The Social Fund for Development (SFD) has been around for 20 years. It was originally created to mitigate the effects of economic restructuring and structural adjustment, to provide a social safety net to help create jobs and employment for returnees from the Gulf War, to help create jobs for those hurt by the privatisation process, and to help create jobs for youth by promoting private entrepreneurship. Later it started to focus on lending to small and micro enterprises (SMEs). Ghada Waly has been managing director of the SFD for a little over a year. She took on the role after the January 2011 Revolution, a critical juncture for Egypt's economy. She brings to the fund extensive expertise on issues of poverty reduction, job creation, human development and micro finance. Prior to the SFD, Waly was assistant resident representative at the United Nations Development Programme (UNDP). Was the performance of the Social Fund for Development (SFD) ever evaluated across its 20 years? Three evaluations were conducted. For each evaluation there was a set of recommendations made and it is with this set of recommendations that we are working now and putting together a strategy. What are some of those recommendations? One of the recommendations relates to governance — the need for a board with private sector practitioners and less ministers. Now there is a smaller number of government representatives and a much higher number of practitioners, and economists, and we have a representative for the first time from the Central Bank of Egypt. They also spoke about a coordination role, a policy advocacy role that the social fund has to play very seriously. They also spoke of strengthening the employment and employability role and not just the SME lending role. The recommendations also dealt with strengthening non-financial services, the communication component, rebranding the SFD and developing a communications strategy and communicating with the government, stakeholders and with the public differently. What is the SFD's contribution to creating jobs in this time of economic slowdown? We are supporting labour intensive projects, which is a goal promoted by the government. These are projects that are short-term employment programmes that would employ a large number of people with limited skills in infrastructure projects. Those infrastructure projects, that are temporary in nature and create temporary jobs, are very important in times of economic slowdown. We have negotiated with a number of donors and we have looked into our resources and have put together a pool of around LE1.3 billion from the German Development Bank (KFW), the UNDP through the government of Japan, the World Bank and the EU available for investment in 30 governorates through short term contracts to local contractors. We are giving local contractors small contracts to work on specific projects to improve infrastructure. For instance, one component of the programme is paving rural roads. Another is cleaning and weeding, covering canals, in cooperation with the Ministry of Irrigation. A third component in some of the funds (because the World Bank does not allow this, but others allow it) is extending water infrastructure to households. Another important component is employing youth in the refurbishment and renovation of school buildings in all governorates. These projects, which are by nature small, use private sector contractors and are labour intensive, will be distributed among governorates with a priority given to the poorest governorates. These local contractors will be employing youth. Those youth are the ones that are hardest hit; the ones that are seasonal agricultural labour, or that used to work in the construction sector or the tourism sector and now have less work. They will be provided with short contracts. And they will be given daily cash for work and this cash will increase demand on local products in their villages. They will use this cash for food, clothing and other necessities so it will help to move and inject cash into the local economy while providing jobs for a three-year programme until the economy picks up. It will benefit some 200,000 with job opportunities and between 800 to 1000 local contractors. The second thing is we are going to be working with 400 NGOs that will be given grants to do labour intensive projects. We give grants to civil society so they can work, hire people and become more active. Meanwhile, we are doing resource mobilisation and fund raising and working with donors on strengthening our non-financial services — a traditionally weak link in our work — improving feasibility studies, helping through the formalisation process (licensing and permits), helping improve the capacity of programmes in marketing, pricing, exhibitions, and so on. Last year we had 17 exhibitions; we used to have two or three. The SFD has been the focus of much criticism from benefactors, complaining specifically of high interest rates. What is your response? Yes, we are charging interest, but it is 30 to 40 per cent less than the regular commercial interest rate. However, those who complain about the interest rate, they start complaining when they are late in repayment because we start charging them delay fees. But those that are doing well, their issue is not the interest rate but having quick access to finance and proper advice, simplification of procedures, and lessening the collaterals required by banks. Because banks assume the credit risk, and there is a risk involved, and because the