Trying times for SMEs
Ever since the government hailed Small and Medium Enterprises as the lifejacket for Egypt's floundering economy, it's been one closed door after another for small entrepreneurs. Yasmine Fathy reports
Mohamed Osman sits in his grocery store, calmly arranging merchandise. His demeanour hides the fact that he is awaiting trial next month on charges of selling expired goods. If convicted, he could face a year imprisonment and a LE1,000 fine. "It's been four years since I took a loan and started my small business," he said. "In those four years I've faced one problem after another. They [the government] shut every door in my face. I'm doing everything legally, I'm walking a straight line, and yet they always find some way to create a problem for me."
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Small is beautiful, yet so vulnerable; a small textile project in Upper Egypt provides crucial employment for young women
Osman's legal woes, he claims, are a result of his unwillingness to bribe a government official.
"I'm frustrated," he says, "and sometimes I just want to give up."
His sentiment is shared by most other owners of Small and Medium Enterprises (SMEs). An ironic sentiment considering the government's promotion of SMEs, which make up 98 per cent of non-agricultural private projects, as an effective answer to Egypt's faltering economy and chronic unemployment.
A major obstacle facing SMEs is the lack of a single governing agency, SMEs are authorised and regulated by approximately 18 different laws and 22 ministries and government institutions. As a result, small businessmen find themselves caught in an absurd bureaucratic circle as they try to establish businesses.
This has led the government and several other institutions to push for a new law. Several drafts of the law have been proposed, and are currently being discussed by different bodies such as the Social Fund for Development, the People's Assembly, the Ministry of Foreign Trade, and the Union for Economic Development Association (UEDA).
The prospective law will take aim at several crucial issues, such as clear guidelines on the amount of capital, number of workers and turnover levels that will define SMEs as against other enterprises. According to Khaled Hamdy, legal advisor for the Minister of Trade, it will also simplify bureaucratic procedures and provide incentives to SME owners.
The definition of SMEs is vital on many different levels. Due to the ambiguity in the definition there is no clear estimate on the percentage of SMEs in the Egyptian private sector. While some institutions such as (UEDA) believe that SMEs make up 98 per cent of non-agricultural private projects, other institutions such as the Social Fund for Development believe they make up only 90 per cent.
Further, the definition of SMEs is important because of the stake many of these enterprises have in receiving aid from donors, said Hamdy. Every non-governmental organisation working in the field of SMEs abides by the definition provided by its donors, which are not always equivalent to classifications typically used in Egypt, Hamdy said. Lacking a single definition creates problems of access between donors and businesses. The ways and means of channelling is at stake here.
"This ambiguity results in the fact that there are now hundreds of small businesses that need help, and that we can't reach," said Mohamed Hamed Saleh, executive director of the Small Enterprises and Community Development Association (SECDA), an NGO funded by the Italian Cooperation that provides financial and technical assistance to small businesses.
The weak link between small businesses, donors and other funding sources means that inexperienced small businessmen without sufficient knowledge of the market have difficulty accessing resources.
Banks are usually the most obvious funding choice. Banque Du Caire provides funding to small business owners under their micro-credit programme. The project, running since June 2001 offers loans in the range of LE1,000-10,000. Although Amro Abouesh, micro-finance adviser at Banque Du Caire, insists the funding process is simple and can be processed in five days, many entrepreneurs find it daunting and inefficient.
"I tried getting funding from the banks, but they started talking about technical issues that I didn't understand. They asked me to provide too many documents, in addition to the ridiculous interest they asked for," said Ahmed Sultan, the owner of a pastry shop in the Bulaq district of Cairo.
Although Banque Du Caire doesn't demand collateral, substituting the process of "due diligence" (checking on the client's reputation), most banks demand it -- and most investors find themselves coming up short.
"If I had a building or a big sum of money to put up as collateral, would I go ask for a loan in the first place?" asked Kamal Omar, owner of a restaurant.
"The bank's aim is always to profit, never to develop SMEs," Saleh of SECDA said. "Their demands on these humble businessmen are much more than they can take. That's why many of the investors turn to us." As Saleh implied, NGOs are another option for entrepreneurs to obtain funding.
