As the global economic crisis roars into 2009, there are indications that financial woes threaten not only Egypt's economy but also a new culture of finance that bankers throughout the country have worked hard to bring about over the past decade. In this period of uncertainty, banks risk losing much of the progress they've made in bringing small and medium enterprises (SMEs) into the fold - molding the culture at these small companies to make them comfortable and familiar with banking. Alfredo Rodriguez is the head of commercial banking at Citi Egypt. He discussed the two challenges that have confronted bankers as they have sought to boost the bankability of SMEs in Egypt. First, he said, banks had to persuade SMEs to accept the idea of taking out loans, raising capital through a third party, etc. "When [SMEs] understand the power of leveraging a bit more, they like it, he said. The next challenge, Rodriguez explained, has been to teach SMEs how to use the services available to them at the bank. Rodriguez cautioned banks that get too tied up in bureaucracy and process, saying that they may end up losing clients over the long term. "Any product has to pass the eight second test, he said, "meaning that you have to be able to explain it to your clients in eight seconds. The economic crisis could not have hit at a worse and more sensitive moment for the fledgling SME-bank relationship. In a country where so little of the population is banked, SMEs had been forming relationships with banks at a faster rate than ever before. "Five to seven years ago they gained steam under the reform program, said Rodriguez about the industry in Egypt. But the economic crisis hit in the middle of this culture change. If SME owners are scared off from banking by the economic climate, there's a risk they'll revert back to the earnings-under-the-mattress approach and all the progress made in the culture shift will be lost, experts say. One of the most significant problems with SMEs that has industry experts worried is that the international community has failed, thus far, to agree on a common definition for SMEs, meaning that governments will struggle to pass legislation to help SMEs through the turbulent waters. "SMEs are seen like the holy grail of banking in the sense that it's seen as the future of banking, said Rodriguez. "The problem is, no one has defined it. Beyond lacking a definition for SMEs, the international community has failed to identify a metric by which to identify them. Rodriguez believes that sales numbers are the most valuable way to measure whether a firm meets the criteria of being an SME. "Sales are the best proxy of what kind of banking products [SMEs] will need, he said. In addition to the challenges facing SMEs on a governmental level, failure to find a common definition for SMEs has hurt on the banking level. Without agreeing on SMEs, it has become more difficult for common strategies and best practices to emerge from the banks. Without conventional wisdom, banks transforming SMEs into bankable entities has become considerably more challenging. "A guy with more business may import/export, so his needs may be different, said Rodriguez. "Depending on how you define them depends on what you offer. In 2003, for example, the European Union adopted legislation that set the definition of an SME as any business with fewer than 250 employees and no more than ?43 million on the balance sheet. This definition, if applied to Egypt which has a smaller economy, would include relatively larger firms and likely mean that the smaller companies would struggle to compete for banks' attention. But there is hope for banks and SMEs alike that the hard-forged relationship may survive the continuing economic crisis of 2009. Rodriguez, a 20-year veteran of Citi, believes that preserving the relationship will mean a culture shift at the banks. Product development ruled at banks, he said. But in today's climate fancy products should take a backseat to traditional cost-effective offerings. "The banking industry in general was focused on giving more for less, he said. Now though, "They'll have to focus less on product development and more on cost. "Simplify all the purchase process.... Focus on making all the documentation very, very easy, he added. Whether SMEs will take a greater hit than the larger companies remains to be seen. At a time when the economic climate has been so volatile, SMEs may have the greatest risk-reward opportunities. "The intuitive understanding of SMEs is that they're riskier and more fragile, etc., said Rodriguez. "To a degree that's true. But I don't see SMEs as being more affected than the larger [entities]. Everybody's being hit. SMEs are "much more agile. Their capacity to change is much larger than larger competitors, he added. Everybody's taking a beating, but some smart maneuvering by banks and small business owners alike may mean that their relationship will emerge intact when the crisis subsides.crisis subsides.
