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CBE’s SME funding initiative met with doubt - Daily News Egypt

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CBE’s SME funding initiative met with doubt

The initiative conflicts with other government lending initiatives because of its low interest rate

The Central Bank of Egypt (CBE) launched a comprehensive initiative finance small and medium enterprises (SME).

The initiative aims to provide financing to 350,000 clients and to create 4m new job opportunities over the course of four years. The CBE instructed banks to allocate EGP 200bn to finance SMEs.

Daily News Egypt selected a random sample of the stakeholders to ask their opinion and to gauge their awareness of the initiative and the extent of the initiative’s acceptance.

According to the CBE’s initiative to finance SMEs in Egypt, the banking sector will provide EGP 200bn in loans to SMEs with a declining interest rate that does not exceed 5%. The programme, which will be overseen by banks in cooperation with stakeholders from the Egyptian state, will increase the percentage of loans provided to SMEs in bank lending portfolios to 20% in the next four years.

The CBE has instructed banks to prioritise financing to industrial and intermediate materials companies addition to industrial labour projects and initiatives that target export.

To mitigate risk, the CBE sought to develop mechanisms provided by the Credit Guarantee Company (CGC) to reduce capital requirements and the cost of funding. The CBE has also allowed banks to deduct the value of funds provided to SMEs from the CBE-mandated reserve holdings.

The CBE defines SMEs according to their annual revenue. Enterprises that have reported an annual revenue less that EGP 1m are classified as micro-enterprises, between EGP 1m and EGP 10m as very small enterprises, between EGP 10m and EGP 20m as small enterprises, and between EGP 20m and EGP 100m as medium enterprises.

In its announcement of the programme, the CBE would also strengthen the role of the Egyptian Banking Institute (EBI) to provide specialised training programmes for the heads of SMEs applying for financing. The training programme aims to promote efficient business practices. The CBE is also looking to the EBI to develop more specialised programmes for workers in this banking sector. The CBE is also trying to expand cooperation between the Federation of Egyptian industries (FEI) , the Ministry of Industry and Foreign Trade and other stakeholders.

SMEs provide 43% of the commodities and service in Arab countries

A report by the Studies and Research Department at the Union of Arab Banks (UAB) noted that Egypt is considered to have one of the largest SMEs sectors among Arab countries. There are approximately 2.45m projects in the sector and they contribute to about 80% of the GDP of the country. SMEs account for more than 90% of the private sector and they provide employment to approximately 65% to 75% of the labour market.

SMEs in Egypt that operate in the formal sector require approximately $1bn in funding annually, according to the UAB report.  However, studies show that funders meet less than 10% of those requirements.

Approximately 5% of SMEs work with banks, and the amount of funding dedicated to SMEs ranges from 3% to 4% of the bank’s total loans portfolio, the report added.

Further, approximately 90% of the SMEs work in industry (51.1%) and trade (40.5%), according to SME Advisor Arabia.

Percentage of SMEs that export abroad does not exceed 6%

The percentage of SMEs operating in Egypt that export to the international market does not exceed 6%. Moreover, 1.8% of those SMEs that export to the international market have capital holdings that not exceeding EGP 250,000, while  27.1% of SMEs have capital holdings that do not exceed EGP 15m; 24.4% of SMEs have capital holdings of approximately EGP 30m and more.

SME Advisor Arabia reported that more than 43% of commodities and services are provided by SMEs in Arab countries.

Initiative may hurt banks’ loans

Fitch Ratings said, in its report issued in January, that the CBE initiative to support SMEs would weaken the quality of Egyptian banks’ loans in the medium term. Fitch attributed this to the high credit risk of these projects.

The rating agency added that the trend to finance SMEs might lead to lower quality of the sector’s assets, noting that the non-performing loans (NPL) ratio stood at 7.6% in the sector at the end of June 2015.

SMEs’ owners between reservation and fear

Daily News Egypt surveyed workshops owners, and the heads of small and very small enterprises, regarding the new lending programme.

Most of the interviewed gave a negative assessment of the financing programme. Abu Amr El-Naggar, the owner of a carpentry workshop in Sayeda Zeinab, Cairo, stated the CBE-directed lending programme is provided at exorbitantly high interest rates and he would not participate in the procedure.

El-Naggar also highlighted the length of the lending process.

A metallurgist, who preferred to remain anonymous, said that with the decline in economic prosperity and the real possibility of being unable to pay back loans, the lending practices will lead to imprisonment.

