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

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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 6

3.1 Export Finance Products 6 3.1.1 Pre-shipment Short Term Finance 7 3.1.2 Export-Project Financing 7 3.1.3 Post-shipment Financing 7 3.1.4 Buyer’s Credit 7 3.1.5 Consignment Exports 7 3.1.6 Barter and Counter-Trade 8 3.1.7 Buyback Agreements 8 3.1.8 Financial Leasing 8 3.1.9 Partnerships and Joint Ventures 8 3.1.10 Credit for Market Development and Product Development 8 3.2 Export Development Bank of Egypt (EDBE) 8 3.3 Support Institutions/Mechanisms and Regional Trade Programs 9 3.3.1 Export Credit Guarantee Company of Egypt (ECGE) 9 3.3.2 The Credit Guarantee Corporation (CGC) 9 3.3.3 Social Fund for Development (SFD) 9 3.3.4 African Export-Import Bank (AFREXIM) 9 3.3.5 The Arab Trade Finance Program (ATFP) 10 3.3.6 European Bank for Reconstruction and Development (EBRD) 10 3.3.7 Inter-Arab Investment Guarantee Corporation (IAGC) 10 3.4 Banks’ Rejection of Export Finance Requests 11 3.5 Banks’ Views on SMEs’ Lost Export Opportunities 11 3.6 Banks’ Views on SMEs’ Awareness of Export Finance Products and Institutions

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3.7 Foreign Donor Agencies 11 3.7.1 Industrial Modernization Program (IMP) 11 3.7.2 Canadian International Development Agency (CIDA-INC) 12 3.7.3 JETRO 12 3.7.4 IESC 12 3.7.5 UNDP 12 3.7.6 Agriculture-Led Export Business (ALEB) 12 4.0 Demand for Export Finance in Egypt 12

4.1 Export-related Organizations 12 4.1.1 Organizations’ Feedback on Export Finance Products 12

4.1.2 Organizations’ Feedback on Export Support Institutions and Regional Programs

16

3

4.1.3 Organizations’ Feedback on Lost Export Opportunities and SME Awareness

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4.2 SMEs 19 4.2.1 SME Utilization of Bank Finance 19

4.2.2 SME Awareness of Export-Finance Products, Institutions and Programs

20

4.2.3 SMEs’ Reasons for Losing Export Opportunities 21 4.2.4 SMEs’ Assessment of the Importance of Finance for Export

Activity 21

5.0 Assessment of Export Development Bank of Egypt (EDBE) and Export Credit Guarantee Company of Egypt (ECGE)

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5.1 EDBE 22 5.2 ECGE 22

6.0 General Legal Environment Supporting Exports 23 6.1 New Export Law 23 6.2 Export Development Bank of Egypt’s Law 24

7.0 Other Countries’ Experiences 24

7.1 India 24 7.2 Turkey 25 7.3 Tunisia 25 7.4 Singapore 26 7.5 Mexico 26 7.6 Italy 26 7.7 Canada 27 7.8 United States of America 28

8.0 Best Practices with special reference to Export Development Companies (EDCs)

31

9.0 Proposed Solutions and Policy Recommendations 32

9.1 Gaps in Supply and Demand of SME Export Finance and Proposed Solutions and Policy Recommendations

32

9.2 Gaps in Legal Aspects 35 9.3 Indirect Factors Affecting SME Access to Export Finance: Gaps and Recommendations

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10.0 Summary of Recommendations 38 Ministry of Foreign Trade Reports and Publications 40

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LIST OF ABBREVIATIONS

AFREXIM African Export-Import Bank ATFP Arab Trade Finance Program CGC Credit Guarantee Corporation CIDA Canadian International Development

Agency ECGE Export Credit Guarantee Company of

Egypt ECS Egyptian Commercial Service EDBE Export Development Bank of Egypt EDC Export Development Company EEPC Egyptian Export Promotion Center EU European Union FOB Free on Board FX Foreign Exchange EXIM Export-Import Bank GOEIC General Organization for Export and

Import Control IAIGC Inter-Arab Investment Guarantee

Corporation ICIIEC Islamic Corporation for Investment

Insurance and Export Credit IMC Industrial Modernization Center IMP Industrial Modernization Program Isl.DB Islamic Development Bank IT Information Technology ITC International Trade Center ITP International Trade Point L/C Letter of Credit L/G Letter of Guarantee MOF Ministry of Finance MOFT Ministry of Foreign Trade SFD Social Fund for Development SMEs Small and Medium Enterprises WTO World Trade Organization

