By Ahmed El-Kholy
A well-developed, diversified and efficient financial system spreads risk over a number of financing institutional bodies, and also provides a sound base for sustainable economic development. Strong evidence has proven that well-developed financial systems grow faster than similar economies lacking one. Countries characterised with diversified financial systems, in addition to developed non-bank financial institutions, are known to be more resilient to economic shocks.
Financial intermediaries play a key role in providing funds to entrepreneurs, which is crucial for economic growth. Developing financial intermediation can lead to an increase in real growth rates. Access to finance has been identified by most developing countries as one of the main impediments to private sector development – with Egypt being no exception. This is because banks are often reluctant to extend loans to newly-established and small-scale enterprises. Banks usually lend large firms with well-established balance sheets and a profitable track record. Moreover, access to medium- and long-loans is extremely limited, constraining the development of various industries that require such funding and intensive capital equipment.
Non-bank financial institutions could play a crucial role in complementing banks by providing services that are not well suited to banks. Non-bank financial institutions could fill the gaps in financial services, and enhance competition in the financial systems. Financial leasing companies have a dual important role, as on one hand, they complement the banking sector by increasing the range of products and services, but on the other side, they compete with the banking sector by forcing it to be more efficient and responsive to the needs of their customers. Thus, they help in diversifying and growing the financial market, which only serves the best interest of the client.
Moreover, non-bank financial institutions, such as financial leasing companies, could provide finance to small-scale firms that do not have sufficient collateral. It could be a way to avoid collateral problems for small-scale firms, which will enable them to substitute a leasing contract with the equipment itself as collateral, and avoid having to borrow or to purchase the asset. Financial leasing could also help in the provision of long-term funding, as well as overcoming various legal and tax impediments. They also have the comparative advantage of being specialised in particular sectors or catering target groups.
In Egypt, there are around 2.5m SMEs, representing 75% of the total employed workforce and 99% of non-agricultural private sector establishments. Despite their importance, they are still facing several problems, in particular with regards to access to finance, which is a common challenge in developing countries. Despite the banking reforms that were launched in 2004, the ability of SMEs to easily access suitable and sufficient means of finance has always been considered a major obstacle. It is worthy mentioning that, from a supply point of view, the majority of banks are becoming more risk-averse towards SMEs, especially due to a wide-spread notion that financing SMEs is risky and that serving them requires high-transaction costs, making them less profitable than larger companies.
Financial leasing is considered to be one of the most efficient financial instruments that suit the Egyptian economic model. The advantages of leasing in emerging markets lie in its separation of ownership from economic use. For the lessor, ownership provides stronger security. In countries like Egypt where collateral laws are not well developed or enforced by courts, secured lending of the type offered by banks can involve considerable collateral risk.
Leasing offers the advantage of simpler procedures for repossession, because ownership of the asset already lies with the lessor. Other advantages to the lessee lie in allowing SMEs to have access to external finance. In addition, leasing enables the lessee to leverage off the purchasing strength of specialised lessor companies. In a nutshell, without a leasing industry, the sources of financing for small-scale enterprises without assets to pledge as collateral, are funds from friends and relatives, suppliers’ credit, moneylenders, and internal funds – which are not business-friendly approaches and lack sustainability.
The leasing industry was established in Egypt in 1995 (Law 95), with further amendments occurring in late 2003. Amendments allow the leasing of all assets. However, leasing contribution to GDP in Egypt is remarkably low (below 0.50%) compared to other developing countries, and the number of leasing companies remains limited.
Part of the reason that the leasing industry remains small is lack of awareness of the sector, in addition to lack of clear official statistics. Together with poor market conditions in Egypt, the foregoing factors have reduced the potential ability of leasing companies to reach out to their clients, especially the new ones, since the leasing industry tends to rely more on banking than on leasing practices. Although the leasing industry has been stagnant during the last few years, it is expected to pick up, partially as a result of the general reluctance of the banks to extend loans, pushing customers to look for alternative means of financing.
Although there are over 260 financial leasing companies registered in Egypt, only a few are active. The majority of the leasing companies in Egypt are controlled by banks or bank-affiliates. An example of a new leasing firm that aims to help qualified corporations and SMEs meet their business goals is EFG Hermes Leasing. The company specialises in offering comprehensive financial leasing solutions and highly sought-after, value-added advisory. EFG Hermes Leasing works with an outstanding network of vendor partners and calls on deep industry knowledge in everything from origination to its credit process ending by the deal fulfilment.
The EFG Hermes subsidiary aims to deliver the fastest turnaround time in Egypt — half the time of industry peers — while incorporating a decision-making process that takes into account a qualitative assessment of the business, its prospects and its character, with a world class system in place designed and customised to match the company process aiming to reach highest efficiency levels.
With the vast growth of the financial leasing market in Egypt, comes a great responsibility for service providers to focus on building a strong relationship with their lessees in order to increase the credibility of the leasing market and to further attract investors into exploring it to help the SMEs business sector to further flourish and eventually changing the business financing scheme in Egypt into a more developed one which will benefit the investors and the economy overall.
Ahmed El-Kholy is the Chief Executive Officer of EFG Hermes Leasing. He started his leasing career at Incolease and became a founding team member where he spent nine years. Later on, he become the Head of Marketing at Corplease followed by GB Lease (a GB subsidiary). Ahmed holds a BA in Accounting from Cairo University and a Master’s in International Business Administration from ESLSCA University in France. He is also a graduate of the EFG Hermes Finance and Investment Appraisal Course and earned a diploma in Risk Management from the American Academy for Financial Management.