to a bank (The Economist, 2015). As a
result, fintech newcomers are unlikely to have a
significant impact on banks' financial performance and risk
management in countries where the banking industry is stable and
large enough to compete.
Since the previous theories demonstrate that there is no
consistent influence of fintech entrants on bank financial
performance and risk management across all countries. The
impact is determined by the type of the fintech services
(complementary or new), the characteristics of the banks, and
banks’ response to the new competition created by fintech
entrants. Consequently, as illustrated in the literature review
section, there is no agreement in the previous studies on the
direction of the impact of fintech firms on bank profitability and
credit risk.
In addition, since the CBE acknowledges that promoting
innovation is essential to transform Egypt’s financial and banking
landscape, the fintech industry is developing rapidly in Egypt in
the past 5 years as shown in figure 1.1. Moreover, as shown in
figure 1.2, there is several fintech sub-sectors in Egypt which
results in diversity in the services offered by fintech startups.
Furthermore, Egyptian banks responded to fintech entrants in
several ways, such as joint partnerships, outsourcing new fintech
services, and funding some fintech startups. As a result, it is
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hypothesized that fintech entrants and fintech funding would have

a robust impact on banks’ financial performance and risk-taking
behavior in Egypt.
Accordingly, the following hypotheses are developed:
H1: The growth in fintech funding volume has a significant
impact on bank profitability in Egypt.
H2: The growth in the number of startups has a significant
impact on bank profitability in Egypt.
H3: The growth in the number of fintech funding deals has a
significant impact on bank profitability in Egypt.
H4: The growth in fintech funding volume has a significant
impact on bank credit risk in Egypt.
H5: The growth in the number of startups has a significant
impact on bank credit risk in Egypt.
H6: The growth in the number of fintech funding deals has a
significant impact on bank credit risk in Egypt.

4. Research Methodology
4.1 Sample and Data
The target population of the study represents all banks operating
in Egypt. According to the Central Bank of Egypt (2022b), the
Egyptian banking sector is composed of 39 banks classified into
commercial, Islamic, and investment banks. Due to unavailability
of required data for several banks, the sample consists of 20 banks
only which is considered a limitation in this study. The names of
the 20 banks are displayed in table 4.1.
In addition, the econometric methodology used for all the
models examined in this study is based on panel data analysis.
Panel data analysis investigates the phenomena/situation
continuously over the period that the phenomena runs its course
(Saunders et al., 2009). Moreover, the sampling period of the
study is from 2017 to 2021. This short sample-period is
considered another limitation in this study; nevertheless, this
period is chosen depending on the availability of data on fintech
funding volume, number of startups, and number of fintech
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funding deals in Egypt which are the measures of fintech

(independent variable).
Table 4.1: Banks used in the sample
Bank Name
1. Commercial International 11. Al Ahli Bank of
Bank (CIB) Kuwait (ABK)
2. Bank du Caire 12. Ahli United Bank
3. Credit Agricole 13. Abu Dhabi
Commercial Bank
4. Egyptian Gulf Bank 14. Alex Bank
5. Export Development 15. Arab African
Bank International Bank
6. Housing and 16. Emirates NBD
Development Bank
7. Qatar National Bank Al 17. National Bank of
Ahli (QNB) Kuwait
8. Societe Arabe 18. Abu Dhabi Islamic
Internationale de Banque bank
(SAIB)
9. Suez Canal Bank 19. Faisal Islamic Bank
of Egypt
10. Bank Misr 20. National Bank of
Egypt
4.2 Identification of Study Variables
Nine panel data regressions are conducted in this study as there
are three dependent variables, which are two bank profitability
measures and one credit risk measure in addition to three
measures for the independent variable (fintech) that are examined
separately in each regression model. According to Ommeren
(2011), bank profitability can be measured by several ratios
including return on equity, return on assets, and net interest
margin as previously mentioned in chapter two. For this study, the
ratios used to evaluate bank profitability are ROA and ROE. On
the other hand, credit risk can be measured using Z-score, loan
loss provisions ratio, non-performing loans ratio…etc. In this

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study, Z-score is used to measure banks’ credit risk.

