SME ACCESS TO EXPORT FINANCE IN EGYPT
EXECUTIVE SUMMARY
Prepared by the Economic Research Forum (ERF)
For the SME Policy Development Project
of the Ministry of Foreign Trade (MOFT)
and the International Development Research Center (IDRC)
April 2004
Table of Contents
List of Abbreviations
List of Tables
1.0 Introduction
6
2.0 General Export Financing Environment
6
3.0 Supply of Export Finance in Egypt
3.1 Export Finance Products
3.1.1 Pre-shipment Short Term Finance
3.1.2 Export-Project Financing
3.1.3 Post-shipment Financing
3.1.4 Buyer’s Credit
3.1.5 Consignment Exports
3.1.6 Barter and Counter-Trade
3.1.7 Buyback Agreements
3.1.8 Financial Leasing
3.1.9 Partnerships and Joint Ventures
3.1.10 Credit for Market Development and Product Development
3.2 Export Development Bank of Egypt (EDBE)
3.3 Support Institutions/Mechanisms and Regional Trade Programs
3.3.1 Export Credit Guarantee Company of Egypt (ECGE)
3.3.2 The Credit Guarantee Corporation (CGC)
3.3.3 Social Fund for Development (SFD)
3.3.4 African Export-Import Bank (AFREXIM)
3.3.5 The Arab Trade Finance Program (ATFP)
3.3.6 European Bank for Reconstruction and Development (EBRD)
3.3.7 Inter-Arab Investment Guarantee Corporation (IAGC)
3.4 Banks’ Rejection of Export Finance Requests
3.5 Banks’ Views on SMEs’ Lost Export Opportunities
3.6 Banks’ Views on SMEs’ Awareness of Export Finance Products and
Institutions
3.7 Foreign Donor Agencies
3.7.1 Industrial Modernization Program (IMP)
3.7.2 Canadian International Development Agency (CIDA-INC)
3.7.3 JETRO
3.7.4 IESC
3.7.5 UNDP
3.7.6 Agriculture-Led Export Business (ALEB)
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4.0 Demand for Export Finance in Egypt
4.1 Export-related Organizations
4.1.1 Organizations’ Feedback on Export Finance Products
4.1.2 Organizations’ Feedback on Export Support Institutions and
Regional Programs
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4.1.3 Organizations’ Feedback on Lost Export Opportunities and
SME Awareness
4.2 SMEs
4.2.1 SME Utilization of Bank Finance
4.2.2 SME Awareness of Export-Finance Products, Institutions and
Programs
4.2.3 SMEs’ Reasons for Losing Export Opportunities
4.2.4 SMEs’ Assessment of the Importance of Finance for Export
Activity
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5.0 Assessment of Export Development Bank of Egypt (EDBE) and
Export Credit Guarantee Company of Egypt (ECGE)
5.1 EDBE
5.2 ECGE
22
6.0 General Legal Environment Supporting Exports
6.1 New Export Law
6.2 Export Development Bank of Egypt’s Law
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7.0 Other Countries’ Experiences
7.1 India
7.2 Turkey
7.3 Tunisia
7.4 Singapore
7.5 Mexico
7.6 Italy
7.7 Canada
7.8 United States of America
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8.0 Best Practices with special reference to Export Development
Companies (EDCs)
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9.0 Proposed Solutions and Policy Recommendations
9.1 Gaps in Supply and Demand of SME Export Finance and Proposed
Solutions and Policy Recommendations
9.2 Gaps in Legal Aspects
9.3 Indirect Factors Affecting SME Access to Export Finance: Gaps
and Recommendations
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32
10.0 Summary of Recommendations
38
Ministry of Foreign Trade Reports and Publications
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LIST OF ABBREVIATIONS
AFREXIM
ATFP
CGC
CIDA
ECGE
ECS
EDBE
EDC
EEPC
EU
FOB
FX
EXIM
GOEIC
IAIGC
ICIIEC
IMC
IMP
Isl.DB
IT
ITC
ITP
L/C
L/G
MOF
MOFT
SFD
SMEs
WTO
African Export-Import Bank
Arab Trade Finance Program
Credit Guarantee Corporation
Canadian International Development
Agency
Export Credit Guarantee Company of
Egypt
Egyptian Commercial Service
Export Development Bank of Egypt
Export Development Company
Egyptian Export Promotion Center
European Union
Free on Board
Foreign Exchange
Export-Import Bank
General Organization for Export and
Import Control
Inter-Arab
Investment
Guarantee
Corporation
Islamic Corporation for Investment
Insurance and Export Credit
Industrial Modernization Center
Industrial Modernization Program
Islamic Development Bank
Information Technology
International Trade Center
International Trade Point
Letter of Credit
Letter of Guarantee
Ministry of Finance
Ministry of Foreign Trade
Social Fund for Development
Small and Medium Enterprises
World Trade Organization
4
LIST OF TABLES
TABLE
PAGE
Table 1: Banks’ Feedback on ‘Credit for Market Development and
Product Development’
Table 2: Banks’ Reports on Reasons for Rejection of Applications
Table 3: Banks’ Reports on Reasons for Lost Export Opportunities
Table 4: Organizations’ Feedback on Pre-Shipment Short-term Financing
Table 5: Organizations’ Feedback on Export Project Financing
Table 6: Organizations’ Feedback on Post-Shipment Financing
Table 7: Organizations’ Feedback on Factoring, Discounting and
Forfaiting
Table 8: Organizations’ Feedback on Specialized Factoring/Forfaiting
Firms
Table 9: Organizations’ Feedback on Barter and Counter Trade
Table 10: Organizations’ Feedback on Buyback Agreements
Table 11: Organizations’ Feedback on Financial Leasing
Table 12: Organizations’ Feedback on ‘Credit for Market Development
and Product Development’
Table 13: Organizations’ Feedback on ‘Partnerships’
Table 14: Organizations’ Reported Constraints on Using ECGE
Table 15: Organizations’ Comments about Regional Trade Finance
Programs
Table 16: Organizations’ Views’ on SME-Awareness of Export Finance
Products and Export Institutions
Table 17: Organizations’ Comments on Reasons for Lost Export
Opportunities
Table 18: Volume of Business of the Enterprises
Table 19: Use of Bank Finance by Different Sizes of Enterprises
Table 20: Reasons for SME-Dissatisfaction with the Utilized Bank Finance
Table 21: Reasons for SME Non-Utilization of Bank Finance
Table 22: SMEs’ Awareness and Usage of Export Finance Products
Table 23: SMEs’ Awareness and Usage of Support Institutions, Export
Organizations and Regional Trade Programs
Table 24: SMEs’ Reported Reasons for their Lost Export Opportunities
Table 25: Gaps in Supply and Demand of SME Export Finance and the
Proposed Solutions and Policy Recommendations
Table 26: Gaps in Legal Aspects
Table 27: Indirect Factors Affecting SME Access to Export Finance - Gaps
and Recommendations
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1.0 INTRODUCTION
Access to finance is one of the constraints to SME exports in Egypt. There is a need
to analyze the situation in a way to contribute to the removal of this constraint, with
the purpose of improving the export capabilities of SMEs1.
Both suppliers and users of export finance were surveyed; and best practices and
international mechanisms were reviewed. The study was conducted in the broader
legal and regulatory context, as well as non-financial services. The objective is to
develop recommendations for best mechanisms and policies that would enhance SME
access to export finance.
2.0 GENERAL EXPORT FINANCING ENVIRONMENT
The relevant literature indicated a number of export finance products. In addition to
the pre-shipment finance for working capital requirements, there are various sorts of
post-shipment finance including discounting, factoring, forfaiting, supplier’s credit,
buyer’s credit, and export credit insurance and guarantee. Some studies consider that
governments have a number of roles to play, particularly in developing countries:
these include the role of export credit insurer since export credit insurance agencies
are usually government-owned, export finance provider by providing refinance
facilities to the lenders through the central bank or specialized banks, and subsidizers
by providing export credit at low interest rates that cannot be provided by the banks
without government subsidy.
SME export finance can encounter various problems such as lack of refinance facility,
lack of export insurance as well as banks’ reluctance to provide export finance due to
doubts about the genuineness of the export order. Small enterprises are not able to
reach export markets on their own or obtain bank finance. Also developing countries
are finding it increasingly difficult to match the terms/prices offered by competitors
from developed countries. With the increasing competition in international markets, it
is difficult to persuade importers to open letters of credit (L/Cs).
3.0 SUPPLY OF EXPORT FINANCE IN EGYPT
3.1 Export Finance Products
Under the survey of export finance suppliers, eight banks were interviewed, having
over 50% of total banking portfolio2. As regards their views on SME-finance, only the
two joint venture banks in the sample said they did have a minimum credit size
1
For purposes of this study, ERF’s SME-definition proposed in 2002 is used i.e. with the following
ceilings for “medium enterprises”the largest category of the sector: “up-to 100 laborers (registered),
and/or up-to LE 10 million in plant and equipment, and/or up-to LE 10 million in annual sales”.
2
These included four public sector banks, two specialized development banks including EDBE, and
two joint venture banks.
6
policy. Going through the various export finance products one by one, the bank
interviewees reported low utilization of most products as follows:
3.1.1 Pre-shipment short-term finance is for working capital needs between the
time of the receipt of the order and the time of shipment; it can be collateralized by a
letter of credit (L/C) from the importer and/or mortgage on exporter’s assets
(Khashaba, 1998). This was not provided to first-time exporters by half of the
interviewees. Most said they required an export L/C as collateral, and some would
require a mortgage of borrower’s assets as an additional collateral. To activate
utilization, some suggested CGC’s guarantee of pre-shipment finance, creation of
EDCs, and more export marketing and promotion.
3.1.2 Export-project financing: The establishment of projects that are exportoriented can be financed by medium and long-term bank loans, mostly against
mortgage of assets. Some would not provide it to first-time exporters. Utilization is
mostly constrained by lack of committed purchase orders, thus the interviewees’
suggestions for encouraging the establishment of alliances through joint-ventures
and/or buyback agreements, hosting workshops for international investors for
facilitating the establishment of joint-ventures, and encouraging the creation of EDCs.
On the issue of providing grants and/or interest subsidy for export-oriented projects,
the banks’ various comments were: “this should be provided to enterprises that have
an increasing volume of exports / to specific sectors only/ on temporary basis only /
WTO rules to be observed/ / interest rate is only a small factor/ what really matters is
FX/ what really matters is technical and logistics support”.
3.1.3 Post-shipment financing: This is mostly short-term up-to 180 days, but could
be medium- or long-term, up-to say 5 years, for capital goods exports. It represents
working capital provided for the time interval between the shipment of the goods and
the actual payment.
Including discounting and forfaiting, post-shipment financing was weakly utilized,
mostly due to the lack of acceptable importer’s bank guarantee. Most banks were not
aware of factoring. But they were mostly not agreeable to the idea of having
specialized firms for forfaiting and factoring: they said this could be done by banks.
