Central Bank: Credit Facilities for
Central Bank: Credit Facilities for Small and Medium Enterprises
On 6 January 2016, in an important step for the banking sector and other businesses, the Board of Directors of the Central Bank of Egypt (“CBE”) took many significant steps that aim at directing banks to grant loans and credit facilities to small and medium-sized enterprises (“SMEs”)[1]. The recent circulars are meant to offer additional means of finance for individuals and owners of SMEs by way of increasing the size of loans and credit facilities portfolio offered to SMEs to reach at least 20% of the total amount of loans provided by banks over the next four years, with an interest rate that does not exceed 5%. In addition, CBE has directed banks to establish specialized units for the financing of those enterprises and to provide a time plan for the implementation of those circulars.
Background
The period from 1998 till 2006 has witnessed a particularly significant growth in the number of SMEs in Egypt. According to the 2008 Human Development Report of the United Nations Development Program, SME projects during this period grew by an average of 4.7% per annum amounting to approximately 2.45 million projects, which contributed 80% of GDP and more than 90% of the number of private sector projects, in addition to having an employment rate between 65-75% of the national workforce.[2] According to CBE statistics, SMEs are highly concentrated in manufacturing (51%), wholesale and retail trade (40%), tourism (3%), building and construction (2%), agriculture (1%), and health (1%).[3] One of the main obstacles to the development of SMEs in Egypt is access to finance. Although the amount of financing needs of SMEs operating in the formal sector is estimated at about one billion dollars per annum, only 10% of this need is met, and only 5% of it is met through bank financing. In addition, the average rate of financing provided by banks to those enterprises represents only 3-4% of the total credit portfolio of the banks. According to the CBE, 66% of SMEs have problems dealing with banks due to the high interest rates, commissions and administrative expenses, 61% of SMEs expressed frustration at the size of required collateral, 53% of SMEs criticized the length and difficulty of the procedures, and 37% pointed out the large number of required documents.[4] In order to overcome these financial constraints, the CBE took several measures starting 2008 to encourage banks to offer various financing options to SMEs. Such measures included an exemption from part of the compulsory cash reserve; the establishment of "the Egyptian Credit Bureau “I-Score”" in order maintain a database of credit information for SMEs and consumers; the establishment of specialized SME financing departments in some banks; and the provision of stimulating credit facilities. As a result of those measures, a reasonable growth in the amount of funding available to SMEs has been achieved, where the portfolio size rose to 35 billion pounds in 2013, and the number of financial products offered increased to nearly 30 various products. In spite of this relative progress, it remained below the desired levels that meant to stimulate the growth of SMEs in order to fulfil its envisioned role as a driving engine for the growth of the Egyptian economy. To emphasize the importance of micro-enterprises and SMEs, a series of important successive legislative developments occurred since December 2014, in an order to improve the position of that sector in the Egyptian finance market. In December 2014, Presidential Decree-Law No. 141 for the Year 2014 was enacted, regulating the micro-finance activity (Egypt Legal Update, December 2014 Issue).[5] The new law provides a legal framework for micro-financing for the first time in Egypt and gives the Egyptian Financial Supervisory Authority (“EFSA”) control over the companies and associations engaging in the micro-finance activity. EFSA has followed the enactment of the Law by issuing several decisions that regulate this type of financing. It is worth mentioning that the Law explicitly states that it is not applicable to micro-finance through banks. Such activity remains regulated by the Banking Law and is subject to CBE supervision.Common Definition