To measure the impact of fintech which is the independent
variable in the study, growth in fintech funding volume, number
of fintech startups, and number of fintech funding deals are used.
Fintech funding volume is the amount of funds given to fintech
and fintech-enabled startups every year in Egypt by the Central
Bank of Egypt, commercial banks, and other incubators. In
addition, the number of fintech startups represents the number of
new fintech startups founded every year. Furthermore, number of
fintech funding deals represents the number of funding deals
made every year. In addition, control variables are included in
each regression model based on the findings of previous literature
that state their robustness as determinants of each examined
dependent variable. The data is collected from the Central Bank
of Egypt (Central Bank of Egypt, 2022a). Refer to table 4.2 for
definitions of the study examined variables.
Table 4.2: List of study variables
Variable Definition Measurement and References

Independent Variable: Fintech Firms Measures

Fintech Amount of 𝐺𝑟𝑜𝑤𝑡ℎ 𝑜𝑓 𝑓𝑖𝑛𝑡𝑒𝑐ℎ 𝑓𝑢𝑛𝑑𝑖𝑛𝑔
Funding funding to 𝑓𝑖𝑛𝑡𝑒𝑐ℎ 𝑓𝑢𝑛𝑑𝑖𝑛𝑔 t
Volume fintech and = 𝐿𝑛
𝑓𝑖𝑛𝑡𝑒𝑐ℎ 𝑓𝑢𝑛𝑑𝑖𝑛𝑔 t-1
fintech-enabled (Li et al., 2017)
startups in
Egypt.
Number Represents the 𝐺𝑟𝑜𝑤𝑡ℎ 𝑜𝑓 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑓𝑖𝑛𝑡𝑒𝑐ℎ 𝑑𝑒𝑎𝑙𝑠
of Fintech number of 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑓𝑖𝑛𝑡𝑒𝑐ℎ 𝑑𝑒𝑎𝑙𝑠 𝑡
Funding fintech firms that = 𝐿𝑛
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑓𝑖𝑛𝑡𝑒𝑐ℎ 𝑑𝑒𝑎𝑙𝑠 t-1
Deals got funded.
(Li et al., 2017)

Number Represents the 𝐺𝑟𝑜𝑤𝑡ℎ 𝑜𝑓 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑎𝑟𝑡𝑢𝑝𝑠

of Fintech number of 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑎𝑟𝑡𝑢𝑝𝑠 𝑡
Startups fintech startups = 𝐿𝑛
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑎𝑟𝑡𝑢𝑝𝑠 t-1
founded every (Haddad and Hornuf, 2021; Phan et al.,
year. 2020)

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Dependent Variables: Bank Profitability and Credit Risk

Return ROA assesses 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐴 =
on Assets the effectiveness 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
(ROA) of banks in
managing and (Ibrahim, 2017; Haddad and Hornuf, 2021;
utilizing its Phan et al. 2020; El-Faham 2020; Abu
assets to Karsh and Abufara 2020; Chhaidar et al.
generate profit. 2022; and Mokaya 2020; Monika et al.
2021)

Return Measures 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

𝑅𝑂𝐴 =
on Equity profitability 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
(ROE) generated from
the equity that (Hassanien 2018; El-Faham 2020; Phan et
shareholders al. 2020; Abu Karsh and Abufara 2020;
invested. Koroleva et al. 2021; Haddad and Hornuf
2021; Lv et al., 2022)

Z-score Z-score is a (𝑅𝑂𝐴 + 𝐵𝑎𝑛𝑘 𝐶𝑎𝑝𝑖𝑡𝑎𝑙)

measure of credit 𝑍𝑠𝑐𝑜𝑟𝑒 =
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑅𝑂𝐴
risk. It evaluates (Agoraki et al., 2011; Kohler 2014; Köhler
bank’s risk 2015; Ghenimi et al., 2017; Deng et al.,
exposure. 2021; Di et al., 2021; Haddad and Hornuf,
2021)
Control Variables in All Regression Models
Inflation Inflation rate is a 𝐶𝑃𝐼 t − 𝐶𝑃𝐼 t-1
𝐺𝑟𝑜𝑤𝑡ℎ 𝑜𝑓 𝐶𝑃𝐼 =
rate macroeconomic 𝐶𝑃𝐼 t-1
(CPI) variable that (Al Smadi and Al Wabel, 2011; El-Faham,
affects banks’ 2020)
activities.

Net NIM assesses the 𝑁𝐼𝑀

Interest bank’s (𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒)
Margin operational =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
(NIM) efficiency as it (El-Faham, 2020; Phan et al., 2020; Abu
shows the bank’s Karsh and Abufara, 2020; Haddad and
ability to Hornuf, 2021; Lv et al., 2022)
generate interest
income
exceeding its
interest expense.