3.1.4 Buyer’s credit, i.e. funds lent by the exporter’s local bank to the foreign
importer to pay to the local exporter, was available at half of the banks interviewed
but with almost nil utilization. Acceptable bank guarantee from the importer is needed
as collateral, also subject to acceptable country risk. The banks said this product was
not demanded by clients; exporters lack the opportunities and the guarantees. Banks’
suggestions for activation were more export marketing as well as more use of EDCs.
3.1.5 Consignment exports: Consignment is an arrangement where goods are
shipped to an importer without the exporter giving up ownership. The importer acts as
agent for the exporter in arranging sale to third parties. Upon sale of goods, the
importer deducts the selling commission and remits the balance of sale proceeds to
the exporter. Consignment is useful when the importer lacks -or is not willing to place
at risk- the funds to purchase the goods outright, but is still able to provide the
exporter with a valuable distribution channel.
They were available at half of the interviewed banks, but some would not provide it to
first-time exporters. They said it is too risky and needs strong collateral e.g. asset
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mortgage. To activate, some suggested a system of regional distribution centers
(preferably controlled by a bank) and take-over by EDCs.
3.1.6 Only three banks considered that barter and counter trade were important
and/or possible to be implemented with some countries. Others said this was no
longer practical and Egypt had had some bad experiences.
3.1.7 As regards buyback agreements, whereby part of Egypt’s imports is to be paid
for in the form of Egyptian exports (a tool that can be used with foreign firms that are
exporters of plant and machinery to Egypt i.e. part of the output of the imported plant
is to be exported to the foreign party) all banks agreed that these agreements were
useful; one said the government ought to apply this tool especially with its influence
as a significant importer.
3.1.8 Financial leasing was available at only three of the interviewed banks; the
utilization was minimal and some suggested raising the awareness about it.
3.1.9 The banks supported the idea of partnerships through joint-ventures and
sharing of know-how, as a means for opening up foreign markets. But three banks
said they wondered whether this was possible as other countries in the region, e.g.
Dubai, have advantages over Egypt in this regard.
3.1.10 Government programs in some countries provide credit for foreign
market exploration and for product-adaptation to the needs of target foreign
markets. If the exporter manages to penetrate a target foreign market, repayment of
the credit would be by 3-4% of sales revenue for a number of years (or 3-4% of sales
increment in an existing market). Insofar as applicability to Egypt, banks’ opinions
were as follows:
Table 1: Banks’ Feedback on ‘Credit for Market and Product Development’
Comment
Could be misused
Good idea; to be implemented by banks rather than programs (i.e. for clientscreening purposes)
Needs to be well-controlled
For specific industries: as a pilot / to compare performance between industries
To be temporary
To be implemented with EDCs, rather than SMEs
If implemented, a heavy misuse penalty is needed
Number
5 cases
4 cases
2 cases
2 cases
1 case
1 case
1 case
3.2 Export Development Bank of Egypt (EDBE)
One of the bank interviewees was EDBE; a brief background is given herebelow
being an essential supplier in this area. Its capital was doubled to LE 500 million in
2002; 25% private sector ownership was allowed since 1996. In the 80’and 90’s,
EDBE got two subsidized loans from the World Bank and from the government,
which helped it provide export finance at reduced interest rates. Then EDBE had to
operate commercially, especially with the private sector ownership, and expanded to
non-export business as well. Due to its limited funding sources, and the decrease in
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government subsidized funds, EDBE increased its branch network thus expanding
client-deposit base being a stable source of funds. To secure foreign currency sources,
EDBE launched a funding campaign and collected about US$ 300 million from Arab
Trade Finance Program, European Investment Bank, African Development Bank, and
Islamic Development Bank. EDBE said they were one of few banks in Egypt dealing
with many international and regional finance/guarantee institutions that allowed it to
support exports to some high-risk markets. They said they have various export finance
tools but utilization is low due to constraints on users’ side i.e. inadequate export
business and lack of collateral and guarantees from foreign importers’ banks.
3.3 Support Institutions/Mechanisms and Regional Trade Programs
3.3.1 Export Credit Guarantee Company of Egypt (ECGE) covers both
commercial and political risks; capital is LE 50 million and the outstanding
guarantees are for US$ 51 million. Their representative said only 25% of the
applications are rejected, due to commercial risk on importer or political risk on his
country i.e. mostly post-shipment aspects (thus no restrictions regarding exporter’s
size or experience). The exporter assigns to his bank his right to ECGE’s indemnity in
case of non-payment by the foreign importer. ECGE’s services are used by EDBE,
Suez Canal Bank and MIBank. None of the interviewed banks dealt with ECGE
except for EDBE who is a 36% shareholder. EDBE’s representative attributed the
weak utilization of ECGE’s services to inadequacy of export business as well as lack
of customer awareness; one of the banks thought ECGE’s rates were too expensive.
3.3.2 The Credit Guarantee Corporation (CGC) is not an export-organization but
was interviewed as an existing and/or potential guarantor of SME export finance; they
guarantee 50% of bank loans of LE 40,000—1,400,000. Cumulative value of
guaranteed loans since CGC’s establishment is LE 1.8 billion; export-finance is below
10%. As ECGE is mostly concerned with post-shipment risk coverage i.e. the risk of
importer’s non-payment, it appears that there is a gap in pre-shipment finance
guarantee. CGC said they could guarantee pre-shipment bank facilities to exporters
provided that the enterprise is not a start-up and not a trading firm. CGC deals with 33
banks but utilization is active with only 6 banks. CGC co-shares the risk and the
collateral with the banks. CGC considers that more than 30% of their clients would
not have got bank finance without CGC’s guarantee. Only a small percentage of
applications are rejected, usually due to risk-related reasons.
3.3.3 Social Fund for Development has an outstanding portfolio of LE 3.5 billion:
export finance portion cannot be estimated because they lend through banks. They
establish overseas exhibitions for the borrowers, through which cumulative exports of
LE 50 million were achieved. SFD’s cooperative insurance association provides
banks with 90% loan value guarantees, but it is weakly utilized which is attributed by
SFD’s representative to be due to banks’ preference for projects that are viable
without reliance on guarantees. He said SMEs lose export opportunities because of
lack of price- and quality-competitiveness, and lack of market information. EDCusefulness was discussed; he said they were studying the ‘cluster’ concept where one
company would handle exports of all the cluster member firms.
3.3.4 African Export-Import Bank (AFREXIM) promotes trade between African
countries; outstanding portfolio in Egypt US$ 60 million. AFREXIM mostly deals
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with banks, provides them with finance and/or guarantee of the foreign importers’
banks i.e. mostly for post-shipment stage. They can deal with clients directly with
minimum size of US$ 10 million in annual sales turnover or US$ 2 million in balance
sheet total3. Project finance is available, buyer’s credit, as well as
discounting/forfaiting, political/sovereign risk coverage, up-to seven years. Preshipment finance is also available subject to acceptable bank guarantee; collateral
varies from one case to another. Consignment exports can be financed against
mortgage of assets, but not to first-time exporters. Utilization is average for preshipment finance and low for other products. The bank’s representative said the
constraints to utilization of AFREXIM’s services were the inadequate export
business, unacceptable bank guarantees, unacceptable country risk, the interest rates
proposed by banks are too low as a return, and inadequate awareness of their services.
To activate, he suggested dealing through EDCs. Only one of the interviewed banks
dealt with AFREXIM. Some banks said utilization was low due to lack of export
business in general, but one bank noted that at times they get client requests for
transactions in certain high-risk African countries on which neither the bank itself nor
AFREXIM could take risk exposure on. Thus some banks recommended more export
marketing in better countries.
3.3.5 The Arab Trade Finance Program (ATFP) provides low cost funds for trade
between Arab countries. Most interviewed banks dealt with it but inactively. To
activate they suggested more export-marketing as well as enhancement of exporters’
awareness of the program. (It is noted that one bank thought that ATFP finances
exports to Arab countries only and considered this as a constraint, while it actually
finances exports to all countries but imports from Arab countries only).
3.3.6 European Bank for Reconstruction and Development (EBRD) is involved
with trade finance with Eastern Europe. Only three of the interviewed banks dealt
with it (for counter-guarantee) and one bank was not aware of it. Utilization is very
low. Banks suggested more export marketing in countries covered by the program. It
is noted however that the products of Turkey and China out-compete Egyptian exports
to this region due to geographical proximity thus better prices.
3.3.7 Inter-Arab Investment Guarantee Corporation (IAIGC) was not dealt with
by any of the interviewed banks but some said its services are important. One bank
noted that the country risk that is not acceptable to the bank is not acceptable to
IAIGC either, thus the nil utilization. Other banks referred to needs for customer
awareness of the program and export business marketing. Islamic Corporation for
Insurance of Investment and Export Credit (ICIIEC) was dealt with by only two
banks, on a very small scale. Constraints to utilization, as stated by some banks, were
the same as mentioned above under IAIGC. Islamic Development Bank (Isl. DB)
provides low cost funding. It was dealt with by five of the interviewed banks of which
one dealt with it in import rather than export business. SFD is also starting to deal
with it. Utilization is average / low. The mentioned constraints to utilization were the
same as IAIGC.
3
The latter limit fits with ERF’s proposed asset-criterion for medium enterprises’ definition.
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3.4 Banks’ Rejection of Export Finance Requests
Banks’ rejection of export finance requests was said by most banks to have a low
percentage, except for one bank that estimated it at 70%. Reasons for rejection were:
Table 2: Banks’ Reports on Reasons for Rejection of Applications
Reason
Client’s lack of experience in exporting
High country risk that cannot be guaranteed
Client’s poor financial standing
Inadequate FX funding sources at the bank
Inadequate collateral
Number
8 cases
5 cases
2 cases
2 cases
1 case
3.5 Banks’ Views on SMEs’ Lost Export Opportunities
On SMEs’ lost export opportunities, the reasons stated by the bank interviewees
(including AFREXIM) were as summarized in Table 3.
Table 3: Banks’ Reports on Reasons for Lost Export Opportunities
Reason
Unacceptable product quality
Lack of price competitiveness in foreign markets
Small production capacity
The local price is more attractive
High risk foreign importers/countries proposed by local exporters
Lack of information on foreign markets
Number
8 cases
7 cases
7 cases
4 cases
4 cases
1 case
3.6 Banks’ Views on SME Awareness of Export Finance Products/ Institutions
As regards SMEs’ awareness of export finance products and institutions, most banks
agreed that awareness was lacking; some additional comments were: especially
outside main centers like Cairo and Alexandria (2 banks), especially for beginners (1),
what is lacking is marketing awareness not awareness of finance products (1), there is
also the problem of inadequate export business (1).
3.7 Foreign Donor Agencies
Meetings were held with some donor agencies to get feedback on their mandates and
resources allocated directly or indirectly to export-enhancement. The results of the
interviews are summarized below.
3.7.1 IMP aims at export development and attraction of foreign investment; the
Special Finance Agreement between EU and Egypt necessitates that IMP looks at
export promotion agencies like EDBE, ECGE, EEPC, ITP, GOEIC, etc.
