CAIRO: A walk past the rows of repair shops and auto parts vendors that line the streets of Marouf, a neighborhood in downtown Cairo, is all it takes to tell that small business is central to the Egyptian economy.
Now, as with most business, slowing consumption and tighter credit are making it harder for small and medium-sized enterprises (SMEs) to operate.
As the crisis wears on, private equity and the government are emerging as two relatively new sources of help for a historically family-run, informal part of the economy.
“[SMEs] are really the base of the pyramid of GDP growth in Egypt, said Marianne Ghali, managing director of Sphinx Egypt, a private equity firm that recently launched a fund for troubled SMEs.
Big obstacles for SMEs – defined by the state as those that employ 10 to 200 people – include training, market access and quality control, according to business owners, experts and officials involved in the sector.
According to the Industrial Modernization Center (IMC), a government body that works actively with around 5,000 industrial businesses – 85 percent of which are SMEs – improving training is a top priority.
“Nothing will set us apart from our competition better than training, better than enhancing the productivity and efficiency of our workforce, said Adham Nadim, the center’s executive director. To this end, he said, over half of the services the center provides to SMEs are directed at human resources.
Because of their size, small businesses often have trouble expanding into new markets. Often, they lack the resources or market knowledge to identify partners, or cannot meet the quality standards required to sell in foreign markets.
In 2007, the IMC helped 200 SMEs export for the first time by connecting them to buyers through trade shows, helping improve quality standards and providing other support. The exports of these firms totaled LE 3 billion throughout the year, Nadim said.
One story the state would like to see replicated is that of Rockal, an Egyptian firm producing mineral wool, which is used in heating and soundproofing. Two years ago the IMC connected Rockal with a British firm specializing in quality control, said Kamal El-Dessouky, Rockal’s founder and chief executive.
By applying methods such as six sigma, a common management technique, Rockal was soon able to sell to Siemens, Toshiba, Mitsubishi and other international firms. Last year the firm pulled in LE 50 million, a 17 percent gain over the year before.
“Now we can think about making branches outside of Egypt, El-Dessouky said. “I am planning to make a factory in Algeria in two or three years.
The firm has now grown to over 350 employees – it began with 30 people in 2003 – meaning they have officially grown into a large business. El-Dessouky said he hopes to employ over 1,000 workers by the end of 2010 as he expands production.
So far, El-Dessouky said he has been able to finance expansions with his company’s profits and other investments. Eventually, however, a bank loan will be necessary, he said.
This step can be beguiling for smaller firms.
“Access to finance is a huge problem for SMEs, said Nadim, the IMC director. “It’s very easy to walk into a bank and ask for a LE 100 million loan – you sit with the chairman of the bank and they finalize the paperwork while you’re drinking tea or coffee. But if you go to a bank and you want LE 3 million, or LE 7 million, you go through the drill.
And banks have only become more conservative as the financial crisis has spread.
Ghali said that her equity fund is likely to see more companies struggling to secure financing over the next six months, especially exporters, who may have trouble getting their partners abroad to pay. “I think people who are exporting are being very well scrutinized, she said.
El-Dessouky confirmed that some Asian and European partners have been late with their scheduled payments, though, he added, it has not been a problem recently.
Easier access to loans is one lure the IMC uses to entice small businesses to register with the state, a weighty task given Egypt’s prodigious informal sector. One method for finding such firms involves analyzing the supply chain of larger companies with many suppliers.
“Every large supplier in Egypt has an informal supplier somewhere down its supply chain, Nadim said. “We try to identify that supplier.
Entering the formal sector is not always enough, though. Five hundred small and medium-sized companies surveyed by the state said they needed a collective LE 8 billion over 2009 to expand their operations. “These are existing, healthy companies, and they are having difficulties with the banking sector, Nadim said.
To support them, the IMC has launched a small equity fund, though it is not nearly large enough to cover all the companies’ needs. The point, Nadim said, is to draw attention to the problem.
As for the banks, they loan using their own guidelines, which fall outside of the IMC’s sway, Nadim said. “You cannot pressure what you do not own, he said.