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Deposits It shows how 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝑠

to assets much does the 𝑇𝐷𝑇𝐴 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
ratio bank depends on
(TDTA) deposits (Al-Qudah and Jaradat, 2013; El-Ansary
compared to and Hafez, 2015; Deng et al., 2021;
total assets of the Koroleva et al., 2021)
bank.
Expenses It assesses the 𝑇𝑜𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
to bank’s 𝑇𝐸𝑇𝑅 =
𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
revenues operational (Abdeldayem and El-Sherbiney, 2018; Liu
ratio efficiency. et al., 2020; Phan et al., 2020; Deng et al.,
(TETR) 2021; Haddad and Hornuf, 2021)

Loans to Indicate the 𝑇𝑜𝑡𝑎𝑙 𝐿𝑜𝑎𝑛𝑠

Deposits percentage of 𝑇𝐿𝑇𝐷 =
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝑠
ratio bank’s loans that (Al-Smadi and Al-Wabel, 2011; Al Qudah
(TLTD) are funded using and Jaradat, 2013; Shihadeh, 2019; Liu et
deposits. A al., 2020; El-Faham, 2020)
measure of
banks’ liquidity.
Non- Measures banks’ 𝑁𝑜𝑛 − 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑁𝐼𝐼𝑇𝐼 =
interest revenue 𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒
Income diversification. (El-Faham, 2020; Deng et al, 2021;Di et
ratio al., 2021)
(NIITI)
Money Money supply is
Supply the total money Measured using M2 (%)
(M2) held by (Deng et al., 2021; Liu et al., 2021)
households and
businesses in a
country at a
certain point in
time.
Provision provisions to net 𝑃𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛𝑠
𝑃𝑁𝐿 =
s to net loans is used as a 𝑁𝑒𝑡 𝐿𝑜𝑎𝑛𝑠
loans proxy for credit
(PNL) risk. (Phan et al., 2020)

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4.3 Model Specifications

Regression Models 1-6:
yit = β0 + β1 FTtk + β2 CPItk + β3 NITIitk+ β4 NIMitk+ β5 TETRitk+ β6
TDTAitk+ εtk

Where t = 1, …..,n covering the sample period from 2017 to

2021
i = number of examined banks
K = number of examined factors in each firm
yit = bank profitability measures (ROA or ROE) for bank i at
time t.
β 0 = intercept (constant)
FFtk = fintech measures (fintech funding volume or number of
fintech funding deals or number of fintech stratups).
CPItk = inflation measure.
NITIitk = non-interest income ratio.
NIMitk = net interest margin.
TETRitk = expenses to revenues ratio.
TDTA = deposits to assets ratio.
εtk = random error term

Regression Models 6-9:

yit = β0 + β1 FTtk + β2 CPItk + β3 NITIitk + β4 NIMitk + β5 TETRitk +
β6 TLTDitk + β7 PNLitk + εtk

Where t = 1, …..,n covering the sample period from 2017 to

2021
i = number of examined banks
K = number of examined factors in each firm
yit = bank credit risk measure (Z-score) for bank i at time t.
β 0 = intercept (constant)
FFtk = fintech measures (fintech funding volume or number of
fintech funding deals or number of fintech stratups).
CPItk = inflation measure.

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NITIitk = non-interest income ratio.

NIMitk = net interest margin.
TETRitk = expenses to revenues ratio.
TLTDitk = loans to deposits to ratio.
PNLitk = provisions to net loans.
εtk = random error term

5. Results
5.1 Descriptive Analysis
The descriptive statistics presented in table 5.1 examines the
mean, standard deviation, minimum values, and maximum values
of the variables for the study period from 2017 to 2021 for the 20
studied banks in Egypt.
Table 5.1: Summary of the Variables Descriptive Statistics
Variable Mean Median Min. STD Max.
ROE .2011 .1713 .0393 .1128 .6043
ROA .0206 .0179 .0028 .0139 .0698
1.590 1.1074 .2674
Z-score 1.5932 2.2309
9
Growth in Fintech 1.293 -.1062 1.3649
.9250 3.4304
Funding 6
Growth in No. .5845
.1231 .1484 -.7205 .9163
Fintech Startups
Growth in No. .1744 .4181
Fintech Funding .5918 .4944 1.2039
Deals
CPI .1046 .071 .054 .0621 .219
Provision/Net Loans .0158 .0096 .0005 .0226 .0779
Expenses/Revenues .8319 0.8489 .5803 .0867 .9768
.8503 .8487 .7696 .03381 .9291
Deposits/Assets
Loans/Deposits .5015 .5033 .1207 .1406 .7375
Non-Interest .0951 .0858 .0197 .0444 .3071
Income/Total
Income
Net Interest Margin .0391 .0392 .0069 .0127 .0728

