Crediting small businesses: Financing SMEs, the country’s leading source of economic activity

Much has been made of the government’s reliance on the domestic banking sector to fund its fiscal obligations in the wake of the 2011 uprising. The stream of high-yield T-bills has proved such an effortless and lucrative line of business to the nation’s lenders that the private sector – with the exception of the blue chips – has been crowded out of the credit market. However, it is important to describe this phenomenon as the acceleration of a trend that was already well established by the time the political unrest of 2011 effectively excluded Egypt from international bond markets.

UNDERLEVERAGED SECTOR: Research conducted by the Dubai-based Rasmala Investment Bank in 2009, at the conclusion of a number of years of healthy GDP growth and massive foreign direct investment, showed that Egypt’s banking sector was distinctly underleveraged, with a loan-to-deposit ratio of 52.3%. One explanation for such inefficiently high liquidity levels was the relatively rigid credit policy implemented by the Central Bank of Egypt (CBE) as it moved to enhance the quality of bank’s asset sheets, but the other reasons adduced then were similar to those frequently heard today: attractive yields on government securities had left little incentive for Egypt’s banks to penetrate the small and medium-sized enterprise (SME) segment, so that only the large corporations and companies with which banks had built close relationships were being adequately serviced by the industry.

The political turbulence of 2011 has only exacerbated this problem. The slowing economy has discouraged banks from taking on risk, while the widening budget deficit and a shortfall of international funding have seen an increasing amount of state securities directed towards the domestic banking sector. For 2008/09, the government issued LE332bn ($55.6bn) in T-bills and LE23bn ($3.8bn) in T-bonds, according to the Ministry of Finance; during the period July 2011 to May 2012 T-bill and T-bond issuance rose to LE525.3bn ($88bn) and 78.8bn ($13.2bn), respectively. The argument that the government is crowding out the private sector, and particularly SMEs, has grown in strength on the back of these figures, and Egypt’s banks, in the eyes of some, are not playing the developmental role that they could for the local economy. ENGAGING SMEs: Egypt’s largest banks, however, point to their strenuous efforts over recent years to engage with the nation’s SMEs, which the CBE defines as firms with a turnover of less than LE10m ($1.7m) per year.

“Most of Egypt’s banks have started to look at SMEs since 2010. We created a dedicated line of business to re-gear the efforts into this sector, believing in its potential and profitability. Our strategy has not changed that much since then. It is a question balancing growth and cost of risk,” Sameh Badry, deputy chief financial officer of the Financial Division of National Société Générale (NSGB), told OBG. The NSGB’s SME outreach includes consultancy, financing and other services.

Commercial International Bank, meanwhile, runs a dedicated SME service through two central units in Cairo and Alexandria, offering financial advice and medium-term financing of up to five years. In 2011, its revenue derived from the SME segment totalled LE597.6m ($100m), compared to the $2.2bn taken in by its corporate banking division, according to its annual report, but expanding its SME business remains central to its growth strategy.

STATE APPROACH: State-owned banks tend to be less explicit in their SME offerings, but have made a similar turn towards the segment in recent years. In 2011, National Bank of Egypt (NBE) extended LE2.2bn ($368m) of credit to the sector, bringing its total accumulated SME lending to some LE8.6bn ($1.44bn) – or 9% of its total credit portfolio. It also introduced a number of new programmes and products to meet its SME clients’ needs, such as its new Master Standard credit card and Master Secure Code service, as well as launching the Al Ahly Mortgage Finance Company. Banque du Caire is also putting increased focus on SMEs.

Banque Misr has not embarked on an SME-focused marketing campaign like the private sector banks, but the public institution has built up an SME portfolio through its extensive branch network. Financing packages are available to SMEs through all the bank’s credit units, dispersed across Egypt. Small-sized enterprises can have their current and under-construction projects facilitated with short and medium-term loans up to a value of LE2m ($368,000), while medium-sized clients are granted credit limits of up to LE20m ($3.35m).

In 2010, the bank expanded its SME offerings with the launching of certificates of guarantee and new products for tax and toll payment. Of the total credit of LE45.3bn ($7.58m) it extended over the 2010/11 financial year, LE1.8bn ($301m), or about 4%, was directed to SMEs and retail clients.

EXTENDING CREDIT: While the efforts of the banking sector to tap into the SME market are plain to see, SME credit extension levels ranging from around 4% to 10% of total credit suggest that the segment has yet to be fully exploited by Egyptian banks. Foreign players in Egypt, as might be expected, have also been similarly corporate-focused in their lending. HSBC, for example, which entered the market in 1984 to concentrate solely on the corporate segment, has over the past decade diversified its product offerings to transform their Egyptian operation into a universal one.

Nevertheless, in 2011 its lending activity was roughly 50% corporate, 20% personal financial services, 20% retail, and the remaining 10% a mixture of SME banking and some other areas. According to Mohamed Abbas Fayed, the vice-chairman of Banque Misr, Egyptian SMEs typically source funding from the underground economy, as they do not generally meet the requirements to borrow from more traditional lenders in the financial system. From a bank’s point of view, lack of awareness regarding banking norms frequently manifests itself in the form of non-performing loans, or late payments on credit facilities. “Our strategy aims to expand beyond our corporate base and moving into the consumer and SME segments,” Rashwan Hammady, head of strategic planning at Commercial International Bank, told OBG. “One of the problems we face here is that some people don’t understand that if you have a due date for a personal or business loan instalment you need to meet it, or you will be negatively listed by the central bank. You therefore need a different collection strategy in Egypt. When we post out our account statements we include information about the importance of paying on time, et cetera, but all this costs money.” The answer to the SME credit problem is that banks need to turn prospective customers into bankable propositions, and keep collection costs to a minimum.

Egyptian banks are in the early stages of their relationships with the nation’s SMEs, even though the CBE estimates the SME segment accounts for more than 80% of the nation’s economic activity, while also providing more than 85% of all employment. These figures, more than others, show how important it is that the nation’s banks’ efforts to reach out to them succeed.