FINANCING SME IN EGYPT AND MIDDLE EAST

CONTENTS
ABSTRACT ...................................................................................................................................................................... 3

INTRODUCTION ............................................................................................................................................................ 5

SMALL AND MEDIUM ENTERPRISES (SMES) .................................................................................................................... 5

BACKGROUND OF SMES IN EGYPT.................................................................................................................................. 5
OPPORTUNITIES IN SMES ................................................................................................................................................ 6
CONSTRAINTS IN THE PROGRESS OF SMES ...................................................................................................................... 6
FACTORS AFFECTING THE FINANCING OF SMES .............................................................................................................. 7

PROBLEM STATEMENT .............................................................................................................................................. 9

OVERVIEW ...................................................................................................................................................................... 9
RESEARCH QUESTION ..................................................................................................................................................... 9
HYPOTHESIS .................................................................................................................................................................... 9
H 1 (the research/alternate hypothesis) ..................................................................................................................... 9
H 0 (the null hypothesis) ............................................................................................................................................ 9

THEORETICAL FRAMEWORK (MODEL AS FOLLOWS) .................................................................................. 10

OBJECTIVES AND AIMS ............................................................................................................................................ 11

OVERALL OBJECTIVE .................................................................................................................................................... 11

SPECIFIC AIMS .............................................................................................................................................................. 11

BACKGROUND AND SIGNIFICANCE ..................................................................................................................... 12

RESEARCH DESIGN AND METHODS ..................................................................................................................... 14

OVERVIEW .................................................................................................................................................................... 14
POPULATION AND STUDY SAMPLE ................................................................................................................................ 14
Convenience Sampling ............................................................................................................................................. 14
Purposive Sampling ................................................................................................................................................. 14
Quota Sampling ....................................................................................................................................................... 14
SAMPLE SIZE AND SELECTION OF SAMPLE .................................................................................................................... 14
SOURCES OF DATA ........................................................................................................................................................ 15
COLLECTION OF DATA .................................................................................................................................................. 15
DATA ANALYSIS STRATEGIES ....................................................................................................................................... 15
TIMEFRAMES ................................................................................................................................................................. 15

REFERENCES ............................................................................................................................................................... 16

2
 ABSTRACT
Background

Small and medium enterprises play a significant role in the economy of Egypt and Middle
East. The small and medium enterprises (SMEs) are a source of economic growth and job creation
for the overall economy of a country. These businesses are a significant factor of the industrial
society. SMEs encourage private ownership and helps in promoting entrepreneurs. These
businesses are much more flexible to the market and economy changes and can adapt rapidly to
the changing supply and demand of the society. They create better employment opportunities and
help in expanding the economic activities. Considering the social perspective the small and
medium enterprises protect the livelihood of a large segment of population. The significant role of
SMEs in Egypt and other Middle East countries became one of the eminent reasons of selecting
this topic for the purpose of research. The study aims to find out limitations and opportunities of
financing SMEs in Egypt and Middle Eastern countries.

Methods
Primary and secondary sources are usually used to conduct an effective research and to
obtain accurate results 1. In Primary sources, various case studied will be used to find out the
limitations and opportunities of the research. Additionally, questionnaire is designed to find out the
opinion of employees of SMEs of Egypt. Websites, Business Reports of Egypt and Middle East,
Journals, articles, annual reports and books are referred for literature review to further enhance the
reality and facts of the research.
Results
A survey is conducted to find out the reasons that are causing hindrance in financing SMEs
in Egypt and Middle East. Additionally, literature review is used to bring the facts and figures to
light.
Discussion and Conclusion
All the results obtained from the survey conducted and literature review obtained from
authentic journals, books and business reports will be analysed using various techniques. Data will
be presented in the form of charts and tables using Excel to prove the results obtained logically.
The Research Hypothesis Legal and regulatory factors, higher interest rates of banks, reforms in
Egyptian banking institute, International Finance Institutions (IFI) support, amendments in taxation
policy, awareness of leasing, partnership efforts to promote SME financing, the role of government,

1 Kumar, Ranjit. Research Methodology. New Delhi: Pearson Education; 2009.

3
time taken to gain finances greatly affect financing SMEs in Egypt and Middle East will either be
accepted or rejected according to the conclusions drawn from data collection and analysis.