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3.7.2 CIDA-INC helps Canadian firms establish partnerships in developing countries,
focusing on technology-transfer. INC finances feasibility studies, market research and
development, legal expenses, etc. This, in addition to availability of a foreign partner,
facilitates project’s access to local banks’ finance.
3.7.3 JETRO supports exhibitions, technical assistance and market research. In
cooperation with ECS they launched an Egyptian Export Campaign to Japan.
3.7.4 IESC provides consultation services of retired US experts to Egyptian
companies including SMEs. The company specifies the needed service e.g. qualityupgrade, internal procedures, etc.; costs are shared between IESC and the company at
75% and 25% respectively.
3.7.5 UNDP’s representative was briefed of certain needs of an information
technology EDC (ASSCET) for training-funds for software programmers whose
services would be for the export markets. UNDP’s representative confirmed their
willingness to support this activity since it copes with their ‘job creation’ target.
3.7.6 Agriculture-Led Export Business (ALEB), USAID-funded, supports
processed food exports. They assist in utilizing market information, integrating food
processing technologies/standards, enhancing marketing and business skills,
strengthening associations and service-firms, and forming strategic alliances. They
introduced a forfaiting firm from Zimbabwe to some local banks. But no significant
business was achieved, mostly because of Africa’s high risk.
4.0 DEMAND FOR EXPORT FINANCE IN EGYPT
The survey of users consists of two main groups as highlighted below: the exportrelated organizations and the SMEs.
4.1 Export-related Organizations4
4.1.1 Organizations’ Feedback on Export Finance Products
The organizations’ feedback vis-à-vis the various export finance products is indicated
in Tables 4 to 13 insofar as “availability of each product and the constraints to its
utilization”.
Table 4: Organizations’ Feedback on Pre-Shipment Short-term Financing
Comment
Banks are reserved, especially with the present market conditions and frequent
client default in repayment; thus they ask for excessive collateral / Some of the
cases said banks sometimes require both L/C and mortgage of assets.
With some countries, exporters find difficulty obtaining L/Cs: this is because
the foreign importers want to avoid incurring the costs of opening L/Cs, and in
particular they are reluctant to open it before the exporter starts manufacturing
the goods i.e. would rather postpone incurring the L/C costs until the goods are
Frequency
6
4
Nineteen organizations were interviewed including 10 Commodity Councils, the ECS, the Export
Promotion Center, International Trade Point, Egyptian Exporters’ Association (EXPOLINK),
Federation of Egyptian Industries, Alexandria Cotton Exporters’ Association (ALCOTEXA), and three
EDCs one of which is owned by a senior expert in exports who headed Al Nasr Export-Import
Company throughout 1958-1970.
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ready for shipment (manufacturing may take several months). One case said
SMEs may be unable to make accurate estimations of their costs and selling
price before they start production i.e. cannot have an L/C opened upfront.
High bank interest on LE-borrowing, 13-15% plus other commissions; one case
pointed out that the manufacturing sector no longer gets reduced interest rates as
it used to in the past.
Inadequate FX at banks for import of inputs
SMEs are too small for banks and not worth the administrative burden, also
more risky thus the excessive collateral requirements.
Industry-specific constraint: in software industry, importers only send a contract
or a supply order with no L/C. Also, banks avoid financing this sector because
of its intangible nature –the bulk of working capital needs are for payment of
wages, which banks avoid financing.
Industry-specific constraint: banks avoid financing the agricultural sector
because of high risks of perish and price fluctuations.
5
7
2
2
1
1
Table 5: Organizations’ Feedback on Export Project Financing
Comment
Frequency
Banks avoid start-ups/ avoid SMEs/ prefer clients with large financial means/
SMEs are not suitable for banks.
Excessive collateral requirements.
Banks’ reservation is understandable given that bank credit officers are often
accused of bribery in case of client default in repayment.
High interest rates (2 of the cases added that there were no preferential rates or
priorities for export projects).
Commercial banks are not suitable for project finance; there is a need for
investment banks.
Certain programs target project finance, but they are not adequately publicized.
4
4
2
4
3
1
Table 6: Organizations’ Feedback on Post-Shipment Financing
Comment
This is only available against L/Cs or letters of guarantee (L/Gs) from the
foreign importer’s bank, which is not always easy to obtain, also noting that not
all foreign banks and not all countries constitute an acceptable risk to the
exporter’s local bank.
High interest rate.
EDBE is short of financial resources.
Banks –including EDBE- avoid SMEs, thus a need for a bank that is specialized
in SME-exports, and a need for EDCs to deal with banks on behalf of SMEs.
Frequency
5
5
1
2
With regard to tools like factoring, discounting and forfaiting, only seven of the 19
interviewed organizations considered them as important tools, yet they reported the
following constraints listed in Table 7.
13
Table 7: Organizations’ Feedback on Factoring, Discounting and Forfaiting
Comment
Aval from foreign banks’ is costly and hard to obtain, (one case said
nevertheless it is important to obtain it for exporter’s security).
Local banks refuse the foreign banks’ guarantee because of high country-risk /
this also applies to EDBE.
Lack of financial institutions linked to the international institutions that
guarantee deferred payment.
ECGE’s support is needed but their resources are limited and they only approve
of specific importers in specific markets where ECGE has re-insurance with
international firms.
Banks avoid SMEs and clients with no track record with the bank.
These financial tools should be provided to EDCs rather than directly to SMEs.
Frequency
3
3
1
1
2
3
An inquiry was made about the need for specialized firms for factoring/forfaiting.
Five cases were not familiar with the issue; the others’ replies are in Table 8.
Table 8: Organizations’ Feedback on Specialized Firms for Factoring/Forfaiting
Comment
Specialized firms are needed because they would be more flexible than banks –
banks are too regulated /and because these tools need specialization and highlevel training.
This depends on how expensive their commissions would be/ some exporters
prefer to do the discounting abroad due to high cost of dealing with local banks.
Banks can do it, no need for firms.
There are branches of German forfaiting firms here.
These tools are not suitable for SMEs in the first place.
Frequency
4
2
1
1
1
Table 9: Organizations’ Feedback on Barter and Counter Trade
Comment
Frequency
This is useful, (2 of the cases said it is useful in dealing with Africa and some
Arab countries/ with Africa and Latin America being sources of raw materials).
This is not applicable to SMEs / it needs a network.
Possible through EDCs: to import materials and export final goods.
It has procedural complications e.g. the quantity to be imported under a certain
export transaction may exceed the needs.
Important among entrepreneurs not among countries, with a need for a special
firm to match between parties and to control the prices.
Only few Egyptian goods are exportable.
Important if the proceeds are paid to the exporter in FX.
Useful to SMEs who export furniture because wood is imported.
5
5
2
2
1
1
1
1
14
Table 10: Organizations’ Feedback on Buyback Agreements
Comment
This is useful and applicable (3 of the cases said it should be established by the
government and needs government pressure) / it is applied in Egypt but on a
small scale: two medium-sized enterprises in Alexandria use it with China for
rice and marble products versus the related machinery/ Tunisia linked car
imports to exports of spare parts/ the foreign exporter could at least help in
locating a foreign buyer.
SMEs will not be able to negotiate it, they lack the necessary skill.
This will not work (2 cases failed) /foreign markets’ demand for our products is
not adequate/ foreign countries from which we import most our machinery –i.e.
advanced economies- do not import our products unless specific production
processes are needed that are labor-intensive or environment unfriendly.
Frequency
11
2
5
Table 11: Organizations’ Feedback on Financial Leasing
Comment
The system is not yet established neither is the culture available / no leasing
firms/ inadequate number of leasing firms/ no authority in charge/ the relevant
law is not yet implemented.
The costs are too high.
Unsuitable for most SMEs / may be for medium but not small ones.
Not useful for highly specialized equipment that do not have many users
because in case of lessor’s re-acquisition of the equipment, due to lessee’s
default in payment of lease-installments, then the lessor may not find another
lessee.
Frequency
9
6
2
1
Table 12: Organizations’ Feedback on ‘Credit for Market Development and
Product Development’
Comment
Frequency
Useful, (3 cases said: should be well-studied and controlled/ to ensure that
exportation actually took place/ to ensure that there is no corruption by the
employees who control it/ awareness-enhancement and human-resource
development for SMEs will be needed for sound implementation).
6
There is no guarantee for repayment/ SMEs will not be able to repay it.
4
The government will not be able to fund it/ foreign donor support is needed.
3
There are other alternatives, (some cases said the government is to bear 50% of
costs of all exhibitions (1 case), all exhibition costs to be borne by MOFT
except for accommodation cost (1), market studies are to be done by the
Egyptian Commercial Service (1), information about export opportunities is
provided to exporters by the International Trade Point (1), there is support
actually provided to SMEs for participation in exhibitions/ the Fund established
15
by the new export law will support market studies and exhibitions (2).
6
The ability to repay depends on profit margin; as in sales’ commissions.
1
Industry-specific comments:
This does no apply to the agriculture sector, marketing and promotion should be
done by the government.
In case of software industry the foreign markets are still not known to us, so part
of this credit ought to be non-refundable.
1
1
Table 13: Organizations’ Feedback on ‘Partnerships’
Comment
Useful/ very useful: this was the general comment by 12 cases including
particular comments such as:
-SMEs need training on how to do it (1 case)
-very important in software
-very important in agriculture where local and foreign growers can form jointventures to complement each other because their production seasons do not
coincide (foreign donor agencies are to help their importers establish joint
ventures with us)
-agreeable to joint ventures and know-how sharing but not acquisitions whereby
the foreign firms usually buy the successful local firms not those in need of
support (1)
-it is applied by Free Zone car industries with British firms (1).
Useful for large firms but not SMEs / SMEs are not qualified for it.
Difficult to implement because the foreign firm will not agree to provide part of
its market share to the Egyptian exporter.
Frequency
12
4
1
Finally, ‘FX risk-hedging tools’ were discussed with the interviewees, most
organizations said these were not very important at the time given that US$ rate
against LE was in favor of exporters and that the rise in cost of imported inputs was
offset by the rise in value of selling price of the final product. Insofar as SMEs are
concerned, some organizations pointed out that this tool was not available to SMEs (4
cases) and that SMEs were not familiar with it (1 case).
4.1.2 Organizations’ Feedback on Export Support Institutions and Regional
Programs
Apart from the various export finance products referred to above, the interviewed
organizations were asked about a number of export support institutions (mainly
Export Credit Guarantee Company of Egypt –ECGE) and regional trade programs.
Discussions were mainly about access to the services provided by these institutions
and programs, and about the organizations’ suggestions for improving the access to/
utilization of services. The replies are indicated in Tables 14 and 15.
16
Table 14: Organizations’ Reported Constraints on Using ECGE
Comment
Frequency
High pricing by ECGE (one case said it is 1-2% plus other charges/ with no
reduced rates for SMEs).
High country-risk is rejected / should be accepted at higher rates (1).
ECGE is undercapitalized thus cannot serve many exporters (one case said it
gives priority to EDBE’s clients only).
ECGE has a system that is difficult to understand / long procedures.
It is a burden/ risk for ECGE to deal with SMEs, this should be through EDCs.