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5.2 Regression Analysis Results

Hausman specification test was conducted for each regression
model and the results were insignificant; thus, the null hypothesis
that the slope coefficients of the fixed and random-effects models
do not differ significantly cannot be rejected. Hence, the random-
effect regression model is employed for all the nine examined
regression models. In addition, depending on the VIF test, the
results shall not be greater than 5 to have moderate
multicollinearity (Daoud, 2017). In this study, two
macroeconomic variables are highly correlated which are ‘interest
rate’ and ‘inflation rate’ that are employed in the ROA and ROE
regression models; therefore, interest rate is excluded from the
examined regression models. Moreover, all variables examined in
the paper are winsorized at 1% to remove any outliers (Leone et
al., 2019).
Tables 5.2-5.4 present the regression results of the effect
of each of the three examined fintech measures on Bank ROA.
The R-square of the regression models represent the coefficients
of determination, meaning that the ROA is explained by growth
rate in fintech funding, number of fintech deals, and number of
startups by approximately 79.41%, 78.66%, and 78.92%
respectively. The results indicate that growth rate in fintech
funding volume, number of fintech funding deals, and number of
fintech startups are significant as their P-values are less than 0.05
which is the significance level used due to a confidence level of
95%. Also, NIITI, NIM, TETR, and TDTA are statistically
significant for the three regression models. CPI is significant at
1% for the growth rate in fintech funding volume and the number
of fintech startups regression models, while it’s significant at 10%
for the growth rate in the number of fintech funding deals
regression model.

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Table 5.2: Regression Model 1 Results

The Impact of Growth in Fintech Funding Volume and Bank
ROA

ROA Coeff. Std. T- Sig. R- F-

Err. stat. squared statistics
Growth -.0016 .0005 -3.28 0.001***
in
fintech
funding 79.41% 155.36***
CPI .1244 .0203 6.11 0.000*** (0.0000)
NIITI .0573 .0256 2.24 0.025**
NIM .5059 .0707 7.16 0.000***
TETR -.0449 .0145 -3.09 0.002***
TDTA .0433 .0205 2.12 0.034**
Constant -.0112 .0267 -0.42 0.675
The table reports the estimated coefficients, their heteroscedasticity-
robust t-statistics, their p-values, the overall R-squared statistic, and
the regression equation F-statistics and its p-value. * denotes
significance at the 10 percent level, ** denotes significance at the 5
percent level, and *** denotes significance at the 1 percent level.

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Table 5.3: Regression Model 2 Results

The Impact of Growth in the Number of Fintech Funding
Deals and Bank ROA

ROA Coeff. Std. T- Sig. R- F-

Err. stat. squared statistics
Growth .0082 .0024 3.41 0.001***
in
fintech
funding
CPI -0.664 .0402 -1.65 0.098* 78.66% 159.36***
NIITI .0509 .0259 1.97 0.049** (0.0000)

NIM .5366 .0715 7.50 0.000***

TETR -.0431 .0145 -2.98 0.003***
TDTA .0446 .0204 2.19 0.029**
Constant -.0068 .0258 -0.26 0.792
The table reports the estimated coefficients, their
heteroscedasticity-robust t-statistics, their p-values, the overall
R-squared statistic, and the regression equation F-statistics and
its p-value. * denotes significance at the 10 percent level, **
denotes significance at the 5 percent level, and *** denotes
significance at the 1 percent level.

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Table 5.4: Regression Model 3 Results

The Impact of Growth in the Number of Fintech Startups
and ROA

ROA Coeff. Std. T- Sig. R- F-

Err. stat. squared statistics
Growth .0019 .0006 3.07 0.002***
in
fintech
funding
CPI .0526 .0103 5.11 0.000*** 78.92% 157.62***
NIITI .0591 .0269 2.19 0.028** (0.0000)

NIM .5001 .0704 7.10 0.000***

TETR -.0465 .0146 -3.19 0.001***
TDTA .0423 .0204 2.07 0.038**
Constant -.0058 .0266 -0.22 0.828
The table reports the estimated coefficients, their
heteroscedasticity-robust t-statistics, their p-values, the overall
R-squared statistic, and the regression equation F-statistics and
its p-value. * denotes significance at the 10 percent level, **
denotes significance at the 5 percent level, and *** denotes
significance at the 1 percent level.

