Egypt’s small and medium-sized enterprises have traditionally had a fairly raw deal from banks, particularly when it comes to access to finance. Despite employing three-quarters of the country’s workers, smaller firms have struggled to get access to finance and even basic banking services due to the informal nature of much of the sector.
The last two years have seen a dramatic turnaround in funding to the segment, however, thanks in large part to the actions of Egypt’s central bank. Under new reformist governor Tarek Amer, the Central Bank of Egypt (CBE) put an end to years of currency crisis by floating the Egyptian pound in late 2016 and was also a prime mover in securing a $12 billion IMF programme that same year.
Boosting SME lending has also been a top priority for Amer. One of his first acts after taking over the top job at the CBE in November 2015 was to introduce targets for banks’ exposure to the segment.
Egypt’s lenders were ordered to increase lending to SMEs to 20% of their total loan portfolios by the end of 2020. At the same time, the CBE also capped rates for SME lending at ultra-low levels, ranging from 5% for small businesses to 12% for working capital for mid-sized firms.
In return, banks were allowed to reduce the level of mandatory reserves held with the CBE by the amount lent to SMEs. Zeinab Abdalla, an analyst at Fitch Ratings, notes that this made the segment very profitable for lenders.
“Instead of having that money on deposit at the CBE paying zero percent interest, they have been able to invest it in high-yielding T-bills,” she says. Egypt’s central bank has this year cut interest rates twice, but the overnight rate still stood at 16.75% in early July.
Eighteen months on from the start of the SME lending programme, analysts say most banks should be able to meet the 20% target by the 2020 deadline.
“Most banks we rate are either at or very close to that already,” says Abdalla.
They were given a helping hand last year by the CBE, which broadened the definition of SMEs to include more mid-sized firms and allowed financing from NGOs and international financial institutions to count towards banks’ mandatory portfolio allocation.
Nevertheless, it is clear that lending to the segment is growing fast. According to the CBE, Egyptian banks issued E£38.4 billion ($2.1 billion) of loans to the segment last year, up from E£22.2 billion in 2016. In total, E£67.6 billion had been disbursed under the CBE’s programme by the end of 2017.
“We expect this trend to persist,” says Nermine El-Tahri in the CBE’s banking reform department.
Leading the charge have been some of Egypt’s biggest privately owned banks. Traditionally, SME lending was largely the preserve of public-sector lenders such as National Bank of Egypt, which were obliged to serve the segment as part of their policy mandate.
In recent years, however, a combination of technological advances and central bank pressure has prompted an increasing focus on SMEs by private-sector players.
CIB was one of the first to spot the segment’s potential, creating a dedicated business banking unit for smaller firms as early as 2011. Its SME offering, which emphasized emergent multichannel technology, proved hugely popular and has since been refined to include a range of bundled accounts for different types of small business clients.
The bank has also been a pioneer in the use of data analytics for risk management in a sector where lack of information has traditionally been one of the main barriers to lending. A recently introduced ‘smart merchant loan’ uses point-of-sale transactions for credit scoring.
“Data management is an area in which we have made significant investment,” says Hisham Ezz Al Arab, CIB’s chairman and managing director. “Through data analytics, we can deliver the right solutions at the right time, monitor accounts and refine credit decisions. This is an enormous value proposition for the customer.”
This use of sophisticated risk management techniques has already helped CIB to boost SME lending to 18% of its total loan portfolio by the end of 2017, up from 10% two years earlier, and Ezz Al Arab is confident that the bank will be able to push the figure to 20% by 2020.
“With the economic reform programme and the improvement of the business climate in Egypt, we are on track to meet the targets set by the CBE for SME lending,” he says.
As banks reach the 20% target for SME lending and their loan books start to mature, we might see some pressure on asset quality- Zeinab Abdalla, Fitch Ratings
CIB is now looking to expand its small business offering to include complementary services from third-party providers, such as auditing and bookkeeping, marketing and export assistance.
It will be following in the footsteps of Bank of Alexandria, another of the private-sector leaders driving Egypt’s SME banking market. Last year, the Intesa Sanpaolo subsidiary launched Business Passport, an online platform offering non-financial services including accounting, website building and educational resources.
