Definition of SME:

The size of the firm (in terms of number of employees and the magnitude
of
the investment it represents) is the most commonly used indicator for the
type of firm. While the simplicity of this approach makes it attractive, it
does not tackle two important aspects of any businesses; fixed assets and
sales.
One of the important issues of SME in Egypt is the lack of one definition
of
Micro, Small and Medium businesses. There are more than 27 definitions
in
the country and each institution, organization or governmental body is
using
its own definition. For this study we are applying the definition of the
Ministry of Finance that focuses on the number of employees, fixed
assets
and sales, as factors of definition and differentiates between
“Manufacturing
and Construction Sectors” and “Services and Trade Sectors”.
(EGP 000’s)
Labor No. Fixed Assets Sales
Manufacturing
and construction
Small 5-49 5,000,000 10,000,000
Medium 50-99 10,000,000 20,000,000
Service and
Trade
Small 5-9 500,000 1,000,000
Medium 10-19 2,000,000 4,000,000
SME’ Role in Economic Development:
Similar to other developing countries, SME development has been
gaining
the attention of the government as a means of addressing the countries
dramatic unemployment problems as well as a poverty alleviation tool.
There are hundreds of thousands SME throughout Egypt, where in 1998 it
was reported that SME constitute around 99.70% of the private sector,
excluding agriculture in Egypt, and produces about 80% of the value
added.
The SME is also accredited for 75% of private sector employment.
For decades this segment suffered serious problems and lack of attention
from the government, where the restrictive policies and indifference to
their
needs contributed to keeping this segment poor and under-developed. The
segment was not viewed by the policy makers as an essential component
of
the economy. The structure of the private sector was not incorporating
this
segment and the system of the banks could not facilitate provision of
credits
to SME. These, in addition to other factors, were behind the ineffective
impact of this segment in the economic development of the country.
However, and during the last two decades, the government started to
exert
serious effort in developing this segment and currently the SME receive
strong support from the government and it appears on the top of its
agenda.
Main Characteristics of SME in Egypt:
It has been noticed that, the majority of SME are concentrated in whole
sale
and retail trade, as well as in the vehicle and maintenance sectors. It in
interesting to note that regardless of the concentration of SME in the
above
mentioned sectors, the services, trade, finance and transport sector are the
ones experiencing the most significant job growth rates; 60%,30%, 28%
and
28%, respectively, over the period of ten years from 1988 to 1998. it
should
be mentioned that over the same period of time, 1,848,000 jobs have been
created in the services sector, versus 584,000 jobs in the trade sector,
72,000
jobs in the finance sector, and 206,000 jobs in the transport sector
( source
: profile of the SME in Egypt, Ministry of Foreign Trade”.
Main Problems of SME in Egypt:
It is very important to identify the real and main problems of this segment
prior to the start of any corrective action. Thorough analysis, studies and
surveys were conducted in this regard with the support of different
donors’
organization:
Limited access to capital and financial services.
Constraints on the inputs needed by SME.
Information and technology.
Low competitive advantage.
Informal sector and the regularity constraints imposed on SME
activity.
Limited managerial and accounting skills.
Declining effective demand on SME products.
Missing middle-sector syndrome.
Poor marketing channels.

Constraints to the expansion of SME leasing in Egypt:

Macroeconomic constraints:
The devaluations of Egypt’s currency have been negatively affecting the
Egyptian economy; the budget deficit, inflation and the limited GDP
growth
are all examples of unfavorable macroeconomic conditions.
Deficiencies in the legal environment:
The two major obstacles facing the legal environment are the lengthy
time
taken to issue the court order of repossession and the impossibility
implementation, were in this case the lessee refuses to return the
equipment,
and hence, the lessor would resort to the court again in an endless attempt
of
acquiring his equipment.
Limitations on the types practiced in Egypt :
According to the leasing law of 95/1995, the only type of leasing that is
allowed to be practiced in Egypt Financial Lease. Existing leasing
companies that have well established themselves with the SME’ sector in
the
financial lease are keen for the law to include operating lease as well. The
will enable them to expand their cliental base with a diversified portfolio
of
assets.
Difficulty in implementation of the tax and customs
incentives:
Despite their presence in the leasing law, the leasing companies
encounter
some difficulties in applying these incentives when dealing with customs
and tax authority.
Lack of credibility in market information:
The Egyptian economy is severely lacking information. Bureaucracy and
stringent lengthy official governmental regulation are other-burdening
lessors.
Difficulties in client investigation procedures:
Such a problem is more highlighted in the SME clients due to the absence
of
a credit history or banking history for this sector. Hence, they resort to
informal methods of investigation that mainly depend on reputation of the
prospective lessee in his area of work and residence and feedback from
his
circle of acquaintances.
Administration problems in the leasing companies:
This is due to the nature of the lessee and the need to adjust and modify
the
companies’ internal software and follow up systems to serve SME
segment
in an attempt to minimize the risk of default.
Difficulties in raising funds:
43% of the leasing companies in the Egyptian market have banks as a
major
shareholder, such a shareholding structure is a valid mitigation to
minimize
this difficulty.
Conclusion:
In conclusion, it is discernable from the analysis that there is a good
potential for the involvement of the leasing companies in providing their
services to the SME sector in Egypt. Still, there are some companies,
which
are worried about the high risk, that can be involved in SME financing
which may result in high pricing strategies or need for initial deposits.
On the other hand, SME’ awareness of leasing activities in Egypt was not
very remarkable, as almost half of the SME interviewees were not even
aware of the existence of leasing companies in Egypt. Despite such lack
of
leasing awareness, SME’ interviewees demonstrated interest in leasing
activities, highlighting a great potential for SME Leasing success in
Egypt,
as they have assessed the conveniences leasing provides as an oppose to
bank lending. In other words, leasing financing was found to be more
attractive to SME than banking financing in Egypt.
On the legal horizon, the Egyptian law, although provides incentives for
leasing companies to operate in the Egyptian market, there are still some
deficiencies-which are mostly related to default as per the interviewees-in
need to be revisited and amended. These regulatory and legal deficiencies
were also evident in Ukraine, and was one of the main reasons hindering
the
development of the leasing market there despite the suitability of the
economic conditions. Moreover, since the only type of leasing, which
practice is allowed in the Egyptian leasing market is financial lease, it
would
be, therefore, beneficial to assess the possibility of introducing new types
of
leasing activities.

