A New SME Supervisor in Egypt

On 24 April 2017, the Prime Minister issued decree No. 947 of 2017 establishing a new supervisory body for overseeing the SME sector in Egypt.[1] The Agency for the Development of Small, Micro, and Medium Enterprises will be subordinate to the Ministry of Industry and International Trade and shall replace the current Social Fund for Development in acting as the overall coordinator of all SME policies and activities. It will also overtake the functions of the Industrial Modernization Centre and Technology and Industrial Training Centres, all previously under the auspices of the same Ministry. The new decree comes as a step prior to the issuance of a new SME law, the draft of which is currently being prepared by the Ministry of Trade and Industry.

Background and Legal Framework

As of yet there is no single comprehensive law dealing with the SME sector in its totality, however, a few key pieces of legislation have affected the sector over the years:

• Presidential Decree No. 40 of 1991[2]

This decree was issued in 1991 establishing the Social Fund for Development (the “Fund”) to – among other things – overlook the development of the SME sector in Egypt. The Fund started by being directly subordinate to the Prime Minister, and in 2015 was moved to the supervision of the Ministry of Trade and Industry. One of the most important shortcomings which became evident over 26 years of the Fund’s life is that it combined the roles of both regulator and funder, an obvious conflict of interests.

• SME Law No. 141 of 2004[3]

The SME Law No. 141 of 2004 (the “2004 Law”) introduced to Egypt – for the first time – definitions for small and micro enterprises, that were based on capital as well size of employment. The definition of micro enterprises under the 2004 Law is any entity or sole proprietorship which undertakes an economic activity whether it be in manufacturing, services, or trade, with paid capital that does not exceed EGP 50,000. The definition of small enterprises under the 2004 Law is any such entity with paid capital that is not less than EGP 50,000 and not more than EGP 1 million, with a number of employees that does not exceed 50. Although the 2004 Law provided that governmental units be established around Egypt, and on the municipal level, to handle all procedures of registration, licensing, and approvals for SMEs, in practice this has not been successful, as debilitating procedures and costs under other pieces of legislation were not streamlined to reflect a clear policy which positively impacts SMEs. For instance, Article (12) of the 2004 Law provided that governmental entities direct 10% of their contracting to SMEs. In practice however, government officials who oversee procurement in these bodies have been reluctant to apply this provision. This could be because in that context the Bids and Tenders Law of 1998[4] was seen as the sole governing legislation, or for difficulties in practice in dividing big government tenders to make it possible for SMEs to bid for the 10% provided in the SME Law. Similar difficulties also faced SMEs when trying to make use of provisions that were available in the Law which were designed in order to facilitate their acquiring of land, or obtaining of necessary approvals, especially construction permits, and industrial operation licenses.

• Microfinance Law No. 141 of 2014[5]

Following efforts from the Egyptian Financial Supervision Authority ("EFSA”), a microfinance law was enacted for the first time in Egypt in 2014 (the “Law”). The Law regulates funding for economic purposes in limited amounts to small-scale projects and aims at alleviating poverty through financial inclusion for the individuals who are expected to benefit from the availability of microfinance. Being in essence a non-banking financial activity, microfinancing naturally falls under the supervision of EFSA by virtue of Law No. 10 of 2009,[6] with the exception that banks undertaking microfinance activities are subject to the rules of the Banking Law and the Central Bank of Egypt. The importance of the regulation of microfinance activities is that it enables companies and associations willing to engage in this line of business to make financing available to small and micro enterprises. This is meant to help bridge the gap in the provision of finance to these enterprises. The Law also created the Egyptian Federation of Microfinance, which comprises companies, institutions and associations operating in the microfinance field, to represent the industry, raise awareness and take administrative measures against members of the federation who violate its professional rules.

• The Central Bank of Egypt Initiatives[7]

In addition, starting 2015, the Central Bank of Egypt (“CBE”) issued a number of directives to banks on the financing of SMEs, that are collectively referred to as the CBE initiative(s). The initiatives aim at making lending available to SMEs through relieving banks of certain reserve requirements, and instructing them to direct 20% of their lending portfolios to SMEs over a period of four years. In 2016 the CBE designated an amount of 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. The CBE also reduced the risk weight assessment related to minimum capital adequacy requirements in lending provided to SMEs. Most importantly, and perhaps controversially, the CBE initiative also provided its own definition for small, medium, and micro-enterprises based on measurements of size of capital, and labour, different than those provided under the 2004 SME Law.

The New SME Body

The new decree establishes the Agency for the Development of Small, Micro, and Medium Enterprises (the “SME Agency”) to replace the Social Fund for Development, the Centre for Modernizing Industry, the Council of Technology and Innovation Centres, and the Industrial Training Council. The constituting decree for the Fund had originally placed it under the direct supervision of the Prime Minister, until an amendment in 2015 delegated the competencies of the Prime Minister in this regard to the Minister of Trade and Industry. The new decree makes the SME Agency subordinate to the Minister of Trade and Industry from the outset. The decree also mentions entrepreneurship, which has been largely absent from SME related legislations in the past.