This helped boost the bank’s profit from the SME segment to E£487 million in 2017, more than double the E£221 million recorded in 2016. AlexBank also grew its exposure to the segment by two thirds over the course of the year, to E£2.4 billion by the end of December.
That still leaves ample room for further growth, however, both at AlexBank and in the wider banking sector. Liquidity remains extremely high – the industry-wide loan-to-deposit ratio for Egyptian banks has yet to rise much above 50% – while banking penetration remains low. The informal, unbanked economy is estimated to account for as much as 40% of the country’s GDP. In this context, overall lending growth of around 10% last year looks modest, particularly after years of near-stagnation in the wake of the Arab Spring.
Some have raised concerns that a CBE-inspired lending spree by banks could result in a deterioration of asset quality. So far, however, this has not materialized, partly thanks to the use of more sophisticated risk management techniques by banks – including a focus on supply-chain financing – and partly to the increasingly benign operating environment.
The improvement in foreign exchange liquidity following the move to a currency freefloat in November 2016 has been particularly beneficial for small to mid-sized firms, according to Abdalla. Before the shift, hard currency was scarce and access to it was severely restricted by the CBE.
“Egyptian SMEs are mainly concentrated in two sectors, manufacturing and trade, for which availability of FX is important,” says Abdalla. “Some of them are also FX generators but were cannibalized by the shortage of FX liquidity in the domestic market.”
Analysts note that there is still a risk of a future rise in non-performing loans, especially if the economic recovery falters.
“As banks reach the 20% target for SME lending and their loan books start to mature, we might see some pressure on asset quality,” says Abdalla.
For the moment, however, the trend is moving in the opposite direction. The overall NPL ratio for the Egyptian banking sector fell to below 5% last year, according to Fitch.
Meanwhile, policymakers continue to explore options for improving SMEs’ access to finance. In January, the CBE acquired a 20% stake in Egypt’s Credit Guarantee Company, an entity that provides support to smaller borrowers, and created a E£2 billion guarantee trust fund targeted at SMEs.
This is a key element in electronic financial service delivery for SMEs- Hisham Ezz Al Arab, CIB
Then, in March, the Financial Regulatory Authority launched a moveable collateral assets registry in association with iScore, the Egyptian credit bureau. The scheme is designed to promote SME lending by allowing machines, patents and engineering designs to be used as collateral.
A draft law on SMEs is also being prepared, along with legislation on leasing and factoring, customs and government procurement – all of which are designed to benefit smaller businesses, according to the CBE. In addition, a change to the tax regime due this year will allow smaller firms to pay a reduced flat rate on annual turnover levels.
Nevertheless, bankers say there is still more that could be done. Ezz Al Arab at CIB says the government should consider allowing the adoption of digital signatures.
“This is a key element in electronic financial service delivery for SMEs,” he says.
He also notes that policymakers could do more to increase SMEs’ access to credit by providing training on corporate governance and financial management.
For the moment, most of the heavy lifting in this respect is being done by international financial institutions. The European Bank for Reconstruction and Development has been particularly active in this area, following its entry into the Egyptian market in late 2012.
As well as working with banks to provide credit lines to SMEs – more than $600 million has been disbursed to date in cooperation with 13 lenders – the EBRD has established a small-business support team in Egypt to help SMEs boost their technical capabilities and improve access to financing.
Janet Heckman, European Bank for Reconstruction and Development
Janet Heckman, head of the south and eastern Mediterranean region at the EBRD, says the bank is particularly keen to help smaller firms outside Cairo and Alexandria in areas often overlooked by both politicians and development banks.
The EBRD has already opened a second office in Alexandria, mainly to serve SMEs, and is looking to expand its presence to upper Egypt and the Suez Canal zone later this year. The bank has also prioritized regional development in its use of funds, with most lending facilities requiring more than 50% of the financing to be disbursed outside Egypt’s main cities.
Heckman says the CBE’s support has been key to the development of SME financing in Egypt.
“The support from the central bank has been incredible,” she says. “The criteria that the balance sheets of banks must have a minimum of 20% SME lending has really helped contribute to growth.”