Egypt launches industry-focused SME fund

Annelle Sheline
7 Min Read

The Industrial Modernization Center (IMC) and the Arab African International Bank (AAIB) announced the creation of a LE 500 million fund for small and medium enterprises (SMEs).

Minister of Investment Mahmoud Mohieldin and Minister of Trade and Industry Rachid Mohamed Rachid attended the inauguration of the fund, as well as Adham Nadim, chairman of the IMC, and Hassan Abdallah Chairman of the AAIB.

Nadim explained that although the IMC was a “catalyst for the fund’s creation, it only provides 10 percent of the funding, leaving the fund managers at AAIB to select companies that receive funding based on their economic viability.

“This is a for-profit initiative, he told Daily News Egypt, “this is not charity. The message we at the IMC are promoting is ‘Invest in industry: it will pay back’.

Nadim restated the goal to double Egyptian exports over the next four years, much of which will be produced by SMEs, but “that plan will only materialize if SMEs receive an injection of an additional LE 60 billion, he warned.

Entrepreneurs and small business owners have been receiving more recognition as a crucial sector of the Egyptian economy. A recent report in this month’s Financial Times attributes 70 percent of the Egyptian GDP and 50 percent of total employment to SMEs. According to the UNDP’s Egypt Human Development Record for 2008, the numbers are even higher, at 80 percent of GDP and 75 percent of employment.

Nadim explained that the fund is intended for medium enterprises, those too small to court the attention of large investment banks with projects worth billions, but too large to benefit from the LE 2 million loans made available by the Social Fund for Development.

“The fund was the result of a survey we took of 15,000 medium sized businesses, Nadim clarified, “We asked them to list their most pressing needs. The response, overwhelmingly, was access to finance.

Nadim explained the hardships of medium sized companies in need of loans between LE 3 million to LE 20 million. “We shopped around for equity funds of this size, but anything less than 30 million is not worth the time of the fund manager. We tried convincing some equity funds to lower their minimum, but we had no leverage with them. So we launched a new wave of equity funds that target just this bracket.

The current AAIB fund joins other funds established with the assistance of the IMC, although Nadim pointed out that it is the first mezzanine fund in Egypt. Mezzanine financing allows the debt holder, in this case AAIB, to require a higher return for its investment than other finance structures, given the high level of risk.

Although enthusiastic about the new fund, Nadim called it, “just a drop in the sea.

“We looked at the financial needs of just 600 medium sized companies in our target bracket – the orders beyond their capacity, their desire for marketing and putting out new product lines – and all their needs together came to about LE 8 billion, he exclaimed.

“There is huge opportunity here for equity. We are planning the creation of more funds. And we are asking people to join us, he added, “Get in touch with the IMC or one of the banks involved like AAIB.

Creating a culture of risk-taking, either by starting a new company or investing in one, is one of the primary challenges faced by institutions like the IMC, as well as for any businessperson looking to undertake a risky project.

Egypt’s notoriously less-than-fertile entrepreneurial soil is further hobbled by hesitancy of investors to take a chance on startups. Dina Khayyat, managing director for Arab African Investment Management, tried to clear up the misperception that startup companies are doomed to fail: “People who have launched businesses and sustained them, have done so without help from anybody, she stated.

Ahmed Ezzat, managing director of Endeavor, a non-profit geared at promoting and supporting entrepreneurship, did not try to downplay that capital invested in startups is high-risk.

He emphasized instead the necessity of removing the stigma associated with failure.

“Start-ups have high levels of failure. But if you’re going to promote an active venture ecosystem, you want to encourage many companies to launch, knowing that only the best of them will survive.The velocity of capital must match the speed of ideas and projects. You can’t have a bright idea and spend years trying to raise the capital for it.

Although Endeavor Egypt was not involved in the creation of the fund, which Ezzat pointed out its non-profit status would prevent, regardless, he does welcome the move.

Although the fund provides needed assistance, it is not the first example of coordinated financial support for SMEs. In 2000 the European Investment Bank (EIB) granted a ?50 million loan to the Industrial Development Bank of Egypt, earmarked for SMEs. A joint initiative between the Canadian International Development Agency (CIDA) and Business Development Services Support Project (BDSSP) is another in a long list of examples.

As Ezzat argues, it takes more than throwing money at the problem. In his opinion, one of the most crucial areas in creating a business culture that welcomes innovation and risk taking is education.

“Currently our education is geared towards rote memorization. We must instead encourage critical thinking and reading skills, encourage students to question. This also requires a newly trained teacher who knows how to develop these skills in students. Then we must incorporate the idea of challenging the system to make innovation part of the objective of education.

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