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Sweet reform for SMEs
Published in Al-Ahram Weekly on 06 - 05 - 2004

A new law promises to give small and micro enterprises a much-needed boost. Gamal Essam El-Din reports
On 26 April, the People's Assembly approved in principle a new government- drafted bill aimed at boosting the contribution of small and micro enterprises (SMEs) to annual economic growth rates, and paving the way for SMEs to soak up a larger share of new arrivals on the job market.
According to the 17-article bill, SMEs employ 79 per cent of workers in both private and public non-agricultural businesses; SMEs employ 80 per cent of those private sector workers. According to the bill's explanatory note SMEs currently face a lot of obstacles which include inability to obtain credit from financial institutions, increased governmental red-tape as well as marketing problems. Most MPs were happy that the new bill seemed to be tackling these issues as well as boosting the role of SMEs in national development plans.
The bill defines small enterprises as those with no more than 50 employees and a paid- up capital of LE1 million, while micro enterprises are companies which employ between one and five employees. The bill states that a unit will be established in each of Egypt's 26 governorates to deal with licensing SMEs.
According to the explanatory note attached to the bill, SMEs are currently required to go through a laborious process during which they have to acquire as many as 32 approvals before being granted a licence to operate. Under the new bill, however, a provisional licence will be granted as soon as an application has been submitted. The SMEs authority will then obtain the required approvals which will be supplied with the final licence.
The law also designates the Social Fund for Development (SFD) as the main coordinator between ministries and local administration units taking charge of sponsoring SMEs. The SFD will also coordinate between foreign donors interested in sponsoring SMEs on the one hand and official ministries and local administration units on the other.
According to the bill, a fund will be set up in each of Egypt's governorates to assist SMEs with credit and finance. The proceeds of these funds will flow from various agencies ranging from the SFD, local finance institutions, non-governmental institutions, local administration donations, foreign grants, to state budgetary allocations. The SFD is also required by the bill to establish a general risk insurance fund to cover the risks of finance provided to SMEs.
In addition to the above, the bill states that no less than 10 per cent of lands within new housing, industrial, agricultural and tourist communities be earmarked for SMEs. These lands will be sold for a nominal sum, taking only costs of electricity and water facilities.
Finally, the bill entrusts the SFD with providing SMEs with an integrated network of services such as preparing feasibility studies and providing information on marketing facilities, project cost risks, and brochures on the best suppliers of equipment and machines on the market.
In spite of all these provisions, some MPs have reservations about the bill. Ahmed Abu Zeid, a prominent MP from the National Democratic Party (NDP), said he was happy that SMEs had finally been given a "father" to take care of them. "In the past, owners of SMEs had to approach more than 32 bureaucratic agencies to obtain approvals. Now they will have one father -- the SFD -- to get rid of all previous bureaucratic obstacles," he continued. He warned, however, that the local administration units set up to deal with the SMEs may themselves prove to be obstacles.
According to the law which brought the SFD into being in 1991, half its funding is required to be given to SMEs. According to SFD Chairman Hani Seif El-Nasr, the SFD provided LE3.9 billion in finance to small enterprises between 1991 and the end of 2003. This created more than 700,000 job opportunities. The SFD, added Seif El-Nasr, also provided LE158 million to micro enterprises, generating an additional 34,000 jobs. The government's national development policy, according to Seif El-Nasr, requires an annual economic growth rate of seven per cent whereby 550,000 new jobs must be created every year until 2017.
"This rate of job creation is necessary to soak up new arrivals to the job market. It is estimated that 59 per cent, or 325,000 of these jobs, will have to be created by SMEs," said Seif El-Nasr.
Kamal Ahmed, an independent with Nasserist leanings, also complained that the cost of credit financing provided to SMEs is still too high. "Although the credit the SFD receives from foreign donors is provided at one per cent interest rate, the SFD gives it to SMEs at a rate of seven per cent. This is too high and a major reason why SMEs are failing," Ahmed said.
Seif El-Nasr countered by arguing that the money the SFD receives from foreign donors (such as the USAID) is provided at 3.7 per cent. "We re-loan it to SMEs at 10 per cent. The difference is necessary to cover administrative costs and credit risks. This percentage, however, is far better than banks which lend to SMEs at interest rates of more than 12 per cent," he continued.
Statistics show that six per cent of all bank loans go to SMEs; 92 per cent of small enterprises applied for but were not granted loans from a bank, while 78 per cent have never applied for a bank loan. The figures are higher for micro enterprises. Ahmed also asked that SMEs be granted tax exemptions as an incentive to boost development. He also expressed fears that the new local authority licensing units may prove more of a hindrance than a help.
Finance Minister Medhat Hassanein said he is against providing tax incentives for SMEs. "The state treasury cannot dispense with any financial resources in the form of tax holidays or incentives," Hassanein said. For his part, Minister of Local Administration Mustafa Abdel-Qader said governors received instructions to provide all kinds of help to SMEs which include reducing the bureaucratic mountain.


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