In a visit to Egypt in late August, US Under Secretary of State Robert Hormats announced a US$34 million loan guarantee extended to HSBC Bank by USAID in support of small- and medium-sized enterprises, or SMEs. The initiative is part of the agency's Egypt Competitiveness Project, first publicized in November 2011. The loan guarantee is intended to mitigate HSBC's risk in extending credit to SMEs, enabling it to venture into a market it might otherwise not consider because of the higher likelihood of default in this sector. Though the initiative offers low risk and potentially high reward for the bank, according to a USAID official, there are no strict guidelines to ensure the credit will be given out to deserving small-business owners. John Beed, acting director of the USAID mission in Egypt, tells Egypt Independent the organization would take a “relatively hands-off” approach to the loan guarantee, clarifying that the only condition it has set is that HSBC must make loans to businesses with total annual revenues less than $8 million (LE48 million). There are no other parameters guiding which companies the bank can extend loans to, nor are there mechanisms to ensure the loans are issued at all. It is unclear which companies are likely to benefit from the increased credit flow. It is also unknown when the credit from this program will start flowing or how potential borrowers will be informed about the new availability of credit. SME-driven growth Hormats' comments at the American Chamber of Commerce in Egypt framed the loan guarantee in the larger context of the Obama administration's commitment to provide $1 billion to economic stabilization and revitalization efforts in post-revolutionary Egypt. Promised more than a year and a half ago, many Egyptians say the specifics of the package are overdue. The HSBC-USAID deal is part of a broader US strategy to support small and medium businesses in Egypt that includes $485 million of aid to similar programs underwritten primarily by the US Overseas Private Investment Corporation. Under the program, private equity firms Citadel Capital and Abraaj Capital are also set to receive OPIC financing to expand their SME portfolios in Egypt, and the US-Egypt Enterprise Fund will seek to foster increased investment in SMEs throughout the country. The assumption that these businesses hold the key to economic growth has been the conventional wisdom of international financial development during the past quarter century. Operating in various sectors of the economy — including manufacturing, trade, agriculture and services — SMEs are thought to hold the potential for broad economic impact. Proponents of SME lending often claim that they create jobs at a lower cost relative to larger businesses. The economies of China, Brazil, Turkey, Indonesia and Malaysia have all benefited from SME growth. Experts say the SME-led growth is particularly lasting in labor-intensive emerging markets with characteristics similar to Egypt's. Referencing several of these countries, Beed calls SMEs “the engine of economic growth and job creation.” He adds that the USAID-backed loan guarantee is “a reflection of HSBC's interest in targeting the SME market.” Beed expects the bank to utilize the facility as aggressively as possible, estimating that the program could increase its SME portfolio by 30 percent. Because the vast majority of small and medium enterprises here exist in the informal economy, they escape government oversight and forgo most traditional funding sources like large multinational banks. Instead, they rely on informal community microfinance options or loans from friends or family. Banks stipulate that the loan recipient have a minimum income per month, which is a prohibitive amount for many small businesses. Many also distrust the approach of formal, Western-style finance for religious or social reasons. If HSBC and other financial institutions begin to take seriously the potential that SMEs pose, the bank and the economy could reap sizable benefits. SMEs account for anywhere between 40 and 70 percent of the country's total output and employment, researchers say. However, that broad figure points to an underlying ambiguity in the term “SME” as well as the difficulty in compiling reliable data on the size of this sector and its specific needs. A policy brief from the Foreign Trade and Industry Ministry differentiates between micro enterprises, which employ fewer than five workers, and small- and medium-sized enterprises, which employ between five and 49 workers. This differs significantly from many international definitions, which labels companies composed of 11 to 50 employees “small” and up to 250 workers “medium.” HSBC to the rescue? According to a USAID document associated with the Egypt Competitiveness Project, SMEs continue to suffer from inadequate access to finance despite recent efforts by the government to support the sector with funding and an SME stock exchange called Nilex — hence the need to increase the availability of finance to such ventures if the economy is to recover from its post-revolution malaise. HSBC might appear a suitable candidate to fill this gap. Headquartered in London, it is the second-largest financial services company in the world, with offices in 85 countries around the globe. Its commercial bank provides services to more than 3 million small, medium-sized and middle-market enterprises. But the organization has yet to prove itself capable of navigating the country's complex small business environment. A slide presentation available on the HSBC website highlights the common complaints that SMEs make of large banks, such as neglecting specific needs and expectations and feeling neglected and undervalued. Furthermore, HSBC's track record in dealing with SMEs in other developing countries is not completely reassuring. According to an article in India-based paper, The Economic Times, HSBC suffered significant losses to its Indian SME division in 2011, causing it to restructure lending practices and sever relationships with less successful businesses. HSBC Egypt did not provide Egypt Independent with a comment on this story, nor provide details about the types of businesses it intends to work with through the loan guarantee program. Its press office said the SME team needed to confer with USAID before giving interviews, but no one was available for comment after those meetings. Going beyond “The hope is they will use [the loan guarantee] and maybe even go beyond,” says Beed. “We hope it gets banks more familiar and comfortable and interested in lending and providing finance to SMEs.” Such visions hold significant potential for the country's economy, particularly the job-producing SME sector. But until these words translate into specific plans and tangible results, millions of Egyptians will be left wondering where the money went. Anders Lustgarten is a researcher with Counter Balance, an NGO coalition that monitors the European Investment Bank, which is also promoting SME investment in Egypt and is active in the country through the investment bank EFG Hermes, currently implicated in the trial of Gamal Mubarak for graft. It also operates through the Euro-Mediterranean Investment and Partnership, providing loans for a total of 310 million euros for power generation projects and for natural gas transmission. Lustgarten says the European Investment Bank's SME investment programs and many others are often a facade for pure profit-seeking lending practices that benefit foreign banks and foreign investors more than local businesses. “They typically promote private equity under the guise of SME lenders,” he says. This piece was originally published in Egypt Independent's weekly print edition.
