Who’s funding SMEs? Although small and medium enterprises (SMEs) make up around 98% of all Egyptian companies, contributing more than 43% of the country's GDP, and employing about 47 mn Egyptians, only a limited number of institutions have managed to crack the code of financing SMEs — which face a financing gap of around USD 46 bn. A decade ago, SMEs saw little financing through traditional methods due to their high risk and low profitability — however, central bank efforts to stimulate lending to SMEs have been game changing, leading to the rise of non-banking financial institutions and fintech firms that are reshaping the sector today.

We gathered a number of key players involved in SME financing during this year’s Enterprise Finance Forum — we spoke with Post for Investment CEO and Managing Director Ahmed Ali Abdelrahman, the National Bank of Egypt’s (NBE) General Manager for Business Development for SMEs Chantal Sabbagh, and non-banking financial services firm GlobalCorp Group CEO and Managing Director Hatem Samir, to take a look at the current market structure, the opportunities ahead, and how institutions are using tech solutions to grow their businesses and mitigate risks.

What do SMEs want? The basic needs of SMEs include access to affordable financing, good service, and digital solutions.

Lenders need to change things up: With the complexities that are present today, a one-size-fits-all approach from lenders is no longer feasible, Sabbagh said, calling on financing entities to change up their approach and look at SMEs’ business models based on the industry and sector they operate in.

Cracking the code to SME funding: Continuous follow up on the needs of SMEs has enabled the NBE and other financial institutions to crack the code of SME financing, Sabbagh said, explaining that although the financing gap for SMEs is large, it’s also a large market that continues to expand. The CBE spares no effort in updating its procedures for SME financing, integrating SMEs into the formal economy, and granting them access to financing — however, it ultimately comes down to these companies’ business models, she said.

By the numbers: The banking sector's lending portfolio amounts to about EGP 10-11 tn, with only half of that going to the private sector, and SME loans — be it provided by banking or non-banking sectors — ranged between EGP 87-90 bn in 2023, Abdelrahman said. Leasing portfolios amounted to roughly EGP 20 bn and the SME lending portfolio of NBFIs is estimated to range between EGP 15-20 bn.

Smaller financial institutions and NBFIs may be more effective when it comes to SME lending — they are more flexible, inclusive, and provide the range of products needed by these companies, including manual lending, asset-backed lending, tech-backed services, factoring services, or even manual underwriting, Samir said. Larger institutions such as banks offer highly specialized programs in areas that are not as effective as one would hope, but are more efficient when for corporate lending and large companies’ structures. “The size of the SME market requires restructuring strategies to help it out financially, while equally providing technical and technological support to help it grow,” Samir explained.

But does the entry of new players into the SME financing sector pose a threat to banks? The entry of new players into the market is not so much a source of competition as it is a source of market integration, said Sabbagh, adding that this requires more coordination among banks with an already established relationship that both parties stand to benefit from. This, in turn, will drive the geographical expansion of NBFIs, she added. Abdelrahman also agreed on the complementary relationship between banks and smaller financial institutions, explaining that NBFIs may serve as a channel for banks to expand their reach and respond more quickly and with greater flexibility to customer requests, allowing them to penetrate the SME sector more swiftly and efficiently.

Banks can achieve greater returns from financing NBFIs than financing small customers directly, Samir said, as banks carry much higher risk costs than NBFIs in these cases. Sabbagh pointed to the high cost of administering smaller customer accounts at banks — banks are also not opposed to having many NBFIs in the market, seeing as they invest significant amounts of money in them, rather than directly lending to consumers.

It's impossible to deny the role of banks in supporting NBFIs, though: “We have to acknowledge that one of the key factors for the success, growth, and prosperity of [the NBFI] industry is the multiplier effect provided by banks, without which the landscape would be entirely different,” Abdelrahman said. Sabbagh agreed with this view, saying that integration is profitable for both parties, especially in a large, unregulated market that is growing slowly, but where customers always prefer cheaper financing. The banking sector benefits in all cases, she said, whether by providing financing directly to the customer or through NBFIs.

The productive sectors, especially industry and agriculture, are among those struggling the most to secure financing at the moment, while the rapid turnover of goods has enhanced the trade sector’s ability to adapt to rising financing costs. The industrial sector has shown significant resilience by passing on the increased costs to consumers, but this does not negate the fact that all sectors are facing challenges, Sabbagh said. Looking at the other side of the equation, leasing, factoring, mortgage financing, and consumer finance have shown growth, but the impact of rising interest rates has resulted in a decline in the number of transaction and customers y-o-y, despite an increase in the size of transaction.

The high cost of financing might even be a bright spot in the long term, as it filters out unstable and non-scalable business models, Abdelrahman said. He explained that SMEs are more vulnerable to economic changes, especially rising interest rates, with World Bank data indicating that every 1% increase in interest rates sees a corresponding 3% decline in the growth of SMEs.

What will the next phase of SME financing look like? Looking at existing companies, we can expect specialization and segmentation of business models by sector, as not all NBFIs will be able to finance all sectors, Sabbagh said.

“It's a game of technology, not finance, when we talk about the future. Reliance on technology will be the cornerstone of development in financing SMEs, as it provides better access to customers and the ability to innovate and develop suitable products, in addition to enhancing the synergy between banks and NBFIs to support these companies,” according to Sabbagh. She pointed out that the market moved faster than its players, with NBFS now essential for everyone to be able to lend more.