Omar El Maghawry, CEO, FEP Capital: Interview

Interview: Omar El Maghawry

How does listing on the Nilex benefit small and medium-sized enterprises (SMEs)?

OMAR EL MAGHAWRY: The Nilex gives SMEs a chance to raise capital within a regulatory environment that is designed to meet their needs; therefore, it has fewer listing and disclosure requirements and offers lower listing and trading fees compared to the Egyptian Exchange (EGX). Any company seeking to list on the Nilex must have a nominated advisor, who will stay with the company for the first two years of its life as a Nilex-listed company. This nominated advisor helps the applicant prepare for listing, and ensures the company’s compliance with the listing and disclosure rules. The company, together with the advisor, then submits a listing request to the Listing Department for approval. After granting preliminary approval, the Listing Department submits the application to the Listing Committee for final approval, pending which the company, together with the advisor, can offer the firm’s shares to investors.

The Nilex listing requirements are considered to be more lenient than the main market’s listing prerequisites to a certain extent, although some companies face a hard time complying with the listing requirements. On average it takes around one and a half years for a company to list its shares from the day it begins looking for a nominated advisor.

What are the primary barriers facing SMEs in terms of securing finance in Egypt?

EL MAGHAWRY: As previously mentioned, the Nilex gives SMEs the chance to raise capital within a regulatory environment designed to meet their needs. According to a study done by the Central Bank of Egypt, in cooperation with the Central Agency for Public Mobilisation and Statistics and the Faculty of Economics and Political Science at Cairo University, SMEs are less likely to be able to secure bank loans than large firms due to a lack of records, a high level of perceived risk,a lack of documentation and other factors. Only 47% of SMEs were found to be involved in banking activities and just 22.4% have access to bank facilities, which is a very low percentage. It was also found that the higher the capital, the easier it is for the SME to have access to a bank facility. Therefore, the Nilex could play a key role for SMEs by offering an alternative means of finance to the banking system.

Some private firms have also begun to focus more of their attention on the SME market in Egypt because of its high growth potential, especially after the launch by the president of the LE200bn ($23.6bn) initiative supporting SMEs at the beginning of 2016. Investing in SMEs is often high risk. Businesses that have high returns but are small are a key driver of economic growth. The level of risk depends on whether the investor will be able to structure and manage SMEs in the correct way. Investments in SMEs are also usually long term and, therefore, not subject to short-term volatility. The government can also encourage investments in SMEs through income and capital gains tax breaks.

What can be done more broadly to build up capacity among the country’s SMEs?

EL MAGHAWRY: We believe that the government should have more policies supporting SMEs, as they are considered to be the most crucial element of the economy. SMEs account for nearly 70-80% of GDP. They also employ nearly 66% of the total workforce and account for 59% of industrial production.

The main challenges in regard to SMEs is that a large portion of the sector is operating informally, meaning that the government must find a way to encourage those firms to work in a more regulated environment.

Education can also help encourage SMEs to take advantage of the benefits which are available to formalised companies. The government is currently working on several initiatives in this regard, including working with banks on improving funding opportunities, although so far only state banks are participating.