Tables 5.5-5.7 present the regression results of the effect

of each of the three examined fintech measures on bank ROE.
Regarding the R-square, the ROE is explained by growth rate in
fintech funding volume, number of fintech funding deals, and
number of fintech startups by approximately 72.57%, 72.34%,
and 71.98% respectively. The results indicate that growth rate in
fintech funding volume, number of fintech funding deals, and
number of fintech startups are significant. Also, NIM, TETR, and
TDTA are statistically significant for the three models as their P-
values are less than 0.05. However, NIITI is insignificant in the
three models. Moreover, CPI is insignificant in the growth in the

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number of fintech funding deals model, while it’s significant in

the other two models.

Table 5.5: Regression Model 4 Results

The Impact of Growth in Fintech Funding Volume and Bank
ROE

ROA Coeff. Std. T- Sig. R- F-

Err. stat. squared statistics
Growth -.0133 .0046 -2.89 0.004***
in
fintech
funding 72.57% 156.05***
CPI 1.391 .2481 5.61 0.000*** (0.0000)
NIITI .1252 .2804 0.45 0.655
NIM 4.408 .6937 6.35 0.000***
TETR -.2642 .1154 -2.29 0.022**
TDTA .5142 .2377 2.16 0.031**
Constant -.2942 .2821 -1.04 0.297
The table reports the estimated coefficients, their
heteroscedasticity-robust t-statistics, their p-values, the overall
R-squared statistic, and the regression equation F-statistics and
its p-value. * denotes significance at the 10 percent level, **
denotes significance at the 5 percent level, and *** denotes
significance at the 1 percent level.

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Table 5.6: Regression Model 5 Results

The Impact of Growth in Fintech Funding Deals and Bank
ROE

ROA Coeff. Std. T- Sig. R- F-

Err. stat. squared statistics
Growth .0734 .0223 3.29 0.001***
in
number
of
fintech 72.34% 165.89***
funding (0.0000)
deals
CPI -.2909 .3606 -0.81 0.420
NIITI .0769 .2784 0.28 0.782
NIM 4.646 .6909 6.72 0.000***
TETR -.2463 .1162 -2.12 0.034**
TDTA .5263 .2314 2.27 0.023**
Constant -.2570 .2729 -0.94 0.346
The table reports the estimated coefficients, their
heteroscedasticity-robust t-statistics, their p-values, the overall
R-squared statistic, and the regression equation F-statistics and
its p-value. * denotes significance at the 10 percent level, **
denotes significance at the 5 percent level, and *** denotes
significance at the 1 percent level.

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Table 5.7: Regression Model 6 Results

The Impact of Growth in the Number of Fintech Startups
and Bank ROE

ROA Coeff. Std. T- Sig. R- F-

Err. stat. squared statistics
Growth in .0163 .0063 2.58 0.010***
number of
startups
CPI .7789 .1445 5.39 0.000*** 71.98% 159.70***
NIITI .1363 .2905 0.47 0.639 (0.0000)

NIM 4.380 .6821 6.42 0.000***

TETR -.2776 .1151 -2.41 0.016**
TDTA .5080 .2403 2.11 0.034**
Constant -.2503 .2815 -0.89 0.374
The table reports the estimated coefficients, their heteroscedasticity-
robust t-statistics, their p-values, the overall R-squared statistic, and
the regression equation F-statistics and its p-value. * denotes
significance at the 10 percent level, ** denotes significance at the 5
percent level, and *** denotes significance at the 1 percent level.

Tables 5.8-5.10 present the regression results of the effect

of each of the three examined fintech measures on Bank Z-score.
The Z-score is explained by the variables in the models of growth
in fintech funding volume, number of fintech funding deals, and
number of fintech startups by approximately 59.83%, 59.44%,
and 60.29% respectively. The results indicate that the examined
fintech measures have insignificant impact on banks’ credit risk.
Nevertheless, almost all the other examined determinants of
banks’ z-scores show significance similar to previous findings in
the literature. TLTD is statistically insignificant; on the other
hand, NIITI and NIM are statistically significant at 1%
significance level. In addition, TETR and PNL are statistically
significant at 5% significance level in the three models except in
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the growth in fintech startups models, where PNL is significant at

1% significance level. CPI is significant in both the growth in the
number of fintech funding deals and the number of fintech
startups regression models, while it is insignificant in the growth
in fintech funding volume regression model.

