CBE Extends SME Financing to Agricu

With the stated aim of supporting the agricultural sector and providing funds to farmers for modernizing irrigation systems, the board of directors of the Central Bank of Egypt (“CBE”) published a circular on 14 March 2019 allowing banks to finance specific cooperatives (“co-ops”)[1] – namely farmers co-ops and irrigation ones – at a 5% interest rate, as part of CBE’s SME-financing Initiative that was launched in January 2016.

Background

In 2016, CBE undertook an overhaul of its SME-related policies. After issuing a new, unified definition of micro, very small, small, and medium-sized enterprises in December 2015, the CBE board issued a circular in January 2016 that provided for financing to these enterprises through banks with the aim of offering them additional funding channels (“SME-financing Initiative”). In particular, the CBE directed banks to increase the size of loans and credit facilities portfolio (direct and indirect) offered to very small, small, and medium-sized enterprises to reach at least 20% of the total amount of credit facilities provided by each bank over the subsequent four years (i.e., until January 2020). With regards to funding granted to very small and small enterprises in specific, the CBE allowed banks to deduct the full amount of these direct loans and credit facilities from the 10% cash deposit reserves that Egyptian banks are obliged to keep at CBE, provided that these loans meet several conditions, one of which was that the interest rates do not exceed 5%. In addition, the circular highlighted certain economic sectors for such funding to small and very small enterprises, including industries producing intermediate components or those concerned with substituting imports. Following that, in February 2016, CBE issued another circular launching an initiative that offers medium- and long-term concessional lending, at a 7% reduced interest rate, to medium-sized enterprises in the industrial and agricultural sectors in order to finance new machinery, equipment, and production lines, while allocating EGP 5 billion to banks for this initiative.

The New Circular: Financing Co-ops at 5% Interest Rates

Although official agricultural policy in Egypt has long provided for subsidized access to credit, formal loans have remained largely inaccessible in practice for the majority of farmers.[2] For example, according to CBE, in 2017, the agricultural sector accounted for only 0.8% of the total volume of bank loans in Egypt, with the majority going to the manufacturing sector.[3] In this context, co-ops have traditionally played an important role in the provision of finance to farmers. The cooperative system in Egypt is among the oldest in the developing world, dating back to the early 20^th century and having a particularly active role in the Egyptian economy during the 1960s and 1970s. In addition, it managed to survive the liberalization of the economy in the 1980s, albeit with some reconfiguration of their tasks.[4] Within this system, agricultural co-ops were the first to develop and they continue being the largest in Egypt. According to statistics published by the Central Agency for Public Mobilization and Statistics (“CAPMAS”), there were as many as 5,800 co-ops in the agriculture sector in Egypt in 2016-2017, which included agricultural credit co-ops and agricultural reform co-ops.[5] The Food and Agriculture Organization of the United Nations (“FAO”) estimates this number at over 7,000 in 2017, with 18 million members, maintaining that agricultural co-ops in Egypt are among the largest co-ops worldwide.[6] As per the Agricultural Cooperatives Law No. 122 of 1980, agricultural co-ops are “economic and social units” aimed at agricultural and rural development. They enable farmers, and particularly small farmers, to share and manage resources, infrastructure, and services. They also assist in the distribution of farm inputs (such as chemical fertilizers and seeds of strategic crops), the organization of land cultivation, the promotion of agricultural mechanization, the marketing of major crops, the dissemination of information and training to farmers, and the provision of finance to its member farmers by securing loans from various sources. In its recent circular, CBE recognizes the value of this system and the effects of the agricultural sector on increasing growth and development rates and enhancing the national economy. Thus, the CBE board decided to extend its SME-financing Initiative to the agricultural sector – specifically to farmers co-ops and co-ops established for irrigation system modernization and pipeline extension – encouraging banks to provide them with financing while not exceeding the 5%-interest rate cap that was set for financing very small and small enterprises.

Conclusion

The move to encourage the provision of facilitated loans to agriculture-sector co-ops under the umbrella of the CBE’s 2016 SME-financing Initiative could widen the platform of the beneficiaries of this Initiative while diversifying it. It could also address the gap in funding provided by banks to the agricultural sector.   [1] CBE Circular dated 14 March 2019 on financing the agriculture cooperatives under the CBE initiative for small enterprises, available through this link (in Arabic). [2] International Food Policy Research Institute, “An Agricultural Policy Review of Egypt: First Steps Towards a New Strategy”, Y. Kassim, M. Mahmoud, S. Kurdi, and C. Breisinger, 2018, available through via this link. [3] CBE, “Annual Report 2016/2017”, available through this link. [4] “Reconstructing Rural Egypt: Ahmed Hussein and the History of Egyptian Development”, Amy J. Johnson, 2004, Syracuse University Press; “Rural Responses to Globalization in Egypt: Final Report Presented to the Ford Foundation”, M. Abdel Aal, July 2007, available through this link; CIHEAM, “Food and agricultural policies in Egypt”, A. Gouell and A. El Miniawy, 1994, available through this link; The Egyptian Centre for Economic Studies, “Agricultural Productivity Growth, Employment and Poverty in Egypt”, H. Kheir-El-Din and H. El-Laithy, February 2008, available through this link. [5] CAPMAS, “No. of agricultural cooperative associations”, available through this link. [6] FAO, “FAO organized two workshops within the project “Support to agricultural Cooperatives Reforms in Egypt”, in Alexandria and Luxor”, 1 March 2017, available through this link.