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LIST OF TABLES TABLE PAGE Table 1: Banks’ Feedback on ‘Credit for Market Development and

Product Development’ 8

Table 2: Banks’ Reports on Reasons for Rejection of Applications 11 Table 3: Banks’ Reports on Reasons for Lost Export Opportunities 11 Table 4: Organizations’ Feedback on Pre-Shipment Short-term Financing 12 Table 5: Organizations’ Feedback on Export Project Financing 13 Table 6: Organizations’ Feedback on Post-Shipment Financing 13 Table 7: Organizations’ Feedback on Factoring, Discounting and Forfaiting

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Table 8: Organizations’ Feedback on Specialized Factoring/Forfaiting Firms

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Table 9: Organizations’ Feedback on Barter and Counter Trade 14 Table 10: Organizations’ Feedback on Buyback Agreements 15 Table 11: Organizations’ Feedback on Financial Leasing 15 Table 12: Organizations’ Feedback on ‘Credit for Market Development and Product Development’

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Table 13: Organizations’ Feedback on ‘Partnerships’ 16 Table 14: Organizations’ Reported Constraints on Using ECGE 17 Table 15: Organizations’ Comments about Regional Trade Finance Programs

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Table 16: Organizations’ Views’ on SME-Awareness of Export Finance Products and Export Institutions

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Table 17: Organizations’ Comments on Reasons for Lost Export Opportunities

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Table 18: Volume of Business of the Enterprises 19 Table 19: Use of Bank Finance by Different Sizes of Enterprises 19 Table 20: Reasons for SME-Dissatisfaction with the Utilized Bank Finance 20 Table 21: Reasons for SME Non-Utilization of Bank Finance 20 Table 22: SMEs’ Awareness and Usage of Export Finance Products 20 Table 23: SMEs’ Awareness and Usage of Support Institutions, Export Organizations and Regional Trade Programs

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Table 24: SMEs’ Reported Reasons for their Lost Export Opportunities 21 Table 25: Gaps in Supply and Demand of SME Export Finance and the Proposed Solutions and Policy Recommendations

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Table 26: Gaps in Legal Aspects 35 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.

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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 export-oriented 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

Number

Could be misused 5 cases Good idea; to be implemented by banks rather than programs (i.e. for client-screening purposes)

4 cases

Needs to be well-controlled 2 cases For specific industries: as a pilot / to compare performance between industries 2 cases To be temporary 1 case To be implemented with EDCs, rather than SMEs 1 case If implemented, a heavy misuse penalty is needed 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. EDC-usefulness 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. Pre-shipment 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 pre-shipment 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

Number

Client’s lack of experience in exporting 8 cases High country risk that cannot be guaranteed 5 cases Client’s poor financial standing 2 cases Inadequate FX funding sources at the bank 2 cases Inadequate collateral 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

Number

Unacceptable product quality 8 cases Lack of price competitiveness in foreign markets 7 cases Small production capacity 7 cases The local price is more attractive 4 cases High risk foreign importers/countries proposed by local exporters 4 cases Lack of information on foreign markets 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. quality-upgrade, 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 export-related 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

Frequency

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.

6

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

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.

5

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.

7

Inadequate FX at banks for import of inputs 2 SMEs are too small for banks and not worth the administrative burden, also more risky thus the excessive collateral requirements.

2

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.

1

Industry-specific constraint: banks avoid financing the agricultural sector because of high risks of perish and price fluctuations.

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.

4

Excessive collateral requirements. 4 Banks’ reservation is understandable given that bank credit officers are often accused of bribery in case of client default in repayment.

2

High interest rates (2 of the cases added that there were no preferential rates or priorities for export projects).

4

Commercial banks are not suitable for project finance; there is a need for investment banks.

3

Certain programs target project finance, but they are not adequately publicized. 1 Table 6: Organizations’ Feedback on Post-Shipment Financing

Comment

Frequency

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.

5

High interest rate. 5 EDBE is short of financial resources. 1 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.

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.

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Table 7: Organizations’ Feedback on Factoring, Discounting and Forfaiting

Comment

Frequency

Aval from foreign banks’ is costly and hard to obtain, (one case said nevertheless it is important to obtain it for exporter’s security).

3

Local banks refuse the foreign banks’ guarantee because of high country-risk / this also applies to EDBE.

