“Security stopped me at Cairo airport. Not clear yet why.”

In the early morning hours of June 30, 2009, Wael Abbas, an Egyptian blogger and political activist, posted the “tweet” on Twitter, the popular blogging website. Moments later, Hisham Kassem, a prominent publisher in Egypt and a fan of Abbas on Twitter, mobilized Egypt’s human rights organizations to call for his release. “We have sent our staff to the airport and speaking to security to end situation,” Kassem tweeted. “Prosecutor general notified, complaint made to Ministry of Interior, National Council for HR [Human Rights] also notified.” Abbas was released 10 hours later, his laptop and papers confiscated.

Dramatic stories such as this have caught the attention of journalists and other observers, who see online social networking sites as an increasingly critical political tool in Egypt, a country ruled by “emergency laws” since the 1980s. Often overlooked, however, is the fact that these sites can also empower aspirational businesspeople, providing them with a means to work within and around a commercial environment that traditionally has had significant barriers to entry. Online business activity, or e-commerce, is still in its infancy in Egypt but is poised to become the country’s next big story.

According to the government, the number of Internet users increased from 1% of the population in 2000 to 17.2% in 2008, or 13 million people. Nevertheless, a solid e-commerce culture has yet to develop, despite many of Egypt’s Internet users being urban youth from high-income households, whose counterparts in other countries are behind the global e-commerce explosion. Online transactions are few and far between – only 0.44% of Internet users conduct commercial transactions online. This statistic is consistent with the low number of secure Internet servers in Egypt. The World Bank reports that in 2008, Egypt had 1.1 servers per million people, compared with an average of 1.8 servers per million people in middle income countries (that is, countries having a per capita income of between US$1,000 and US$10,000). Beyond that, the government found that 71% of respondents to a survey it conducted did not know what e-commerce was, while 21% are aware of it but don’t want to use it. Why the reticence?

The primary reason for the underdevelopment of e-commerce is a lack of electronic payment options. Credit and debit cards are the lifeblood of e-commerce transactions. Yet in Egypt, only 10% of the population has bank accounts. Many Egyptians instead open savings accounts with the country’s post office. This phenomenon – combined with the fact that 45% of the population is younger than 18 and so are not yet eligible for bank-issued cards – means only 4% of Egyptians have debit cards and less than 2% have credit cards, according to market research firm RNCOS and consultants at Oliver Wyman.

The good news is that the number of people owning credit or debit cards is increasing. Visa International says it experienced a 40% rise in Egyptian card ownership in 2008. Sherif Hashem, executive vice-president of the government’s Information Technology Industry Development Agency (ITIDA), says the increase is due, in part, to Egypt’s growing credit culture.

Until recently, Egypt did not have a credit bureau, so there were no credit histories and no lasting consequences for a consumer who defaulted on a loan or wrote checks that bounced. To protect themselves, banks only offered credit cards to wealthy clients and required deposits ranging from 50% to 110% of the credit line, an offer too unattractive for even Egypt’s wealthiest individuals. “Banks were too risk-averse,” Hashem says.

He now hopes that I-Score, Egypt’s fledgling credit bureau, will help retail financial institutions manage their risks more strategically. The bureau, launched in 2008 with help from the U.S. Agency for International Development and the International Finance Corporation of the World Bank, reported 4.3 million corporate and individual customers in its first year. Since then, banks have been easing off on requiring collateral on credit cards as they begin using consumer credit ratings and payroll data to approve card applicants.

While waiting for credit and debit card use to increase, some online entrepreneurs have resorted to cash-on-delivery (COD) models. One early COD adopter is Otlob.com, a website founded in 1999 to provide a home delivery service for hungry locals in Cairo, which features menus from dozens of restaurants. The site accepts orders online, which are confirmed over the phone and transmitted to restaurants. The restaurants deliver the food, collect cash payments and later pay a per-order fee to Otlob. But COD is labor-intensive and becomes riskier as a transaction amount increases – customers may refuse to pay, changing their minds and cancelling their purchase after the order is placed.

In addition to COD, Egyptian e-commerce firms are experimenting with other payment methods, including prepaid scratch cards, debit cards and mobile payments. None has yet surpassed COD, especially for small businesses.

