CBE answers Sisi’s call to support small businesses

Egypt’s Central Bank announced plans on Sunday evening to encourage local banks to give loans to small and medium sized businesses.

The announcement follows a Saturday speech in which Egyptian President Abdel Fattah al-Sisi said he had asked the Central Bank to enable the financing of youth-run small and medium enterprises. Sisi promised that within four years, 20 percent of bank loans would be allocated to such projects. 

“Banks will offer around LE200 billion, which should [launch] 350,000 companies that will offer job opportunities to more than four million people,” Sisi said, promising to reduce interest rates to less than 5 percent on all loans given to youth initiatives, as he explained high rates have prevented many young people from starting their own businesses in the past. Projects in Upper Egypt and the border governorates will be given extra attention, Sisi asserted.

In a Sunday press release, the Central Bank reiterated these goals, including the 5 percent interest rate, 20 percent of loans being directed to SMEs, and the aim of creating 4 million jobs.

A 5 percent interest rate on loans is lower than the rate banks currently charge each other to borrow money overnight, which averaged 9.4 percent as of January 6. With annual inflation hitting almost 12 percent in Egypt, and with interest on short-term loans to the government exceeding 11.5 percent, issuing low-interest loans to small businesses is unlikely to be financially attractive to banks. 

To sweeten the deal for banks, the Central Bank said it would lower reserve requirements for participating banks. They will be able to deduct the amount of money they loan to SMEs from their required cash reserves, effectively allowing them to continue issuing high interest loans at their current volume, while creating a new pot of money from which low-interest loans can be made to SMEs.

The Bank also said it would support small businesses, which are traditionally seen as more likely to default on loans than the government or larger, more established companies, by introducing mechanisms to reduce their risks.