Friday,24 May, 2019
Current issue | Issue 1126, 13 - 19 December 2012
Friday,24 May, 2019
Issue 1126, 13 - 19 December 2012

Ahram Weekly

Craving assistance

Nesma Nowar‭ ‬investigates what is hampering SME growth in Egypt

Al-Ahram Weekly

For those who want to see economic development and prosperity grow in Egypt‭, ‬empowering small and medium-sized enterprises‭ (‬SMEs‭) ‬should be a national priority‭, ‬experts agree‭.‬
Egypt’s SMEs account for more than 98‭ ‬per cent of total companies and 80‭ ‬per cent of employment in non-agricultural private enterprises‭.‬
Given their importance‭, ‬supporting SMEs was a main pillar in the electoral programmes of all presidential candidates‭. ‬A good part of President Mohamed Morsi’s‭ ‬“Renaissance Project”‭ ‬is dedicated to SMEs‭. ‬It promises technical support‭, ‬training programmes‭, ‬financial tools and an improved legislative climate‭. ‬
In recent months‭, ‬many announcements of support to SMEs have been made by international institutions‭, ‬government agencies as well as the banking sector‭. ‬Yet‭, ‬SMEs in Egypt are well below their potential due to a number of obstacles‭. ‬
Access to finance and government bureaucracy are the main two challenges to SME growth‭, ‬according to Wafaa Al-Arabi‭, ‬owner of a‭ ‬small commercial shop‭. ‬Al-Arabi stated that it is very hard for SMEs to obtain loans from banks‭. ‬
“I did not even try to approach banks for a loan due to the difficulty of the process as well as the loan’s soaring interest rate‭,‬”‭ ‬Al-Arabi told‭ ‬Al-Ahram Weekly‭.‬
Instead‭, ‬Al-Arabi sought a loan from the Social Fund for Development‭ (‬SFD‭), ‬which is an organisation that supports SMEs through‭ ‬offering easy-term loans‭.‬
However‭, ‬for Al-Arabi obtaining a SFD loan was not at all easy‭. ‬She described the conditions associated with the loan as‭ ‬“incapacitating”‭, ‬including many requirements that anyone who is still starting a business would not be able to meet‭.‬
In addition‭, ‬receiving the loan takes time‭. ‬It took Al-Arabi eight months to obtain her loan‭. ‬“In other cases it takes longer than that‭, ‬and it could be even rejected after such a period‭,‬”‭ ‬she said‭.‬
Government bureaucracy and complexity of procedures needed for business registration is one big obstacle to SMEs‭, ‬and it is also‭ ‬costly‭, ‬says Al-Arabi‭.‬
“Over 360‭ ‬shops in my neighbourhood are not formally registered‭,‬”‭ ‬Al-Arabi says‭. ‬She believes that the government should offer low-interest loans to SMEs and eliminate bureaucracy‭. ‬
Beside financing and bureaucracy problems‭, ‬SMEs find it hard to prove themselves in the market‭. ‬“It takes a lot of time and effort to prove yourself as an SME‭,‬”‭ ‬said Iman Sabri‭, ‬founder of H Consultants‭, ‬a body that offers training and coaching for individuals and corporations‭.‬
This highlights the importance of SMEs’‭ ‬need for advisory services and support that should guide them forward towards expansion and achieving profitability‭.‬
To Sabri‭, ‬it is important to have a government agency that embraces SMEs and entrepreneurs‭. ‬She said that this entity should meet regularly with entrepreneurs and learn about their projects‭. ‬This agency‭, ‬said Sabri‭, ‬should have the capacity to support small projects and take them to a macro level‭.‬
“It not about finance‭; ‬entrepreneurs need to be heard‭,‬”‭ ‬Sabri said‭.‬
Sherif Makhlouf‭, ‬founder of Boost‭, ‬a business accelerator‭, ‬shares a similar view‭. ‬He said that obstacles faced by SMEs in Egypt‭ ‬are the same as those witnessed in the developing world where government bureaucracy and a lack of access to capital are key issues holding back the progress of small businesses‭.‬
He explained that in Egypt‭, ‬the complexity of the registration process prompts small and medium businesses to shun the formal registration process‭. ‬Some 80‭ ‬per cent of Egypt’s SMEs are not formally registered and consequently it is hard to make them bankable and investable companies‭. ‬
Makhlouf said that it is hard for banks to grant SME loans because they do not have a unified mechanism by which they can assess‭ ‬the risk associated with small and medium businesses‭. ‬He ascribes this to the lack of data available in Egypt on SMEs‭, ‬whereas‭ ‬in developed countries there is a credit rating system that assesses the ability of SMEs and individuals to pay back loans‭.‬