The Root of the Matter

Going hand in hand with an embryonic infrastructure is lackluster protection for online transactions. But recent developments indicate that the country is on the right track to address that. Egypt’s only law that specifically addresses e-commerce was enacted in 2004. Law No. 15/2004 accorded legal standing to verified electronic documents and added to the ITIDA’s vast remit the power to approve agencies that can verify these documents. Meanwhile, on October 5, 2009, the ITIDA announced the launch of the Egyptian Root Certificate Authority (Root CA), which links all certificate service providers (CSPs) in the country in order to provide uniformity and legitimacy to their activities, in addition to connecting them with other Root CAs around the world. The ITIDA’s Hashem reports that one such CSP has already received an operational permit, with two more expecting to have their permits approved soon. The services these companies offer will eventually give e-signatures full force in Egyptian courts.

Validating electronic documents may increase public confidence in e-commerce, but it is far from a comprehensive solution. Egyptians, like e-consumers elsewhere, fear the risk of identity theft and invasion of privacy that online transactions pose. Currently, all Egyptian encrypted information is based on public key infrastructure technology, of which ITIDA has full administrative control, including the ability to punish anyone who abuses the technology or violates its confidential nature. Yet neither identity theft nor privacy concerns have been addressed by the Egyptian legislature, leaving consumers understandably wary. Hashem says legislators are working on a draft law addressing online security, but he doesn’t expect it to be adopted for at least another two years. Why the delay? He cites a heated debate that’s dividing lawmakers over the fine line between spam and advertising, which shows no immediate sign of being resolved.

In addition to payment methods and legislation, another challenge for e-commerce is how Egyptians use the Internet. Wael Fakharany, country manager for Google in Egypt, Saudi Arabia and North Africa, explains that Egyptian online content is not ready for e-commerce. According to Google statistics, Egyptians consider the Internet to be first and foremost an entertainment medium that’s an attractive alternative to censored movies and television programs, rather than a commercial resource. Moreover, Fakharany says most online searches performed in Egypt are difficult to monetize, which, in turn, discourages online advertising and makes it more challenging for online businesses to prosper. He predicts that demand for online transactions will gain momentum first in the business-to-business arena because online advertising is less important for B2B in terms of attracting customers.

The Government’s Response

Internet usage among private businesses is 60%, according to the government. Among households, the figure is only 15%. The government wants to increase both. Under its “A PC in Every Home” program, it has placed three million computers in households through subsidies and generous financing, with payments as low as $9 per month. According to Euromonitor International market research, there are an estimated 18.4 million households in Egypt, which means that the program has resulted in approximately 16% of households now having computers. The government has also partnered with Telecom Egypt to provide dial-up Internet for the price of a local phone call, making access essentially free.

Meanwhile, the government is moving some of its own services online. For example, teenagers can register for the thanawiya amma, Egypt’s equivalent of the baccalaureate exam, and get their results online, eliminating the hassle of having to wait for hours in person to find out how they did. During 2009’s examination period, Google registered a sizeable increase in online searches related to the exam, as students and parents alike explored the new system. It’s one way to help people get used to conducting business online.

The government is also co-developing Arabiclanguage content on Google through a partnership with Al-Azhar, Egypt’s oldest university and a source of Arabic literature. Another program has Google promoting Egypt’s tourism, aviation, trade and investment sectors online. As part of the program, Google has agreed to train hundreds of local advertising experts and media experts on how to work on the web as well as invest in Egyptian online startups. There’s a good reason for Google’s interest: “Media in the Arab world is a $6 billion industry, yet only $100 million is funneled through online channels,” says Google’s Fakharany.

Google is also bolstering its own online Arabic content. It has developed a tool called Ta3reeb to facilitate Arabic searches on computers with Latincharacter keyboards and launched Ejabat, an interactive question-and-answer website in Arabic. It has also added a tailored version of its Google Sites service, which lets users create web pages in Arabic quickly, and has partnered with Wikipedia to translate 200,000 of the online encyclopedia’s entries into Arabic.

Despite the frenzy of activity, the government still faces obstacles. Its forward-looking administrators say they have been stymied by a conservative old guard and have been bogged down with bureaucracy. For example, the Economist Intelligence Unit, which is part of The Economist Group publishing house, reports that the ITIDA reserves seats on its board for state security officials. Part of that bureaucracy includes state security officials, who according to the Economist Intelligence Unit (of the Economist Group publishing house) receive standing seats on the board of ITIDA. State security is cautious when permitting new technology in Egypt.

For example, in 2007, when the government expressed concerns about iPhone users’ ability to locate sensitive security sites in the country, Apple agreed to drop the GPS feature from its iPhone model in Egypt. But according to a senior telecoms executive, local industry representatives lobbied at the highest levels to allay concerns, explaining how diffuse this technology already was. The phones are now sold in Egypt with GPS capabilities.