SMEs do not know about it.
ECGE’s requirements are difficult to meet, L/Cs are required.
Coverage is not 100%.
5
3
2
2
2
1
1
1
(NB. However, by discussing the above interviewees’ complaints with ECGE’s
representative, he explained that a) on the issue of rejecting high-risk countries rather
than accepting them at higher rates, ECGE can only assume a risk that is calculated
while in certain markets the risk is evident, b) on the issue of high pricing, ECGE now
makes use of a government subsidy thus charges only 0.75% flat fee regardless of
risk, c) on the issue of giving priority to EDBE’s clients only, he said this was not the
case and they dealt with two other banks, and d) on the issue of complicated
procedures, ECGE considered their procedures to be straight forward, and said that
L/C-requirements are for exports to some countries not all).
Table 15: Organizations’ Comments about Regional Trade Finance Programs
Comment
Frequency
Egypt is not making adequate use of such programs / our rank is 20th among
countries making use of these programs.
Their terms and conditions are not known / difficult to understand/ their services
are not known/ there is a need for human resource development at SME-level to
raise the awareness about these programs / even banks are not fully aware of
them (1).
Their services are available to public firms only, and only through public banks
or EDBE.
Our negotiations are not adequate/ the programs’ conditions may not be
favorable.
Dealing with programs should be through EDCs, SMEs are small.
5
6
3
2
2
4.1.3 Organizations’ Feedback on Lost Export Opportunities and SME
Awareness
Also addressed in the interviews were the organizations’ perceptions of the reasons
for lost export opportunities by SMEs, and of SMEs’ awareness of export finance
products and institutions. The replies are summarized in Tables 16 and 17.
17
Table 16: Organizations’ Views on SME-Awareness of Export Finance Products
and Export Institutions
Comment
There is this lack of awareness
This could be the case.
SMEs are aware / but the financial products are inadequate (1).
Frequency
12
3
2
Table 17: Organizations’ Comments on Reasons for Lost Export Opportunities
Comment
Lack of finance / Difficulty in obtaining finance: due to sub-items like high cost
of finance (5 cases), lack of financing of marketing activities e.g.
exhibitions/catalogs (2), excessive collateral requirements/ because of high
country risk, we mostly export to developing countries (2), no priority is given
to export finance (1), banks have no time to deal with SMEs: this should be
through EDCs (1), industry-specific issues e.g. banks avoid financing the
software sector because it is intangible and not understood / banks avoid
financing agricultural exports because of risks of perish and price fluctuations.
Price is not competitive in foreign markets: due to cost-burdens and other
factors indicated by the following sub-items: high bank interest and bank
commissions on import L/Cs (5), high custom duties on imported inputs and
equipment (3), various types of bureaucracy including custom delays (4), no tax
exemptions (2), sales tax on capital goods (1), port charges (1), slow progress of
the industrial modernization (1), low labor productivity (1), dishonesty (1), and
banks’ long procedures for SMEs (1).
Marketing Constraints: Inadequate attention is given to marketing / lack of
marketing training / lack of branding / marketing and catalog-preparation should
be done by associations of SMEs as it is beyond the financial capacity of single
SMEs.
Lack of information about foreign markets.
SMEs have no specific parent organization to handle their matters.
There is a need for EDCs: these are to be profit-oriented; to provide SMEs with
information on the required specifications then buy the SMEs’ output and
export it.
Quality is not acceptable to foreign markets.
Products are not adapted to foreign markets’ needs: product-adaptation needs
government subsidy/ industry-specific factor: leather is exported half-tanned
rather than tanned because of the delay in establishment of the leather high-tech
industrial cluster.
Due to FX shortage, L/C-opening is delayed: so SMEs need to import large
quantities at a time thus bear heavy interest expense on the warehoused goods.
Lack of trained exporters.
Lack of access to technology / there should be at least one pilot technological
park in each governorate.
Laborers quit after they acquire the skill and join another competitor firm.
Industry specific constraint: we are not attracting joint ventures for
manufacturing in spite of the high quality of our raw cotton; also at a certain
point of time it was an obligation to sell first to the local yarn factories before
we export, which resulted in a huge reduction in our world market share, not yet
fully picked up till present.
Frequency
14
11
7
4
3
2
4
2
2
2
2
1
1
18
The lower-ranked constraints were as follows:
--The local market price is more attractive to the producer (2 cases).
--Indirect exporters are not entitled to duty drawback (1 case).
--High risk and inadequate guarantees e.g. some African countries (1 case).
--Lack of export finance tools (1 case).
--It is easier to sell to the local market (1 case).
4.2 SMEs5
The selected SMEs were located in Cairo, Damietta and Tenth of Ramadan in
numbers of 16, 4 and 5 respectively. Sectors were textiles and related accessories (10
cases), furniture (4 cases), leather (2), agriculture (2), metals (2) and stationery (1).
Four were EDCs. All were private domestic enterprises, except for three domesticforeign partnerships and one subsidiary of a foreign firm. Only 18 cases agreed to
disclose information on their volume of sales and/or exports (Table 18). The number
of registered employees was below 50 (12 cases), 50 to 99 (3 cases) and 100 and
above (10 cases). Most of these ten cases having 100 employees and above can still be
considered to be within the medium category under the proposed definition, as eight
had annual sales below LE 10 million.
Table 18: Volume of Business of the Enterprises
(in LE)
below 1,000,000
1 to below 2 million
2 to below 5 million
5 to below 10 million
10 million
above 10 million
Total:
Total Sales (local sales + exports)
2 cases
2 cases
3 cases
6 cases
2 cases
3 cases
18 cases
Exports only
4 cases
Nil
5 cases
2 cases
1 case
3 cases
15 cases
4.2.1 SMEs’ Utilization of Bank Finance
Only 13 cases did use bank finance (the others just had bank current accounts) of
which 7 cases (i.e. 54%) were not satisfied therewith -including two cases that ended
the relationship because of inflexible response to their needs. Dissatisfaction was not
associated with particular firm sizes. The information on use of bank finance is
summarized in Tables 19 to 21.
Table 19: Use of Bank Finance by Different Sizes of Enterprises
Labor
Below 50
50 -- 99
100 and above
total
Use bank finance
6
2
5
13
Do not use bank finance
6
1
5
12
Total
12
3
10
25
5
Case-study type of interviews were conducted with 25 enterprises, generally medium-sized and
engaged in export activity.
19
Table 20: Reasons for SME-Dissatisfaction with the Utilized Bank Finance
Reason
Frequency
high cost of finance: interest/ correspondence charges/ contract stamp, etc
excessive collateral requirements/ thus less obtained finance than needed
complicated procedures
shortage of foreign exchange (FX) available at banks.
4
3
3
1
Table 21: Reasons for SME Non-Utilization of Bank Finance
Reason
Frequency
never applied because they did not need: they have adequate self-finance
(these included 3 cases with foreign capital share).
never applied because of reasons other than self-sufficiency:
-high interest (mentioned 3 times)
-it is not safe to borrow from banks (mentioned 3 times)
-mortgage requirement (mentioned twice)
-religious reasons (mentioned once).
applied but were rejected, due to:
-small size of the requested loan (1 case)
-inadequate collateral (1 case)
-being a newly established firm (1 case)
5
4
3
4.2.2 SMEs’ Awareness of Export Finance Products, Institutions and Programs
The interviewed SMEs were largely unaware of export finance products and exportrelated organizations, support institutions and regional trade programs. Their usage
thereof was very limited. Awareness and utilization are indicated in Tables 22 and 23.
Table 22: SMEs’ Awareness and Usage of Export Finance Products
Product
Discounting/ forfaiting
Factoring
Consignment Exports
Counter trade
Financial Leasing
# Respondents
aware of the
product
7 (28%)
Nil
1 (4%)
# Respondents
that need it /use
it
Nil
Nil
Nil
7 (28%)
3 (12%)
Nil
Nil
Views
--Too risky
Could increase exports, but
to be run by government (2)
--
Table 23: SMEs’ Awareness and Usage of Support Institutions, ExportOrganizations and Regional Trade Programs
Institution / Program
International Trade
Point (ITP)
EXPOLINK
# Respondents
aware of it
#Respondent
s that use it
12 (50%)
4 (16%)
6 (24%)
2
Views
The 4 users benefited by getting
information on foreign importers
--
20
Export Promotion
Center
Egyptian Union of
Exporters
ECGE
CGC
Isl.DBank
other programs
mentioned earlier
14 (55%)
2
--
4 (16%)
nil
18 (72%)
-1 (4%)
3
---
--the 18 cases heard of ECGE but
unaware of the provided support.
---
--
--
--
4.2.3 SMEs’ Reasons for Losing Export Opportunities
The various reasons reported by the interviewed SMEs for losing export opportunities
are summarized in Table 24. (It is noted that while most SMEs complained of
difficulties in marketing abroad, the four cases having foreign investment did not,
which reflects the importance and benfits of having joint ventures).
Table 24: SMEs’ Reported Reasons for their Lost Export Opportunities
Reasons
Frequency
Lack of bank finance: due to a number of sub-items like high cost of finance
(6 cases), inadequate collateral e.g. foreign importers refuse to open L/Cs
while banks insist and/or mortgage required in addition to the L/C (5), and
due to high country risk (1). Two other cases have limited self-finance but
refuse to deal with banks/ so unable to tailor their products to foreign market
needs.
Prices are not competitive in foreign markets (most considered it as the most
serious constraint, including some that reduced their exports as a result).
Better prices in the local market.
Lack of information about foreign markets.
Custom procedures problems: delay / duty drawback refund sometimes takes
as long as 10 months/ the duty drawback officers do not approve of the
Industrial Control Authority’s estimations of product-components/ producers
have to export ‘all’ the imported components before they get the refund,
which is difficult to control.
High custom duties on imported components.
Small production capacity.
Industry-specific constraints:
a) Furniture producers in Damietta use wood that is imported by other
enterprises so they do not get the duty drawback refund.
b) Leather exporters incur a rise in cost of production, thus a non-competitive
price in the foreign market, due to a recent tax levied by the government by
piece of leather. (But this issue was discussed with the Leather Commodity
Council Head who clarified that the levy is on leather that is exported halftanned (or raw) rather than tanned, because the latter has higher value added.
12
9
5
5
8
1
1
1
1
4.2.4 SMEs’ Assessment of the Importance of Finance for Export Activity
Finance and cost of finance were considered as major factors of export success by
96% and 50% of the SME group respectively. As to the weight of cost of finance in
21
total production costs, out of 13 SMEs using bank finance, 6 did not know the weight;
others estimated it at 15% (2 cases), 7% (2), 5% (1), and below 5% (2).
5.0 ASSESSMENT OF EDBE and ECGE
5.1 EDBE: It successfully adapted itself to market changes rather than waiting
indefinitely for government subsidies. They operated commercially at higher cost to
mobilize the funds needed for meeting customers’ needs; they also attempted to
reduce interest burden on export business through the provision of a mixed portfolio
of export and non-export business. EDBE was ahead of other banks in providing
services like export insurance, forfaiting and post shipment finance, and in using the
services of regional and international trade finance programs. EDBE’s financials
during the last five years indicate increases in portfolio, equity and net profit. But the
volume of export finance (estimated by the interviewee as a percentage of total
portfolio) decreased not only as a percent of portfolio but also in absolute terms.