Table 5.8: Regression Model 7 Results

The Impact of Growth in Fintech Funding Volume and Bank
Z-score

Z-score Coeff. Std. T- Sig. R- F-

Err. stat. squared statistics
Growth -.0039 .0040 -0.97 0.343
in
fintech
funding
Volume 59.83% 19.97***
CPI -.3934 .3309 -1.19 0.249 (0.0000)
NIITI 1.4127 .4163 3.39 0.003***
NIM 4.2249 .8154 5.18 0.000***
TETR -.2793 .1188 -2.35 0.030**
TLTD -.1159 .1305 -0.89 0.385
PNL -.5676 .2025 -2.80 0.011**
Constant 1.6452 .1098 14.99 0.000***
The table reports the estimated coefficients, their
heteroscedasticity-robust t-statistics, their p-values, the overall R-
squared statistic, and the regression equation F-statistics and its p-
value. * denotes significance at the 10 percent level, ** denotes
significance at the 5 percent level, and *** denotes significance
at the 1 percent level.

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Table 5.9: Regression Model 8 Results

The Impact of Growth in Fintech Funding Deals and Bank
Z-score

Z-score Coeff. Std. T-stat. Sig. R- F-

Err. squared statistics
Growth -.0001 .0162 -0.01 0.995
in
number
of 59.44% 16.65***
fintech (0.0000)
funding
deals
CPI -.5627 .2948 -1.91 0.072*
NIITI 1.401 .4140 3.38 0.003***
NIM 4.4802 .8099 5.53 0.000***
TETR -.2915 .1172 -2.49 0.022**
TLTD -.1270 .1365 -0.93 0.364
PNL -.5721 .2056 -2.78 0.012**
Constant 1.6601 .1105 15.02 0.000***
The table reports the estimated coefficients, their
heteroscedasticity-robust t-statistics, their p-values, the overall
R-squared statistic, and the regression equation F-statistics and
its p-value. * denotes significance at the 10 percent level, **
denotes significance at the 5 percent level, and *** denotes
significance at the 1 percent level.

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Table 5.10: Regression Model 9 Results

The Impact of Growth in Fintech Startups and Bank Z-score

Z-score Coeff. Std. T- Sig. R- F-

Err. stat. squared statistics
Growth .0076 .0059 1.29 0.214
in
number
of 60.29% 21.64***
fintech (0.0000)
startups
CPI -.5820 .2268 -2.57 0.019**
NIITI 1.434 .4199 3.41 0.003***
NIM 4.0850 .8170 5.00 0.000***
TETR -.2769 .1192 -2.32 0.031**
TLTD -.1124 .1270 -0.89 0.387
PNL -.5771 .1971 -2.93 0.009***
Constant 1.6533 .1083 15.27 0.000***
The table reports the estimated coefficients, their
heteroscedasticity-robust t-statistics, their p-values, the overall R-
squared statistic, and the regression equation F-statistics and its p-
value. * denotes significance at the 10 percent level, ** denotes
significance at the 5 percent level, and *** denotes significance at
the 1 percent level.

6. Discussion
This paper examines the influence of fintech entrants on bank
profitability and credit risk in Egypt from 2017 to 2021. The
results of regression models employing ROA and ROE as the
bank profitability measures show that fintech funding volume has
a significant negative impact on bank profitability. This means
that as fintech funding increases, bank profitability decreases.
This negative association is comparable with the findings of
previous research undertaken in emerging markets similar to

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Egypt, such as Wonglimpiyarat (2017) and Phan et al. (2020),