• Management

The decree divides the managing responsibility of the SME Agency to two levels: A board of directors, and a board of trustees. The SME Agency is to also have an executive director to oversee the implementation of the policies set out by the board of directors and ratified by the board of trustees. The board of trustees is to be chaired by the Prime Minister and comprise the Ministers of Trade and Industry, Planning, Local Development, Social Solidarity, International Cooperation, in addition to the Chairman of the Federation of Egyptian Industries, and the Chairman of the General Union of Trade Chambers. The board of directors is to be chaired by the Minister of Trade and Industry and comprises the executive director and a number of experts in the field not to exceed 10. Both the board of trustees and the board of directors may invite to their meetings any representatives of ministries or relevant entities in relation to the Agency's mandate, without, however, having counted votes. The aim of having these different levels of management is believed to be ensuring implementation. However, the absence of representation of non-governmental organizations, including business associations who work directly with SMEs, is worth noting. In addition, having board members and trustees at the Ministerial level could hinder prompt decision making which is usually needed to overcome many of the hurdles which SMEs face.

• General Powers and Objectives

In terms of the powers granted to the Agency, they are largely similar to those of its predecessor. Its mandate is to layout a national program for the development of projects, and facilitate an encouraging environment for SMEs, as well as encourage citizens to enter the labour market through these projects, and promote a culture of entrepreneurship, research, and innovation. It is also to coordinate the efforts of all other bodies and stakeholders in the SME sector, propose laws, and design training programs including in the areas of capacity building for marketing and value chains, facilitate collective negotiation, encourage SME exports, and work on easing the procedures required for the obtaining of licenses and permits to initiate SME activities. Also notable is that the Agency's mandate includes the establishment of a database for SMEs, and preparing and publishing information regarding the services that the Agency is to provide to SMEs. The board of directors is to design awareness and marketing plans for the Agency’s services. The Agency may also establish companies and funds solely or in partnership with others, or own equity in existing companies or funds that are engaged in fields which further its interests and are related to its objectives. Most importantly, the decree retains the SME Agency's role as funder which could lead to the same issues that arose from the contradiction in roles of the repealed Social Fund. It is also worth noting that the duties of the board of directors include laying out performance monitoring controls for the different services and programs provided by the Agency, and entities that undertake activities that lie within its scope. Moreover, the board of directors may lay out criteria for the classification of projects according to the volume of activity, capital, or size of labour force.

• Resources

Similar to the Fund, the Agency's resources will comprise designations in state budget, grants and loans that are accepted and entered into by the Agency – including grants in international treaties and organizations that are directed to SMEs and entrepreneurship, fees in exchange for the services performed by the Agency, and fees under related laws.

Conclusion

The new decree comes as a step prior to the issuance of a new SME law, the draft of which is currently being prepared under the auspices of the Ministry of Trade and Industry. The aim is to overcome some of the many hurdles which stand in the way of the formalization of the small, and micro enterprise sector, which is a sizable part of the Egyptian economy. However, as is often the case, the problem remains in implementation, both in terms of the bureaucracy of procedures and inflexibility of the implementing bodies in resolving the issues which face SMEs and entrepreneurs in trying to benefit from these legislations; and in conflicting laws. Therefore, the anticipated Industrial Licenses law will be key for the ability of SMEs and other investors to make use of these initiatives of facilitation. In addition, the Bids and Tenders Law must be amended before any entities can make use of provisions which purport to facilitate government tenders and ensuring a space for SMEs to compete therein. Moreover, in the absence of any consequences for non-compliance with the provisions which govern the SME sector in Egypt, the applicability of the powers granted to the SME Agency could remain to be in question. We see that giving a voice to stakeholders who are directly affected by these policies in the decision-making process is the way to ensure the soundness and effectiveness of said decisions. Finally, we hope that the SME Agency's inheritance of the resources and employees of the Social Fund for Development, the Centre for Modernizing Industry, and the Council of Technology and Innovation Centres does not mean that it inherits the mindset or incompetence which led to the shortcomings of those replaced entities.   [1] Prime Minister’s Decree No. 947/2017 establishing the Agency for the Development of Small, Micro, and Medium Enterprises, Official Gazette, Issue No. 16 (bis) (a), 24 April 2017. [2] Presidential Decree No. 40/1991 establishing the Social Fund for Development, Official Gazette, Issue No. 6, 7 February 1991. [3] Law No. 141/2004 on Small Enterprises Development, Official Gazette, Issue 24 (cont.) (a), 10 June 2004. [4] Law No. 89/1998 on Bids and Tenders, Official Gazette, Issue No. 19 (bis), 8 May 1998. [5] Law No. 141/2014 Regulating Microfinance Activity, Official Gazette, Issue 46 (cont.), 13 November 2014. [6] Law No. 10/2009 Regulating Supervision on Non-Bank Financial Markets and Instruments, Official Gazette, Issue No. 9 (bis), 1 March 2009. [7] Please refer to the March 2017 Week 4 Issue of the Egypt Legal Update for more on this topic.