The initiative is encouraging for some

Conversely, Mohamed Khattab noted that he previously was provided loan to expand his business-workshop for leather manufacturing in El-Hussein, Cairo and he had made the payment in full. He referred to the CBE’s initiative as encouraging and a measure that will support small enterprises.

Further, Abdel Tawab Mostafa, the owner of sweets manufacturing factory in Qena, Upper Egypt, said he is preparing a lending application within the framework of the initiative.

Khaled Abdel Hadi , an owner of a supermarket , said the initiative is a positive indication that the government will take care of small investors. “Nevertheless, I don’t need to apply for loan and I don’t have the patience to finish all the papers and procedures of the banks,” Abdel Hadi added.

The initiative does not focus on specific projects 

Moataz El-Tabbae , the executive director of the SME sector at Alexandria Business Association (ABA), said that although the initiative aims to stimulate the role of SMEs in the Egyptian market, it does not specify the projects which are eligible for funding. Additionally, banks have not adjusted internal regulations to align with the programmes specifics.

ABA is a non-governmental, non-profit organisation based in Alexandria, Egypt and provides micro loans to parties in seven governorates of Egypt. El-Tabbae contended that the CBE should define those projects that it wishes to finance.

He noted that the CBE should monitor the initiative and should raise the interest rate above 5%.

“In the framework of the initiative, some applicants submitted their papers to the banks a month and half ago and banks still demand further papers from them. So, it is a very long process,” El-Tabbae said. “A survey that was conducted by ABA showed that the client cares more about the period of funding than the interest rate.”

El-Tabbae pointed out that his association provides micro loans with interest rates higher than 5% because of other services provided with the loan.

The ABA provides social services for its clients with EGP 12m to EGP 13m of the association’s budget.

Moreover, the association’s social solidarity fund provides funds for those who are unable to pay their loan and insurance to those clients who are uninsured.

El-Tabbae said ABA increased its client base by 25% in 2015 compared to 2014. The association serves 295,000 clients through 60 branches, estimated at 19% of the microfinance sector in Egypt.

“We have thought about increasing the value of our loans but we are waiting for the results and feedback on the CBE’s initiative as we can’t compete with its low interest rate,” El-Tabbae added.

The initiative lacks specific implementation mechanisms

Businessman Ahmed Mashour, a member of the Egyptian Junior Business Association (EJB) claimed that the CBE’s initiative is a very important step in concert with the new investment law, which encourages investment agencies to submit applications if they wish to finance SMEs.

Mashour indicated three issues within the programme, notably the bank’s commitment to finance SMEs, the conditions that will allow for initial success, and amendments to the bankruptcy law that will allow those that default on their loans to avoid prison.

Further, Mashour claimed that, while the initiative is attractive, it lacks the proper implementation mechanisms. He called for the creation of a specific government agency to supervise the SME sector.

“The Egyptian Junior Business Association provides loans for youth to start their startups and business with a 0% interest rate,” said Mashour. “We have about 18 success stories as a result of the programme and some of these SMEs are exporting abroad.”

EBRD hero to support SMEs in Egypt

The European Bank for Reconstruction and Development (EBRD) Egypt director, Philip ter Woort, told Daily News Egypt that that the bank aims to provide $260m in direct debt or equity financing to Egyptian SMEs.

Ter Woort added that EBRD works closely with the National Bank of Egypt (NBE), Qatar National Bank (QNB), National Bank of Kuwait (NBK) and Bank Audi, relying on their branch networks to make funding available to SMEs all across Egypt.

“In addition to these SME loans, EBRD has, jointly with the NBE, developed two innovative new credit lines to be on-lend via the NBE to SMEs,” said ter Woort. “A $20m loan focussed on women-led businesses and the second, a $30m loan to energy efficiency investments in SMEs.”

EBRD has provided direct technical support to approximately 300 SMEs, addressing business strategy, marketing, management information systems, and human resources.  There are 50 women-led enterprises among these 300.

On 30 November, the EBRD announced allocation of €1bn to finance SMEs in Egypt’s automotive sector.

Commenting on the SME initiative recently announced by the CBE and its newly issued regulations, ter Woort said it reflects the recognition that the SME sector is crucial for the sustainable development of Egypt’s economy and for the development of the private sector.

Youth do not prefer dealing through banks

The youth demographic is a principal group targeted by the CBE’s initiative. Thus, Daily News Egypt surveyed several members to understand how it views the programme.