who studied Thailand and Indonesia, respectively. Furthermore,
according to Monika et al. (2021) study conducted in Indonesia,
fintech firms have an inverse effect on the profitability of
government banks.
The regression results, on the other hand, are inconsistent
with the Li et al. (2017) study, which was conducted in a
developed market, the United States. According to Li et al. (2017),
fintech investments have a strong positive impact on bank
financial performance. Li et al. (2017) use bank share prices to
assess bank financial performance, which is not the financial
performance measure examined in this study. As a result, this
could explain the contradiction in the findings.
Moreover, the rationale behind the negative impact of
fintech funding volume on the profitability of banks in Egypt can
be explained by the fact that large Egyptian banks are the main
funding sources of fintech startups. For example, according to
Central Bank of Egypt (2022a), the National Bank of Egypt, Bank
du Caire, and Bank Misr established an investment fund worth 1.3
billion Egyptian pounds to support innovation and fund fintech
and fintech-enabled startups with the aim that this fund becomes
the largest fintech focused fund in the region. In this study, the
National Bank of Egypt, Bank Misr, Banque du Caire, and other
large banks are included among the 20 banks of the sample.
Therefore, the impact of their massive funding contributions to
the fintech industry might have negatively impacted their profits
throughout the past years. This would explain the significant
inverse relationship between the rise of fintech funding in Egypt
and bank profitability.
Moreover, studies conducted in Indonesia supports the
findings of a negative relationship because banks are the leading
funding providers for fintech entrants in Indonesia as well.
According to MEDICI (2021), there is a deep collaboration
between fintech startups and Indonesian banks. Large banks in
Indonesia set up venture capital funds and incubators to invest in
fintech startups, some of which are BCA, Bank Mandiri, Bank
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Rakyat, Bank CIMB Niaga, and Bank Bukopin. Consequently,

the robustness of the negative impact of fintech funding on bank
profitability, particularly in developing economies, is
demonstrated. On the other hand, another rationale behind the
negative relationship can be due to the short study period of this
paper, from 2017 to 2021. As a result, bank funding for fintech
and fintech-enabled firms did not take long enough to demonstrate
its benefits to bank profitability, resulting in a negative
association.
Moreover, the findings of the regression reveal a
significant positive relationship between bank profitability and
number of fintech startups as well as number of fintech funding
deals using both profitability measures, ROA and ROE. This
implies that when the number of fintech entrants increases in
Egypt, the profitability of banks is positively impacted. Moreover,
when the number of fintech funding deals increases, bank
profitability increases.
These findings are consistent with the results of Li et al.
(2017) as they claim that growing number of startups and fintech
funding deals have a significant and positive impact on share price
of bank; thus, improves bank performance in United States. The
measures used in this paper for growth of fintech startups and
growth of fintech funding deals are same as in Li et al. (2017)
study. Moreover, the study period of the thesis is 5 years; on the
other hand, Li et al. (2017) study period is 6 years, revealing that
both studies are conducted on short periods due to limitation of
data. Thus, this would explain the consistency in the results.
In addition, the findings of this study regression models
are also consistent with studies of Haddad and Hornuf (2021),
Chahaidar et al. (2021), and Ibrahim (2018) that are conducted on
87 different countries (including developed and developing
countries), European countries, and Kenya respectively. Those
studies claim that fintech startups have a significant positive
impact on bank profitability using net interest margin, ROA,
ROE, Tobin’s Q, and annual stock return as profitability
measures. However, results are inconsistent with Abu Karash and
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Abufara (2020) as they state that fintech has an insignificant

impact on bank profitability, the study was conducted on Kenyan
and Lithuanian banks.
The rationale behind the positive impact of the growth in
the number of fintech startups and number of fintech funding
deals on bank profitability is that emerging fintech firms in the
market increases competition, putting pressure on banks because
the services offered by fintech firms are similar to those provided
by banks, particularly payment and lending services. According
to Central Bank of Egypt (2022a), payment and remittance fintech
firms represent 30% of the total number of fintech firms in Egypt.
Furthermore, lending fintech firms account for 15% of total
fintech firms. Thus, banks in Egypt started to adopt fintech in their
offered services in order to compete in the market and achieve the
same degree of innovation as fintech startups. This rationale is
consistent with the findings of Jakšič and Marinč (2019) who state
that the expansion of information technology and the competitive
pressure created by fintech startups benefit bank stability.
Moreover, the explanation behind the positive impact of
the growth in the number of fintech startups and fintech funding
deals on bank profitability may be indirect. The key drivers for
achieving financial inclusion in Egypt are banking digital
transformation and the use of fintech in the delivery of financial
services (Hussein, 2020). According to Alshehadeh and Al-
Khawaja (2022), financial inclusion has a positive effect on bank
profitability in Egypt. Thus, the growth in the number of fintech
firms and fintech funding deals could have positive impact on
bank profitability through enhancing financial inclusion in the
Egyptian economy.
Regarding bank credit risk, the results of the regression
revealed an insignificant relationship between banks’ Z-score and
the growth rate in fintech funding, number of fintech startups, and
number of fintech funding deals. This demonstrates that there is
no relationship between fintech entrants and bank credit risk.
These results are inconsistent with studies conducted in China by
Wang and Wu (2018), Pierri and Timer (2020), and Deng et al.
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(2021). Moreover, the findings contradict Haddad and Hornuf's

