Funding SMEs: A Bumpy Road Despite Government Facilitation Measures
Small and medium-sized enterprises (SMEs) need access to credit,? to accelerate their growth and improve their competitiveness in today’s highly demanding market. They are considered the cornerstone for economic development and many State-led initiatives have been rolled out by the Central Bank of Egypt (CBE) to make bank loans accessible. However, the road to actually securing bank credit by SMEs owners is not a walk in the park, as banks enforce prerequisites for loans that they see as highly justified.
In February 2022, a new directive issued by the (CBE) requires banks to increase micro, small, and medium enterprises’ (MSMEs) share of their loan portfolios by five percentage points to 25%. The move is expected to translate into an extra 117 billion pounds in funding for 120 thousand MSMEs by the end of 2022. Small enterprises alone will be allocated 10% of banks’ lending portfolios(2). However,? the actual steps to securing bank loans by SMEs’ owners remain complex and fraught with hoops to jump through, as banks try to minimize the risk of each loan.?
A common misuse of these loans is reflected in SMEs? behavior early in the application process. Many SMEs owners are faced with a sudden need to finance a specific growth or sustenance phase and rush to apply for loans,? without being equipped with a solid business plan, that efficiently utilizes said funds in a manner that guarantees revenue generation, and consequently, they? quickly incur debt. Accordingly, a few months later, they develop the need to seek funding once again, to support their working capital or to invest in an asset or needed equipment. In such cases, banks reject their debt application citing evidence of lack of planning and the high risk that a returning company applying for a second loan poses.
“SMEs need to have access to bank debt and loans but many business owners don’t know why they need the money or what they are going to use it for. Most of them don’t have a business plan, so they don’t know what their target is , or what they need to invest in, or what the funding needs to support.”
Kareem Al-Zorkani, Founder & CEO of Leverage - Financial Consultant?
From the? SMEs owners' perspective, there is an additional major obstacle while applying to funding; which is the lack of diversified financial products offered by banks. There are a substantial number of banks that do not offer finance products that best fit the varying needs of SMEs(3) like venture capital, trade finance, overdrafts, leasing, working capital, among others.?
SMEs? are also critical of the banks' perception of the SMEs lending market and the nature of how small and medium sized businesses operate,? their management and financial structures, and their time-sensitive? needs when obtaining a bank loan. Unfortunately, the process itself that starts with applying for bank credit and ends with securing the credit line,? is lengthy and time-consuming. It entails a series of approval requirements that begin with? filling in paperwork and end with? presenting guarantees/collaterals. Funds are released months later. Banks, on their? part, have explained that the lengthy process is a reflection of the due diligence necessary, due to a predominant prevalence of? poor internal management of local SMEs that apply.?
“Banks have a long process, averaging four months to make an assessment then an approval to give the funding required. This is overly complicated because SMEs typically have what is referred to in the industry as double and triple books. Two different sets of financial books depending on who they are addressing and this further complicates the process for banks, and therefore makes it harder for them to make two assessments and release funding.”
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Kareem Al Zorkani, Founder & CEO of Leverage - Financial Consultant?
To close the gap between SMEs and banks in a way that eases the process of obtaining loans and generated progress in this realm, SMEs have to develop sound management practices, strong accounting systems that produce reliable financial statements and present their business in a clearer manner. They need to understand the indispensable need for having a solid business plan and a budget that justify their application for bank loans. On their part, banks need to get more involved in the sector, better understand the nature of SMEs, give hands-on training to their staff about the nature of micro and small businesses and how they operate in order to better serve them.
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Footnotes and citations:
1- In 2015 and 2016, the Central Bank of Egypt (CBE) launched initiatives to support SMEs. In 2015, the CBE has obliged banks to allocate 20% of their loan portfolio to finance SMEs.