Beyond funding, another major hurdle small business owners must clear are stiff bureaucratic procedures. "A small businessman needs to go to at least 22 different authorities in order to set up his business," said Abdel-Moty Lotfy, vice chairman of UEDA, "a very long and costly process for a humble man or woman with limited resources".
In order to be licensed, a small business owner has to provide a long list of documents from different ministries and institutions. Necessary documents include health insurance forms and taxation cards, as well as consent forms from the Ministry of Environment, the Ministry of Health and the Civil Defence Administration.
"Each one of these [ministries] makes its own set of demands," complained Ahmed Amin, owner of a factory that manufactures electric metres in Bulaq. "I've been trying to get licensed for the past four years. Whenever I try to speed up the process, the employees at the licensing administration tell me 'Why are you in a hurry? You'll never get it'."
Lacking a licence, these business owners are easy targets for corrupt officials looking to augment their normally paltry salaries. "A few months ago a government employee came and asked me for my licence. I told him I don't have it, so he asked for a bribe; I had to give it to him," said Mohamed Nour, owner of a restaurant in Bulaq. "After he took the money, he told me that as long as I pay he will be my servant and can even wipe my shoes if I ask him to." Nour now puts aside money every month for various officials. "I know if I don't pay I'll spend the night in prison instead of at home," he said.
Also suffering due to his problem obtaining a business licence, is Osman, the grocery store owner currently awaiting trial. The supply inspector came for the monthly bribe when he wasn't there to produce it, he claims. "So he just went to the basement and grabbed some expired products and claimed that I was selling them. Now I'm facing prison," Osman lamented.
In order to eliminate this type of story, one of the suggestions of the prospective law is the creation of a consolidated body that could issue a licence in less than a month. Instead of bouncing from ministry to ministry, all the paperwork would be obtained and filed in one place. However, most businessmen interviewed by the Weekly were sceptical that this will solve the problem of corruption. "The people who will work there will still be government employees, with the same mentality. We will probably have to bribe them too," Amin said.
Small businessmen are harassed by a host of government officials. The health inspector, supply inspector and environment inspector are all monthly obstacles for many SME owners. Ahmed Omar, owner of a pastry shop, has been ordered to take out social insurance for all of his employees. "In addition to me there are seven employees in this shop. Each insurance policy costs about LE60 a month. How can I afford that when I'm hardly surviving and up to my neck in debts," he wailed. "The last time the insurance inspector came and found that I didn't have insurance I was dragged to the police station and spent the night there. Must the treatment be so humiliating?"
According to UEDA official Lotfy, Omar's experience highlights the acrimonious relationship the government has with small businessmen. The government, he pointed out, needs to build trust with them. "All these small businessmen are trying to protect their businesses in order to support their families. Most of them are very simple people," he said. "They do not have the financial or intellectual capacity to deal with the strain the government is putting on them from every direction. The least the government can do is to respect them and not treat them as criminals."
Taxes are another thorn in the side of many small business owners. They claim that these usually far exceed their means. Many businessmen thus create what they dub "under the stairwell" businesses: enterprises that operate without the government's knowledge. Ali Mohamed knows all about both "secret" and official SMEs. Mohamed has two businesses, a restaurant which he operates openly, and a company that distributes food to hospitals ''under the table" (or stairwell, as the case may be). "But no one is aware of this company," he explained. "Everything is operated from my apartment. I hired five girls who come every day and pack food quietly in my house. If they [government officials] don't know about it, I can't be taxed for it," he said.
Opinions vary on whether owners of SMEs should be given a partial or complete tax exemption. Hamdy of the Trade Ministry said that taxation should be appropriate to the size of the business.
In practice, owners of SMEs find themselves paying according to the random appraisal of the tax officer, again victimised by officials looking to shave a little off the top. "This time instead of taking bribes from us, they just give you a higher than normal rate and pocket the difference," Amin explained. In a different sort of tax malady, the tax officer could miscalculate the amount, due to ignorance of the trade he is taxing.
This often happens in Kerdassa, a village in Giza renowned for its handmade carpets. "They send us tax officers who have no knowledge of carpet making, or how long it takes to make a carpet," said Hamda El-Fouly, owner of a carpet gallery in Kerdassa who blames the stress of over- taxation for his father's death. El-Fouly went on to explain that during his father's time they used to make small rugs called "kleem kaskees". These are made by little pieces of cloth sewn together and sold for two pounds. "The tax officer however, came and had a look at all the small rugs we had and taxed them as he would carpets. No matter how much we explained, he didn't understand that these were not carpets!" he said.
