Depending on which statistics you read, up to 75% of Egypt’s workforce is employed in the SME sector, making it a crucial part of the country’s economy. Getting finance into the sector is therefore crucial.
Rather than take the Nile Corniche, he recommends driving through the unpaved and heavily pot holed back streets of the Egyptian capital, where donkeys compete for space with cars. Here, he says, you cannot help but notice that all the shops are full. Look a little closer, and you’ll see that the retail outlets are interspersed with hundreds of tiny workshops, all of which are hives of frenetic round-the-clock activity.
Defining the SME sector
Welcome to the vibrant, chaotic and exclusively cash-based world of egypt’s small and medium sized businesses (SMEs), which are often described as the backbone of the country’s economy. Data on the size of the SME sector varies, in part because although there are official parameters defining small companies, the vast majority populate Egypt’s sprawling informal economy.
“Egypt’s informal economy is estimated to be at least the size of the formal economy, if not larger,” notes a recent report published by the London-based frontier markets specialist, Exotix, which adds that only 10% of SMEs are estimated to be part of the formal economy.
Hany Farahat, senior economist at CI Capital in Cairo, says that the country’s approximately 2.5m SMEs account for about 75% of Egypt’s total workforce. According to the Central Bank of Egypt (CBE), 85% of the country’s SMEs employ fewer than 20 employees, while 83% have tiny capital bases of below E£250,000 ($3,300). An unusually large proportion of Egypt’s SMEs (51%) are in the manufacturing sector.
The World Bank/IFC’s 2014 Doing Business in Egypt report sheds some more light on the size and structure of the SME sector, calculating that 98% of companies in Egypt employ fewer than 10 people, and that SMEs contribute 63% of the country’s GDP.
In spite of its clear importance as a generator of economic activity and employment, the formal and informal parts of the SME sector in Egypt have been neglected by the financial services industry. According to the Exotix update, total lending by banks to SMEs represents just 7% of their total portfolios, in spite of an exemption from Central Bank of Egypt (CBE) reserve requirements equivalent to notional loan values to SMEs.
This represents a small increase since 2010, when SMEs accounted for 5% of bank lending, according to a World Bank survey. It is modest, however, compared to other leading North African economies, with World Bank data indicating that SME lending accounts for 15% of the total in Tunisia and 24% in Morocco in 2010.
“SMEs in Egypt have been under-addressed and have had virtually no access to bank finance,” says Farahat. “New initiatives such as the microfinance law are positive steps, but there is a lot of work that still needs to be done to improve small companies’ access to funding.”
The microfinance law, passed in November 2014, allows non-bank microfinance institutions to make loans of up to E£100,000 ($13,190) to projects and borrowers regarded as too small or insufficiently creditworthy to be eligible for bank loans. In February, the Egyptian Financial Supervisory Authority (EFSA) awarded its first licence under the terms of the new law to the specialist microfinance lender, Reefy Microfinance Enterprises Services. Reefy, which has paid-up capital of E£22.5m ($2.97m), was originally set up by Ahmed El-Bardai, a former Banque du Caire chairman.
Increased bank lending to SMEs
Today, Egypt’s leading banks insist that they are focusing their attention more on SME lending than ever before. The oldest and largest public sector bank, National Bank of Egypt (NBE), has indicated that it plans to increase the size of its SME portfolio from E£12.5bn to E£15bn ($1.65bn to $1.98bn) in 2015.
Banque Misr, meanwhile, has also unveiled a series of initiatives to finance micro, small and medium sized companies. In April 2014, according to the state-owned news agency, MENA, it announced that the first of these would focus on providing SMEs with loans of E£1,000-E£50,000 ($130-$6,550) with tenors of two years. A second programme will offer facilities of up to E£2m ($260,000) in short and medium term maturities of up to five years. Misr’s third SME lending programme, targeted at medium-sized companies, will make facilities of up to E£30m ($3.9m) available with seven year maturities.