The past two months witnessed significant regulatory developments with regards to the financing of micro-enterprises and SMEs (referred to as MSMEs). On 3 December 2015, the CBE issued a common definition of “micro, very small, small and medium-sized” enterprises, in addition to giving incentives to banks that provide financing options to these enterprises. The new definition sets the annual revenues of micro-enterprises at less than a million EGP (with an employment base of less than 10 individuals), from one million to less than 10 million EGP for very small enterprises (with an employment base of less than 200 individuals), from 10 million to less than 20 million EGP for small-sized enterprises (with an employment base of less than 200 individuals), and from 20 million to less than 100 million EGP for medium-sized enterprises (with an employment base of less than 200 individuals). The previous definition used by CBE considered SMEs as those that have 1) a business volume or annual sales of not less than one million EGP and not more than 20 million EGP, and 2) with a minimum paid-up capital of 250 thousand EGP and not more than to 5 million EGP. Thus, the new circular has differentiated between different sizes of enterprises, and provided each type of these enterprises different facilities in line with its size. On the other hand, the CBE has approved the use of "paid-up capital" instead of the previously used business volume criterion to classify new enterprises. This classification criterion can only apply for one year from the start of business and until information on business volume is available. Thus, it is considered a temporary classification/definition after which the original definition will be applied. In comparing the new definition with the previous one that was issued by CBE in 2008, it can be noticed that the paid-up capital has become 50,000 pounds for micro-sized enterprises, 50,000 - 5 million EGP for very small and small-sized enterprises, 5 - 10 million EGP for manufacturing medium-sized enterprises and 3 - 5 million EGP for non-manufacturing medium-sized enterprises. However, the previous circular also required a business volume between 1 - 20 million EGP, which is not required under the new circular. It should be noted that the Microfinance Law issued in December 2014 did not provide a clear definition of the different sizes of enterprises (MSMEs). In this sense, it did not focus on the definition of the recipients of the funding, but rather focused on the funding itself. Thus, it defined microfinance as finance of up to one hundred thousand EGP for economic productivity, service, and commercial purposes.Availability of financing for SMEs
The recent circular issued by the CBE on 6 January 2016 focused on providing financing to MSMEs through banks. The CBE directed banks to increase the size of loans and credit facilities portfolio (direct and indirect) offered to those enterprises for up to 20% of the total credit portfolio of the relevant bank during the period ending on 11 January 2020. In order to encourage and stimulate Egyptian banks to provide funding to these enterprises, CBE has allowed banks to deduct the full amount of loans offered to very small and small enterprises from the 10% cash deposit reserves that Egyptian banks are obliged to keep at CBE, provided that these loans have met several conditions, including:- The interest rate on those loans shall not exceed 5%;
- Banks should pay special attention to certain important economic sectors such as industries producing intermediate components, or those concerned with substituting imports;
- The amount is to be deducted – in EGP – from the total amount of direct loans and credit facilities apart from contingent liabilities granted to new customers as of 1 January 2016, as well as the increased amount of existing loans and facilities.
Procedural Reforms
In addition to the incentives granted by the CBE to Egyptian banks to encourage them to provide financing to MSMEs, the recent circulars have also removed some procedural constraints that were impeding banks from granting loans to those enterprises. In December 2015, the CBE’s circular removed the Article that required a ratified certificate from an auditor stating a company's business or sales volume up to the most recent quarter of the fiscal year. It also allowed banks to grant financing to micro and very small enterprises during the first year of business without the need to have financial statements certified by an auditor, in recognition of the fact that some of those companies are working in the informal sector. Furthermore, in order to give sufficient time to these enterprises to complete the registration process and prepare the required certified data and financial statements. CBE has granted the banks a grace period ending on 30 June 2016 to adapt to the new directives, and to establish or develop departments specialized in granting financing to these enterprises through the development of policies, procedures and internal systems, in addition to collecting the data needed to develop a classification system specific to MSMEs within 3 years.Conclusion
