In a bid to help improve inclusive growth and employment, Egypt’s central bank has taken aggressive steps to help expand commercial lending to the country’s small and medium-sized enterprises (SMEs).
SMEs are already a mainstay of the Egyptian economy, accounting for 80% of GDP and employing a majority of the country’s workforce.
In January the Central Bank of Egypt (CBE) announced that credit to SMEs must account for at least 20% of any commercial bank’s loan book by 2020. This stimulus package could amount to an injection of $25bn, according to figures from Wamda Research Lab (WRL), an organisation focusing on entrepreneurship in MENA.
Under the new lending guidelines, companies with revenue of between $130,000 and $255,000 can access loans at highly attractive rates of less than 5%, which is significantly lower than the CBE’s main credit rate of 11.25%.
Currently, approximately 5% of bank loans in Egypt are provided to SMEs, which is below the MENA average of 8%, and much less than the 18% rate seen in middle-income countries, according to Jonas Feller, a research analyst at WRL.
The new initiative follows on a steady campaign by the authorities to expand bank involvement in the SME segment. In 2012 the CBE allowed lenders to write off an amount equivalent in size to their SME credit facilities from the 14% required reserve ratio (RRR), whilst also reducing the RRR from 14% to 12% – in effect freeing up liquidity to be directed to the SME sector.
Furthermore, the arrival of new mini-branches to previously under-banked areas of the country – thanks to the CBE’s 2014 regulation, which established a range of capital requirements depending on a branch’s location – is also seen as an important facet of the government’s wider efforts to support SME growth.
While public sector banks are making moves to increase SME lending, the CBE’s reforms are not without their critics, with concerns being raised from the more risk-averse private sector.
Although the country’s credit bureau I-Score has deepened coverage of the SME segment through the launch of Tasnif, a subsidiary which focuses exclusively on small and medium-sized companies, international credit rating agencies have said that pushing banks towards SME lending at rates below their deposit rates could damage balance sheets and increase credit risk.
“Recent regulations are credit-positive for the country but credit-negative for the banks,” Moody’s said in a statement earlier this year, in response to the new regulations.
However, the reforms will certainly be welcomed. As in many emerging and frontier markets in the region, SMEs make up the majority of enterprises in Egypt and account for three-quarters of total employment; but they often find it challenging to access finance.
Feller cites reasons such as poor credit information and financial reporting, as well as weak creditor rights for this shortfall, with industry stakeholders highlighting the importance of being able to adequately assess a company’s financial soundness.
“SMEs are the backbone of the economy. Despite the economic problems facing the country, they have momentum and they are the solution for Egypt’s economic recovery,” Omar Adel El Maghawry, CEO of FEP Capital, an SME-focused Egyptian private equity firm, told OBG.
“The double booking practice performed by most SMEs is still a huge block – it makes it difficult for us to assess a company’s potential, and very difficult for us to invest in these companies as a regulated private equity firm looking for post-acquisition leverage and potential listing,” Maghawry told OBG.
Although bank lending has been the traditional route for many SMEs looking for outside financing, the Nile Exchange (NILEX), an alternative board launched in 2010 with lighter disclosure and listing requirements, is another option for smaller businesses.
While it had a slow start at the outset, the past few years have seen interest pick up speed, with a steady rise in trading, a turnover ratio that exceeds that of the main board and the launch of a new SME index to track performance. The board has 32 companies currently listed, with two companies joining the market in the first couple months of the year, and the trend does not appear to be slowing: MB Engineering’s IPO, for example, was oversubscribed by more than 29 times when it ended on April 5.
Despite the rising activity, companies have still pointed out that the necessary paperwork makes listing a drawn-out process, with Maghawry noting that not only does the listing process need to be accelerated, but financial disclosure by listed companies is also in need of improvement.
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