Banking on SME
A leading Egyptian bank is finding big benefits in lending to small enterprises. Sherine Nasr reports
Enthusiasm for small and medium enterprises (SMEs) is finally reaching the Egyptian banking sector. Small entrepreneurs now have a new source of loans for their projects thanks to a pioneering initiative led by Banque Du Caire (BDC) with the support of the United States Agency for International Development (USAID).
Beginning in 2001, BDC has devoted a small percentage of its total investments to financing micro enterprises, trying to simultaneously strike a balance in its portfolio and help support one of the most vital sectors in the Egyptian economy.
"During the past 32 months, the bank has put forth some LE270 million in the form of 92,000 loans to be paid in monthly instalments at an annual interest rate varying from 16 to 18 per cent. Unexpectedly, the default rate is less than one half of one per cent, which is excellent," said Amr Abu Wesh, counsellor to the BDC's chairman.
The loans were allocated to some 61,000 small entrepreneurs representing a broad spectrum of economic activity. These businesses typically are not exporters, but often into the category of feeder industries, which provide intermediate products for larger, export-oriented corporations.
In support of this initiative, the USAID, under the Small and Micro Enterprises Development Programme, provided the necessary training to the bank personnel as well as the technical support in creating an efficient monitoring system to help minimise default possibilities.
"Since its start in Egypt, SMEs have been a top priority to the USAID. We are talking about micro and small entrepreneurs, particularly women, and the goal is to help them build productive enterprises which we believe are absolutely crucial to providing income and employment opportunities," said Kenneth Ellis, director of the USAID in Egypt.
Excluding publicly-owned enterprises, SMEs account for almost 98 per cent of the country's total economic activity. They provide about 80 per cent of all the value added in the Egyptian economy. Moreover, SMEs employ up to two thirds of Egypt's entire workforce.
The USAID, which is now directly or indirectly supporting almost 70 per cent of micro financing in Egypt, launched a credit guarantee company to help SMEs find sufficient capital. Meanwhile, the Poverty- Lending Programme was initiated to help female-headed families finance their income-generating activities.
In July 2001, USAID and BDC signed a memorandum of understanding to cooperate in offering micro loans to needy entrepreneurs.
Before deciding to implement this new strategy, BDC meticulously studied the business market in Egypt to define their target category of entrepreneurs.
"One of the big surprises was that we discovered that there are at least 2.4 million clients who need loans but do not have access to banks simply because they lack in sufficient guarantees. We estimated that those clients could use up to LE8.9 billion in loans, but no bank was willing to take the risk," said Ahmed El-Barda'i, chairman of BDC.
El-Barda'i explained the primary reasons for banks' cautious attitude towards small borrowers. "Firstly, micro and small enterprises are believed to be very risky. Secondly, the cost for monitoring the activity is very high compared to a meagre profit," he said.
"In the beginning, BDC was unwilling to take the risk. We were under the misconception that the loans would not be reimbursed," admitted El-Barda'i.
However, the BDC also took into consideration the fact that there were no other competitors tapping into this potential market of millions of enterprising clients.
BDC came to the decision to provide micro loans ranging from LE1,000 to LE10,000 to any business, whether commercial or industrial, with no guarantees required except for disclosing the physical location of the economic activity.
"We were lucky to have BDC as a partner, knowing that it has some 120 branches all over the country, which means that it can extend its services to as many clients as possible," Ellis said.
"It takes a few days to study the case and agree on the loan. The loans are reimbursed in instalments in four to 12 months. Twenty five per cent of the loan seekers are women, who have proved entirely committed and recorded zero defaults," said Abu Wesh who added that 81 per cent of clients have both repaid their debts and are seeking new loans.
"We tend to believe that banks do not and cannot lend money to SMEs. This is not true. SMEs deserve the support of banks as well as policy- makers in Egypt," said Ellis.
