Small and medium-sized enterprises (SMEs) play a crucial role in the Egyptian economy, although a historic lack of definitions and the large size of the informal economy have made it hard for government planners to scale their contribution. “Access to information on the SME sector is a major challenge and, as many operate in the informal sector, the infrastructure for collecting that information has traditionally been lacking,” Omar El Maghawry, CEO of FEP Capital, told OBG. “The last official report on the sector was in 2006, which counted a total of 2.45m SMEs – or 90% of all private enterprises – while a 2016 estimate suggests that figure has increased by nearly 37,000 business each year,” he added. The true figure is likely to be higher still.
In 2016, with unemployment rising and government finances under pressure, efforts to encourage private sector growth at the smaller end of the business spectrum took on a new urgency. As in many emerging and frontier markets in the region, SMEs also account for the majority – in this case, roughly two-thirds – of total employment; but they often find it challenging to access finance.
The Central Bank of Egypt (CBE), which has taken a proactive stance on SME lending for years, cites access to finance is one of the primary obstacles to small business growth (see Banking chapter). “Due to insufficient records, high perceived risk, a lack of documentation and other factors; only 47% of SMEs were found to be dealing with any of the banks’ activities, and just 22.4% have access to bank facilities, which is a very low percentage,” El Maghawry told OBG. “The double-booking practice performed by most SMEs is still a huge block – it makes it difficult for us to assess a company’s potential, and very difficult for us to invest in these companies as a regulated private equity firm looking for post-acquisition leverage and potential listing,” he added. In 2009, facing a cooling global economy, the CBE announced it would discount the value of loans granted to SMEs from the cash reserves banks are required to hold with the CBE.
In late 2015 it made a more significant move; after establishing definitions for micro- and small businesses for the first time, it revealed a new set of SME lending rules to be applied in January 2016. “At the same time, the CBE launched a programme to finance some 350,000 SMEs with LE200bn (equivalent to $10.6bn as of December 2016) and a lower interest rate of 5% per annum – part of a broader initiative launched by President Abdel Fattah El Sisi in 2016,” El Maghawry told OBG.
A new law that requires microfinance institutions to obtain a licence to operate brought the number of recognised institutions from 400 to 640 The programme also requires banks to increase SME loans to 20% of their portfolios and is expected to create some 4m jobs within four years, helping to unlock the full economic potential of SMEs. “SMEs are a crucial element in any economy,” El Maghawry told OBG. “In Egypt, they contribute 70-80% to GDP, employ nearly 66% of the workforce and account for 75% of non-agriculture manpower, which means their contribution to the economy is significant at all levels.” This stimulus package could amount to an injection of $25bn, according to figures from Wamda Research Lab (WRL), an organisation focusing on entrepreneurship in the MENA region.
Under the new lending guidelines, companies with revenue of between LE1m ($53,000) and LE20m ($1.1m) can access loans at the 5% interest rate, which is significantly lower than the CBE’s main credit rate of 11.25%. The regulator has established a priority list for the new funding, with an emphasis on export-oriented projects based on innovative ideas – an important factor in the context of Egypt’s deteriorating balance of payments.
The new initiative follows a steady campaign by the Egyptian authorities to expand bank involvement in the country’s SME segment. In 2012 the CBE allowed lenders to write off an amount equivalent in size to their SME credit facilities from the 14% required reserve ratio (RRR), while also reducing the RRR from 14% to 12% – in effect freeing up liquidity to be directed to the SME sector.
Furthermore, the arrival of new mini-branches to previously underbanked areas of the country – thanks to the regulation introduced by the CBE in 2014, which established a range of capital requirements depending on a branch’s location – is also seen as an important facet of the government’s wider efforts to support the growth of SMEs.
Although the country’s credit bureau I-Score has deepened coverage of the SME segment through the launch of Tasnif, a subsidiary that focuses exclusively on small and medium-sized firms, international credit ratings agencies have said that pushing banks towards SME lending at rates below their deposit rates could damage lenders’ balance sheets and increase overall credit risk.
“Recent regulations are credit-positive for the country but credit-negative for the banks,” Moody’s said in a statement in early 2016, in response to the new regulations. In spite of the concern that the new SME lending quota is driven more by an economic ambition than a prudential one, the CBE has pressed ahead with implementation of its new regulations, indicating in 2016 that it would impose fines on banks that do not reach the loan target.
The five biggest commercial banks have already established SME lending platforms, and smaller businesses are starting to benefit from the development of non-bank financial institutions with an SME interest. In November 2014 the government promulgated a new Microfinance Law, first proposed in 2010 but delayed by the 2011 revolution.
The new law’s requirement that microfinance institutions (MFIs) obtain a licence to operate brought the number of recognised MFIs from 400 to 640, according to the Egyptian Financial Supervisory Authority (EFSA). By May 2015 the EFSA had already issued 253 licences, with more to follow. Mix Market, a data provider for the MFI industry, reports there are over 873,000 MFI borrowers in Egypt, with $295m in outstanding loans.
With the number of MFI licences well over the 600 mark, the industry is well placed to advance the cause of SMEs in Egypt. Taken together, the CBE’s recent actions on SME lending and the development of the Egyptian microfinance industry are an important step in the government’s long-term ambition to encourage SME growth.
Although bank lending has been the traditional route for many SMEs looking for outside financing, Egypt has a wide variety of existing mechanisms for helping firms scale up. Perhaps the most prominent of these is the Nilex, an alternative board launched in 2010 with lighter disclosure and listing requirements (see Capital Markets chapter). For example, as of late 2016 the revised fee schedule brought the fees that listed SMEs must pay down to LE0.50 ($0.03) per LE1000 ($53) of capital, with a minimum of LE500 ($26.50). Firms also do not have to exceed a minimum profit level and only need to produce financial statements dating back one fiscal year.
Like most SME-focused boards, it had a slow start at the outset, but the past few years have seen interest pick up speed, with a steady rise in trading, a turnover ratio that exceeds that of the main board and the launch of a new SME index to track performance. The board has 32 companies currently listed, with two firms joining the market in the first couple months of 2017, and the trend does not appear to be slowing: MB Engineering’s initial public offering, for example, was oversubscribed by more than 29 times when it ended in April 2016.
Looking ahead, the CBE has highlighted its intention to cooperate with the Federation of Egyptian Industries, the Ministry of Trade and Industry (MTI), the Arab Organisation for Industrialisation and other concerned ministries, as they continue to roll out separate initiatives that target the country’s SME sector.
For example, the MTI has announced plans to build 21 specialised clusters for SMEs across 14 of the country’s 27 governorates to help improve coordination between firms, boost scalability and build up talent pools. These programmes come on top of several other policies currently in place, including those led by the Social Fund for Development, the Industrial Modernisation Centre and the Ministry of Finance’s SME development unit (see overview).
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