CAIRO: Default rates on loans handed out to small and medium enterprises (SMEs) reach 12 to 13 percent, said Khaled El-Defrawy, director of SMEs’ Corporate Banking at the National Bank of Egypt (NBE).
“It is very, very important to be very clear and transparent about our lending. We don’t want people to get the wrong message,” he said earlier this week at the SME Conference organized by Global Trade Matters.
The conference gathered bankers, finance experts and government representatives to discuss the SME sector in Egypt. One of the main issues raised was the mismatch of SMEs expectations and banking institutions’ requirements for lending which can result in risky loans.
El-Defrawy gave an example with a recent client of NBE, a furniture shop owner, who took out a loan from the bank but failed to pay the installments for a year and a half. When approached by the bank, he explained, “It’s the people’s money and it’s back to the people.”
“This is basically a message that was transmitted wrongly to the guy,” said El-Defrawy.
Ahmed Abu El-Saad, managing director of investment bank Delta Rasmala, also expressed concerns over risky lending or investment in SMEs.
“The culture of the entrepreneurs is the problem,” said El-Saad, explaining that Rasmala faced challenges when it tried to establish a fund for development of Upper Egypt. According to him, companies seeking funds were convinced those were ‘for free’ and did not expect the commitments that go with seeking investment.
While developed economies usually report loan default rates of up to 2 percent, double-digit numbers are common for SME finance in emerging markets. European economies, however, are already seeing rates above 2 percent and the US SME agency, the Small Business Administration (SBA), reported this year a default rate of 11.9 percent on SBA loans for small businesses.
Risk factors
In Egypt risk is not the only factor averting financial institutions from funding SMEs.
El-Saad pointed out that the funds that SMEs seek “is a very thin number” that would not interest a larger institution.
“SMEs in Egypt are not bankable and I, as a bank, would not throw away my money,” said Mahmoud Abdel Latif, chairman of Bank of Alexandria. Although the bank does not have a clear rule on buying into SMEs, it does not pursue such deals.
Ashraf Naguib, CEO of Global Trade Matters argued that a small amount of funds (compared to asset management transactions) can make a very significant difference in the SME sector and banks should not ignore them.
“This is where the problem is. The person in the bank cannot understand the difference between a corporate and an SME. When he walks into a bank and says, ‘I need one million,’ you look at him and say, ‘It’s not something we are interested in,’” said Naguib.
The central role that SMEs play in the Egyptian economy and their number can be a very lucrative sector for banks, some experts at the conference pointed out.
According to statistics announced at the conference, 90 percent of the companies operating in Egypt are SMEs. They contribute to 80 percent of the country’s GDP, employ two-thirds of the labor force, pay 32 percent of all salaries, and output 56 percent of industrial production in the country.
“This is not an amicable environment for SMEs. […] This size [of companies] does not flourish in this country in any respect: lending, capital financing, capital raising,” observed Basel El-Hini, managing director of Banque Du Caire.
“SMEs will not progress unless there’s funding,” he said.
He explained that lending regulations are the most challenging to SMEs in Egypt. The Central Bank of Egypt (CBE) has set up regulations that require companies to submit three years of audited financial statements controlled by CBE-certified auditors in order to be eligible for a loan.
Most SMEs in Egypt do not follow financials and auditing and thus cannot qualify for a loan. The result is that only 20 percent of credit available in Egypt goes to such enterprises, despite their significant contribution to the GDP.
Regulations also have largely stifled the growth of Nilex, the Egyptian Exchange’s market for SMEs.
“What needs to be done is promoting [Nilex] in a better way and relaxing some of the regulations.”
Trading on Egypt’s Nilex begins June 3.
Leaders in the SME funding industry have approached CBE to de-regulate lending for the sector, but the bank has resisted relaxation of the restrictions on lending.
In El-Hini’s opinion, efforts have to be streamlined and all stakeholders in SME funding have to come together for any change to take place. Many delegates agreed with this point urging for SME development to move beyond discussion into an action plan.
