Why Egypt's SME lending plan misses the mark

The Egyptian central bank’s new plan to encourage banks to lend to small and medium-sized enterprises (SMEs) is a noble measure, but unfortunately its rewards are likely to be few.

The central bank quite rightly views SMEs as a crucial motor of growth that will absorb the growing legions of young people seeking job opportunities every year.

Unemployment was 12.7 per cent in the first quarter of this year, according to the state statistics agency Capmas. Egypt’s economy grew 4.2 per cent in 2014-15, but this is almost certainly not enough to generate the jobs needed to deal with the demographic bulge.

And so in regulations announced in January, the central bank is requiring banks to allocate more of their lending to microenterprises and SMEs – in other words, companies with turnover of less than 100 million Egyptian pounds (Dh41.3m). It wants banks to increase their lending to these companies to 20 per cent of their portfolios, or 200 billion pounds, by January 2020.

Banks will not be allowed to charge more than 5 per cent interest on loans to microenterprises, which the central bank defines as having turnover of less than 1m pounds, and small companies, which it defines as having turnover of less than 20m.

In exchange, banks will be able to reduce their statutory reserves with the central bank by a similar amount and instead invest in treasury bills. Reserves earn the bank zero interest, while the effective yield on a one-year treasury bill is more than 11 per cent. This provides a profitable incentive to banks to lend to microenterprises.

The central bank is also pushing banks to favour SMEs that work in industry, that export and that are labour-intensive. It is also pushing banks to finance companies in Egypt’s underdeveloped south. Every bank is required to set up a special SME lending unit.

There are a host of problems with this plan.

At an SME finance conference on Monday, the head of Commercial International Bank’s banking services sector, Rashwan Hassan Hamdy, said 66 per cent of SMEs canvassed said their biggest obstacle to doing business was not accessing finance, but rather dealing with complicated government regulations.

So what does the government do? Rather than chop through and simplify the country’s rules and regulations, it adds a vast new layer of bureaucracy and government intervention in the banking sector.

Some banks specialise in lending to smaller businesses, while others make a point of catering to corporate borrowers. Why should these banks be forced to add expensive infrastructure and apply models outside their expertise? Why is this something the central bank is getting involved in to begin with?

Another problem is that many, if not most, of Egypt’s SMEs and microenterprises can provide little proper financial data. Most banks don’t have the infrastructure or credit models in place that would let them lend, and it will require a diversion of resources to put them together. At the same time, the central bank has eased up considerably on its SME lending requirements to accommodate the lack of proper financial data.

One of the main duties of the central bank, and of commercial banks, is to protect the money of depositors. Now it is telling banks to put 20 per cent of their portfolios into risky investments while easing up on reserve requirements.

The cash-strapped government has been borrowing heavily from banks to finance its deficit. More than 60 per cent of all Egyptian bank financing goes to the government, crowding out private borrowers. This does not leave much for corporate lending, let alone SMEs.

Another problem is how to manage the way these small companies use the funds they borrow. Who is to stop a microenterprise from borrowing money at 5 per cent and reinvesting in a one-year treasury bill that earns 11 per cent? A whole new level of bureaucracy will be needed for monitoring.

At the operational level, if a tiny company goes into a bank asking for credit, the bank is still likely to refuse. Credit officers will not want to jeopardise their careers by approving loans with a default high risk.

A whole slew of non-banking enterprises dedicated to SME finance has been emerging in Egypt, some with copious amounts of funding from international organisations. Perhaps the government should let the private sector come up with its own solutions and instead should concentrate on streamlining regulations and providing accurate data on SMEs, something financiers say is sorely lacking, that specialised companies can build their models on.

Patrick Werr has worked as a financial writer in Egypt for 25 years.


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