The Central Bank of Egypt Adjusts i

On 28 February 2017, the Central Bank of Egypt’s (“CBE”) Board of Directors issued a directive that was circulated to banks operating in Egypt last week, on the conditions for lending to Small Medium and Micro Enterprises (“SMEs”). The goal is to open the door for more lending to these projects. The amendment abolishes the definition for “very small” enterprises, and increases the thresholds for the definitions of Small, Medium, and Micro enterprises, thus allowing more projects to benefit from these lending conditions. It also improves the type of data provided by banks in relation to SME financing.

Background

The CBE has adopted policies that encourage bank financing to SMEs from the outset of 2016. These included the issuance of unified SME definitions, and an initiative in 11 January 2016[1] that made available lending at a 5% return, and relieved banks of the related reserve requirements, while instructing banks at the same to direct 20% of their lending portfolios to SMEs for four years. In 22 February 2016, a directive was issued making available EGP 5 billion at a rate of 7.5% for projects operating in the fields of agriculture and industry for a period not exceeding 10 years, and capped at EGP 20 million per client.[2] Finally, in 28 December 2016,[3] a directive was issued adjusting the risk weight related to minimum capital adequacy requirements in lending provided to SMEs, in accordance with the aforementioned CBE initiatives (Please see ELU January 2017 Week 3 and March 2016 Week 1 Issues on the matter).

The Most Recent Amendment on 28 February 2017[4]

The decision issued by the CBE on 28 February 2017 makes several amendments concerning lending to SMEs. It amends the definition of small, medium, and micro enterprises so that (i) micro SMEs are now those with an annual business volume not exceeding EGP 1 million, employment of not more than 10 persons, and paid capital for newly established enterprises that does not exceed EGP 50,000, (ii) small enterprises are those with an annual business volume ranging between EGP 1 to 5 million, with employment not exceeding 200 persons, and a paid capital for newly established enterprises ranging from EGP 50,000 to EGP 5 million for industrial enterprises, and less than EGP 3 million for non-industrial enterprises, and (iii) medium enterprises are those with an annual business volume ranging from EGP 50 to EGP 200 million, with employment not exceeding 200 persons, and paid capital for new establishments between EGP 5 and EGP 15 million  for industrial enterprises, and EGP 3 to EGP 5 million for non-industrial enterprises. In addition to the increases in the above thresholds, the new amendment abolishes the definition of “very small enterprises”, which was applicable before. In addition, the previous directives allowed banks to lend small and micro enterprises without obtaining their certified financial statements for one year. The amendment has increased that period to two years. It also adds new and renewable energy to the scope of activities which fall under the CBE initiative for SME financing at low interest rates, whereas these benefits were previously exclusive to agricultural and industrial activities. The amendment also increases the maximum amount of financing available to one client from the same bank under the low interest rate financing initiative, to EGP 40 million instead of the original EGP 20 million cap. Furthermore, the amendment makes available an amount of EGP 10 billion through banks for the financing of SMEs at a return rate of 12% instead of the 7.5% rate that was applicable since January 2016, with the CBE bearing the difference in costs.

Conclusion

This is a positive development in the sense that it comes in response to the desire of banks wishing to make use of the CBE initiatives aimed at encouraging SME financing. However, the overall climate for the financing of these establishments remains inappropriate because of the legal and procedural constraints which act as obstacles to the access to finance by SMEs, and thus the prospected contribution of these enterprises to the national economy.  There is therefore a serious need for an overhaul which tackles these obstacles at a deeper level so that small and medium enterprises are able to benefit from the policies which the CBE aims to implement.   [1] CBE Circular dated 11 January 2016 encouraging banks to finance SMEs, Available through this link (Arabic). [2] CBE Circular dated 22 February 2016 on the initiative for medium-sized industrial and agricultural companies, Available through this link (Arabic). [3] CBE Circular dated 29 December 2016 amending Circular dated 11 January 2016 encouraging banks to finance SMEs, Available through this link (Arabic). [4] CBE Circular dated 5 March 2017 containing Board of Directors decision of 28 February 2017 amending the SME initiatives, Available through this link (Arabic).