Foreign-owned banks in Egypt have also been increasing lending in the SME area. At the end of 2014, for example, some 30% of Emirates NBD’s E£2.4bn ($320m) Egyptian credit portfolio was accounted for by SME loans. Banque Audi’s Egyptian operation, meanwhile, has indicated that it plans to more than double its SME lending from E£160m ($21.11m) at the end of 2014 to E£400m ($52.77m) by the end of 2015, according to the local Daily News.
SME banking is, however, not at the top of the to-do list for all foreign banks in Egypt. HSBC, for one, had to bat away some negative publicity recently when it was reported that it had written to a number of smaller customers advising that it had closed their accounts.
Leveraging the potential of the SME sector has also been identified as a priority for Commercial International Bank (CIB) — Egypt’s largest private sector bank. It launched its business banking pilot project in 2011, and the scheme went live in 2012, targeting companies with annual sales of up to E£60m ($8m). Today, CIB’s business banking unit has some 4,000 customers, according to the bank’s latest IR presentation.
Hisham Ezz Al-Arab, CIB’s chairman and managing director, says that the chief competitor to bank lenders in the SME market has traditionally been Egypt’s parallel or shadow banking sector. “Our challenge is to reach the point where SMEs recognise that it is cheaper for them to satisfy their financial requirements through regulated financial intermediation rather than through the parallel system,” he says.
Shadow banking for SMEs in Egypt, says Al-Arab, can often take the form of supplier credit. “Small grocery shops buying from manufacturers, for example, are often sold credit as zero interest products, much as car dealers used to do,” he says. “The reality is that the cost of supplier credit is much higher than bank lending.”
Al-Arab adds that Egypt’s SMEs need more than basic lending. “What is needed… isn’t so much financing for small businesses as hybrid equity and business incubators to give them advisory services,” he says.
Attacking red tape
Others argue that SMEs in Egypt would benefit from reforms chopping out some of the red tape that is especially draining for micro and small companies. A 2014 assessment of SME policy in the MENA region published by the OECD, the European Commission (EC) and the European Training Foundation (ETF) recognises that some progress has been made in this respect in recent years.
For example, minimum capital requirements have been eliminated for limited liability companies, while the registration process for business start-ups has also been accelerated. According to the World Bank/IFC’s 2014 Doing Business in Egypt report, as recently as 2004, individuals had no option but to travel to Cairo in order to register and start a business. Today, there are one-stop shops for registering new companies in Alexandria, Assuit and Ismailia and Cairo. The result, notes the World Bank/IFC report, is that it takes eight days to register a new business in Cairo, Alexandria and Giza, compared with 11 in cities such as Aswan, Kharga and Port Said.
Nevertheless, the OECD/EC/ETF reports that “it takes more than four years to close a business, longer than in any other MED economy”. The MED economies in the assessment are Algeria, Egypt, Israel, Jordan, Lebanon, Libya, Morocco, Palestine and Tunisia. The assessment adds that “the cost of the overall procedure represents 22% of the debtor’s estate, higher than any other MED economy except Israel. In addition, creditors recover only 16 cents for every dollar owed, which is the lowest recovery rate among MED economies”.
International agencies have been responding to the requirement for support and advisory services through a number of initiatives, with the European Union (EU) and the European Bank for Reconstruction and Development (EBRD) launching a Small Business Support (SBS) unit in Alexandria in March 2014.
The IFC, meanwhile, which committed almost $1.1bn to 20 projects in Egypt between FY2011-2014, reports that its principal focus in the country has been on “supporting companies with the ability to create jobs, boosting access to finance for small and medium enterprises, and demonstrating Egypt’s long-term potential to investors”.
Several other supranational development banks have also been expanding their lending programmes for SMEs in Egypt. EBRD, for example, which opened a resident office in Cairo in November 2014, has now invested in 185 mid-caps and SMEs. More specifically, it has set up a $30m programme helping NBE to on-lend to SMEs, as well as a $20m pilot Women in Business facility and a $30m scheme for lending to SMEs exploring opportunities in energy efficiency projects.
FRENCH VERSION