4
 INTRODUCTION
In this paper we will discuss the current situation of the SMEs of Egypt and Middle East and the
limitations and opportunities available in this sector. We will be addressing various factors that
affect the growth and development of this sector. Some of the factors discussed in this paper limit
the opportunities to growth as there are problems of financing SMEs. On the other hand there are
many advantages of these enterprises to the economy and these can be enhanced by some
regulations.

Small and medium enterprises (SMEs)

The most frequently used criteria for defining SMEs are depended upon the number of workers
and the fixed capital or assets of the enterprise. The value of the annual sales is also used in some
developed countries like the United States and Canada. Other countries like Mexico, Turkey and
Thailand only define SMEs by the number of employees 2.
The small and medium enterprises (SMEs) can be a source of economic growth and job creation
for the overall economy of a country. These businesses are a significant factor of the industrial
society. SMEs encourage private ownership and helps in promoting entrepreneurs. These
businesses are much more flexible to the market and economy changes and can adapt rapidly to
the changing supply and demand of the society. They create better employment opportunities and
help in expanding the economic activities. Considering the social perspective the small and
medium enterprises protect the livelihood of a large segment of population.

Background of SMEs in Egypt

Egypt defines SMEs by the number of employees ranging from 5 to 50 3.Small and medium
enterprises represent around 90% of the businesses in Egypt and are a major source of
employment. On the other hand their share in value added is disproportional that shows that there
are some factors that hinder the performance of SMEs. These factors do not allow these
enterprises to work on their full potential and this problem is prevalent in other Middle East
countries as well 4.

2
Anonymous. Profile of M/SMEs in Egypt . Cairo: Ministry of Foreign Trade; 2003.
3 . Report on Support to SMEs in Developing Countries Through Financial Intermediaries. New York:
Dalberg; 2011.
4
Kabbani, Rola Nabil and Christian Kalhoefer. Financing Resources for Egyptian Small and Medium
Enterprises. Cairo: German University in Cairo; 2011.

5
Opportunities in SMEs
The major advantage of SMEs is that they mostly expand their activities across services, trade and
manufacturing. The trade and service sector mostly dominates the SMEs although now the
manufacturing sector has started to rise along with the IT sector in the services sector. Another
major advantage of the small and medium sized enterprises is that low cost is involved that can
generate high employment. These enterprises offer numerous jobs at a very low cost resulting in
making more profit. In Egypt only a minimal amount of financing of these SMEs is from a formal
source like banks. Most of the investment depends on the savings and other private resources.

Constraints in the progress of SMEs

Some of the major drawbacks in this sector are discussed below:
The access to finances is mostly restricted and there are limited lending options for SMEs.
According to an estimate only 10% of SMEs have an access to formal credit 5.
The process of registering and operating small businesses is very time consuming and
expensive that often forces people to continue operating on an informal basis. As a result
these SMEs are not part of the formal economy as they are not registered.
SMEs often require technical assistance to improve their performance but the lack of this
facility hinders the growth of these enterprises in Egypt. The technical business services
are offered to a very limited number of SMEs.
There is also a shortage of premises for SMEs in Egypt and this factor also needs to be
addressed.
There are many small enterprises which are located in residential areas where they can
work with less capital costs but these businesses are not registered officially.

5
Anonymous. The Contributions of SMEs to Egypt's Economy. Cairo: UNDP, 2005.

. Profile of M/SMEs in Egypt . Cairo: Ministry of Foreign Trade ; 2003.

