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CBE Initiative to Offer Medium and

CBE Initiative to Offer Medium and Long-Term Concessional Lending to Medium Enterprises in Industrial and Agricultural Sectors
On 22 February 2016, the Central Bank of Egypt launched an initiative that offers medium and long term lending to medium-sized enterprises in the industrial and agricultural sectors in order to finance new machinery, equipment, and production lines.[1] The CBE will allocate EGP five billion to banks,[2] starting March 2016, which in turn re-lend the amount to medium enterprises at a 7% reduced interest rate over a period of up to ten years. It is worth noting that medium enterprises are the ones whose annual revenues range between EGP 20 million to less than 100 million (and labour force of less than 200 individuals), according to the unified definition issued by the CBE on 7 December 2015 for micro, small and medium enterprises.[3]  
Initiative Details
The CBE has identified several conditions for the said initiative to ensure the allocated fund reaches its targeted beneficiaries (medium enterprises in the industrial and agricultural sectors), as follows:
  1. The interest rate is reduced and is determined by the administrative department at the CBE.
  2. For performing clients, it is not possible to change the applied interest rate after the allocation of lending and throughout the loan period; however, it is possible for the bank to change the interest rate in cases of non-performing clients.
  3. The CBE administrative department can reconsider pricing offered to the new segments that require bank lending, given market developments and for only once a year.
  4. The fund is allocated to banks through treasury bills and bonds that are renewed periodically.
The banks will repay the loan principal on a quarterly basis according to the repayment schedules and grace periods agreed upon with clients, while the interest rate will be repaid monthly. A single client is not allowed to benefit from the initiative except once, and with a maximum amount of EGP 20 million via a single bank.  
Commentary
The new CBE initiative comes in line with several other decisions taken recently by the Bank to redirect available liquidity in the banking sector to real and productive sectors, that are most effective in the Egyptian economy, rather than consumption purposes. This in turn leads to the attainment of real and sustainable growth, as well as job creation. On 11 January 2016, the CBE reduced the maximum exposure (single client obligor) per client to 15% of a bank’s total deposits (instead of 20%) and for clients and related parties to 20% (instead of 25%).[4] The purpose of the said decision was to expand and diversify the clients' pool and credit portfolios at banks in order to prevent their concentration. The CBE also set a cap for the total amount of consumer loans so as not to exceed 35% of the total monthly net income of individuals. It also reduced the maximum exposure (single client obligor) per client.[5] This aims at reducing the consumption lending pattern prevalent in the banking sector and redirecting the concentration of bank finance from consumption to productive purposes. Furthermore, the CBE launched an initiative to encourage banks to increase credit portfolios and facilities available to small and medium enterprises to reach not less than 20% of total loans offered by the banking sector over the upcoming four years, with a reduced interest rate of 5% (Egypt Legal Update, January 2016 Edition). Those decisions are complementary to the overall government economic policy that aims at encouraging local production by means of restricting imports (to reduce pressures on foreign currency) and optimizing revenues. For example, the President of Egypt issued Decree No. 25 for 2016 to increase customs tariffs for a number of final goods, with rates ranging between 20% and 40% (Egypt Legal Update, February 2016, second week edition). It is worthy to note that the CBE has targeted the industrial and agricultural sectors in particular, since both are considered of the main driving forces of real growth in Egypt, through their contribution to national income, employment, investment, and exports. During the period from 2008-2014, the average rate of contribution of both sectors to gross domestic production was around 16.5% and 11% consecutively, and their average rate of growth reached 10% and 3% consecutively. As for investments in both sectors, they constituted around 12.8% and 4% consecutively of total investments in 2014.[6] Moreover, the amount of loans offered from banks to private industrial enterprises reached around EGP 139.018 billion in local currency and EGP 78.484 billion in foreign currency, while those offered to private agricultural enterprises reached around EGP 6.169 billion in local currency and EGP 2.102 billion in foreign currency.[7] In light of the importance of the two said sectors, as highlighted above, around 52% of small and medium enterprises are concentrated in them (51% in the industrial sector and 1% in the agricultural sector). On the other hand, small and medium enterprises constitute around 98% of total existing industrial enterprises (especially in food industries), in addition to 99% of total labour force in the agricultural sector. Consequently, CBE's initiative above is a good and complementary step towards encouraging and developing local production in the most productive and employment generating sectors; where medium enterprises are their cornerstone. However, it is essential that all government entities collaborate to overcome other obstacles – other than financial ones – that could constraint the development of small and medium enterprises. Of such obstacles are the: difficulty to register and obtain required licenses, environmental, and safety concessions; the increased costs of transportation and shipment; the difficulty to market products due to the limited number of exhibitions available for SMEs; the big number of inspection and regulatory bodies; the difficulty to enter and/or exit many markets that are monopolized by big enterprises; the difficulty to hire skilled labour at affordable costs; the lack of decent organizational structures for labour rights in SMEs; the limited number of bodies that train medium business owners to prepare the required economic and financial feasibility studies, financial data, and marketing plans.   [1] CBE Circular dated 22 February 2016 on the Initiative for medium-sized industrial and agricultural companies, available through this link. [2] At a 3% interest rate. [3] CBE Circular dated 7 December 2015, on MSMEs definition, available through this link. [4] CBE Circular dated 11 January 2016 on the concentration of bank's credit portfolios, available through this link. [5] CBE Circular dated 11 January 2016 on the debt burden ratio of retail portfolio, available through this link [6] Ministry of Finance, Financial Monthly Bulletin, January 2016, available through this link. [7] Central Bank of Egypt, Statistical Bulletin, available through this link.