The low utilization of export credit insurance/guarantee as well as low utilization of
services/benefits of some of the regional programs was attributed by the bank’s
representative to inadequate export business in general as well as lack of customer
awareness. But it is our understanding that exporters’ awareness of export
insurance/guarantee facilities and of regional programs’ benefits ought to be part of
the bank’s role. This should be undertaken by the bank’s marketing officers and part
of their duty.
The interviewed SMEs and organizations had complaints of EDBE; the latter’s
representative comments about the criticisms were a) EDBE’s resources used to be
limited as mentioned but EDBE then expanded its deposit base and mobilized FX
resources; b) EDBE’s avoidance of SMEs is not true: there are no minimum size
limits; c) interest rates are high because subsidized funding is no longer available; d)
forfaiting and factoring are not provided for all countries because EDBE cannot get
into non-calculated risk; e) regional program services are not provided by EDBE to
public enterprises only as some interviewees thought but to private firms as well.
Although the users of finance called for government subsidized-loans to EDBE (as
well as to other banks –for the export portion of a firm’s sales), yet interest subsidies
may not be the best solution, unless for exceptional cases that need support. The
prevailing interest rate level is high for all sorts of business not only for export
activity; special treatment is advocated for exports but subsidies are not guaranteed
and not sustainable. Rather, this could be through creation of special units for export
finance in each bank, with specialized bankers and financial analysts. EDBE’s role
would thus include the provision of specialized services to all banks such as knowhow and expertise, and awareness-enhancement in areas of: innovative financial
services, country risk and benefits of exporting to advanced countries, contacts,
longer-term credit for exports to accommodate the longer collection period compared
to local trade finance, a new culture of collateral suited for exporters, etc.
5.2 ECGE: EDBE said some of its clients could not have got finance without ECGE’s
insurance; also ECGE-insurance allowed for an increase in size of credit granted by
EDBE to some clients. These were positive indications. But only three banks in Egypt
22
deal with ECGE, including EDBE –a shareholder. Most interviewed SMEs did not
know about the support mechanism provided by ECGE. ECGE considers the low
utilization of its services to be due to low exports and lack of exporters’ awareness. In
our opinion, the promotion of ECGE’s services should be part of their officers’ duty.
6.0 GENERAL LEGAL ENVIRONMENT SUPPORTING EXPORTS
6.1 The New Export Law
The export-organizations were much more familiar with the new Export Law than the
other interviewees. They said positive aspects of the law were the establishment of a
support fund on a temporary basis of 3-5 years for exporters in some sectors (6 cases),
addressing the issue of duty drawback system and establishing a related joint Unit
between MOF and MOFT (4), unifying the authorities that exporters deal with (2),
etc. Their main reported negative aspects were the lack of tax exemptions or benefits/
no solving of the hassle of dealing with tax authority (8 cases), unclear responsibility
for final say in the established Customs-Unit (3), the law did not adequately address
marketing and promotion activities (2), the amended drawback system is still not
flexible (1). Their suggestions for law-enhancement were: tax incentives for
exporters/ this could be addressed by the executive regulations of the law (4 cases),
assigning a specialized overseas firm for conducting market studies (3), law violation
is not to be considered as a criminal act (1), etc.
To address the interviewees’ views of the Export Law, the following is noted:
a) Tax issues are addressed by the Tax Law rather than the Export Law; the
former is currently undergoing a study for modifications. Executive
regulations of a law are not the area for determining tax rates and/or custom
duty rates as suggested;
b) Studies indicate that tax exemptions do not necessarily have a significant
effect on encouraging investment. Special treatment could be considered for
some areas like in other countries. SMEs, like other investor groups in the
society, would rather benefit from streamlining the tax system, easing
collection procedures, and ensuring consistency and predictability. In future,
there will be a need for providing support for ‘change of conduct’ of exporters
in a way to re-direct their targeting activities to international rather than local
market. This kind of support does not violate WTO measures;
c) The introduction of a system of sharing views between two ministries is a
positive aspect of the new law. The support provided to exporters has been
formalized and institutionalized as a regular contribution. Unutilized portions
thereof can now be carried forward to following years rather than wasted as
the case used to be in previous setting under government budget;
d) Latest amendments to Customs Law did take away the criminal consequences
associated with mismatch of ‘reported’ and ‘inspected’ quantities. Setting a
maximum period for tax-rebate was addressed by the Customs Law whereby
the refund should be within one month maximum from date of exporter’s
submission of proof of re-exportation. Partial refund is allowed in case of
partial exportation: the Law states that the original guarantee can be returned
and replaced by a guarantee of remaining quantities of imported inputs.
23
6.2 EDBE’s Law
Regarding EDBE’s Law, the following is noted:
--“The law calls for a data-center for exporters to be established by EDBE. It is said
that this center wasn’t actively used due to the establishment of ITP, but that EDBE
intends to modernize the center anyway”. It may be better to leave this to ITP if there
is duplication of information; EDBE’s financial resources are limited and could be
used in other areas suggested below.
--“The law gives to EDBE seniority rights to borrowers’ money, immediately next to
Treasury rights (i.e. superior to other lenders’ rights in case of an exporter who deals
with more than one bank)”. But some banks refuse to have inferior security-position.
So some joint venture banks that could provide high quality services to exporters, may
refuse to deal with an exporter who deals with EDBE as well. While it is unlikely that
an SME deals with more than one bank, we are also concerned with EDCs: these are
sizeable and can deal with many banks at a time.
--“The law refers to the Board of Directors’ duty to establish a staff-incentive
system”. There is a need in this regard to address linking ‘staff and management
incentives’ to ‘the amount of export finance provided by the bank’. It is noted here
that the interview with EDBE indicated a fall in their volume of export finance.
--“The law states that EDBE is to perform activities leading to promoting Egyptian
exports and opening up foreign markets”. It is suggested that EDBE establishes a
special Unit for ‘credit for market development and product development’. The unit
could be set up with support of donor/government funds, and special expertise, given
that this type of credit is not common in Egypt and the ability to repay it is not clear.
--“The law refers to EDBE’s objective to provide finance and guarantees to banks
and foreign importers in a way to facilitate exports”. Unacceptable country risk and
unacceptable foreign banks’ guarantee were stated by many interviewees as major
deterrents to export finance at post-shipment stage. EDBE’s law could state that
EDBE is to study ways of expanding the network of correspondent foreign banks that
could open and/or confirm L/Cs acceptable to the Egyptian banks.
7.0 OTHER COUNTRIES’ EXPERIENCES
Other countries’ programs and policies in support of export finance are highlighted
below.
7.1 India: There is the Export-Import Bank of India, government-owned, partners
with EU to promote joint ventures between Indian and Eurpoean countires. For large
projects, e.g. turnkey plants, the Bank can issue guarantees to overseas banks or to
foreign buyers of Indian goods and services. A division for advisory and training
services provides information and support to help improve prospects for securing
business in projects funded by multilateral agencies, and promotes Indian consulting
exports. The Small Industries Development Bank of India provides SMEs with
financial assistance and capacity enhancement with emphasis on adoption of
24
improved technology. They have a Single Window Scheme and a Composite Loan
Scheme for providing credit to micro-enterprises on easy terms and minimal
administrative complexity. They provide various kinds of export finance including
credit for market development. Financial assistance is provided to women
entrepreneurs and to organizations involved in marketing the products manufactured
by women entrepreneurs.
7.2 Turkey: Turk EXIMBbank, state-owned, participates in the preparatory stage of
the Five-Year Development Plans that reflect the government’s overall export
strategy. The treasury covers losses incurred by the Bank due to political risks. The
Bank provides direct lending and insurance and guarantees to Turkish commercial
banks to encourage them to finance export transactions. Turk EXIMBank thus
channels some commercial banks’ funds into export financing. This also takes place
in an indirect manner since part of the funds available to Turk EXIMBank are
borrowed from commercial banks. Upon establishing a Customs Union with the EU
in 1996, Turkey made arrangements for harmonizing its legislation with that of the
EU in related fields, including officially supported export credits.
Turk EXIMBank has been mandated to support foreign trade and Turkish contractors/
investors operating overseas through various credit, insurance and guarantee schemes.
While the Bank now provides SMEs with short term working capital finance, it plans
in future to emphasize long-term schemes (especially non-funding facilities i.e.
guarantee and insurance) leaving short-term finance for commercial banks. The Bank
seeks opportunities to cooperate with foreign institutions on financing joint venture
projects involving Turkish and foreign partners in third countries. Various financial
instruments are provided by the Bank: its largest program is the Pre-shipment Export
Credit, implemented through intermediary commercial banks. Examples of special
credit programs are the ‘Overseas Chain Stores Investment Credit Program’, the
‘Tourism Marketing Credit Program’ and the ‘International Transportation Marketing
Credit Program’. Turk EXIMBank also acts as an intermediary agency for the Export
Financing Scheme of the Islamic Development Bank. Credit Information reports on
Turkish firms are provided by the Bank to foreign export credit agencies, being the
most reliable source of credit information.
7.3 Tunisia: There is the Center for the Promotion of Exports (CEPEX) operated by
the Ministry of Commerce. Technical, administrative and promotional assistance is
provided to exporters; also a marketing strategy was developed for a cross-section of
exporting SMEs. Fairs are coordinated by the Center and a database is maintained.
The Fund for Access to Export Markets (FAMEX) is focused on increasing the
number of exporting SMEs. Technical aid consists of support for consulting missions
involving FAMEX experts that help in the development and implementation of the
exporter’s Export Marketing Plan, by co-sharing the costs.
The government created a high-level Council for Exports in 1997, for establishing
trade networks, providing trade training, simplifying trade documentation and custom
procedures, and conducting market studies for export opportunities. COTUNACE
(Compagnie Tunisienne pour l’Assurance du Commerce Exterieur) is an export credit
agency that supports exporters through the provision of credit and guarantees.
25
7.4 Singapore: There are some specific programs for SMEs in Singapore. The
Government Development Assistance Program (GDAP) has a number of programs
such as ‘Local Enterprise Finance Scheme’, ‘Local Enterprise Finance Scheme –
Micro Loan Program’, ‘Local Enterprise Technical Assistance Scheme’,
‘Regionalization Financing Scheme’ (to assist the local enterprises in setting up
overseas operations), ‘Business Development Scheme’ (only applying to missions or
projects undertaken on a group basis), ‘Double Deduction for Overseas Investment
Development Expenditure’ and ‘Double Tax Deduction Scheme’ (that allows for
deduction from taxable income twice the eligible expenses related to the expansion of
overseas marketing e.g. fairs and exhibitions, overseas marketing offices, master
franchising, catalogs, etc).
