The Central Bank of Egypt (CBE) has taken aggressive steps to help expand commercial lending to the country’s small and medium-sized enterprises (SME) as growth in these sized businesses has helped propel economic recovery, improve inclusive growth, and increase employment as these businesses account for 80% of Egypt’s GDP.
In January, the CBE announced that credit to SMEs must increase to 20% of any commercial bank’s collective loan value by 2020. This increase would amount to $25bn according to Wamda Research Lab, an organisation focusing on entrepreneurship in MENA.
Companies with revenue between $130,000 and $255,000 will be able to access loans with 5% interest, lower than the CBE main credit rate of 11.25%, the MENA average of 8%, and far lower than the 18% average seen in middle-income countries according to Jonas Feller, research analysis at Wamfa.
This represents a steady campaign on the part of authorities to expand bank involvement in the SME sector. In 2012, the CBE allowed lenders to write off an amount equivalent in size to their SME credit facilities from 14% required reserve ratio (RRR) whilst also reducing RRR from 14% to 12%, freeing up liquidity to be direct to the SME sector.
The increase in cash liquidity is being funnelled into areas that previously had little access to financial services due to new regulations that established a range of capital requirements depending on the location of a branch. This in turn led to an increase in mini branches to previously under penetrated areas of the country.
However, there are concerns from the more risk adverse private sector, which is alarmed by the push on banks to finance SMEs below their deposit rates. This could jeopardise financial health and increase credit risk.
Moody’s previously pointed to the risk of SMEs in the long term, which will increase the debt burden on the country and banking instability.
There is no doubt that the reforms were positive as many companies found it difficult to access finances; however, poor financial reporting and weak credit rights must be rectified if the financial sector is to avoid instability. “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.
“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,” Omar Adel El Maghawry, CEO of FEP Capital, told Oxford Business Group.
The Nile Exchange (NILEX) has also increased its role in servicing international financial needs of SMEs since its founding in 2010. Modelled on the NASDAQ Stock Market to target the support of SMEs, NILEX has lighter disclosure and listing requirements than traditional bank loans. This makes it an ideal market for SMEs, particularly in the IT industry, which have low capital reserves and are difficult to value.
The exchange lists 32 companies and growing with no slowdown in sight. Demand for MB Engineering’s IPO exceeded the total number of shares issued by more than 29 times the initial offering.
However, companies are demanding that the necessary paperwork be streamlined since listing a company is a long process. Maghawry noted that not only does the listing process need to be accelerated by financial disclosure by listed companies but also needs to be improved.