Economic View

On developing the country’s market for small and medium-sized enterprises (SMEs)

What is the environment around SME activity on the Nile Stock Exchange (NILEX), and what areas do you believe need more focus?

OMAR EL MAGHAWRY: There is a lack of interest in the SME segment on the part of investors for several reasons, but one is that Egypt has not had a targeted focus on SMEs to date. The NILEX has 32 companies listed, but no dedicated management, thus the best option is for the NILEX to have its own chairman and CEO. We would also like to see a valuation for the NILEX and have it listed on the Egyptian Exchange (EGX). Development initiatives have the attention of one body or another for a period of time, but other pressing priorities means focus eventually fades away. Each company needs to have its own dedicated management and objectives, and the management need to deliver results. 

A key priority of the EGX at the moment is the programme of government initial public offerings, which makes sense given the size of the project and the benefits this will have for Egypt’s capital markets overall. However, this does not in any way mitigate the need for ongoing efforts to support the NILEX. 

What barriers limit SMEs’ access to the regulated market and financial institutions? 

EL MAGHAWRY: Indeed, another challenge that Egypt faces with respect to SMEs is the difficulty in finding qualified leads, despite the fact that the economy is overwhelmingly composed of SMEs. For instance, out of the 800 companies that we have looked at, very few qualified for next stage funding due to diligence matters. One reason for this is the prevalence of companies keeping multiple accounting books. Many SMEs have one set of books for the tax authority, one set for the banks and the real set for the shareholders. Of course, regulated entities cannot operate in this way. 

The reservation on the part of many SMEs to using their real records is the fear that they will be held accountable for past taxes. Any effort to reduce the grey economy and bring these companies into a fully regulated market runs into this obstacle. One part of the solution has to be a comprehensive SME tax law that limits liability for past unpaid taxes for companies that come clean and submit their real books, and use them going forward. If you are hiding 70% to 90% of your business revenue, the country is missing out on the huge benefit of that economic contribution. We are stuck in the middle at the moment, so it is a question of whether we reprimand SMEs for their past conduct or we benefit from them going forward.

How can the NILEX be made more attractive to SMEs?

EL MAGHAWRY: On a good day the NILEX makes LE1m ($57,400) in trading. As an owner of an SME, you want to go to the NILEX to raise capital, but this is not an option if there is no liquidity. Increasing the liquidity of the NILEX will require real attention. The same need for a dedicated regulatory unit is true. Greater regulation and enforcement of rules on the NILEX would increase its attractiveness as a platform for SMEs significantly, even in terms of ensuring that the required data is submitted and available so that asset managers are able to do their due diligence to participate in the market. Many of these businesses do not necessarily need money, but many do require better corporate governance and structure. 

SMEs looking to raise capital are looking to the EGX rather than the NILEX, but the requirements of the EGX are a big step for most family businesses. The NILEX could be a good stepping stone to listing on the EGX, but only if we are able to tackle some of the issues around governance and liquidity to make it a more attractive market. I know of one company that has taken this path, but more success stories would make the NILEX a real alternative for raising capital.