The CBE’s latest circulars have focused on providing incentives on the one hand (through exempting banks from a portion of cash reserves when granting loans and credit facilities to SMEs), and on removing obstacles on the other hand (by adjusting conditions that need to be met by those who require financing). In addition, the CBE tried to help banks cope with these enterprises through the consolidation of definitions and concepts. On 11 January 2016, the CBE issued a press release announcing that the recent circulars aim to pump 200 billion EGP in loans provided to MSMEs in order to finance about 350,000 enterprises (providing about 4 million new jobs) so as to reach a percentage of not less than 20% of the total loans provided by the banking sector over the next four years. As previously mentioned, the latest steps help to overcome one of the most important issues facing this sector which is financing. Going through those circulars and the legislative amendments issued by EFSA with respect to the micro-finance sector, it is clear that the government is interested in encouraging this sector. The consolidation and unification of definitions (for example, the definition of small-sized enterprise) between EFSA and CBE is encouraged in order to unify the procedures taken by banks (subject to the supervision of CBE) and associations/companies engaging in micro-finance activities (subject to the supervision of EFSA) while dealing with MSMEs requiring finance. [1] Central Bank of Egypt Circular dated 11 January 2016 encouraging Banks to Grant Loans and Credit Facilities to Small and Medium-sized Enterprises, Available through this link. [2]Human Development Report, Egypt, United Nations Development Programme, in cooperation with the Institute of National Planning, Egypt, available at: http://www.undp.org.eg/Portals/0/EHDR%20Page/Alia%20El%20Mahdi-Arabic.ppt [3] Small and Medium Enterprises Portal, Central Bank of Egypt, Available through this link. [4] Small and Medium Enterprises Portal, Central Bank of Egypt, Available through this link. [5] Presidential Decree-Law No. 141/2014 on Micro-Finance, Official Gazette, Issue No. 46 (cont.), 13 November 2013.
On 6 January 2016, in an important step for the banking sector and other businesses, the Board of Directors of the Central Bank of Egypt (“CBE”) took many significant steps that aim at directing banks to grant loans and credit facilities to small and medium-sized enterprises (“SMEs”)[1]. The recent circulars are meant to offer additional means of finance for individuals and owners of SMEs by way of increasing the size of loans and credit facilities portfolio offered to SMEs to reach at least 20% of the total amount of loans provided by banks over the next four years, with an interest rate that does not exceed 5%. In addition, CBE has directed banks to establish specialized units for the financing of those enterprises and to provide a time plan for the implementation of those circulars.
Background
The period from 1998 till 2006 has witnessed a particularly significant growth in the number of SMEs in Egypt. According to the 2008 Human Development Report of the United Nations Development Program, SME projects during this period grew by an average of 4.7% per annum amounting to approximately 2.45 million projects, which contributed 80% of GDP and more than 90% of the number of private sector projects, in addition to having an employment rate between 65-75% of the national workforce.[2] According to CBE statistics, SMEs are highly concentrated in manufacturing (51%), wholesale and retail trade (40%), tourism (3%), building and construction (2%), agriculture (1%), and health (1%).[3] One of the main obstacles to the development of SMEs in Egypt is access to finance. Although the amount of financing needs of SMEs operating in the formal sector is estimated at about one billion dollars per annum, only 10% of this need is met, and only 5% of it is met through bank financing. In addition, the average rate of financing provided by banks to those enterprises represents only 3-4% of the total credit portfolio of the banks. According to the CBE, 66% of SMEs have problems dealing with banks due to the high interest rates, commissions and administrative expenses, 61% of SMEs expressed frustration at the size of required collateral, 53% of SMEs criticized the length and difficulty of the procedures, and 37% pointed out the large number of required documents.[4] In order to overcome these financial constraints, the CBE took several measures starting 2008 to encourage banks to offer various financing options to SMEs. Such measures included an exemption from part of the compulsory cash reserve; the establishment of "the Egyptian Credit Bureau “I-Score”" in order maintain a database of credit information for SMEs and consumers; the establishment of specialized SME financing departments in some banks; and the provision of stimulating credit facilities. As a result of those measures, a reasonable growth in the amount of funding available to SMEs has been achieved, where the portfolio size rose to 35 billion pounds in 2013, and the number of financial products offered increased to nearly 30 various products. In spite of this relative progress, it remained below the desired levels that meant to stimulate the growth of SMEs in order to fulfil its envisioned role as a driving engine for the growth of the Egyptian economy. To emphasize the importance of micro-enterprises and SMEs, a series of important successive legislative developments occurred since December 2014, in an order to improve the position of that sector in the Egyptian finance market. In December 2014, Presidential Decree-Law No. 141 for the Year 2014 was enacted, regulating the micro-finance activity (Egypt Legal Update, December 2014 Issue).