6
Factors affecting the financing of SMEs
Some of the variables affecting the financing of SMEs are discussed below:
IFI Support: The international finance institutions increase the competence and knowhow of
intermediaries in terms of SME lending. IFIs are very cost efficient and this is achieved by
working with local intermediaries thus creating an efficient local lending industry. these
institutions apply strict lending standards and monitor theses intermediaries in their
operations 6.
Global economic crisis: The economic crises have a negative impact on all business
activities that affect the supply and demand of goods and employment rate but this shock is
much greater for SMEs. The SMEs are more vulnerable to economic shocks that further
restrict access to finances. The impact was much more severe on the innovative
enterprises due to high risk involvement in these businesses. As a result of this the profits
were minimized and that further affected the creditworthiness of these businesses 7.
Taxation policy reforms: Many SMEs are still operating without registering and therefore
escape the tax collection each year. This negatively affects the economy so there is a need
to encourage these enterprises to enter the formal economy 8.
Role of government: The government and bureaucracy have a very negative image in the
general business sector especially in the small and medium sized businesses. The
entrepreneurs are mostly uncertain about the transparency of the government process
while dealing with the state. They are always doubtful about the response they are going to
get from these bureaucrats and government officials 9.
Partnerships for financing SMEs: The partnership effort in the form of BEST (Business
Enterprise Support Tools) has been one of the most beneficial techniques to support SMEs
in Egypt. It is collaboration between UNDP and SFD that provides financial support and
guidance to these enterprises. BEST and Incolease are jointly serving 4 governorates that
include Beni Suef, Minia, Giza and Fayoum 10.

6 Scaling-Up SME Access to Financial Services in the Developing World. New York: International Finance
Corporation; 2010.
7
"Main International Financial Facilities Available For SMEs." 2011.
8 Business Climate Development Strategy. Cairo: MENA-OECD; 2010.
9
Saady, Reem El. The Role of SMEs in Mediterranean Economies: The Egyptian Experience. Cairo; 2011.

10 Financing Opportunities for SMEs in Egypt. Conference Report. Cairo: Ministry of Finance; 2007.
7
 Legal and regulatory factors: The process of licensing and taxation and other clearance
certification often becomes too difficult to handle for these businessmen 11. The rules and
regulations regarding these aspects need to change in order to facilitate the registering
process.
Raising awareness of leasing: leasing is a very effective source of financing SMEs but
some factors limits the use of this technique that are discussed below:
Only one type of leasing is normally practiced in this region that limits its
advantages.
The leasing law allows thin capital.
There is no financial regulator to monitor the leasing activity.
Lack of access to capital.
The leasing awareness can be enhanced by meeting with the official departments to
increase this practice and setting up a specialized committee to deal with practical problems. In
addition to that the leasing companies should be provided with quasi and semi quasi funds 12.

Reforms in banking institute: The central bank of Egypt (CBE) has taken some initiatives in
the recent years to enhance SME lending. A SME unit has been established in the Egyptian
Banking Institute for the training of banks and SMEs to work in collaboration to enhance
this market. In addition to that they are also coordinating with other counterparts like credit
bureau, SFD, etc to formulate a nationwide strategy for SME market. The formulation of
lending regulations is another step taken by the banking institute to create more awareness
and to minimize risk factor in the process 13.
Time taking process: This is yet another constraint in the registration and financing of these
small scaled businesses. The normal process for registration is very time taking and
involves a number of steps although many amendments have been made in this respect
but still the problem prevails. The SME owner has to undergo a number of procedures to
get the final approval of financing and they are often disappointed with the response they
get from administration involved in this process. This factor de motivates these owners to
get their firms formally registered and they prefer to rely on internal financing 14.

11
H. Zaied, Abdel Nasser. Barriers to E-Commerce Adoption in Egyptian SMEs. Cairo: MECS, 2012.
12 Ibid
13 El-Said, Hala, Mahmoud Al-Said and Chahir Zaki. Small and Medium Enterprises Landscape in Egypt:
New Facts from a New Dataset. Cairo: JEL Classifications; 2011.
14 Innovations in SME Financing. Cairo: Egyptian Banking Institute, 2012.
8
 PROBLEM STATEMENT

Overview
The research is based on cause and effect relationship comprising of nine independent and
one dependent factor. The nine independent factors of the research are as follows:
Legal and regulatory factors
Higher interest rates of banks
Reforms in Egyptian banking institute
International Finance Institutions (IFI) support
Aamendments in taxation policy
Awareness of leasing
partnership efforts to promote SME financing
The role of government in providing financing opportunities for SMEs
Time taken to gain finances
The dependent variable is financing SMEs in Egypt and Middle East.

Research Question
The factors affecting the financing of small and medium sized enterprises in Egypt and
Middle East

Hypothesis
Hypothesis testing is a very useful procedure used in research to evaluate the strength of
evidence from the sample provides an outline for figuring out determinations related to the
population. It is used to check the consistency of the research to make conclusions out of the
observed findings in a sample under study 15.