Makhlouf added that some small businesses in Egypt reject the idea of loans because they consider interest rated as usury‭, ‬which‭ ‬is religiously forbidden‭. ‬“Some businesses do not take bank loans‭; ‬however‭, ‬they go for equity‭,‬”‭ ‬he told the‭ ‬Weekly‭.‬
Makhlouf further pointed out that the debt model‭ (‬bank loans‭) ‬is not suitable in all cases‭. ‬He cited the Internet and information technology‭ (‬IT‭) ‬projects as an example of projects that do not often achieve profits in the first five years and thus would not be able to repay a bank loan‭.‬
A recent study conducted by the German Development Institute‭ (‬DIE‭) ‬in collaboration with the Egyptian Centre for Economic Studies‭ (‬ECES‭), ‬also identifies access to finance as one major constraint to SMEs‭. ‬It states that micro-to-small enterprises find it more difficult than medium-to-large ones to apply for bank loans‭.‬
Banks tend to lend to SMEs at rates higher than large enterprises‭, ‬and require collateral that cannot be readily met‭. ‬SMEs also‭ ‬find it difficult to obtain supplier credit and venture capital‭.‬
The report also notes that although a stock exchange has been recently established for SMEs‭, ‬NILEX‭, ‬it is yet to gain further momentum‭. ‬Moreover‭, ‬the problem of access to credit is aggravated by the informal status that many SMEs hold‭.‬
In reference to business development services‭, ‬the study notes that the three main business providers‭ (‬the SFD‭, ‬the General Authority for Investment‭ [‬GAFI‭] ‬and the Industrial Modernisation Centre‭ [‬IMC‭]) ‬do not provide the services that are tailored to foster SMEs growth‭. ‬The SFD supports micro-to-small enterprises under a rather limited budget which is mostly channelled to finance‭,‬‭ ‬as opposed to technical and training for SMEs in general‭.‬
While supporting larger enterprises‭, ‬GAFI also works under a similar constraint‭. ‬As for the IMC‭, ‬it tends to be more focussed on‭ ‬export-oriented medium-to-large enterprises than on micro-to-small ones‭.‬
Another obstacle to SMEs growth is skilled labour‭. ‬The study highlights that many SMEs complain of the mismatch between their demand for and the supply of skilled labour available on the market‭.‬
“The inadequate level of education among SME entrepreneurs is an added problem with many of the surveyed enterprises not completing the full 12-year course of schooling‭.‬”‭ ‬
The study replicated Makhlouf’s view regarding the formalisation process of SMEs‭. ‬It states that official documentation required for formalisation is lengthy‭,‬‭ ‬expensive and may be subject to a high incidence of corruption‭. ‬“Combined‭, ‬these factors often prompt SMEs to remain informal so as to avoid paying taxes which they consider to be a major constraint to doing business‭,‬”‭ ‬the study said‭.‬
As a result‭, ‬Makhlouf stated that legislative amendments should be done in a way that would encourage SMEs to formally register‭ ‬their business‭.‬
In this regard‭, ‬Makhlouf suggests that the Finance Ministry should offer SME incentives for formal registration based on an‭ ‬“incentive-penalty system”‭. ‬This means that the ministry could exempt an SME from taxes for five years against its formal registration‭. ‬Meanwhile‭, ‬businesses that fail to register would be exposed to penalties‭.‬
Makhlouf attributes the failure of many private and governmental initiatives to have a significant impact on SME development to‭ ‬the absence of one government entity dedicated to supporting SMEs‭. ‬“There is no coordination between these programmes and many SMEs do not really know about them‭.‬”
Makhlouf suggests that the government create a website that lists all the programmes designed to support SMEs‭, ‬so people can easily know about them‭. ‬“This is a measure that could be done immediately‭.‬”
Makhlouf stressed the importance of SMEs in creating jobs‭. ‬Given the current hard economic conditions and the high rate of youth‭ ‬unemployment‭, ‬Makhlouf said that existing SMEs are the only way to offer immediate jobs‭.‬
The government‭, ‬he noted‭, ‬should support such projects‭, ‬especially during this delicate juncture‭, ‬so as to increase their ability to expand and generate jobs‭. ‬

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