In a move aiming at energising the economy, the Central Bank of Egypt (CBE) has called on banks to increase their financing of small- and medium-sized enterprises (SMEs) nationwide. The announcement followed a speech in which President Abdel-Fattah Al-Sisi said he had asked the CBE to expand credit to youth-run small- and medium-sized enterprises that are key contributors to the state's investment and production sectors. According to Al-Sisi's plans, within four years 20 per cent of bank loans should be allocated to these businesses. The banks will offer around LE200 billion to finance 350,000 companies and thus create job opportunities for more than four million people. Interest rates will be less than the five per cent on loans given to youth initiatives, as Al-Sisi said that in the past high rates have prevented many young people from starting their own businesses. A press statement has appeared on the CBE website confirming these details and adding that a five per cent interest rate will be offered to firms generating between LE1 million and LE20 million a year in revenues. The banks participating in the four-year programme will be able to deduct the loans from their required reserves at the CBE, according to the statement. Ahmed Selim, a former manager at the International Arab African Bank, told Al-Ahram Weekly that the plan is a “major step forward” but there is a danger that the banks will not cooperate unless obliged to do so. “The banks pay eight per cent on deposits. If they are expected to make loans to SMEs at five per cent there will be huge losses,” Selim said. One vice-chairman of an Egyptian bank, who spoke on condition of anonymity, said, “The losses will be huge as the eight per cent rate does not include the cost of procedures and operations, which may cost another six per cent.” Both the Fitch and Moody's rating agencies have reservations about the plan. Fitch said in a statement that regulations to boost SME lending could weaken the quality of loans extended by Egyptian banks in the medium term. “Recent regulations are credit-positive for the country but credit-negative for the banks,” Moody's said in a statement. Fitch criticised the low interest rate offered, saying that a five per cent interest rate on SME loans is well below both the current yield on local treasury bonds (around 13 per cent for a five-year bond) and normal commercial lending rates. It added that while risk weights on SME portfolios would be reduced, any shift away from investing in zero risk-weighted government bonds, which represented over 40 per cent of sector assets at the end of September 2015, would be costly for the banks. “We think the banks may well seek greater incentives to support the SMEs lending scheme to compensate for low returns, higher capital charges and the higher default rates normally associated with SME lending,” Fitch said. However, Moody's believes that boosting SME financing will positively impact unemployment, standing at 12.8 per cent as of September 2015, as well as revive investment. Small enterprises employing less than 10 workers account for 97 per cent of Egypt's businesses, according to a 2012-2013 census published last year by the state-run statistics body CAPMAS, while medium-size businesses account for 2.7 per cent, and large firms with over 50 employees account for 0.4 per cent. A World Bank study published in 2015 said that SMEs play a major role in most economies, particularly in developing countries. Formal SMEs contribute up to 45 per cent of total employment and up to 33 per cent of national income (GDP) in emerging economies, it said. These numbers are significantly higher when informal SMEs are included. The study found that in emerging markets most formal jobs are with SMEs, which also create four out of five new positions. However, access to finance is a key constraint to SME growth, and without it many SMEs languish. Selim thinks providing finance for SMEs in Egypt will make a positive difference for the economy, and added that the former Mubarak regime had neglected SMEs in favour of large-scale projects. However, the banker who spoke to the Weekly said that SMEs in Egypt need more than finance. They also need marketing and reaching out to those who really need them and can efficiently use them, he said. A World Economic Forum report published last January said that financing SMEs is challenging for financial institutions for a number of reasons, but especially because a lack of information makes assessing and serving this sector difficult and expensive. Some developed countries take a capitalistic approach, providing little in the way of government incentives for SME financing, it said, while others use government guarantees and other measures to reduce risks and costs. In emerging economies to date, most SMEs (including formal-sector firms) are financed from sources outside the formal financial sector, which is expensive for the enterprise and can hamper the flow of financing, thus hindering growth.
