Access to Credit Strengthens Egypt's Entrepreneurs by the Center for International Private Enterprise -------------------------------------------------------------------------------- Perhaps the single most daunting obstacle entrepreneurs face is obtaining credit. Because banks generally earn most of their profits from issuing large loans to big businesses, small and "micro" entrepreneurs often have no choice but to seek credit from informal-sector moneylenders -- who charge stratospheric interest rates on short-term loans. In sum, many small entrepreneurs have yet to benefit from the astonishing evolution of the world financial system. In Egypt, however, a pathbreaking project is changing the rules of the game. Since its inception in 1990, the Small and Micro Enterprise Project -- a cooperative effort by the Alexandria Business Association, local commercial banks, and the US Agency for International Develop-ment (USAID) -- has made $27 million in credit available to entrepreneurs who previously stood little chance of obtaining loans. Some 80% of its borrowers are microenterprises with five or fewer employees, and the remainder are small ventures of six to fifteen employees. These small enterprises typically obtain loans between 5,000 and 25,000 Egyptian pounds ($1,000-5,000), while microenterprises usually borrow less than 3,000 Egyptian pounds. Loans generally range in term from four to eighteen months. In terms of administrative costs, the project became financially self-sufficient in January 1992, two years ahead of schedule. While the program benefited from the experience of successful "microbanking" projects elsewhere, its innovations reflect a keen awareness of Egypt's unique business culture. One technique employed by ACCION International and the Grameen Bank of Bangladesh is to issue small loans to groups of individuals who are mutually responsible for each other's loans. In this way, defaults are kept down and profits up. In Egypt, however, it quickly became clear that entrepreneurs were unwilling to borrow in groups. Even so, close monitoring by loan officers and excellent lender education -- coupled with the entrepreneurs' serious commitment to repayment -- have kept defaults under 1%. The loan officer is the bridge between the banks and the entrepreneur. Loan officers work closely with a potential borrower to complete the application, appraising the business and the credit needs of the new client. The project employs 100 loan officers, each overseeing no more than 120 clients. -------------------------------------------------------------------------------- "We were delighted to see private initiative playing the same pivotal role in both our countries," said Pedro Jiménez, ADEMI's executive director. -------------------------------------------------------------------------------- Motivated Bankers -- and Clients When USAID was working with the Alexandria Business Association at the inception of its lending project, agency officials arranged for staff from another successful microbanking project -- one managed by the Dominican Republic's Microenterprise Development Association (ADEMI) -- to assist in training the Alexandria project's staff. The upshot was an opportunity to borrow successful management ideas such as ADEMI's incentive-oriented pay system, which served as a model for the Alexandria project. "We were delighted to see private initiative playing the same pivotal role in both our countries," said Pedro Jiménez, ADEMI's executive director. "As a result, our experience in lending to microenterprises turned out to be applicable half way around the world." The project's system of incentives for loan officers constitutes one key to its success. The basic salary of loan officers is low, but they can boost their pay as much as six-fold by attracting new borrowers and by raising the approval rate of the loans they oversee. They are also rewarded for maintaining the repayment rate of their active loans, with bonuses at rates above 97%. These incentives have produced impressive results: almost three-quarters of all loan officers achieved a repayment rate of 100% in August. An equally innovative repayment scheme underscores the simplicity of the project's administration. Once an application is approved, the borrower receives a check in the amount of the loan and signs post-dated checks in the amount of the installments -- including interest and the loan's principal -- that will come due over the course of the loan. The loan officer simply deposits these checks as the payments come due, eliminating the need to seek out the occasional delinquent. Prompt enforcement has contributed to the project's excellent repayment rate. If a borrower has insufficient funds in his or her checking account, the check will "bounce," leading to enforcement through the Egyptian legal system. Another virtue of the repayment scheme is the way it prepares entrepreneurs to enter the formal financial system. The Small and Micro Enterprise Project not only addresses the credit needs of small businesses, it also relies upon checking accounts for its own administration. By introducing entrepreneurs to basic banking operations, they are brought closer to the day when they will be able to utilize the services of conventional banks. In fact, the project has succeeded in large part thanks to the strong relationship between the Alexandria Business Association and the city's commercial banks. USAID provided the initial capital for the project, which was deposited in interest-bearing accounts in local banks. The banks then make a line of credit available to project managers for lending purposes. The project pays interest on the amount of credit outstanding, and repayments are deposited with the banks to reduce the balance outstanding. With the capital denominated in US dollars, a decline in the value of the Egyptian pound would not endanger the project. -------------------------------------------------------------------------------- By introducing entrepreneurs to basic banking operations, they are brought closer to the day when they will be able to utilize the services of conventional banks. -------------------------------------------------------------------------------- Cutting Transaction Costs Straightforward administrative procedures and commercial lending standards have kept transaction costs down. If approved, first loans are typically disbursed 15 days after the application is submitted, and requests by repeat borrowers are processed within 72 hours. Borrowers who have repaid their loans on time and in full are usually granted further loans -- and may qualify for larger sums. Even so, only established businesses qualify for loans, and the interest rate -- currently pegged at 17% -- is strictly commercial. The economic impact of the project is best illustrated by the achievements of the enterprises it has benefited. About 70% of borrowers are small manufacturers, especially producers of apparel, leather goods, and furniture. Traders account for about a fifth of all loans, with the service sector taking the difference. Twelve percent of all borrowers are women, who make up just 9% of the workforce. The project has helped the city's small businesses to create 43,000 new jobs while simultaneously boosting productivity. As of mid-1995, the project had issued over 37,000 loans to 17,000 enterprises; the current rate is 1,500 loans per month. The Small and Micro Enterprise Project has built upon its success by establishing the Alexandria Small Business Center to offer training for borrowers and others. It offers training in accounting, pricing strategies, production planning, quality control, taxation, licensing and marketing, as well as technical support for entrepreneurs in specific industries, such as textiles. It also provides training to the lending project's loan officers, and personnel from microenterprise projects located elsewhere in Egypt -- as well as Tunisia, Lebanon, and Jordan -- have attended its courses. Fees are charged for training sessions, which has helped the center move toward financial independence. With eight branches in greater Alexandria, the managers of the project are working with USAID to replicate its success elsewhere. The US aid agency is currently seeking partners to administer similar projects in five other Egyptian governorates, but the Alexandria Business Association will manage these ventures until local partners are found. By any measure, the Small and Micro Enterprise Project has made a real difference for Alexandria's smallest enterprises. Nabil Elshami, who has served as executive director since the project's launch, insists that its success can be attributed to just two factors: a strict selection process and regular followup for each loan. Thousands of firms have seen their prospects improve as they have invested in new equipment, new employees and new marketing strategies -- while taking their first steps into the world of commercial banking.