(2021) study, which is conducted in 87 countries (both developing
and developed countries). According to these studies, fintech has
a robust impact on the level of risk taking in banks. The studies
reveal that development of fintech startups enhances bank risk
management and reduces banks' exposure to systemic risk.
The justification behind the insignificant impact of fintech
on bank credit risk in this study can be attributed to the
characteristics of the sample period employed. The five-year
sample period spans the two years of the COVID-19 pandemic,
which had a significant impact on bank risk. As a result, all banks'
Z-scores were extremely erratic as shown in the descriptive
statistics displayed in table 5.1. Consequently, the results of the
regression models examining the impact of fintech on bank credit
risk might have been influenced by the extreme value of banks’
Z-scores.

7. Conclusion and Recommendations

The objective of this study is to examine the impact of fintech on
bank profitability and credit risk in Egypt during a five-year
period, from 2017 to 2021. To ensure the robustness of the
findings, both ROA and ROE are employed to assess bank
profitability. Moreover, the growth in fintech funding volume,
growth in the number of fintech startups, and growth in the
number of fintech funding deals are used to measure fintech. In
addition, the Z-score is utilised to assess bank credit risk.
Moreover, control variables, including internal and external
variables, are employed in the regression analysis to control for
differences between banks in each regression model. As a result,
three dependent variables are examined, with the three fintech
measures used alternately as independent variables for each
dependent variable, resulting in nine regression models.
The findings reveal that the growth in the number of
fintech startups and the number of fintech funding deals have a
significant positive impact on bank profitability. The justification

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for this relationship is the growing competition in the banking

industry which encourages banks to incorporate fintech in their
activities and engage in banking digital transformation. This leads
to improved and more convenient services to customers, which
enhances bank profitability. Thus, findings of this paper are
supported by the consumer theory and disruptive innovation
theory as illustrated in section 3.
On the other hand, the growth in fintech funding volume
shows a significant negative relationship with bank profitability.
The reasoning behind this relationship might be attributed to the
fact that several banks in Egypt are considered as the primary
source of funding for fintech and fintech-enabled startups, which
could have a negative impact on bank profitability, particularly on
the short-term. However, considering the impact of the growth in
the number of fintech startups and number of fintech funding
deals on bank profitability, it is clear that banks are highly
benefiting from the existence of fintech firms. As a result, banks’
profitability improves. Moreover, fintech does not have
significant impact on bank credit risk. However, the occurrence
of COVID-19 pandemic over the last two years in the five-year
sample period might have resulted in a highly volatile Z-scores.
As a result, the regression model results for Z-score and fintech
variables may have been negatively affected.
The Central Bank of Egypt could find this study of great
value, as the Central Bank of Egypt must continue to pay close
attention to fintech and fintech firms by supporting and funding
them. Based on the findings of this study, the CBE's
encouragement to fund and promote more fintech firms will not
only encourage more fintech firms to emerge and function in the
market, but will also contribute to increased bank profitability in
Egypt.
Moreover, according to the findings of this study, bank
management should adopt digital transformation and offer fintech
solutions to gain a competitive advantage and adapt to changing
market needs. Customers nowadays are searching for services that
are simple to use and convenient, and they have found this in the
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services provided by fintech firms. As a result, bank executives

should devise new strategies to capitalize on the development of
the fintech industry. This can be accomplished by developing
their own fintech solutions, outsourcing fintech services, forming
joint ventures with fintech firms, or acquiring fintech startups.
Furthermore, the study's findings are important for the
literature since they will shed light on the influence of fintech
entrants on bank profitability and credit risk in Egypt.
Additionally, this article investigates a new determinant of bank
profitability known as 'fintech,' which has not been addressed
before in the Egyptian market. Furthermore, the study employs
three measures of fintech firms that have not been employed
before in researches conducted in Egypt. Thus, the study serves
as a guide for future research on this topic in Egypt.
As a result of the paper findings, it is recommended to
reexamine the influence of fintech on bank credit risk across a
longer sample period in order to offset the effect of COVID-
19 pandemic on bank Z-score values. Furthermore, to ensure the
robustness of future findings, it is suggested for forthcoming
studies to employ other credit risk indicators in addition to Z-
scores, such as the non-performing loans ratio.

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