7.5 Mexico: Bancomext provides SMEs with trade-related information, matchmaking
services, training and valuation services. Some of its main trade financing instruments
that are relevant to SMEs are a) ‘Equipment Financing’ up-to US$250,000, and b)
‘Short term Financing for Small Exporters’ up-to US$50,000 -can be secured by
export receivables. Bancomext also offers international project financing, syndicated
credits, evaluation services, and other various types of financing instruments.
7.6 Italy: The Italian Institute for Foreign Trade is a public agency entrusted with the
promotion of trade, business opportunities and industrial cooperation between Italian
and foreign companies, mostly by organizing the participation of Italian firms in fairs,
exhibitions, workshops and bilateral meetings, through 100 offices in 80 countries. It
also has special assignments for cooperation between Italy and some of its neighbors Mediterranean countries, Eastern Europe and the Middle-East.
SIMEST is a state-operated financial institution under the Ministry of Foreign Trade,
mandated to develop and promote Italian business internationally. Shareholders
include banks, firms and business and sector associations. It has an additional role to
play as a minority shareholder in joint ventures set up by Italian firms in foreign
countries outside EU. It is funded by the government for providing Italian firms with
financial support in areas like exporting, foreign investment, foreign marketing,
participation in international tenders, feasibility studies, etc. Some of the financing
support programs are: a) Export Incentives (to allow Italian firms to export machinery
and related services at deferred payment on competitive terms in line with those
offered by other EU and OECD exporters; incentives are in the form of interest
subsidy or guarantee for export credit loans and cover the difference between the
market rate demanded by the lending bank and the subsidized rate -established by
international agreements- charged to the foreign buyer), b) Concessionary Financing
for Market Penetration Programs (this includes financing for establishing permanent
branch offices abroad, sales and customer service networks and promotional outlets),
c) Financing for Participation in International Tenders, d) financing of feasibility
studies linked to Italian exports or investments abroad.
SACE (Export Guarantees) is a public agency that provides Italian SMEs with export
guarantees and insurance, either directly or through intermediary banks. It covers
risks related to supplier credits, buyer credits, production, and payments. It insures
companies for repayment of bonds (bid bonds on tenders) as well as a variety of other
political risks associated with operations in a foreign country.
26
7.7 Canada: There are Federal Government programs such as the services of the
Department of Foreign Affairs and International Trade, through International Trade
Centers (for counselling on developments of export markets), a national data bank on
trade fairs, the Canadian International Trade Commissioner Service located in over
100 cities around the world to provide on-site market advice and assist Canadian
companies wishing to enter these markets, Business Service Centers, Program for
Export Market Development (covers up to 50% of a firm’s expenses in attending
trade fairs outside Canada or visits to agents and distributors). Assistance can also be
obtained for expenses on bidding for overseas projects, establishing a sales office
abroad and for marketing initiatives in other countries.
Export Development Corporation (Can-EDC) is the export credit and insurance
agency, a Crown corporation directed by the Minister of International Trade. Its
guarantee programs include the protection of exporters against calls on performance
bonds and against losses of foreign investments. Its export finance programs include
‘Direct loans’ negotiated with foreign buyers to support the purchase of capital goods
and services, ‘Lines of credit and protocols’ negotiated with foreign banks and
financial institutions to provide financing for Canadian exports to particular markets,
‘Buyer credit and Supplier credit protocols’, ‘Note Purchase Programs’ where CanEDC purchases promissory notes issued by foreign buyers to Canadian exporters, and
‘Loan guarantees’ to commercial banks that finance foreign purchasers of Canadian
exports to protect the banks against non-payment by the foreign borrower. To arrange
for Can-EDC financing, the exporter must provide sufficient information to prove that
the transaction is feasible (including cash flow projections and collateral).
Canadian International Development Agency (CIDA) provides development funds
through its Partnership Program that involves transfer of funds to major multilateral
development banks e.g. World Bank and CIDA’s own Industrial Cooperation
Program, to assist Canadian firms wishing to establish long-term business
relationships with developing countries (especially in technology transfer). Through
its Bilateral Program, CIDA provides Canadian goods and services for specific capital
development projects identified by the recipient country, and program aid for a wide
variety of developmental projects undertaken by the recipient country. CIDA sponsors
the supply of equipment and services by Canadian firms to develop specific sectors of
the recipient country’s infrastructure e.g. transportation and communication links.
Canadian Commercial Corporation (CCC) is a Crown corporation assisting Canadian
exports by assuming prime contractor role in government-to-government transactions.
It is a conduit through which requests for Canadian goods/services (and invitations to
bid) received from foreign governments and organizations are transmitted to Canadian
suppliers. CCC’s services also include: technical and financial evaluation of
transactions, analyzing risks, participating in international negotiations, and executing
and guaranteeing performance of prime and back-to-back contracts.
Bank Services: Canadian banks have overseas offices in all Canada’s major markets
and a large network of correspondent banking relationships around the world. As
outlined by Canadian Bankers’ Association, the services provided include the
capability to a) appraise, advise and submit surveys, report on market conditions,
sales prospects, import and export regulations in both Canada and abroad; b) prepare
27
reports and advise on the credit status of buyers and potential buyers in foreign
countries; c) provide liaison between foreign financial assistance corporations; d)
handle and give guidance on commercial L/Cs; e) pay or negotiate drafts drawn under
L/Cs on Canadian or foreign banks; f) collect time and sight drafts drawn by exporters
on foreign importers; g) advance money against drafts for collection, or against drafts
drawn under L/Cs in favor of exporters; h) fulfill orders of exporters in their FX
transactions in the principal foreign currencies both for immediate and future
delivery; i) handle foreign remittances and transfers; j) provide liaison between
federal and provincial government organizations in their various assistance programs
for exporters; and k) assist Canadian companies entering the export business. Banks
also provide many services to Canadian importers including reports on the reliability
and credit standing of foreign buyers and sellers.
Export Financing Consortia (Example of Northstar): Northstar Trade Finance Inc.
supports Canadian exporters by offering financing to creditworthy foreign buyers of
Canadian goods and services. It fills a recognized gap in the financial market by
financing export sales transactions of between $100,000 and $5 million with
repayment terms of one to five years. Its support is available in two distinctive
products: A) ‘Term Finance’ is provided to foreign buyers, secured by a registered
lien over the exported goods, and insured by Can-EDC. Northstar maintains recourse
to the exporter only for performance of the exporter's sales contract with the buyer.
Exported goods and services must have Canadian content of at least 50% of the value.
B) ‘Floor Plan Finance’ is provided to American distributors of Canadian goods then
the distributor repays Northstar when the goods are sold or in 360 days, whichever
occurs first. The loan is secured by a promissory note and security interest in the
inventory financed. The cost to the Canadian exporter is a non-refundable application
fee of $300. The cost to the foreign buyer is loan interest at current competitive
market interest rates based on Northstar’s cost of funds and fixed for the term of sale.
An insurance premium is payable to Northstar to cover Can-EDC’s insurance on each
successful transaction. The rate is determined by Can-EDC and varies by country and
buyer credit risk. There is a front-end administration fee of 1.25% of the amount of
the export sale on each successful transaction. Costs also include all reasonable outof-pocket costs for the loan, including legal fees. Any Canadian exporter, regardless
of location in Canada, can use the facilities of Northstar provided they meet its
requirements for export performance coupled with a creditworthy foreign buyer
insurable by Can-EDC.
7.8 U.S.A.:US Small Business Administration (SBA) provides business development
and financial assistance to help small businesses’ exports. SBA offers loan guarantees
to help businesses obtain the capital needed to explore/ expand international markets.
Some of the programs are a) ‘Export Working Capital Loan Guarantee Program’ to
support single transactions or a series of like transactions, with loan maturities of 12
months with options to renew. Lenders are encouraged to lend by guaranteeing
repayment of up to $1 million or 90 percent of a loan amount, whichever is less. The
applicant must have been in business -not necessarily exporting- for at least 12
months. B) ‘Regular Business Loan Program’ to guarantee up to 90% of a bank loan
up-to $155,000, or 85% of a loan up-to $750,000. Loan guarantees for fixed-asset
acquisition are up-to 25 years maturity, and for working capital loans 7 years. To be
eligible, the applicant's business generally must be independently owned, operated for
profit and within SBA’s size standards. Export trading companies and export
28
management companies also may qualify. C) ‘International Trade Loan Program’
provides finance up-to 25 years, whereby loans are made by lending institutions with
the SBA guaranteeing up-to 85% of the loan up-to $1.25 million (with maxima of $1
million and $250,000 for equipment loans and working capital respectively). The
applicant must establish that the loan proceeds will significantly expand existing
export markets, or develop new export markets, or that the small business is adversely
affected by import competition. Proceeds can be used to buy land and buildings; build
new facilities; renovate, improve or expand existing facilities; and purchase or
recondition machinery, equipment and fixtures. D) ‘Small Business Investment
Companies (SBICs)’ approved and licensed by SBA, may provide equity or working
capital exceeding the agency's $750,000 statutory maximum. Unlike SBA, SBICs can
invest in export trading companies where banks have equity participation. E) ‘SBA
Export Express’ allows lenders to use streamlined loan review and approval
procedures to process SBA guaranteed loans up to $150,000. Loan proceeds may be
used for most business purposes including market development e.g. participation in a
foreign trade mission; transaction-specific financing.
Export-Import Bank of United States is a federal government agency responsible of
assisting export financing. Main programs are A) ‘Insurance Programs’ (through their
Insurance Division or an insurance broker) protect the exporter against the failure of
foreign buyers to pay their dues for commercial or political reasons. Two insurance
policies for small businesses are new-to-export and umbrella policies, short-term
(upto 180 days), under which the Bank assumes 95% and 100% of commercial and
political risks respectively. This special coverage is available to companies that are
just beginning to export, or have an average annual export credit sales volume of less
than $2,000,000 and meet the SBA definitions of small business. B) ‘Pre-export
Program’ (The Working Capital Guarantee Program) assists small businesses in
obtaining working capital by guaranteeing 100% of the principal and interest on
working capital loans extended by commercial lenders to eligible U.S. exporters. The
loan may also be used for marketing. The Bank requires the working capital loan to be
secured with inventory, accounts receivable or by other appropriate collateral. C)
‘Direct Loans and Intermediary Loans’ respectively to foreign buyers of U.S. exports
and to commercial lenders that extend loans to foreign buyers of U.S. capital goods
and services. Both the loan and guarantee programs cover up to 85% of the U.S.
export value, with repayment terms of one year or more. Direct or intermediary loans
are offered at the lowest interest rate permitted under OECD. D) ‘Guarantee
Programs’ to provide 100% protection for private sector loans to creditworthy buyers
of U.S. capital equipment and services. Most guarantees provide comprehensive
coverage of both political and commercial risks.
US Department of Commerce provides counseling on federal, state and private trade
finance resources, through a field network of 70 domestic offices and 170 foreign
posts, under the U.S. & Foreign Commercial Service.
29
US Department of Agriculture has a Market Promotion Program (MPP), under the
Foreign Agricultural Service Program, to help U.S. producers finance promotional
activities for U.S. agricultural products, through funds from USA's Commodity Credit
Corporation. Funds are used to partially reimburse program participants conducting
specific foreign market development projects for eligible products. The financed
activities include market research, consumer promotions and technical assistance.