H 1 (the research/alternate hypothesis)

Legal and regulatory factors, higher interest rates of banks, reforms in Egyptian banking
institute, International Finance Institutions (IFI) support, amendments in taxation policy, awareness
of leasing, partnership efforts to promote SME financing, the role of government, time taken to gain
finances greatly affect financing SMEs in Egypt and Middle East.

H 0 (the null hypothesis)

Legal and regulatory factors, higher interest rates of banks, reforms in Egyptian banking
institute, International Finance Institutions (IFI) support, amendments in taxation policy, awareness

15
Kothari, C. R. . Research Methodology: Methods and Techniques. London: Routledge; 2004.

9
of leasing, partnership efforts to promote SME financing, the role of government, time taken to gain
finances does not have any affect on financing SMEs in Egypt and Middle East.

THEORETICAL FRAMEWORK (MODEL AS FOLLOWS)

Legal and regulatory

factors (V2) Higher interest rates
Partnership efforts to
of banks (V3)
promote SME financing
(V1)

Financing SMEs in Egypt Reforms in Egyptian

Time taking process banking institute (V4)
and Middle East (V10)
(V9)

Role of government
(V8) International Finance
Amendments in
Institutions (IFI) support
Awareness of leasing taxation policy (V6)
(V5)
(V7)

V1-V9 is Independent Variables

V10 is Dependent Variable

10
 OBJECTIVES AND AIMS

Overall Objective
The study aims to find out limitations and opportunities of financing SMEs in Egypt and
Middle Eastern countries. Factors affecting the SMEs are discussed in detail. Null and alternate
hypothesis is designed in order to verify the results. Constraints in context of SMEs financing are
discussed thoroughly. Research is conducted with the help of questionnaires. The population
target will be the employees of SMEs to get most logical and appropriate results out of the
research. Excel will be used to analyse the data properly and present it in the form of tables and
graphs to prove the results out of the research. Many additional factors are discussed in this
research paper that further back up and support the research purpose. Background of SMEs in
Egypt and Middle Eastern countries is discussed in detail. Exact facts and figures about SMEs of
Egypt and Middle East are brought to light with the help of journals, articles, business reports,
authentic website and books. Background of SMEs of Egypt and Middle East is also discussed in
detail.

Specific Aims
The research aims to find out Legal and regulatory factors, higher interest rates of banks,
reforms in Egyptian banking institute, International Finance Institutions (IFI) support, amendments
in taxation policy, awareness of leasing, partnership efforts to promote SME financing, the role of
government, time taken to gain finances greatly affect financing SMEs in Egypt and Middle East.
The research intends to find accurate result while considering the limitations of the study,
presenting the findings clearly in the form of charts and tables to make accurate analysis, making
appropriate recommendations without exceeding the scope of study and to organize the findings
and results logically to reach a solid conclusion.

11
 BACKGROUND AND SIGNIFICANCE
Small and medium enterprises (SMEs) are important in the economic development of a country
and also contribute to the GDP as well as the employment of the nation. There definition varies
from country to country but in Egypt and Middle East they are generally defined by the number of
employees hired by these enterprises. They are an important source of job creation in a society but
often face hurdles in middle and lower income countries 16.
The basic obstacle in the success and growth of these businesses is the lack of financial funding
from the local financial institutions. They often rely on internal sources of funding rather than
relying on the external sources but as the business progresses the growth is restricted. The
owners savings or retained earnings are often not sufficient to finance these enterprises at a later
stage so they have to look for alternatives in order to survive in the market. Internal financing is
negatively related to company growth while the external financing is significantly associated with
the progress of the enterprise.
The banking institute shows major reluctance in funding these businesses due to various reasons.
They are often uncertain about the competence of these entrepreneurs as they believe that they
are unable to devise a profitable business plan. There is a general perception that SME lending is
unprofitable so banks usually avoid these investment approaches 17. Banks are not very keen to
look for additional profit centres as the corporate banking system is still not very competitive. SME
banking is still believed to be a risky business as there is always a lack of information. The risk
assessment is a time taking process and normally banks avoid getting into such details.
However the complete blame cannot be put on the banking institute as there are still some loop
holes in the owners of this sector. When a group of owners were questioned why they had no
funding from a bank, around 12% said that the bank has rejected their demand for loan. On the
other hand majority of the owners had not even applied for the loan because of high interest rates,
lack of interest in the necessary paperwork involved and fear of the cost they will have to pay if
they fail to repay the loan amount 18.
The fear of repayment of loan is much higher because of the regulations set by the banking
institute. The Egyptian legislation has mentioned severe sanctions if someone is unable to repay
the loan and makes the owner liable for complete repayment 19. The owners private property is