According to Lotfy the government is treating SMEs as they would treat large enterprises. "They tell the small businessmen 'go find a place, get a licence, market, and sell your product. After you are finished, after you're successful we will exempt you from the taxes.' This is ridiculous," he said. "The government should help in the beginning, not the end."
Lotfy claims that the government can do this by simplifying licensing procedures, offering property at reasonable prices and providing easy access to loans. "After that if they want taxes, we will happily give it to them," he said.
According to Saleh of SECDA, the government should also accumulate and publicise market information to SME owners and prospective entrepreneurs. He explained that many hopefuls establish a business only to find there is no market for the product they are manufacturing. He said the government further needs to provide venues for the business owners to display their products. This is especially relevant for craftsmen, who could display, market and sell their products in galleries, hopefully earning enough money to repay their loans. "Two or three galleries yearly organised by the gallery association is not enough," Lotfy said.
In the case of Kerdassa, the galleries are not only important in terms of marketing the product, but also in saving a traditional craft from extinction.
"This street in Kerdassa used to have 20 shops selling handmade carpets, now there are only three. This is due to the lack of support from the government. Tunisia, Iran, India and Egypt are all renowned for their handmade carpets, and Egypt is the only one that is losing the trade. Does the government ever ask itself why?" asked Omar Mukhtar, owner of a shop selling handmade carpets.
In Tunisia, he pointed out, the government sells the carpet makers wool and cotton at subsidised prices. That in addition to regular gallery showings and training courses to protect the craft.
"This is completely different from the humiliating treatment we get," El-Fouly exclaimed. He pointed out that the prices for both wool and cotton in Egypt are continuously on the rise. "That is if we even find cotton in the first place," added Ahmed Gamal, another carpet vendor. "The last time I went to buy cotton they told me that the government had sold its cotton for the next five years. Why are they selling the cotton abroad if we need it? Would you give your food to the neighbour's children, and leave yours hungry?"
In various sectors, the result of this neglect is the gradual extermination of the trade in crafts and the departure of the few skilled craftsmen who remain in the country. Tulba Abdel-Ghany, winner of several awards for his carpet making plans to relocate to Qatar with his family in the next few months. "I have not been appreciated in my country, but I was abroad," he lamented. Abdel-Ghany will work in a handicraft school to teach the trade. "Do you think it doesn't kill me that I'm going to teach an Egyptian craft to non-Egyptians? Of course it will, but what other choice do I have?" he asked.
He indicated that the government will find itself overseeing an economy full of unproductive businesses with all their licensing paperwork in order. "What I want to tell the government is to stop asking for useless documents and to look for real artists and real businessmen -- simple people who don't know about stuffy documents and who might not be able to read or write, but who are productive and beneficial to the country," Abdel- Ghany explained.
Abdel-Ghany cited unemployment as an example of a problem that the government's policies worsen. He had a carpet factory that employed 15 people. After being repeatedly harassed by officials, he closed his factory. "Now these 15 people are out in the street. One works in a bakery, one is a street vendor and the rest are unemployed. Each of those has a family to support," he said.
None of the businessmen and craftsmen who were interviewed by the Weekly were aware of the SME draft law. However, according to Saleh, if this law is observed by the ministries and officials concerned, small business owners will feel its positive effects along every arduous step of launching their enterprises.
Abouesh argued that the law will be useless given that it doesn't adequately address the gargantuan bureaucracy that currently causes so many problems for small business owners. "The bottom line is that the government is not giving SMEs the attention they need," he said. "It is ridiculous that 94 per cent of the capital goes to the large enterprises which make up two per cent of the economy and six per cent goes to the SMEs which make up 98 per cent of the same."
Abouesh believes the law is being discussed at present because certain cliques want to assume ownership over the sexy issue of SMEs.
However, Saleh just wants to see positive action of any kind on behalf of SMEs. "What is important is that something needs to be done. Sometimes it feels like we are putting these small businessmen in a vicious circle and telling them, 'you have to fail'," he said. "We are trying, they are trying, we need the government to start trying too."