Aiding the development of the nation’s SMEs

Although estimates vary, sources such as the OECD and Egypt’s General Authority for Investment and Free Zones (GAFI), the Ministry of Investment’s promotion agency, assert that small and medium-sized enterprises (SMEs) account for between 80% and 90% of total businesses, and between 75% and 80% of employment. However, the development of SMEs has been hindered by structural challenges, including the burden of regulatory compliance, limited resources for training and human capital development, and the difficulties they face in accessing external financing due to the relatively conservative policies of the banking sector.

Government Efforts 

Much of the current effort to boost the sector is generated by public sector bodies. One of the most important of these is the Social Fund for Development, which was set up in 1991 to mitigate the effects of the government’s macroeconomic policy of market liberalisation. Its developmental financing remit incorporates community-level initiatives; mobilisation of national and international funds; and efforts to work with governmental bodies, non-governmental organisations and private sector groups to provide employment opportunities.

Legislation passed in 2004 gave the organisation an explicit mandate to support SMEs in terms of access to finance, establishment, licensing and similar matters, and made it the main coordinating agency of policy development for the sector. One of its most successful programmes has seen the fund partner with local banks to provide development financing. These channels carried the bulk of the organisation’s SME financing, which in the first half of 2013 amounted to a total disbursement of LE839.6m ($119.2m) and was distributed to 7663 separate enterprises.

The Ministry of Trade and Industry also plays a major role in the government’s efforts to boost SME growth. It carries out its mandate through three entities: the Industrial Modernisation Centre, tasked with improving the performance and competitiveness of Egyptian Industries; the Industrial Development Authority, which is primarily occupied with land allocation and registration for SME industrial projects; and the Egypt Technology Transfer and Innovation Centres, charged with developing research and development capabilities in a number of targeted industries. Other arms of the government that have a direct role in SME promotion include GAFI, which offers a single access point to a wide range of SME services, and the SME development unit of the Ministry of Finance, tasked with policy formulation and research since the year 2000.

Beyond Government

A range of international bodies and domestic private sector initiatives are also working to boost the SME sector. The launching of a new initiative by the EU and European Bank for Reconstruction and Development in March 2014 acted as a reminder as to the scope of non-governmental efforts in this area. The new Small Business Support programme is intended to assist SMEs in Alexandria by connecting them with consultants and experts, and has been kick-started with a €2.4m grant from the EU. Other SME support organisations operating in Egypt have a regional footprint. The Egyptian division of the Education for Employment Foundation, for instance, has a network which includes Egypt, Jordan, Palestine, Morocco, Tunisia and Yemen, and partners with local businesses in designing training programmes and preparing graduates for high-growth businesses – in Egypt’s case, banking and textiles. Other significant non-government SME support organisations include Efham, a scheme that aims to enhance the role of Egyptian youth in economic life, and the Egyptian Junior Business Association, which has over 420 members representing more than 170,000 employees and is mainly concerned with advocating for policies that enhance the regulatory framework applied to small businesses.

Financing

The issue of access to finance remains a central concern. The banking sector has traditionally sought yield through corporate lending or investing in high-return government securities, largely eschewing the riskier extension of credit to SMEs. Attitudes began to change, however, when the 2008 global economic crisis led to a reduction in corporate demand for credit. As a result Egyptian lenders started to create specialised SME products, train personnel in the distinct issues of SME lending, and, in some cases, work with industry bodies and non-governmental organisations to offer credit to SMEs in return for their formalisation.

The increasing prominence of SMEs within the overall strategies of Egypt’s banks has led in many cases to internal restructuring, by which banks have promoted SME lending units from mere sub-sections of their corporate banking activities to stand-alone business units. For example, Barclays has opened a new business banking and SME unit, which targets firms with a turnover of LE130m ($18.5m) and below.

Credit Bureau 

The extension of banking activity into the SME sector has been greatly aided by the arrival of Egypt’s first credit bureau, I-Score, which commenced operations in 2012, and as of May 2014 had logged the credit data of 118,277 businesses and 8.9m consumers. I-Score has rated small SMEs using the same framework it applies to its coverage of individuals, but this is expected to change in the short term with the launch of a new subsidiary dedicated to SMEs. I-Score is expected to retain a 75% stake in the new company, which will produce ratings for SMEs based on varying levels of credit history, financial statements, management expertise, supplier and customer bases, competitors and the laws governing their activities.

A nascent equity-financing arena is also taking shape in Egypt and may prove to be a useful driver of growth for Egypt’s larger SMEs. The NILEX is a subsidiary board on the Egyptian Exchange (EGX), established in 2010 to allow smaller firms to list on the bourse. As of August 2014, 24 companies had listed on the board, five of which had joined it in 2013. Building on this momentum to establish the NILEX as a route to funding for Egypt’s large SME sector is one of the EGX’s main priorities (see Capital Markets chapter). In 2014 Mohamed Omran, EGX chairman, used the Euro-Mediterranean Conference and Exhibition on Donor Funding, Banking and Novel Financial Instruments, which was attended by a number of international investment firms as well as the EU delegation in Egypt, to urge global investors to take ownership stakes in SMEs in Egypt via the NILEX.

Looking Ahead

The nation’s SMEs clearly have a wide choice of routes to technical assistance, and the financing options available to them are rapidly growing in scope. It is yet unclear how the new government’s commitment to the sector will be realised in practical terms, but a starting point might be a restructuring of the institutional framework which governs SME policy and development, in order to remove administrative overlaps and inconsistencies. While the array of domestic and foreign institutions addressing the sector’s concerns currently play an important role in the development of SMEs, a lack of strategic cohesion remains a potential hindrance to the sector’s development.