U.S. Agency for International Development (USAID) implements U.S. Foreign
Economic Assistance Program in developing countries. Technical assistance projects/
commodity programs are implemented through providing US goods and services.
Overseas Private Investment Corporation provides project financing, investment
insurance and a variety of investor services for U.S. companies in some 140
developing and emerging economies. Direct loans are available to projects sponsored
by American small businesses, and loan guarantees for larger projects, starting at $2
million. Risks of investing overseas are insured against political violence,
inconvertibility of currency and expropriation. Fee-based services offered are
feasibility studies, investment missions, and database of business opportunities.
US Trade and Development Agency provides grants to fund feasibility studies and
other planning services for major development projects in recipient countries. The
studies must be performed by U.S. companies or consortia. In conducting the study,
the company establishes a presence in the country and develops long-term relations
with host-country officials and project managers that can lead to additional business
opportunities. Types of projects include energy and natural resource development,
transportation, telecommunications and the environment. The agency also publishes a
newsletter called the TDA Bi-Weekly, which provides U.S. suppliers and
manufacturers with up-to-date information on the projects supported by the agency.
Small businesses may identify subcontracting opportunities through the publication.
30
8.0 BEST PRACTICES / with Special Reference to EDCs
Common mechanisms in export finance were reviewed as indicated above, including
the finance of market research, product development, marketing activities, production
and shipment, receivables, as well as insurance and guarantee.
EDCs role includes market studies, providing information on product specifications
needed by foreign markets, concluding deals and exporting SME-products. They can
provide finance to SMEs and/or purchase inputs on their behalf. Quantity-purchases,
bulk-borrowing and bulk-shipment would all entail discounts that allow for lower sale
prices thus better competitiveness in foreign markets. The survey results indicated that
all banks confirmed the importance of EDCs, and most organizations said EDCs are
very useful /an efficient system that should be focused on; some mentioned certain
conditions for success such as EDCs are to be industry-specialized (5 cases), with
qualified/experienced, flexible and language proficient management/staff (2).
As to SMEs, by excluding four cases that were EDCs themselves, and one relatively
large cotton-exporting company, the replies of the remaining 20 interviewees were:
not familiar with the concept (8 cases i.e. 40%); willing to deal with an EDC (3 cases
i.e. 15%); knew their markets and not willing to deal with EDCs (4 cases); had
foreign partners thus stable foreign markets with no need for EDCs (4 cases).
Interviews were conducted with some EDCs as highlighted below.
--Mohamed Ghanem is a senior expert who used to serve about 150 SMEs; annual
volume of exports was $20-25 million; he used to hire distributors in foreign markets.
He suggested that a) the government supports EDCs by bearing the cost of marketing
activities, b) EDCs can use their name and strong market-standing to ‘recommend’
their member SMEs to the banks, in order to facilitate SMEs’ access to bank finance.
--The Arab Contractors Co. (Osman Ahmed Osman and Co.) is not an EDC but can
be considered as such in the context of executing contracting jobs abroad with a large
component of Egyptian goods produced by SMEs e.g. furniture, sanitary ware, pipes,
ceramics, lighting tools, air conditioning. They provide support to some of the SMEs
they deal with i.e. finance, advance payment against L/G, local L/C, etc. On the other
hand, they lose overseas business opportunities because of lack of finance due to one
or more of the following constraints: too large funding requirements, too long tenor,
political risk, and/or lack of deferred payment facility to the importer of the service.
--A software EDC was established in 1998 but the owner said he had to shut down as
he could not get bank finance for marketing activities. It used to serve 14 SMEs but
annual exports were LE 2 million only. The owner said Egypt has a good software
export potential but banks avoid financing this sector for being intangible.
--ASSCET (part of Mansour and Maghrabi Group) is a software-EDC that plans to
export software and to ‘incubate’ programmers whose services could be exported
under contracts between the EDC and foreign partners. But training costs per
programmer are too high, and after getting trained he may quit (while the labor law
does not allow the employer to get back from the employee the training expenses).
31
9.0 PROPOSED SOLUTIONS AND POLICY RECOMMENDATIONS
The survey findings, and the review of best practices and other countries’ experiences
in export finance, led to identifying a number of gaps in the supply and demand sides
of export finance:
9.1 Gaps in Supply and Demand of SME Export Finance and the Proposed
Solutions and Policy Recommendations
Table 25: Gaps in Supply and Demand of SME Export Finance and the Proposed
Solutions and Policy Recommendations
Gaps
Recommendations
1. While some of the interviewed banks said
they did not avoid SME-lending, some did
have a minimum size credit policy (especially
the joint venture banks).
Creation of large size EDCs to deal with
the banks on behalf of SMEs (thus large
size loans that are attractive and profitable
to the banks).
2. Only half the interviewed banks were willing EDCs’ owners / managers are highly
to provide pre-shipment short-term financing to experienced with export business and can
first-time exporters, and only if they were deal with the banks on behalf of the SMEs.
existing producers. Same with post-shipment
finance instruments like discounting/ forfaiting.
3. Lack of collateral for pre-shipment finance:
Most interviewed banks said they required an
export L/C as a condition for providing shortterm pre-shipment finance, including 4 banks
that said they might require additional
mortgage of fixed assets by some clients, on
case by case (i.e. more collateral requirements
in case of non-prime clients).
-Creation of EDCs: their strong market
standing and experience with foreign
markets makes them creditworthy bank
customers, which may be re-assuring to
banks in a way to relax collateral needs
(versus requirements from SMEs).
-CGC could guarantee the pre-shipment
financing (since ECGE usually covers the
post-shipment stage).
4. Exporters sometimes find difficulty
obtaining L/Cs because the foreign importers
want to avoid incurring the costs of opening an
L/C, and in particular they are reluctant to open
it upfront before the exporter starts
manufacturing the goods i.e. would rather
postpone incurring the L/C costs until the
goods are ready for shipment (noting that
manufacturing may take several months).
Foreign importers may be more responsive
in this regard to the needs of EDCs (rather
than SMEs) being large suppliers, also
noting that larger L/Cs are relatively less
costly to open. As to local banks, they may
be more willing to waive the L/C
condition for EDCs than for SMEs as
noted above, or at least to postpone the
L/C requirement till shipment time.
5. Finance of export-oriented projects is
hampered by the lack of collateral and the lack
of committed purchase orders.
-Project finance is not suitable for commercial
-To secure long-term commitments by
foreign buyers through alliances and/or
buyback agreements.
-To host workshops for international
32
banks, there is a need for investment banks.
investors for facilitation of joint-venture
-More partnerships and joint ventures are establishment in specific sectors.
needed, for opening up foreign markets.
-Support to these workshops by ECS
senior staff
6. High cost of finance; interviewees called for
interest subsidies for export finance, in EDBE
and in other banks. (One interviewee pointed
out that the manufacturing sector no longer gets
reduced interest rates as it used to in the past).
Subsidized interest is unsustainable, but
special treatment/ support for specific
sectors could be considered. Also special
treatment for exports could be through
creation of special units for export finance
in each bank, with specialized bankers.
7. EDBE’s volume of business has significantly
increased, but its export finance portfolio
appears to be falling in absolute terms not only
as a percentage of total portfolio.
EDBE is to work on maintaining a volume
of export finance that is not decreasing in
absolute terms even if decreasing as a
percentage of total portfolio.
8. -ECGE’s resources are limited.
-It is said that ECGE cannot guarantee
transactions in certain countries unless it has a
government backup guarantee.
-Apart from EDBE (a shareholder of ECGE),
only two other banks deal with ECGE.
-One of the interviewed banks thought that
ECGE’s rates were too expensive, while it is
not the case.
-Capital increase is recommended.
-Some countries’ experiences indicate that
export insurance losses due to political
risks are covered by the Treasury; this is to
be considered.
-Better marketing and promotion by
ECGE for their services; linking their staff
performance evaluation system to the
volume of business achieved by ECGE.
-Awareness enhancement for the banks
about ECGE services.
9. Most of the SMEs interviewed did not know
about the export credit insurance mechanism or
about ECGE altogether.
-None of the interviewed SMEs heard of
ECGE’s ‘exhibition coverage insurance
policy’.
-SMEs are said to be burdensome and risky
clients for ECGE to deal with.
-ECGE’s procedures are said to be difficult to
understand.
-Promoting ECGE’s services ought to be a
responsibility of ECGE; this could also be
through linking staff performance
evaluation systems to the volume of
achieved business as mentioned above.
10. ECGE said their insurance coverage mostly
relate to post-shipment stage i.e. an increase in
utilization of pre-shipment finance may
activate the use of ECGE’s services. But as
mentioned earlier, pre-shipment finance is
hampered by inadequate collateral provided by
the exporter (i.e. lack of export L/Cs and/or
guarantees from acceptable foreign banks and
countries).
-As mentioned earlier under item 3 of this
table, the constraints to banks’ provision
of pre-shipment finance could be reduced
through creation of EDCs, and through
more use of CGC’s services to guarantee
the pre-shipment finance.
-EDBE is to study ways of expanding the
network of correspondent foreign banks
that could open and/or confirm L/Cs
acceptable to the Egyptian banks.
-EDCs would be more suitable clients for
ECGE, and more able to understand its
procedures.
11. Weak utilization of AFREXIM’s services -Better export marketing in low-risk
by the banks due to inadequate export business countries i.e. in advanced economies
in general, inadequate awareness of their (which would also be more feasible by
33
services, and unacceptable bank guarantees EDCs than by SMEs).
and/or unacceptable country risk.
-Better product adaptation/tailoring to the
market needs of the advanced economies.
-Awareness enhancement for banks about
AFREXIM’s services.
12. Weak utilization of ATFP’s services by the -Awareness enhancement of ATFP’s
banks due to inadequate export business in services for both banks and exporters.
general, and inadequate awareness of their
services by both banks and exporters.
13. Egypt is not making adequate use of the
services of regional trade programs.
-Weak bank utilization of the services of
regional programs like Isl.DB, IAIGC and
ICIIEC, due to inadequate export business in
general, inadequate bank and exporter
awareness of their services, and unacceptable
bank guarantees and/or country risk.
-Awareness enhancement for banks and
exporters about the regional programs.
-Better export marketing in low-risk
countries.
-Better product adaptation to market needs
of the advanced (i.e. low-risk) economies;
which is more feasible by EDCs than
SMEs.
14. SMEs not familiar with regional trade
programs and the organizations that provide
export services e.g. ITP, EXPOLINK, Export
Promotion Center, etc..
-SMEs are not suitable for using the services of
regional trade programs.
-Human resource development at SME
level is needed and raising their awareness
of these programs.
-Using the regional trade programs’
services through EDCs.
15. The weak utilization of export credit
insurance/ guarantee, and weak utilization of
the services of some regional programs, was
attributed by EDBE to inadequate export
business in general as well as lack of customer
awareness.
