Small industries, big opportunities
More funding channels are now open before small and micro enterprises to expand, writes Sherine Nasr
In the high-stakes world of finance, it may be difficult to believe that the sum of LE1,000 can change one's life. However, in the field of small and micro enterprises, loans of similarly modest value have made a difference in the lives of many Egyptians.
"Things haven't been the same since my husband passed away a few years ago," said Amal Mohamed Sadeq, owner of a kiosk in downtown Alexandria. "There was not enough cash to buy adequate merchandise, customers were slipping away and I had to do something," she said.
Unable to borrow the money from relatives or neighbours, Amal had no choice but to turn to a bank to alleviate her pressing need for liquidity. Luckily, Banque Du Caire (BDC), a branch of which lies across from her kiosk, had just launched a pioneering initiative to finance micro enterprises with minimal guarantees. Amal was approved for a LE1,000 loan to be reimbursed over six months, and has already re-paid two installments. She described the experience, her first encounter with a bank, as encouraging, and said "I would not hesitate to apply for another loan later."
Before BDC launched its unprecedented initiative, the first by a state-owned bank, it undertook a thorough study of the small and medium-sized enterprises (SMEs) to define the potentials of this market.
According to Ahmed El-Baradei, chairman of BDC, there are at least 1.6 million officially recorded private sector enterprises, apart from the agricultural sector. Informal private sector enterprises are estimated to contribute some 35 to 50 per cent of the total economic activity in Egypt. Moreover, jobs created by SMEs make up to two thirds of Egypt's entire work force.
"One estimate indicated that there are at least 2.6 million clients, 90 per cent of whom have no access to funding. Those clients could use up to LE8.5 billion," said El-Baradei.
The discovery of this huge, untapped market encouraged the BDC to direct a small percentage of its total investments into small and micro loans. "We needed to strike a balance in the portfolio and to help support a vital sector to the Egyptian economy," he said.
Starting in 2001, BDC extended LE270 million in the form of 92,000 loans which range from LE1,000 to LE10,000 to be paid in four to 12-month installments at an interest rate of 16 per cent. The only guarantee required by the bank was confirmation of the enterprise's location.
According to Amr Abu Wesh, counsellor to the BCD's chairman, at least 61,000 beneficiaries have made use of the loans either to start a new enterprise or to expand an already existing one.
With the help of the United States Agency for International Development (USAID), the bank staff received the necessary training. Technical support was also provided in the form of the internal system which helps the bank to keep record of its loan seekers, to prevent duplication and to minimise default possibilities.
A major indicator of the success of the attempt is that more loan seekers are applying to the bank while recorded default rates are close to nil, with women, who constitute 25 per cent of the loan seekers, proving to be the most committed.
Although clients were happy with the service the bank is providing, many are requesting to a higher loan ceiling in accordance with the rising inflation rates. "I see no reason why the bank should not provide a bigger loan, especially with trustworthy clients," said Saad El-Sayed Abdel-Latif, a mechanic.
"We are seriously studying the possibility to increase the ceiling of the loans to some LE15,000 as part of other facilities the bank will extend to its clients during this year," confirmed Abu Wesh.
Although BDC is the first public bank to take this initiative, other NGOs have long been struggling to extend a helping hand to this large, yet widely informal sector of the Egyptian economy. The Alexandria Business Association (ABA) launched its pioneering Small and Micro-Scale Enterprise Project in 1990 and achieved self-sufficiency in two years. "We used to issue 36 loans per month when we first started. Now, some 6447 loans are provided per month with a total of LE8.2 million issued," said Nabil El-Shami, executive director of ABA.
According to El-Shami, the total amount lent by the association has reached LE732 million in the form of 330,000 loans and the portfolio at risk is kept at two per cent.
"The great news is that about 80 per cent of our loan seekers have turned into formal clients and this is one major social aspect of the service we are providing," commented El-Shami.
At present, the ABA is operating three major credit programmes: the Small and Micro Credit Programme which targets the already existing micro enterprises employing up to five workers and small enterprises employing up to 15 workers. The loans provided in this programme vary from LE500 to LE25,000 at a repayment terms ranging from four to 24 months.
The Blossoms of Micro Enterprises is the second programme initiated in 1999 to extend credit and technical assistance to the poorest of the poor, especially female-headed families. "In addition to providing small loans, the programme also aims at improving the social, cultural and health standards for the beneficiaries," said Mohamed Ragab, chairman of the ABA.
The third and most recent is the Towards Self-Employment Programme (TSEP), which provides seed capital in the form of a conditional grant to be disbursed in two equal installments. "This is mainly directed to the poorest people with an aim to build their skills and utilise their unemployed time for production," said El-Shami.
With some 28 branches, the ABA managed to expand its lending activities in five different governorates. The most recently opened office, established under a $9.3 million award to the ABA from USAID, is in Damanhour, Beheira governorate.
With the help of the USAID, the ABA is planning to establish an institute with an aim to graduate highly-qualified field officers whose task is to supervise and follow up the loan seekers across the country. "This is a prerequisite in order to expand our activities in other governorates," said El-Shami.
It is worth noting that USAID is supporting almost 70 per cent of all the activities of micro finance in Egypt as it is operating a nation-wide programme and helping seven major NGOs working in the field.
"A top priority for the USAID is to continue its support to the SME sector in Egypt," said Kenneth Ellis, director of USAID in Egypt. He characterised aid to establishing the SME sector as a means to addressing the needs of low-income citizens and allowing them to become full participants in its economic growth.