[5] The new law provides a legal framework for micro-financing for the first time in Egypt and gives the Egyptian Financial Supervisory Authority (“EFSA”) control over the companies and associations engaging in the micro-finance activity. EFSA has followed the enactment of the Law by issuing several decisions that regulate this type of financing. It is worth mentioning that the Law explicitly states that it is not applicable to micro-finance through banks. Such activity remains regulated by the Banking Law and is subject to CBE supervision.Common Definition
The past two months witnessed significant regulatory developments with regards to the financing of micro-enterprises and SMEs (referred to as MSMEs). On 3 December 2015, the CBE issued a common definition of “micro, very small, small and medium-sized” enterprises, in addition to giving incentives to banks that provide financing options to these enterprises. The new definition sets the annual revenues of micro-enterprises at less than a million EGP (with an employment base of less than 10 individuals), from one million to less than 10 million EGP for very small enterprises (with an employment base of less than 200 individuals), from 10 million to less than 20 million EGP for small-sized enterprises (with an employment base of less than 200 individuals), and from 20 million to less than 100 million EGP for medium-sized enterprises (with an employment base of less than 200 individuals). The previous definition used by CBE considered SMEs as those that have 1) a business volume or annual sales of not less than one million EGP and not more than 20 million EGP, and 2) with a minimum paid-up capital of 250 thousand EGP and not more than to 5 million EGP. Thus, the new circular has differentiated between different sizes of enterprises, and provided each type of these enterprises different facilities in line with its size. On the other hand, the CBE has approved the use of "paid-up capital" instead of the previously used business volume criterion to classify new enterprises. This classification criterion can only apply for one year from the start of business and until information on business volume is available. Thus, it is considered a temporary classification/definition after which the original definition will be applied. In comparing the new definition with the previous one that was issued by CBE in 2008, it can be noticed that the paid-up capital has become 50,000 pounds for micro-sized enterprises, 50,000 - 5 million EGP for very small and small-sized enterprises, 5 - 10 million EGP for manufacturing medium-sized enterprises and 3 - 5 million EGP for non-manufacturing medium-sized enterprises. However, the previous circular also required a business volume between 1 - 20 million EGP, which is not required under the new circular. It should be noted that the Microfinance Law issued in December 2014 did not provide a clear definition of the different sizes of enterprises (MSMEs). In this sense, it did not focus on the definition of the recipients of the funding, but rather focused on the funding itself. Thus, it defined microfinance as finance of up to one hundred thousand EGP for economic productivity, service, and commercial purposes.Availability of financing for SMEs
The recent circular issued by the CBE on 6 January 2016 focused on providing financing to MSMEs through banks. The CBE directed banks to increase the size of loans and credit facilities portfolio (direct and indirect) offered to those enterprises for up to 20% of the total credit portfolio of the relevant bank during the period ending on 11 January 2020. In order to encourage and stimulate Egyptian banks to provide funding to these enterprises, CBE has allowed banks to deduct the full amount of loans offered to very small and small enterprises from the 10% cash deposit reserves that Egyptian banks are obliged to keep at CBE, provided that these loans have met several conditions, including:- The interest rate on those loans shall not exceed 5%;
- Banks should pay special attention to certain important economic sectors such as industries producing intermediate components, or those concerned with substituting imports;
- The amount is to be deducted – in EGP – from the total amount of direct loans and credit facilities apart from contingent liabilities granted to new customers as of 1 January 2016, as well as the increased amount of existing loans and facilities.