Earlier this month the World Bank announced a $300 million loan to Egypt to finance micro and small enterprises (MSEs). The Enhancing Access to Finance for Micro and Small Enterprises Project is expected to boost job creation and economic growth in the poorest layers of Egyptian society. The loan matures over 28.5 years with a grace period of seven years. "Micro and small businesses are a primary driver for job creation and economic growth in emerging economies, said Shamshad Akhtar, World Bank vice president for the Middle East and North Africa. "In several countries of this region they contribute to economic diversification and play an important role in private sector development. Through increasing access to finance for small business players, we aim at increasing productivity and employment as a development priority in our support to this region. The World Bank reports that MSEs account for 85 percent of non-agricultural private-sector employment and 40 percent of total employment. MSEs have also absorbed the majority of the informal sector. Because of their informal character, MSEs have largely been denied attention in the formation of Egypt's economic development plans. "It should be made clear that informal activities have always been an integral part of Egyptian economic activity. However, awareness of its potential is only a recent phenomenon attributable to the diminishing role of government and state-owned enterprises, to the slow pace of the formal private sector enterprises in offering work opportunities, and to the recessionary atmosphere, said Alia El-Mahdi, professor of economics and former vice dean of the faculty of economics and political science at Cairo University, in a report of the International Labor Organization. According to UNDP numbers, 70,000 enterprises are established yearly in Egypt. Small establishments operating with up to four people have registered the highest growth in recent years leading significantly in total employment numbers on companies with more than 50 workers. Sahar Nasr, team leader of the project, said the project was designed to encourage a successful institutional framework that could eventually be scaled up nationwide and replicated in other countries in the MENA region. "This will enable MSEs to access a much broader range of financial services and better quality services. As a result, MSEs will be able to manage risk more effectively, secure lower risk sources of finance, and reduce transaction costs and payment delays, she added. Microenterprises are defined in Egypt as enterprises with a paid capital of less than LE 50,000; small enterprises are those with capital between LE 50,001 and LE 1 million. The average size of loans that they receive is about LE 1,600, while the penetration of formal borrowing is only 6 percent. According to the World Bank, there around 2.3 million formally registered MSEs, which together with the informal ones might reach a total of 5 million. El-Mahdi puts the number of informal enterprises at 82 percent of the total. The informal character and small unit size of the sector discourages banks from lending to MSEs. Speaking to Al-Ahram, Ghada Waly, assistant resident representative at the UNDP, said that the majority of banks refrain from extending financial services to the poor. "They believed they were a high-risk group, and owners of small enterprises in turn do not resort to the banks to fund their projects. They don't have the collateral needed to repay their loans, she said. According to the ILO, 77 percent of invested capital in MSEs is from informal sources, such as previous employment savings, inheritance, borrowing from relatives, remittances or gameia (cooperative saving) schemes. The global economic crisis not only limited the lending banking practices, but also affected negatively some of these informal sources of borrowing for the MSEs. The loan from the World Bank, therefore, is quite timely. The implementing agency of the funds will be the Social Fund for Development (SFD) which has provided significant support to MSE policy efforts in recent years. The loan money will be distributed in two different credit lines. The first one is allocated to microenterprises and disbursed between for different lending distributors: NGOs, microfinance institutions (MFIs), banks, and service agents at post office branches. Microenterprises will also be approached through Islamic microfinance and mobile phone banking. The second credit line will be dedicated to small enterprises. They will have the option of borrowing directly from banks or from NGOs distributing bank loans. The World Bank is encouraging the SFD to target underserved areas and clients as well as women and residents of the 1000 poorest villages in Egypt. Currently the Fund is working with seven banks and 390 NGOs, from which it will choose the World Bank loan distributors. As of June 2009, the SFD has provided finance to about 200,000 microenterprises and 100,000 small enterprises as of June 2009. The Fund was established as the responsible organ for MSEs development with Law 141 of 2004. The stipulations of the law were aimed at encouraging the large informal sector of the country to legalize. To ease registration, the law stipulates that SFD offices or the branches of the General Authority for Investment and Free Zones in all governorates should issue MSE licenses within 30 days of submission of the required documents. According to the law, governorates are supposed to allocate 10 percent of industrial and construction communities to MSEs as well as information on investment opportunities. Waly warned that despite the advances in easing regulations, MSEs lack the human and material resources to cope with Egyptian bureaucratic procedures. This is one of the barriers that prevent them from entering the formal sector and benefiting from formal finances.
