Borrowed Success

Egyptian shopkeepers stand in a passageway in the souk of Khan Al-Khalili in Cairo, Egypt. ED GILES/Getty Images

Egyptian shopkeepers stand in a passageway in the souk of Khan Al-Khalili in Cairo, Egypt. (ED GILES/Getty Images)

The Egyptian press all but ignored it, but the announcement on June 17 that the European Bank for Reconstruction and Development (EBRD) is likely to provide USD 100 million to Egypt’s small businesses was a rare piece of good news for a country that has known nothing lately but grim tidings.

While Egypt’s Islamist government and its secular oppositionists bickered noisily and inconclusively over Egypt’s future, the EBRD had correctly diagnosed what is arguably the nation’s greatest peril—an illiquidity crisis that had ground business to a halt—and readied an infusion of badly needed capital. Half the proposed lending facility would allocate medium-term doses of micro-credit; the other half would finance trade. The EBRD, a publicly owned, UK-based bank, also plans to work with small business owners to leverage debt to their advantage, a poorly understood concept in what remains a cash economy despite decades of financial-sector reform.

“We need to bring these companies out of the shadows,” says Nada Shousha, who heads the Egyptian operations of the International Finance Corporation (IFC), the World Bank's investment banking arm. “That’s why we’re working with local banks to train their people to lend to small concerns.”

Since the revolution that toppled Egyptian dictator Hosni Mubarak in early 2011, the Egyptian economy has sputtered from the lack of investment. The Egyptian pound has lost more than 13 percent of its value against the US dollar and the country’s foreign reserves dwindled to USD 13.4 billion in March—a ten-year low, down from the pre-revolution level of USD 36 billion, a ten-year high—forcing the central bank to ration hard-currency loans amid brisk demand for black-market dollars. Despite the worsening crisis, negotiations between the government, led by Muslim Brotherhood-affiliated president Mohamed Mursi, and the International Monetary Fund for a USD 4.3 billion loan have gone nowhere.

Were it not for emergency assistance from countries like Qatar and Saudi Arabia, Egypt would likely be on the brink of default. When foreign hedge funds dumped their holdings of Egyptian sovereign bonds during the revolution, it fell to local banks to fill the vacuum. They are estimated to be holding 70 percent of the public debt Cairo regularly auctions off to remain solvent, which leaves little money left for private lending, even for businesses that are willing to borrow in such an unstable environment.

“People are not borrowing,” says the country manager of a major foreign bank with operations in Egypt. “I’m telling my staff to bring in some loans, because I’m tired of investing in government paper.”

Not all the news is bad, however. Once primitive and opaque, Egypt’s financial sector has been transformed by a decade of liberalization. Its banks have largely shed the non-performing loans that had lingered on their books since the 1950s, when the country lumbered under a command economy. The number of lending institutions has declined over the last ten years, and they enjoyed double-digit growth from 2004 to the advent of the global financial crisis four years later. Egyptian bankers now lend against revenue rather than fixed assets, and borrowers are increasingly able to launch a business or expand existing ones on credit rather than putting up their homes as collateral. Regulators closely monitor provisions against bad loans—capital adequacy ratios are well above the Egyptian Central Bank’s threshold of 10 percent—and the industry is in the process of adopting the Basel II standards laid down by the Basel Committee on Banking Supervision.

Egyptian banks are still somewhat miserly, however, when it comes to small-to-mid-sized enterprises. According to Egyptian economist Tarek El-Ghamrawy, credit allocated by Egyptian lenders for new investment accounts for a mere 3.5 percent of the total, compared with an average 12.8 percent for the Middle East and North Africa region. Only 4.2 percent of those loans are held by small or mid-scale businesses. According to Ghamrawy, 51 percent of credit extended to the private sector goes to 0.19 percent of bank clients.

Fortunately, there is always enough money in Egypt’s informal “shadow” economy, a vast cauldron of cash transactions, to keep demand alive. Injecting capital to the country’s small, family-owned businesses, as the EBRD facility is designed to do, would energize a crude but highly responsive sub-culture of the Egyptian economy. “This is a market that has not been fully tapped,” says Shousha. “Realizing that potential is important.”

The International Finance Corporation has invested over a billion dollars in Egypt over the years, and it is expanding its work with small, unregistered companies. In particular, the IFC advises small-business owners on how to register and license their companies, and it recently launched the country’s first small-business credit bureau. It is also building an asset registry where business owners can quantify their assets for the sake of transparency.

All that is needed, according to Shousha, is for the banks to step in. “We know these companies represent a profitable proposition,” she says. “The challenge is educating the bankers.”


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