Attempts by the Central Bank of Egypt (CBE) to boost lending to small and medium-sized enterprises (SMEs) dates back more than a decade. The Access to Finance initiative was one of the pillars of the second Egyptian banking reform plan – which was in effect over the 2008-11 period – and introduced the idea of exempting banks from a portion of their reserve requirement, equivalent to the direct facilities they extended to SMEs. This era saw a dedicated SME unit established in the Egyptian Banking Institute (EBI) to provide specialised training to banks and SMEs. The CBE also undertook a nationwide census to obtain an accurate picture of the SME landscape – a process made particularly challenging by the large degree of informality in the Egyptian economy. This first step did much to highlight the issue of SME lending, but less to increase access to finance, as the SME segment remained a high-risk and unattractive prospect to lenders. In June 2016, therefore, the CBE made a more decisive move, ordering banks to boost the share of SME loans in their total loan portfolios to 20%, and capping rates for SME lending to 5% for small businesses and 12% for medium-sized firms.
In 2017 the CBE made some small refinements to its scheme, extending it to renewable energy companies established after February 2016, broadening the definition of SMEs to include more medium-sized firms, and allowed financing from NGOs and international financial institutions to count towards the 20% SME lending target banks are required to meet.
Banks were given until 2020 to align their loan books with the new target, which – although not unique as a concept in the region – is one of the highest in emerging markets. In return, lenders were permitted to reduce the mandatory reserves they hold with the CBE by the amount they extend in the form of SME loans.
Good Deal
The new SME targets are a challenge for the sector, particularly for those banks that have little or no record of business in the segment. Banks face costs in the form of increased exposure to risk and the need to hire personnel with knowledge of SMEs and their differing requirements. However, most analysts at the time agreed that meeting the deadline was possible. The government-owned banks were already well advanced in SME territory, and the big five institutions had moved to boost their SME lending.
Egypt’s banks also saw a useful opportunity in the CBE’s decision to allow them to offset their SME lending against their required reserves. Rather than park capital at the CBE with no interest, they were able to deploy their newly liberalised reserves in the money markets, investing in high-yielding Treasury bills. Average yields on the 91-day Treasury bill were over 18% in January 2018, making the practice of placing capital in government paper a lucrative one for domestic banks. The margins secured by lenders this way have helped them overcome the costs associated with SME lending.
Current Status
With time to meet the CBE’s deadline running short, the progress of Egypt’s banks towards achieving the 20% SME lending target will be heavily scrutinised in 2019. The regulator has recently demonstrated its determination that the entire sector attains its objective. In late 2018 the CBE reported that many banks had shown a willingness to increase the size of their SME loan portfolios, but that others needed “more incentives to take part in the initiative”.
Once such inducement comes from the Credit Guarantee Company (CGC), in which the CBE acquired a 20% share in January 2018. Through the acquisition the regulator was able to create a LE2bn ($112.4m) guarantee trust fund targeted at SMEs, making it easier for banks to lend to smaller companies with no or inadequate collateral. This speaks directly to one of the domestic industry’s biggest concerns: poor record keeping and low accounting standards place the bulk of Egypt’s SMEs beneath the threshold of banks’ prudential lending criteria. By underwriting credit extended to smaller businesses, the CGC helps financial institutions to serve clients they might otherwise have been unable to.
Widening Mandate
By October 2018 the CBE reported that Egyptian banks had disbursed LE110bn ($6.2bn) of LE200bn ($11.2bn) it had set aside for SME financing over a four-year period ending in 2020. The regulator also noted, however, that funding alone would not be sufficient to realise the full potential of the SME sector, and it therefore must be accompanied by the development of an SME-friendly business environment. This represents a broadening of the CBE’s SME drive, and one it expects domestic lenders to play a considerably more proactive part in.
Nonetheless, the regulator continues to play a central role, and in 2017 it joined forces with Nile University to launch the five-year Nile Pioneers initiative, which aims to help entrepreneurs in the SME arena. Under the project’s framework, banks can establish permanent support centres in areas rich in investment opportunities, while Nile University provides business service centres in its headquarters, giving technical support and sharing research expertise. The Financial Regulatory Authority also has a role in the project, lending its expertise to the preparation of manuals and tools, and providing training sessions in areas such as real estate financing and financial leasing. Under the first round of funding, five projects were chosen from 130 applicants. Each project benefitted from LE150,000 ($8430) in funding, and the winning ideas included an automated irrigation system, an electronic platform linking farmers and traders, and a packaging and distribution solution. Projects such as Nile Pioneers are, however, limited in scope, and while these schemes represent useful technological advances, the hand-picking of a small number of start-up ventures is not the broad revolution in SME financing that the CBE is targeting.
Changing Attitudes
Therefore, the CBE is also focused on changing the attitude of lenders, and from 2019 it will be awarding points to banks for their business development centres, as a way of highlighting their role in the provision of non-financial advice to the SME market. The CBE has also announced that it intends to place a requirement on banks to gain an entrepreneurship certification, the details of which will be finalised with the cooperation of the International Labour Organisation, the Frankfurt School of Finance and Management, and the Egyptian Banking Institute.
A number of banks have already started to provide a range of ancillary services to SMEs beyond their core lending function. Those that are part of broader financial groups are well positioned to use their subsidiaries to provide SMEs not only with financing options, but also a host of non-lending products and services to support their growth. QNB Alahli, for example, is integrating its normal SME banking services with a range of products from its subsidiaries, which include QNB Alahli Life Insurance Company, QNB Alahli Leasing Company and QNB Alahli Factoring Company. According to the lender, by the end of September 2018 its SME portfolio accounted for some 19.51% of its loan book in total.
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