From (((CBE Annual_2008-2009.pdf)))

1/7: Banking Sector Reform

Pressing forward with its banking reform plan, launched in September
2004,
the Central Bank has completed the preparations for the second stage
(2009 - 2011).
This stage aims at raising the efficiency and soundness of the Egyptian
banking sector, and enhancing its competitiveness and ability for risk
management so that it
can perform its role in financial intermediation in a way that serves the
national
economy, and achieve the targeted development. The reform plan is
based on a
number of pillars namely:
• Preparing and implementing a comprehensive program for the financial
and
managerial restructuring of specialized state-owned banks (The Principal
Bank
for Development and Agricultural Credit, Egyptian Arab Land Bank, and
Industrial Development and Workers Bank of Egypt).
• Following up the results of the first stage of restructuring the National
Bank of
Egypt, Banque Misr and Banque du Caire, and completing any
requirements
for enhancing their efficiency in the area of financial intermediation and
risk
management.
• Applying Basel II standards in Egyptian banks to enhance their ability
for risk
management.
• Adopting an initiative to increase and improve opportunities for
providing
finance and banking services, particularly to small and medium-sized
enterprises.
• Revising and strictly applying the international governance rules
relating to
banks operating in the Egyptian banking sector, and the CBE.
Within this context, a protocol was signed with the European Central
Bank and
seven European central banks to provide a three-year technical assistance
program to
be initiated on 1 January 2009, to apply Basel II standards in the banking
sector.
Moreover, the CBE launched in December 2008 an integrated initiative to
encourage
banking credit to companies and small and medium-sized enterprises. To
this end, the
CBE exempted banks – extending loans and credit facilities to those
companies and
enterprises– from the reserve requirement ratio (14 percent). Exemption
shall be
made, proportional to the volume of credit granted by banks to those
companies and
enterprises.

a- Why are SMEs are important??

1- High Contribution to domestic production
2- Significant export earning
3- Low investement requirements
4- Operation flexibility
5- Location wise Mobility
6- Capacities to develop appropriate indigenous technology
7- Import substitution
8- Contruibuation toward defense production
9- Technology – oriented industries
10- Competitiveness in domestic and export markets

a- Trends in SMEs Financing

b- Obstacles to SMEs Financing
 1- Poor access to Capital markets
2- Collateral
3- The intrinsic higher risk associated with small scale activities
4- Business plan / Strategy
5- Accounting, finance, corporate governance.
6- Credit history, credit discipline
7- Equity in Business
8- The existence of marked informational asymmetries between small business and
lenders, or outside investors.

c- Finance Gap:
Finance is available for large and Micro businesses, but limited for the small in developing
countries.

d- Activities and efforts by the government

e- Major players and for SMEs fincing
1- HSBC (Yalla Business)
2- CIB
3- Future generation foundation
4- Efham
5- Sonbola
6- ..
7- ..
8- ..
9- ..
10- ..
f- How dp SMEs get the money ????
g- Problems in SMEs;
1- XX% of SMEs have been categorized sick
2- Poor financial disclosure on account of taxes.
3- High risk perception has led to high borrowing cost
4- Credit history, credit discipline.
5- Cooateral
6- Working capital
7- The poor quality of projects submitted for financing
8- The inability of SMEs to make the best possible use of available sources of funding
9- The negative attitude displayes by SMEs toword equity financing