risk has been increasing with everything that is happening in the country, they start asking for collateral. So risk sharing methods, innovative finance methods and simplified rules and procedures are more important than the interest rate. What are the challenges facing SMEs in Egypt? They need a business environment that is friendly and a culture that supports entrepreneurs, access to government procurement, government land and government resources and help in moving from the informal sector to the formal sector. And it is not just the role of the social fund. There is a need for the government to have a vision. For example, by law SMEs should be provided 10 per cent of government procurement and this is huge and can make a difference. But they are not because first of all they never hear about those procurements. And there is a huge insurance that needs to be paid to buy the conditions booklet. Another example is the need for decentralisation. If schools in every governorate can get their supplies from locals, it can increase demand for SMEs. However, we must also work on improving the quality of the products and the costing, because sometimes buying a pen made in India is much cheaper. SMEs also need to work in clusters, where they can supply each other or access materials together. Many banks have now started offering services to SMEs. Where does the SFD stand on that? All banks are now interested in SMEs. We have signed contracts with a number of banks that were not traditionally working with SMEs. Banks are realising that by lending to SMEs they are distributing the risk among a large number of borrowers rather than concentrating the risk with five or 10 large ones. So the creditworthiness of small enterprise has become more known to banks. The Central Bank of Egypt has been working on encouraging banks to lend to SMEs by allowing them lower reserve requirements if they expand their SME lending. And the Egyptian banking institute has been training bank staff on dealing with SMEs. The SFD has been giving banks cheap money. What we get from donors we give to banks and we assume the foreign exchange risk and the long-term repayment rates. And we give money to the banks for five or six years and we allow them to revolve this money and give it to small enterprises. At the beginning of the SFD's work banks were only using the fund's money. When they tested the waters and found out that it is a lucrative business, they started using their own money. Furthermore, there is now interest to develop Islamic SME financing tools. So they first started working with our money, tested it, tasted it, liked it, and then they use their money. And this is exactly what we want them to do. In countries where there was a similar engine like the social fund, lending down the road is the banks' business; they should be doing the lending because they have access depositors' money and to sustainable finance. We should be focusing on policy reform, non-financial services and programmes for mitigation of risks when it comes to unemployment. What is your definition of SMEs? By Law 141/2004 the definition is that a loan less than LE50,000 and for less than five workers is a micro loan. More than LE50,000 and up to 50 workers is a small loan with a maximum paid capital of LE1 million. So the SFD does not help enterprises with more than 49 employees or paid capital of more than LE1 million. Anything less than that we work with. And the maximum loan size is LE2 million. I want to change that. I want to increase the maximum loan to LE5 million because I want to increase the contribution to the industrial sector. What is the number of SMEs in Egypt? Most SMEs are informal. There is an estimate that they form 87 per cent or 90 per cent of the economy and it also depends on the definition. It is the majority of enterprises in this country are SMEs. How many have you served this year? Over 12,000 small projects and 100,000 micro projects. The bulk is micro lending. The micro projects are important for self-employment and income generation. They are not creating a new job but sustaining an existing income generating activity. The small enterprises are more important for job creation and it is those that I would like to see double in number. If banks start lending from their own resources these figures will improve tremendously. How do you see your role in these hard times when the economy is slow? We are using grant money to inject cash into the economy, through labour intensive programmes or providing money to civil society for on-lending or through working on policy reform, but for the short term, continuing to be there for banks. Banks have a liquidity issue because of pressure from government borrowing through treasury bills and bonds. We are giving cash to banks; this is important. We are also intervening to support specific sectors, such as poultry, that do not receive support from anywhere else. Have grants been affected by the situation in the developed world? The economy in Europe is not doing well, but all donors are very much interested in Egypt. We are still a cornerstone country. Stability in Egypt is very important and improving the economy of Egypt is important. We are a market of 80 million. When the market becomes a vibrant market, it is a market that buys products from Europe and that can provide labour to the West. There is great interest in supporting Egypt, but we have to have a clear vision, be specific on what our needs are, and show consensus to get others to support us.
