Leading Economic Resilience

CAIRO - 26 September 20148: Confident that small and medium enterprises (SMEs) can play a vital role in the overall development of the Egyptian economy, Egypt has taken serious steps to bolster the sector, which is believed to be a key factor of economic resilience.

That’s a smart decision, given that SMEs are thought to provide about 75 percent of overall job opportunities, shape some 98 percent of all industrial facilities in Egypt, as well as employ around 47 percent of this sector’s labor.

According to a recent study released by the Egyptian Center for Public Policy Studies, SMEs represent approximately 46 percent of the world’s GDP and provide around 50 to 60 percent of the world’s employment opportunities.

The study also highlights the successful role of SMEs in the development of many economies, namely the United States and China, since they are easily initiated projects, yielding various benefits for citizens and the state alike.

The development of SMEs in Egypt is closely associated with efforts aimed to curb the informal economy which represents around 60-70 percent of the overall economy, yet these projects and activities are unregistered, do not pay taxes and do not deal officially with state agencies. If encouraged to join the formal market, the sector would contribute significantly to enhancing the SMEs and their role in economic development and resilience.

In April 2017, former Prime Minister Sherif Ismail issued a decree to merge the Social Fund for Development (SFD), which has been serving SMEs for over 25 years, with the Micro, Small and Medium Enterprises Development Agency (MSMEDA) into one entity.

The move aimed include these businesses in the formal sector and the new entity was assigned to upgrade and develop this sector by offering financial and non-financial services as well as coordinating with all SME entities to make sure they are properly implemented.

According to Egypt’s Small Enterprise Law (No. 141, 2004), SMEs are defined as “all companies or facilities with productive, commercial or service-providing economic activities, with a minimum capital of LE 50,000, a maximum capital of LE 1 million and a maximum of 50 employees.”

However, MSMEDA worked on revising the legislative climate that serves the SMEs sector, including this law that was amended to take into account a unified definition for SMEs. “We noticed that entities are adopting different definitions for this sector. We coordinated with the Central Bank of Egypt in reaching a unified definition,” says MSMEDA Director Nevine Gamea.




In January 2016, the CBE launched the SMEs’ initiative which directed local banks to increase finance provided to SMEs and to allocate not less than 20percent of their lending portfolios to these businesses at competitive interest rates (5percent) over the next four years. The initiative also obligates banks to establish specialized units for providing the financial services to these enterprises. Local SMEs received a total of LE 49 billion between the launch of the initiative and June 2017.

On March 5 2017, the CBE issued a circular unifying the definition of SMEs, with small enterprises being defined as those enterprises with business volumes starting from LE 1 million to LE 50 million while they were defined in a previous circular issued in December 2015 as those with business volumes starting from LE 10 million up to LE 20 million.

On the other hand, medium enterprises were defined as businesses whose volume ranges between LE 50 million and LE 200 million, up from LE 20 million to LE 100 million under the previous circular.

President Sisi launched the SMEs’ initiative aimed at allocating LE 200 billion in 2016. The CBE subsequently directed banks to raise lending rates to SMEs to up to 20 percent at an interest rate of 5 percent, says former deputy managing director of Banque Misr Sahar al-Damaty.




“This initiative was very important because it resulted in unified definitions of SMEs at least for the banking system. This step laid the ground for SMEs in Egypt . . . those who did not benefit from this initiative have lost a great opportunity to grow their own businesses,” she maintains.

Since its launch in 2016, the CBE initiative for SMEs has provided about LE 70 billion for around 70,000 projects. Similarly, the MSMEDA provided LE 5.1 billion for SMEs and micro businesses last year, up from LE 3.8 billion in 2016. “We are targeting to push our financing portfolio up 20 percent to LE 6 billion by the end of this year,” says Gamea.

Challenges and proposed solutions

Despite the growing attention aid to SMEs, the sector’s role in economic development remains limited and does not reflect its potential. While the government and the CBE have made significant progress in providing the needed finance to SMEs and easing their access to funds, securing the required funds at cheaper rates remains one of the key challenges hindering the growth of these businesses.

“The cost of loans available for SMEs is high. Additionally, we have not seen the achievements of the MSMEDA which replaced the SFD,” says economic expert and former head of the Egyptian Direct Investment Association and the Arab Private Equity and Venture Capital Association Hany Tawfik.

Tawfik urges the government to encourage all businesses; the small, medium and big enterprises, to revive the whole economy, affirming that paying attention to the big industries will automatically activate small ones.

“We have to provide cheaper finance for SMEs, work on training the workers and employees to promote their efficiency, and offer incentives for these businesses such as providing lands at low prices, lower interest rates, tax exemptions and low customs for imported materials,” he concludes.

Damaty points out that the main challenge the government faces is getting SMEs to join the formal sector—most tend not to, to avoid being registered and thus pay taxes on their activities.

At the 5th edition of the Youth conference held in Cairo last May, President Sisi urged owners of informal businesses to join the formal economy, promising them a five-year tax exemption, as well as facilitated social insurance for their workers and employees.

The president also noted that integrating informal businesses into the formal economy would create more jobs and thus bring down unemployment rates.

“We have to follow the government’s commitment to implementing this pledge because, if applied, it will [attract] many SMEs to the formal economy and this would boost both the economic development and the state tax revenues,” Damaty says, affirming that there is a great resistance from many SMEs to turn formal and afford additional burdens resulting from the recently applied bold economic reforms which are currently taking a toll on low- and middle-income sectors.

“This requires greater incentives to attract these businesses and convince them to bear the extra costs,” she argues.

While providing an affordable finance is key to the growth of SMEs, there are other vital elements for their expansion, including the professional training for business owners and workers in many domains.

“SMEs’ pressing issues are not only a matter of finance, as there are other challenges such as the need for professional marketing, management, budgeting, as well as developing human resources and upgrading technology systems,” Damaty says, calling on the government to organize obligatory preparatory training courses for those seeking finance to their SMEs and micro businesses.

The private sector should also play a significant role in promoting SMEs and it could be a part of its corporate social responsibility by training young people at their factories and companies, Damaty suggests. “This requires a state direction to order the private sector to abide by this proposal,” she maintains.

In April, the MSMEDA and the Federation of Egyptian Industries (FEI) signed a memorandum of understanding that aims to develop the skills of entrepreneurs and workers in SMEs nationwide. At the time former trade minister Tarek Kabil had said the agreement comes in light of the ministry’s keenness to develop SMEs and integrate them into the economy.

The agreement will help in developing industrial projects and providing jobs for youth by offering training and technical support for SMEs. A similar MoU was also signed with the Ministry of Manpower to prepare youth to set up SMEs and train workers to man in these projects. In a previous interview, MSMEDA’s Gamea told Egypt Today Egypt that the agency is launching four new training programs, certified by the International Labor Organization, to develop the skills of project founders.

Given the importance of SMEs for boosting the Egyptian economy, creating more jobs, combating poverty and yielding more revenues from taxes, it is imperative for policy makers to harmonize efforts to create a more comprehensive strategy for the development of these businesses.

The government would also do well to work on providing further financial and non-financial assistance such as knowledge and administrative resources for these projects.

Working on the informal sector and adopting legal and financial procedures that would encourage them to move to the official market are also critical for promoting Egyptian SMEs, as well as collecting more accurate data on the informal sector to raise the awareness of its project owners about their role in the economic development