Haitham Soliman, an accountant, said that the initiative does not have specific features and that the conditions of the fund seem ambiguous.

Soliman added that there are other funds with specific criteria, such as the Social Fund for Development (SFD), in addition to other funds that specifically fund the youth demographic.

Soliman claimed that the initiative will not serve youth and they will not benefit from it because the investment atmosphere in Egypt is not safe.

“Businessmen are the main beneficiary of this initiative because youth do not have the capabilities to start business or enterprises with capital amounts of EGP 50,000,” Soliman said.

Naglaa Amgad, a young entrepreneur, stated that she will not seek a loan. “If I have the capital, I will start my project; otherwise, I will wait to obtain the money,” Amgad said.

Ahmed Lamloum, a recent graduate, said he had not heard about the initiative but stated that if the interest rate is low, it would be great opportunity. However, he doubted the facilities provided by the CBE.

Amr Kandil, a social media officer serving a consortium of hospitals, said he had not heard about the initiative. However, he would not risk acquiring a loan because the risk would be higher than the benefits.

Kandil expressed fear of the current practice by which those who are unable to pay their loans are imprisoned, indicating that the alternative it to turn to a private investor to fund the project.

Lack of awareness of the initiative

Heba Abdel Salam said she was unaware of the initiative but that she was suspicious of it. She claimed to have heard stories about people being sentenced to prison because of their inability to pay the loans.

Abdel Salam contended that these are other ways to secure financing, including turning to other social formations, such as family units and money pools, which are provided without interest.  “I don’t trust the government,” she said.

Mohamed Helal stated that he is currently trying to establish a startup and would consider the CBE’s initiative. However, while he expressed interest in learning more about the initiative, he also expressed an interest in looking at other funding sources.

Helal said that if the CBE provides the youth demographic with a low interest rate and repayment plans, he would ask for loan.

Magdy Hamdy, a doctor, claimed the loans provided by the CBE are usurious and do not accord with Islamic banking practices.

“I always think of expanding my business but I don’t have enough money to do that. Some advised me to acquire a micro loan but I’m hesitant because I’m afraid of usury,” said Gamal Salama, a kiosk owner.

Salama stated that he would first ask an Islamic sheikh before deciding whether to pursue a loan.

Money pooling: an alternative financing method

In the course of Daily News Egypt’s survey regarding the CBE’s initiative to finance SMEs, the most common alternative proffered against the new lending policy was “money pooling”.

Money pooling, commonly known as “Gamaaya”, occurs within a community where members borrow and save money together. However, these funds do not provide the social benefits typically provided by banks to the low-income sector.

Daily News Egypt spoke to a representative of one of the money pooling associations that provide loans without interest. Ahmed Raaouf, the administration manager at the Gm3yah.com association, said the association started to provide such services three years ago, and has witnessed great demand and success.

Raaouf added that his association provides loans based on Islamic financing practices, without interest, and does not threaten imprisonment in the case of default.

“The association provides money for borrowing with no limit and anyone can acquire a loan without paying any benefits and the borrower pays a monthly premium that is estimated according to the loan amount and her monthly salary,” said Raaouf. “The borrower can obtain a third of the amount of needed money in the first six months of premiums payment.”

Initiative marginalises other lending initiatives

Before the CBE’s initiative to support SMEs, other initiatives were launched to finance projects implemented by the youth demographic.

Gamaeiti is one of initiatives launched in December 2015 by the Ministry of Supply and the Social Fund for Development (SFD) to grant members of the youth demographic loans ranging between EGP 50,000 and EGP 100,000 with an interest rate of 5.5% and a repayment period of five years.

Moreover, the Mashrouak initiative was launched by the government in March 2015 to provide job opportunities for youth in the field of SMEs. The initiative is divided into three tranches; the first tranche includes lending measures from EGP 1,000 to EGP 25,000 with no additional premium paid by the client, while the second tranche includes financing between EGP 25,000 to EGP 100,000 in which the client has to pay 10% of the loan’s value.

The interest rate of the two initiatives is higher than the CBE’s initiative, which means that it will marginalise the other lending initiatives, according to Ateya Salem, the chairman of Principal Bank for Development and Agricultural Credit (PBDAC).

“Now banks that are involved in Mashrouak are also in CBE’s initiative to fund SMEs, so it seems conflicting and I demand that the CBE include Mashrouak inside its recent initiative,” noted Salem.

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