On 22 February 2016, the Central Bank of Egypt launched an initiative that offers medium and long term lending to medium-sized enterprises in the industrial and agricultural sectors in order to finance new machinery, equipment, and production lines.[1] The CBE will allocate EGP five billion to banks,[2] starting March 2016, which in turn re-lend the amount to medium enterprises at a 7% reduced interest rate over a period of up to ten years. It is worth noting that medium enterprises are the ones whose annual revenues range between EGP 20 million to less than 100 million (and labour force of less than 200 individuals), according to the unified definition issued by the CBE on 7 December 2015 for micro, small and medium enterprises.[3]  
Initiative Details
The CBE has identified several conditions for the said initiative to ensure the allocated fund reaches its targeted beneficiaries (medium enterprises in the industrial and agricultural sectors), as follows:
  1. The interest rate is reduced and is determined by the administrative department at the CBE.
  2. For performing clients, it is not possible to change the applied interest rate after the allocation of lending and throughout the loan period; however, it is possible for the bank to change the interest rate in cases of non-performing clients.
  3. The CBE administrative department can reconsider pricing offered to the new segments that require bank lending, given market developments and for only once a year.
  4. The fund is allocated to banks through treasury bills and bonds that are renewed periodically.
The banks will repay the loan principal on a quarterly basis according to the repayment schedules and grace periods agreed upon with clients, while the interest rate will be repaid monthly. A single client is not allowed to benefit from the initiative except once, and with a maximum amount of EGP 20 million via a single bank.  
Commentary
The new CBE initiative comes in line with several other decisions taken recently by the Bank to redirect available liquidity in the banking sector to real and productive sectors, that are most effective in the Egyptian economy, rather than consumption purposes. This in turn leads to the attainment of real and sustainable growth, as well as job creation. On 11 January 2016, the CBE reduced the maximum exposure (single client obligor) per client to 15% of a bank’s total deposits (instead of 20%) and for clients and related parties to 20% (instead of 25%).[4] The purpose of the said decision was to expand and diversify the clients' pool and credit portfolios at banks in order to prevent their concentration. The CBE also set a cap for the total amount of consumer loans so as not to exceed 35% of the total monthly net income of individuals. It also reduced the maximum exposure (single client obligor) per client.[5] This aims at reducing the consumption lending pattern prevalent in the banking sector and redirecting the concentration of bank finance from consumption to productive purposes. Furthermore, the CBE launched an initiative to encourage banks to increase credit portfolios and facilities available to small and medium enterprises to reach not less than 20% of total loans offered by the banking sector over the upcoming four years, with a reduced interest rate of 5% (Egypt Legal Update, January 2016 Edition). Those decisions are complementary to the overall government economic policy that aims at encouraging local production by means of restricting imports (to reduce pressures on foreign currency) and optimizing revenues. For example, the President of Egypt issued Decree No. 25 for 2016 to increase customs tariffs for a number of final goods, with rates ranging between 20% and 40% (Egypt Legal Update, February 2016, second week edition). It is worthy to note that the CBE has targeted the industrial and agricultural sectors in particular, since both are considered of the main driving forces of real growth in Egypt, through their contribution to national income, employment, investment, and exports. During the period from 2008-2014, the average rate of contribution of both sectors to gross domestic production was around 16.5% and 11% consecutively, and their average rate of growth reached 10% and 3% consecutively. As for investments in both sectors, they constituted around 12.8% and 4% consecutively of total investments in 2014.[6] Moreover, the amount of loans offered from banks to private industrial enterprises reached around EGP 139.018 billion in local currency and EGP 78.484 billion in foreign currency, while those offered to private agricultural enterprises reached around EGP 6.169 billion in local currency and EGP 2.102 billion in foreign currency.[7] In light of the importance of the two said sectors, as highlighted above, around 52% of small and medium enterprises are concentrated in them (51% in the industrial sector and 1% in the agricultural sector). On the other hand, small and medium enterprises constitute around 98% of total existing industrial enterprises (especially in food industries), in addition to 99% of total labour force in the agricultural sector. Consequently, CBE's initiative above is a good and complementary step towards encouraging and developing local production in the most productive and employment generating sectors; where medium enterprises are their cornerstone. However, it is essential that all government entities collaborate to overcome other obstacles – other than financial ones – that could constraint the development of small and medium enterprises. Of such obstacles are the: difficulty to register and obtain required licenses, environmental, and safety concessions; the increased costs of transportation and shipment; the difficulty to market products due to the limited number of exhibitions available for SMEs; the big number of inspection and regulatory bodies; the difficulty to enter and/or exit many markets that are monopolized by big enterprises; the difficulty to hire skilled labour at affordable costs; the lack of decent organizational structures for labour rights in SMEs; the limited number of bodies that train medium business owners to prepare the required economic and financial feasibility studies, financial data, and marketing plans.   [1] CBE Circular dated 22 February 2016 on the Initiative for medium-sized industrial and agricultural companies, available through this link. [2] At a 3% interest rate. [3] CBE Circular dated 7 December 2015, on MSMEs definition, available through this link. [4] CBE Circular dated 11 January 2016 on the concentration of bank's credit portfolios, available through this link. [5] CBE Circular dated 11 January 2016 on the debt burden ratio of retail portfolio, available through this link [6] Ministry of Finance, Financial Monthly Bulletin, January 2016, available through this link. [7] Central Bank of Egypt, Statistical Bulletin, available through this link.