Reluctance to loan, not financial capacity, inhibit Egypt’s SME growth

After years of government financial regulation, many Egyptian bankers finally see an opportunity to play a more effective role in the development of the country’s small and medium enterprise (SME) sector.

Traditionally, the ability of new SMEs to penetrate local markets has been extremely limited. They have historically lacked access to capital, knowledge, and, in some cases, the market itself, preventing them from establishing competitive positions relative to larger companies. 

Nevertheless, Egypt’s SME sector–which is expected to absorb around 530,000 new labor market entrants this year (some 70 percent of the total)–has recently experienced tentative growth. 

This week, the Egyptian Banking Institute (EBI) held its fourth annual conference devoted to the promising sector, entitled, “SMEs Financing: An Integrated Vision for the Next Era.” At the event, panelists representing local and international regulators, financiers, entrepreneurs, and academics spoke to a professional audience for two days of presentations and discussions. 

Over the course of the conference, a broad consensus emerged among attendees as to the main obstacle currently holding Egyptian SMEs back: namely, financing.    

Institutional SME financing in much of the world has been the vehicle that has propelled successful companies such as Apple–as well as entire economies like those of the Asian Tigers–to international prominence.  Egypt, for its part, has been unable to emulate these performances, despite seeming to have many of the same components and similar potential.

At the root of the problem is the apparent disconnect between SME owners/entrepreneurs and financial institutions. Many Egyptians, for example, have a not-entirely-unjustifiable distrust of bankers. 

Traditionally, state-owned banks have lent a lot more freely to larger institutions and “high-worth” individuals. These institutions still bear the blame for making a string of bad loans to high-profile businessmen over the past 20 years, while their high default rates have helped put the country in the perilous economic state that it is currently in.

Banks, meanwhile, have largely failed to tap into the nascent SME market for a number of reasons, one of which is the higher perceived risk. 

Panelist Hany Tawfiq of the Arab Venture Capital Association called the lack of appetite for risk a “naïve outlook,” since it failed to take into account the potential upside. Tawfiq, along with several other speakers, stressed the need for an institutional liaison between SME owners and financial institutions to help bridge the gap. 

Mohamed Sarhank of ITE Corp, for his part, complained that reluctance on the part of banks to gamble on intangible industries with limited collateral served to stymie growth in sectors like the software industry.

“Banks give the impression that they want to take our ideas in order to make money without risking anything,” said Sarhank. “We need a partner in risk as well as reward.”

Surprisingly, money itself is not the problem.

“All the banks present here have liquidity,” said Bank of Alexandria Chairman Mahmoud Abdel-Latif. “We just lack the mechanisms to move it around.”  

But without a common language between entrepreneurs and bankers, he noted, such necessary mechanisms are rendered impossible. 

Entrepreneurs tend to use a technical and operational language. Their preoccupation with the functioning of their own businesses means they seldom have the time or knowledge to aptly communicate with bankers, who speak in a language laden with bottom-line references to five-year plans, rates of return, ratios and risk. 

Ashraf Sheta of the Middle East Council for Small Business Enterprises believes that education lies at the heart of the issue. Egyptian SME owners, he says, simply lack the basic knowledge of the financial system necessary to maintain a functioning relationship with banks and investors. 

Banks, too, however, must do more to enhance their ability to connect with SMEs.

National Bank of Egypt (NBE) Chairman Tarek Amer spoke about the successful experience his bank has had with its specialized SME funding hubs and its LE12-billion portfolio, with which it supports over 20,000 regional small and medium businesses.  

But outside the NBE, many banks lack the capacity or infrastructure to allow their loan officers to be able to provide SME funding.

Abdel-Latif asserted the need for banks to do this on their own. 

“Us bankers, at least the regional bank heads in Egypt, all work alone,” he said. “We can’t wait for the government or for regulators to always help us out. We now have the infrastructure and capability, so we need to get together and do it ourselves.” 

HSBC-Egypt’s Yalla Business initiative was presented at the conference as a viable example of such efforts. If they can afford it, business owners can also hire banking consultancy services to act as a link between them and the banks.

Many conference participants also stressed the need for increased government planning and regulation to facilitate the process of SME financing.  

Alia Almahdy, dean of economics and political science at Cairo University, is a staunch believer in the need for more government action in this regard. In her speech at the conference, she noted that government shortcomings in several administrative and regulatory areas were contributing to the chaotic nature of the SME sector.

“Unfortunately, the same issues I brought up in 1994 are still being discussed today,” she said.

The government, she argued, should act as a facilitator first, and then as a regulator. Some 30 percent of SMEs are not registered with any government body, she noted, while only 18 percent of all SMEs are fully legal– a result of the red tape one must go through to properly register a business. 

Easy systems of registration, as well as the same kinds of incentives given to large companies, are imperative for encouraging SME growth, Almahdy said. She echoed calls by many other speakers at the conference for the need to provide SMEs with non-financial services–before even thinking about capital injections. 

Along with Almahdy, most panelists also reached a consensus on the need for adequate access to information in Egypt–where reliable statistical data is notoriously hard to come by–as a prerequisite for any kind of progressive financial policy.

Despite these challenges, Hala Alsaid, conference organizer and EBI executive director, spoke optimistically about the current state of Egypt’s SME sector. 

Alsaid, herself a regulator, believes the country has just emerged from an unprecedented period of financial reform and is ready–from a financial, institutional, and regulatory perspective–to begin SME financing in earnest. 

“All the components and potential are there,” she said. “I’m not dreaming when I hope that next year we can speak of an initiative that will put us on track to begin something similar to the Malaysian experience.”

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