16
Halime, Farah. "Egyptian SMEs on the rebound." 17 February 2012. The National. 14 August 2013.

17 Poldermans, Robert. Expanding Egypt's Banking Frontiers. Cairo: Egyptian Banking Institute; 2011.

18 Loewe, Markus, et al. Which Factors Determine the Upgrading of Small and Medium-Sized Enterprises
(SMEs)? Cairo: Egyptian Center for Economic Studies (ECES); 2012.

19 . Egyptian Banking Institute. 2011. 15 August 2013.

12
also at stake if the company fails to pay the loan. All these regulations can lead to serious
consequences for the borrower of loan 20.
Another problem with SME financing is the government regulation and bureaucracy of the state.
Due to continued complaint regarding this factor many amendments have been made till 2011 like
the steps involved were reduced to six and even the time span has been minimized. The initial
capital required has also been reduced from 740% of per capita income to almost zero. Despite
these reforms still the private sector suffers from overregulation of the country regarding the tax
payment, various permits involved, etc.
The government bureaucracy is yet another factor that hinders the financing and establishment of
these SMEs and many owners have reported complaints in these terms 21. They are rather unsure
whether the administration will deal fairly with them or not and are thus reluctant to register their
firms and become a part of the formal economy.
The role of government is very important in context of lack of financial literacy of SME owners. This
is a major problem reported by the banking institutes that they cannot grant loans to weak
entrepreneurs due to the risk involvement. The government needs to initiate training courses to
educate these owners and help them in making better business plans. This problem can be
addressed at the very basic level by including courses related to entrepreneurship in the education
system. This will enhance the basic business and financial skills of the general population.
This education and training is also needed at the banking institutes to enable them to screen
customers more accurately. This will reduce the risk involved in the lending issues and enhance
the performance of the overall system. There is a general need to create awareness of SME
businesses so that the lending and borrowing process can come into flow without hindrances.
The government bodies as well as the banking institute of Middle East and particularly Egypt need
to promote transparency in the system. Along with that there is a need to be responsive in terms of
the administration involved and a clear understanding of the risk and benefits involved in the
process in order to bring the system in flow. This will promote the SMEs in this region that will add
up to the economy of Middle East.

20 Small and Medium Enterprise (SME) Program Review. Executive Report. Cairo: Canadian International
Development Agency, 2006.
21
Shalaby, Abdel Rahman. "Govt prepares legislation to boost SMEs." 21 12 2010. EGYPT INDEPENDANT. 15
August 2013.

13
 RESEARCH DESIGN AND METHODS

Overview
Impartial and unbiased data collection strategies are implemented to get the desired results
out of the research. Limitations of the study are kept in mind in order to get logical and precise
results out of the research. Additionally, Excel is used for data analysis.

Population and Study Sample

The three methods of non-random sampling are:
Convenience sampling
Purposive sampling
Quota sampling

Convenience Sampling
In this method, taking whoever is willing to participate in the research 22.

Purposive Sampling
In this procedure, a criterion is set for the selection of sample population 23.

Quota Sampling
This method depends on interviewing or studying members of particular demographic subgroups 24.

Population will be employees of SMEs of Egypt for this research.

Sample Size and Selection of Sample

Three useful tips while selecting a sample size include:
Less costly methods of data collection should be implemented
Data must be collected fast.
Sample population must be selected wisely.
Non-random sampling technique will be implemented in this research. Purposive sampling
technique will be used to figure out the population and after figuring out the population, exact

22
Zerde, Alpaslan and Richard Bowd. Participatory Research Methodologies: Development and Post-
Disaster/Conflict Reconstruction. Cambridge: Ashgate Publishing Limited; 2012.

