Limited access to finance and high collateral requirements from banks is a major hurdle stifling the growth of Egyptian companies, experts said at the 20th annual Euromoney Conference in Cairo on Tuesday.
“Egyptian borrowers are required by banks to put up collateral of around $2.70 to $3 for every dollar borrowed, while for the rest of the world its $1.97, which suggests that lenders here in Egypt heavily discount the value of collateral that is offered,” said Jacinta Fabiosa, trade and investment team leader at the Office of Economic Growth for USAID Egypt, referring to a World Bank Enterprise survey.
The value of collateral needed for a loan to small firms and medium firms, which represent the majority of businesses in Egypt, represents 296 percent and 317 percent of the value of the loan respectively, compared to a regional MENA average of 203 percent, according to the same survey.
A dearth of information, says Fabiosa, particularly the absence of “an efficient movable asset registry in Egypt,” creates a high degree of uncertainty for banks, and the high cost of litigation to appropriate the collateral in the case of default deters them from making loans to smaller businesses.
“It’s not an access to finance issue, it’s a deficiency in institutional and policy components,” Fabiosa said at a panel on SMEs in Egypt.
Only 6 percent of Egyptian firms have a loan or line of credit according to the 2013 survey.
Last week, Egypt’s financial regulator announced an agreement between the Egyptian Federation of Microfinance and Egyptian credit bureau I-Score, which maintains a database of credit information for SMEs and consumers, aimed at addressing this issue, regulator head Sherif Samy told Ahram Online on the sidelines of the conference.
The regulator has also finished drafting a new law on movable good guarantees which aims to create an online registry for movable goods, said Samy, to reduce credit risk for lenders and facilitate borrowing for SMEs who seek credit for movable goods such as machinery.
The draft law passed a review by Egypt’s Council of State and is awaiting ratification by the government, Samy said, though he could not specify when this would be done.
A law for micro-insurance is also in the pipeline and is to be completed “within weeks”, he added.
Small enterprises employing less than 10 workers account for 97 percent of Egypt’s businesses, according to a 2012/13 census published last year by state-run statistics body CAPMAS, while medium-size businesses account for 2.7 percent and large firms with over 50 employees account for 0.4 percent.
This bottom-heavy structure and “missing middle” phenomenon is a symptom of low-growth probability for Egypt’s businesses, said Fabiosa.
“Unfortunately it is that middle that drives innovation, investment and employment in the economy,” he said.
Egypt also has a large informal sector, which, according to its minister of finance, accounted for 30 percent of its economy in 2014 and employed 40 percent of its labour force.
“One of the issues that really need to be overcome is the massive percentage of informal economy,” said Marion Hoenicke, head of division in the Lending Operations in Neighbouring Countries Department at the European Investment Bank.
“Banks today obviously need to reach out more to SMEs and the private sector in general, but they need someone to reach out to,” she said, adding the need for bureaucratic and regulatory reform to “encourage a first cohort of the informal economy to move into the formal economy”.
Egypt introduced its first law regulating micro-finance services by non-banking institutions in November of last year.