Beyond legislation and regulations, Egyptian officials will have to work hard to address Internet inequalities as well. Currently, dial-up access is virtually free, but the average cost for high-speed Internet access remains high relative to average per capita income. Statistics from the Ministry of Communications and Information Technology (MCIT) show that households earning more than $1,400 annually account for 51.8% of Internet users in a country where the average per capita income is $2,056. In 2008, the International Telecommunication Union found that Egyptians spent, on average, 5.9% of their monthly income on broadband Internet access compared with, for example, 0.3% in Morocco. To address this, the MCIT recently reduced the base price of broadband access from $27 to $8 a month. Also noteworthy is that, according to the ministry’s estimates, 24% of urban households own computers compared to 4.5% of rural households, with Internet usage reflecting that trend.

Social Networking Meets E-Commerce

As the government pursues changes to the legislative and electronic-payment landscapes to bolster e-commerce, some entrepreneurs have found a way to capitalize on the thirst among high-income urban youth for online distractions. Facebook, with 1.82 million Egyptian users, is leading the charge.

While political-interest Facebook “groups” in Egypt have proliferated, the networking site introduced a feature allowing users to create business-focused groups. This empowers users to showcase merchandise and services online, spread the word about their companies through networks of friends and associates, interact directly with consumers, and join forces with other businesses to advertise their goods on Facebook using links and testimonials. The best part is that it’s free – there are none of the rents or fees to pay that hosting and maintaining traditional websites usually require. Essentially, Facebook has become a golden opportunity for many entrepreneurs to set up small online “storefronts,” contributing to the rise of new businesses in Egypt.

In addition, Facebook businesses serve a niche debit and credit cards in Egypt, large and mid-sized businesses have had little incentive to get involved in online commerce because the sales volume hasn’t been high enough. The generally smaller Facebook businesses, on the other hand, can serve customers who are small themselves and often require more tailored services than larger companies can or want to provide. Businesses that have been doing well in the Facebook environment include retailers selling homemade products and imported goods.

Mai Ahmed Abdelhany, founder of the Facebook business Paint Ur Life, creates personalized graphic art to sell on t-shirts, mugs and wall hangings. Through Facebook, she has spread the word about her business, reaching nearly 3,500 people. Because businesses such as Abdelhany’s generally have low sales volumes, they can use a COD method as Otlob does, but require fewer logistical resources.

Facebook entrepreneurs take advantage of the site’s innate tendency to segment markets by creating networks of users who share the same interests and spending habits. In addition, many entrepreneurs add to the exclusivity of their businesses by granting access to their groups by invitation only. Others set up groups solely in English even though Arabic is their mother tongue. “I keep the site in English to attract a certain level of society,” Abdelhany notes.

Many businesses also target women. According to Shady Adel, owner of the Facebook-based cosmetics business Marvelous Beauty, Internet usage among women in Egypt is growing, and they tend to spend more on consumer product sites than men. It’s not just beauty products attracting female consumers. An array of Facebook groups offer, among other things, personalized t-shirts for women, baby clothes and wedding dresses.

Like bricks-and-mortar companies, Facebook entrepreneurs rely on maintaining high levels of overlooked by larger businesses. Given the dearth of credibility and service standards to keep their customers coming back. But in an online world such as Egypt’s, special customer care is especially important in order to help dispel concerns about shopping online. Sharing “friends” on Facebook, promptly answering questions through text messages or emails, encouraging customer feedback, and providing flexible return policies go a long way to putting shoppers at ease. Adel, for his part, acknowledges the importance of such customer relationship management at Marvelous Beauty. “My customers know who I am and can always contact me any time via Facebook,” he says.

Given that e-commerce is a new phenomenon with few players in Egypt, Facebook is particularly critical for entrepreneurs launching and expanding businesses, while establishing themselves as first movers in the online marketplace. By focusing on wealthy urbanites, small businesses are reaching a targeted, potentially lucrative segment of consumers. And they’re doing this with a robust business model, one with relatively low overhead costs so they can sell products at more competitive prices than traditional retail shops.

The story of e-commerce in Egypt will change as more households connect to the Internet, legislation regulating online activity evolves and consumer credit becomes more widely available. What’s more, Egyptians will feel increasingly confident going online as Arabic content in general, and Egyptian content in particular, expands. At that point, large retailers will begin muscling in on the online marketplace. Until then, innovative entrepreneurs can take advantage of their lead, thanks in large part to social networking sites. It is a new and open playing field.

This article was written by Matthew Axelrod, Stephanie Brockman, Francis Doumet and Salma Zahr, members of the Lauder Class of 2011.