The Central Bank of Egypt (CBE) has been providing support to the sector of small- and medium-sized enterprises (SME) since 2009 through a number of initiatives and moves.
In 2009, the CBE decided to discount the value of loans granted by banks to SMEs from the amount of mandatory cash reserves banks are required to deposit at it.
In addition, in December 2015, the CBE set specific definitions for SMEs for the first time, and gave banks a period to adjust their positions in accordance to the new definition. The period is set to come to an end on 30 June 2016.
In January 2016, the CBE launched a programme to finance 350,000 SMEs with EGP 200bn over the next four years, with a declining interest rate of 5% per annum. Moreover, it obliged banks to increase the rate of loans directed to this sector to 20% of their total loans portfolio.
In February 2016, the CBE issued a new initiative that targets enabling EGP 5bn in loans for medium-sized companies in both the industry and agriculture sectors, with a declining interest rate of 7% with the purpose of financing machinery and equipment and expanding in production lines.
In light of all these initiatives the CBE has launched to support SMEs, the question remains whether these initiatives are sufficient to support this sector.
Challenges exist, requiring irregular solutions
Chairman and Managing Director-Executive of Industrial Development and Workers Bank of Egypt (IDBE) El-Sayed El-Kosayer believes small, medium, and very small enterprises face a number of problems that limit their prosperity.
He explained that some of these problems are associated with the investment climate, marketing, and the inability of these projects to compete with imported products and the products of large enterprises.
He added that these projects also confront problems associated with their administrative and regulatory capacities, in addition to the fact that many of them are still part of the informal sector.
El-Kosayer suggested a number of solutions for the development of this sector, including activating the role of civil society organisations and businessmen’s associations and providing financing to these entities to be able to lend SMEs.
He added that it is also necessary to expand in spreading companies supporting SMEs and activating their role, such as financial leasing and credit information companies.
El-Kosayer highlighted the importance of establishing a research entity to explore new investment opportunities and the types of projects and industries of which their production is needed in the market and their locations, in order to direct investors to these fields.
Expanding in the establishment of local and foreign exhibitions to help SMEs market their production is important as well, whereby promoting these projects still requires support and encouragement, according to El-Kosayer.
Establishing direct investment funds, regulatory body
El-Kosayer further emphasised the importance of expanding in the establishment of direct investment funds and directing their investments to small businesses located in places with low growth rates, such as Upper Egypt and New Valley.
He added that it is also essential to have a single body providing all approvals for the owners of these projects, and to apply a mechanism to protect them, through naming certain goods to be produced exclusively through these projects. In addition, he suggests obliging the large projects that win government tenders to buy part of the projects’ needs from SMEs.
El-Kosayer pointed to the importance of exempting these projects from taxes for an appropriate period of time, on condition that they provide added value and are established in rural and low-income areas.
According to Deputy Chairman of the Egyptian Association for Finance and Investment Studies Mohsen Adel, supporting SMEs should begin with the establishment of a regulatory entity that works on the development of this sector.
He explained that supporting these projects also requires the development of a legislative framework that adopts the definition of these projects, as announced by the CBE. The legislation also needs to regulate the allocation of lands for these projects.
He added that it is also important for this legislation to stipulate the facilitation of the process of ending businesses of SMEs. In addition, a special system needs to be adopted to calculate taxes imposed on these projects, even if it is only for a specific period, in accordance with regulations to be announced by the Egyptian Tax Authority.
New mechanisms, incentives necessary
According to Chairman of Metropolitan Consulting Khaled Nagati no one denies the importance of the step the CBE has taken to decrease the cost of financing through the initiative it launched. However, it is important to clarify the financing mechanism and regulations, and the guarantees required by banks.
Nagati highlighted the importance of creating a new mechanism to deal with this sector, in order to complete the measures needed to support it and to facilitate granting it finances.
According to banking and economic expert, and general manager at one of the Arab banks operating in the Egyptian market, Ezz El-Din Hassanein, the CBE has taken a number of decisions to direct the liquidity of banks to SMEs, which is positive. However, he noted that the government must provide incentives to support this important sector.
Hassanein explained that developing these projects requires bold government decisions, especially by the Ministry of Finance and the Ministry of Trade and Industry, to create an appropriate investment climate. Such decisions include facilitating the procedures of granting lands and licenses, and activating the single-window system to unify the procedures of establishing businesses.
He added that the CBE should adopt simple mechanisms to grant loans to the owners of these projects in a quick and easy way.