It is our understanding that while Egypt’s
low export-preparedness is a problem that
is beyond EDBE’s capacity, the exporters’
awareness of export insurance/guarantee
facilities and of regional trade programs’
benefits ought to be part of EDBE’s role.
This should be undertaken by the bank’s
marketing officers and part of their
performance evaluation criteria.
-EDBE’s role is to include the provision of
specialized services to all banks such as
know-how and expertise, and awarenessenhancement in areas of: innovative
financial services, country risk, longerterm credit for exports to accommodate the
longer collection period compared to local
trade, a new culture of collateral suited for
exporters, etc.
16. Credit for market development and product
development is provided in other countries but
not in Egypt. Support is provided by MOFT for
exhibitions expenses (but this is unsustainable
and cannot cover all exporters’ needs)
This type of credit is to be studied (e.g. by
EDBE). It could be provided for specific
industries. It needs to be well controlled to
avoid misuse. (This credit is expected to
be more suitable to EDCs than to SMEs,
due to the former’s higher probability of
success in penetrating foreign markets and
meeting their needs, thus a better ability to
34
repay the credit).
17. SMEs lack awareness of export business
and the export finance products and
instruments.
Awareness enhancement / training for
SMEs in banking, export finance products,
L/Cs, custom clearance, shipping, etc.
-Counter trade is possible through EDCs
i.e. to import the inputs and export the
-Buyback agreements are not possible through final goods.
SMEs, they lack the necessary negotiation -Government pressure needed for buyback
agreements, as the government is a
skills.
significant importer.
18. Counter trade is not applicable to SMEs.
19. Consignment exports are too risky.
Regional marketing through regional
distribution centers/warehouses to be
established by EDCs and controlled by a
bank.
20. Most interviewed banks were not aware of
the factoring instrument.
Awareness enhancement for the banks
9.2 Gaps in Legal Aspects
Table 26 Gaps in Legal Aspects
1. Most of the interviewed banks were not
familiar with the new Export Law.
-This in a way reflects the low priority
given by banks to export finance. There is
a need to establish export Units in all
banks as recommended above, and to raise
banks’ awareness of the new Export Law.
2. Most of the interviewed SMEs were not Awareness-enhancement for SMEs is
familiar with the new Export Law.
needed.
3. Some interviewed organizations said the (Note that the importance of EDCs was
export law should stipulate the establishment of highlighted above in a number of items in
EDCs that are tax-exempted, as large joint this table.)
stocks with adequate financial and technical
resources, to purchase the local and imported
inputs for SMEs, supervise the manufacturing
process at SMEs, then export their output.
4. Most of the interviewed export-related Tax issues are to be addressed by the Tax
organizations criticized the new Export Law Law now under modification. Studies
indicate that tax exemptions do not
for not stipulating tax exemptions for exports.
necessarily have a significant effect on
encouraging investment. Special treatment
could be considered for some areas like in
other countries. SMEs, like other investor
groups in the society, would rather benefit
from streamlining the tax system and
easing tax collection procedures, as well as
35
ensuring consistency and predictability.
5. EDBE’s law stipulates the establishment of
an export information center. EDBE has one
that is inactive, but may be considering to reactivate it.
This may be duplicating ITP’s database.
EDBE’s resources are limited and could be
used in a number of other ways to support
exports and other banks as noted above.
6. EDBE’s law stipulates that it has seniority It is recommended to remove the seniority
rights to borrowers’ money, immediately next rights clause because it places the other
lenders in inferior security-position. Thus
to the rights of the Treasury.
some joint venture banks, that could
provide high quality services to exporters,
may refuse to deal with an exporter who
deals with EDBE as well. It is important to
encourage all banks to provide export
finance, not only EDBE.
7. The financial leasing law is not yet
implemented/ no authority in charge/ system
not yet established/ inadequate number of
leasing firms/ costs too high.
It is recommended to address these
constraints by a specialized body; this
instrument is said to be important for
specific sectors (and for medium rather
than small enterprises).
8. Industry-specific constraint: banks avoid
financing the information technology (IT)
sector because of its intangible nature –the bulk
of working capital needs are for payment of
wages, which banks avoid financing.
There is a need to develop a method of
financing IT sector against supply
contracts; it may be more likely with IT
EDCs than SMEs. EDBE could undertake
an initiative in studying this.
9.3 Indirect Factors affecting SME Access to Export Finance: Gaps and
Recommendations
Other indirect factors are highlighted in Table 26 below, given that a major constraint
to SME-utilization of export finance is the limited export business itself. The latter is
affected by cost-burdens encountered by exporters thus reducing their pricecompetitiveness in foreign markets, and quality-competitiveness in advanced
economy markets.
Table 27: Indirect Factors affecting SME Access to Export Finance: Gaps and
Recommendations
Gaps
Recommendations
1. Marketing constraints:
-Lack of financing of marketing activities e.g.
exhibitions, catalogs, etc.
-Marketing and catalog preparation are beyond the
financial capacity of SMEs.
-Lack of marketing training
-Lack of information about foreign markets
-EDCs are more capable of
marketing than SMEs.
-As noted in Table 25, if “credit for
market development” is introduced,
banks would be more likely to
provide it to EDCs than to SMEs,
due to EDCs’ higher probability of
success in penetrating foreign
36
markets. But this type of credit
would need to be well studied and
controlled, to ensure that exportation
actually took place and to ensure
that there is no corruption by the
employees who are in control of it.
2. Quality is not acceptable to foreign markets; SME- -Again, EDCs are capable of
products lack quality competitiveness in foreign studying the foreign market needs
and providing SMEs with advice
markets.
and technical assistance on the
needed product specifications.
3. SMEs lack access to technology.
Some suggested having at least one
technological park per governorate.
4. SMEs lack price-competitiveness in the foreign
markets (mostly due to high cost of finance, high
custom duties on imported inputs, custom delays,
sales tax on capital goods, etc).
-Custom delays were addressed in
the amended Custom Law; custom
duties on inputs as well as sales
taxes on capital goods are issues that
need to be addressed.
-It is said that if inputs are purchased
in bulk by EDCs, on behalf of a
number of SMEs collectively, some
quantity discounts could help reduce
costs thus allowing for offering sale
prices that are more competitive in
the foreign markets.
-Also custom delays may be avoided
by EDCs since they are large
enough to get ‘prime customer
service’ compared to SMEs, as well
as being more familiar with the
customs procedures.
5. The local selling price is more attractive to
exporters than the export price.
This is attributed by some studies to
the import tariffs that represent a
high level of protection, also noting
that sales’ taxes are levied on the
price duty-inclusive. There may be a
need to address this issue.
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10.0 SUMMARY OF RECOMMENDATIONS
(1) To formulate policies that encourage the establishment and growth of EDCs
whose owners / managers are highly experienced with export business and can deal
with the banks on behalf of the SMEs. State intervention is to work on keeping the
number of EDCs low to enable them to grow large. Thus the need for a selective
approach to EDCs through setting eligibility criteria that ensure a minimum scale of
operations. These criteria can also be used to distinguish EDCs that truly wish to
establish export marketing as their main activity from EDCs that are merely formed to
take advantage of any government export promotion incentives. (Policy makers are to
tap on the experience of chambers of commerce and industry, export promotion
organizations, research organizations, potential EDCs, etc.)
(2) Government support to EDCs is needed in both administrative and financial
aspects. The development of an export market by an EDC is not only cost-intensive
but also has a long gestation period and needs careful nurturing once a market has
been identified. State intervention could be in market development assistance (e.g.
some countries grant 60% of the cost of mounting an export delegation if the EDC is
involved in exporting SME products; also state financial assistance in market
development is needed for setting up offices/warehouses abroad, after-sales services
facilities, import and dispatch of samples, quality control, consultancy services, etc.
Special treatment for EDCs in import clearances to speed and facilitate import
procedures would help EDCs to efficiently supply their SMEs). It is important to give
the impetus to an EDC at its in initial years through the State’s recognition of EDCs’
special role for the economy by offering incentives that would curb the tendency of a
manufacturer to export directly and take over the market that was developed by an
EDC -for short-term gains6. (Note that the costs of marketing cannot be covered by
the margin /or sales commissions earned on only one export transaction to a new
market, but by a margin on on-going exports to that market).
Given that country risk is a major constraint to access to bank export finance, EDCs
are worth government support in view of their ability to export to low-risk countries
(i.e. advanced economies) and help their SMEs adapt their products to these markets’
needs. Also noting that the international Trading Houses usually demand quality
standards and ensured continuous supply. In those respects, Egyptian EDCs would be
most suitable counter-parts to the international Trading Houses.
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Some propose that the amount of incentives increase in correlation with the increase, if any, in the
EDC’s annual volume of exports. The government bodies in concern could also help by a) publicizing
the role of EDCs in promoting SME exports, and improving SMEs’ conviction of the benefits of
paying fees to EDCs b) encouraging dialogue between SMEs and EDCs, c) providing to EDCs the
membership in various advisory committees and trade delegations, and d) providing support to EDCs
in implementing counter-trade agreements with other countries whereby imports are paid for by
Egyptian exports.
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(3) Awareness enhancement is needed for the exporting SMEs and the banks, about
export finance products and support mechanisms including export insurance and
guarantee, as well as about the regional trade programs’ services and their terms and
conditions. There is also a need to establish Export Units in all banks and to raise
banks’ awareness of the new Export Law.
(4) EDBE is to work on maintaining a volume of export finance that is not decreasing
in absolute terms even if decreasing as a percentage of total portfolio. EDBE’s role is
also to include a) the provision of specialized services to all banks such as know-how
and expertise, and awareness-enhancement in areas of: innovative financial services,
country risk, a new culture of collateral suited for exporters, etc., b) to study ways of
expanding the network of correspondent foreign banks that could open and/or confirm
L/Cs acceptable to the Egyptian banks, c) to study the provision of special types of
credit such as the ‘credit for market development and product development’, and d) to
increase exporters’ awareness of export insurance/guarantee facilities and of regional
trade programs’ benefits (as a promotional activity that ought to be undertaken by the
bank’s marketing officers and part of their performance evaluation criteria).
As regards EDBE’s Law, it is recommended to remove the ‘seniority rights’ clause
because it places the other lenders in inferior security-position thus causing them to
refrain from lending to exporters who deal with EDBE.
(5) There appears to be a need for considering a capital increase for ECGE. Also to be
considered is the Treasury’s coverage of ECGE’s losses arising from political risks.
Promoting ECGE’s services ought to be a responsibility of ECGE; this could also be
through linking staff performance evaluation systems to the volume of achieved
business as mentioned above.
(6) Government pressure is needed for buyback agreements, given that the
government is a significant importer. Counter trade is to be encouraged through EDCs
i.e. to import the inputs and export the final goods.
(7) To secure long-term commitments by foreign buyers through alliances and/or
buyback agreements. Workshops to be hosted for international investors to facilitate
the establishment of joint-ventures in specific sectors. Support to these workshops to
be provided by ECS senior staff
(8) CGC to be encouraged to guarantee the pre-shipment financing (since ECGE
guarantee usually covers the post-shipment stage leaving a gap in pre-shipment
finance).
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