Small- and medium-sized enterprises (SMEs) have been heralded as the solution for Egypt’s problems post-2011 by not just the government and the Central Bank of Egypt (CBE), but also by the United States, European Union, and international financial institutions such as the World Bank and the International Monetary Fund.
But is the hype too good to be true? Daily News Egypt spoke with Mohamed Farid, chairperson and CEO of Dcode Economic and Financial Consulting, on the limits and potential of an SME focused policy.
When President Obama came to Cairo in 2009, he gave a speech entitled “A New Beginning” in which he announced he would “host a summit on entrepreneurship”. The Global Entrepreneur Summit, according to then US secretary of state Hilary Clinton, is a policy focused on Muslim majority countries, which would promote civil society and develop the private sector through support of SMEs.
The World Bank has also produced a litany of publications on the objectives of pro-SME growth to ensure “sustainable economic development, reduce wealth inequality, and fight poverty”, however after more than 10 years of implementation in Egypt it is imperative to see if this truly is a new beginning or a same old song and dance.
SMEs Promote SMEs
Farid states that interests have less to do with their promotion by the US and World Bank, but with the success stories of startups, among which Uber is a good example. However, not all SMEs were made to become the size of Uber. Most small- and medium-sized businesses remain small- and medium-sized, which is “of course not a problem”, says Farid.
Staying between an income of $100,000 and $250,000 is sometimes the best an entrepreneur can expect with some room for growth. At the “Road to Global Entrepreneur Summit” held at the American University in Cairo (AUC), Laila Sedky, one of the founders of NOLA cupcakes, detailed how a business that started in her apartment grew into a single shop and has since expanded into more than seven locations around Cairo and Alexandria and is announcing the opening of a new factory that produces locally all the ingredients needed.
American SMEs different than Egyptian SMEs
Egyptian success stories like NOLA, The Bakery Shop, or Seha Capital are not what media and international financial intuitions are referring to when they say that 80% of Egypt’s GDP is made up of SMEs. Farid drew a distinction between entrepreneurs in the western cultural context and micro-sized businesses or informal shops, of which the “majority of SME firms” in Egypt fall under with very few true entrepreneurs. Because SMEs in Egypt are defined by both the number of employees and assets, many businesses are grouped under the SME umbrella.
Micro-sized businesses are the mainstay of the informal economy, with various workshops, markets, cleaners, and other small-scale enterprises. These enterprises usually do not have permits, legal status, economic support, and they are usually not taxed or monitored, nor do they receive any support or assistance from government institutions. So, when the CBE announced they would be providing credit to businesses with a net worth between $100,000 and $250,000, they were not talking about 80% of the Egyptian economy.
When asked about the issue, Farid stated that while SMEs can provide the potential for true economic development and increase the standards of living, SMEs alone will not be able to combat extreme poverty, of which Egypt suffers a colossal 26.3% who do not have access to basic goods and services. He stated that SMEs are not what Egypt should rely on for strictly pro-poor policies. He stated that while there are attempts to start the development of the SME sector in some cities of Upper Egypt, Cairo, Giza, and Alexandria receive the lion’s share of support and, according to Farid, inequality will persist between urban and rural sectors of the economy.
This is the main issue many developing countries have taken with the large degree of emphasis placed on SMEs. People in the country must attain a certain level of wealth and education before SMEs can work to bridge inequality gaps. Also, consider that Moody’s credit agency in a report on the health of Egyptian financial intuitions sounded the alarm that the rapid rise in SME loan financing will put an unnecessary debt burden on the government in the long term with Atradius, a Dutch credit and risk consultancy agency, estimating that Egypt may have 120% of debt to GDP ratio by the end of 2017.
Seeds of failure
A 2014 study released by AUC on the access to finance in micro-level and informal business in Imbaba found that informal shops have “absolutely no access to formal financing or credit and have faced great difficulty in dealing with the system, repaying the loans, and dealing with high interest rates”.
A study conducted by GTZ-PDP project in Mansheit Nasser sampled 5,217 workshops that had problems accessing credit due to the absence of licensing and official registration. No more than 20% are officially registered with the government due to complicated and costly procedures.
Reform reform reform
Reiterating past calls, Farid was adamant that access to finance is one of the main barriers to a thriving SME market. Farid stated that beside accessing loans and credit, “banks need to change completely in order to truly support the growth of SMEs in Egypt”, and that while banks have been able to support entrepreneurs after they are established, the initial financing generally comes from either private investment or more commonly, assistance from families.
However, the government does seem to recognise this disconnect and potential for catastrophe. Emphasis was placed on support of the industrial sector and financing of industrial companies that produce feeder components to larger scale industries or for export to increase the productive capacity of the country and to cut unemployment. The government has also embarked on a strategy to formalise the informal sector and to increase their access to knowledge and finance in order to transition their informal businesses into formal SMEs.
However, while the government may want to target industrial development, entrepreneurs might not. During the “Road to Global Entrepreneur Summit”, industrial SMEs were not discussed as much as SMEs in the IT, food, hospitality, finance, and entertainment sectors.
Tamer Azer of A15, a venture capital fund, stated that entertainment has become the future focus as the food and beverage industry is oversaturated. In fact two Egyptian entrepreneurs in the entertainment industry, Amr Hussein and Mostafa Saadani, won the GIRST SPIRIT of Tech-1 2016 competition at the Global Entrepreneurship Summit, and founder of Eventtus, Mai Medhat, sat on a panel discussion with Barack Obama and Mark Zuckerberg in recognition of her success.
A benefit too big to ignore
That being said, Farid stated that the biggest benefit a pro-SME policy can have is finding gainful employment to Egypt’s youth. According to CAPMAS, 26.3% of Egypt’s youth are unemployed while 51.2% suffer in poverty. These indicators have led to a wide spread brain drain as qualified individuals are disappointed with the opportunities available for them after receiving an education that should ensure productive employment and upward mobility.
Kids become desperate to leave the country for a more developed nation where they can at least in theory increase their living standard and build a better life for themselves and their families. This represents a terrible setback for Egypt’s development as the only resource Egypt does have plenty of is Egyptians.
“SMEs give the youth their own money,” Farid summarises, which at its core means that SMEs can help the youth attain freedom and independence, one of the demands they fought for in the 25 January Revolution. In this way, educated middle and upper class Egyptians have a chance to stay in the country if they are given the means and opportunities to become entrepreneurs.