23
Lyon, Fergus, Guido Mllering and Saunders Mark . Handbook of Research Methods on Trust. London: Edward Elgar
Publishers; 2012.

24 Ibid
14
sample will be selected with the help of convenience sampling. Exact sample size will be
determined with the help of Sample Size Calculator.

Sources of Data
Primary sources used in this study are questionnaires filled by employees of SMEs of Egypt
and Middle East. Secondary sources used are Information Technology related annual reports of
Egypt and websites. Journals, articles, annual reports and books are referred for literature review.

Collection of Data
Primary sources and secondary sources will be used for data collection. Primary sources
refers to unpublished first hand sources of data collection such as interviews etc. whereas
secondary sources can be published documents and can be called as second hand data as well 25.
Primary sources used in this study are questionnaires filled by employees of SMEs of Egypt and
Middle East. Secondary sources include websites, journals, articles, annual reports and books.

Data Analysis Strategies

Excel will be used to analyse data with the help of graphs and charts. Literature review will
further help in supporting the research results with facts and figures.

Timeframes

Submission of Thesis Proposal Submission of Complete Thesis

19th August 2013 19th October 2013

The deadline for the submission of Thesis Proposal is Monday, 19th August 2013.
The deadline for the submission of Complete Thesis is Saturday, 19th October 2013.

25 Kumar, Ranjit. Research Methodology. New Delhi: Pearson Education; 2009.

15
 REFERENCES
Kumar, Ranjit. Research Methodology. New Delhi: Pearson Education; 2009.

Anonymous. Profile of M/SMEs in Egypt . Cairo: Ministry of Foreign Trade; 2003.

Report on Support to SMEs in Developing Countries Through Financial Intermediaries. New York:
Dalberg; 2011.
Kabbani, Rola Nabil and Christian Kalhoefer. Financing Resources for Egyptian Small and Medium
Enterprises. Cairo: German University in Cairo; 2011.

Anonymous. The Contributions of SMEs to Egypt's Economy. Cairo: UNDP, 2005.

Profile of M/SMEs in Egypt . Cairo: Ministry of Foreign Trade ; 2003.

Scaling-Up SME Access to Financial Services in the Developing World. New York: International
Finance Corporation; 2010.
Main International Financial Facilities Available For SMEs. 2011.
Business Climate Development Strategy. Cairo: MENA-OECD; 2010.
Saady, Reem El. The Role of SMEs in Mediterranean Economies: The Egyptian Experience.
Cairo; 2011.
Financing Opportunities for SMEs in Egypt. Conference Report. Cairo: Ministry of Finance; 2007.
H. Zaied, Abdel Nasser. Barriers to E-Commerce Adoption in Egyptian SMEs. Cairo: MECS, 2012.
El-Said, Hala, Mahmoud Al-Said and Chahir Zaki. Small and Medium Enterprises Landscape in
Egypt: New Facts from a New Dataset. Cairo: JEL Classifications; 2011.
Innovations in SME Financing. Cairo: Egyptian Banking Institute, 2012.
Kothari, C. R. . Research Methodology: Methods and Techniques. London: Routledge; 2004.
Halime, Farah. "Egyptian SMEs on the rebound." 17 February 2012. The National. 14 August
2013.
Poldermans, Robert. Expanding Egypt's Banking Frontiers. Cairo: Egyptian Banking Institute;
2011.
Loewe, Markus, et al. Which Factors Determine the Upgrading of Small and Medium-Sized
Enterprises (SMEs)? Cairo: Egyptian Center for Economic Studies (ECES); 2012.
Egyptian Banking Institute. 2011. 15 August 2013.
Small and Medium Enterprise (SME) Program Review. Executive Report. Cairo: Canadian
International Development Agency, 2006.
Shalaby, Abdel Rahman. "Govt prepares legislation to boost SMEs." 21 12 2010. EGYPT
INDEPENDANT. 15 August 2013.

16
Zerde, Alpaslan and Richard Bowd. Participatory Research Methodologies: Development and
Post-Disaster/Conflict Reconstruction. Cambridge: Ashgate Publishing Limited; 2012.
Lyon, Fergus, Guido Mllering and Saunders Mark . Handbook of Research Methods on Trust.
London: Edward Elgar Publishers; 2012.

17