3

Lack of financial institutions linked to the international institutions that guarantee deferred payment.

1

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.

1

Banks avoid SMEs and clients with no track record with the bank. 2 These financial tools should be provided to EDCs rather than directly to SMEs. 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

Frequency

Specialized firms are needed because they would be more flexible than banks –banks are too regulated /and because these tools need specialization and high-level training.

4

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.

2

Banks can do it, no need for firms. 1 There are branches of German forfaiting firms here. 1 These tools are not suitable for SMEs in the first place. 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).

5

This is not applicable to SMEs / it needs a network. 5 Possible through EDCs: to import materials and export final goods. 2 It has procedural complications e.g. the quantity to be imported under a certain export transaction may exceed the needs.

2

Important among entrepreneurs not among countries, with a need for a special firm to match between parties and to control the prices.

1

Only few Egyptian goods are exportable. 1 Important if the proceeds are paid to the exporter in FX. 1 Useful to SMEs who export furniture because wood is imported. 1

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Table 10: Organizations’ Feedback on Buyback Agreements

Comment

Frequency

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.

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SMEs will not be able to negotiate it, they lack the necessary skill. 2 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.

5

Table 11: Organizations’ Feedback on Financial Leasing

Comment

Frequency

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.

9

The costs are too high. 6 Unsuitable for most SMEs / may be for medium but not small ones. 2 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.

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

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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

Frequency

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 joint-ventures 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).

12

Useful for large firms but not SMEs / SMEs are not qualified for it. 4 Difficult to implement because the foreign firm will not agree to provide part of its market share to the Egyptian exporter.

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.

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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).

5

High country-risk is rejected / should be accepted at higher rates (1). 3 ECGE is undercapitalized thus cannot serve many exporters (one case said it gives priority to EDBE’s clients only).

2

ECGE has a system that is difficult to understand / long procedures. 2 It is a burden/ risk for ECGE to deal with SMEs, this should be through EDCs. 2 SMEs do not know about it. 1 ECGE’s requirements are difficult to meet, L/Cs are required. 1 Coverage is not 100%. 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.

5

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).

6

Their services are available to public firms only, and only through public banks or EDBE.

3

Our negotiations are not adequate/ the programs’ conditions may not be favorable.

2

Dealing with programs should be through EDCs, SMEs are small. 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.

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Table 16: Organizations’ Views on SME-Awareness of Export Finance Products and Export Institutions

Comment

Frequency

There is this lack of awareness 12 This could be the case. 3 SMEs are aware / but the financial products are inadequate (1). 2 Table 17: Organizations’ Comments on Reasons for Lost Export Opportunities

Comment

Frequency

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.

14 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).

11

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.

7

Lack of information about foreign markets. 4 SMEs have no specific parent organization to handle their matters. 3 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.

2

Quality is not acceptable to foreign markets. 4 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.

2

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.

2

Lack of trained exporters. 2 Lack of access to technology / there should be at least one pilot technological park in each governorate.

2

Laborers quit after they acquire the skill and join another competitor firm. 1 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.

1

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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 domestic-foreign 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) Total Sales (local sales + exports) Exports only below 1,000,000 2 cases 4 cases 1 to below 2 million 2 cases Nil 2 to below 5 million 3 cases 5 cases 5 to below 10 million 6 cases 2 cases 10 million 2 cases 1 case above 10 million 3 cases 3 cases

Total: 18 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

Use bank finance

Do not use bank finance

Total

Below 50 6 6 12 50 -- 99 2 1 3 100 and above 5 5 10

total 13 12 25 5 Case-study type of interviews were conducted with 25 enterprises, generally medium-sized and engaged in export activity.

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Table 20: Reasons for SME-Dissatisfaction with the Utilized Bank Finance

Reason Frequency high cost of finance: interest/ correspondence charges/ contract stamp, etc

4

excessive collateral requirements/ thus less obtained finance than needed 3 complicated procedures 3 shortage of foreign exchange (FX) available at banks. 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).

5 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).

4 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)

3

4.2.2 SMEs’ Awareness of Export Finance Products, Institutions and Programs The interviewed SMEs were largely unaware of export finance products and export-related 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

# Respondents aware of the

product

# Respondents that need it /use

it

Views

Discounting/ forfaiting 7 (28%) Nil -- Factoring Nil Nil -- Consignment Exports 1 (4%) Nil Too risky Counter trade

7 (28%)

Nil

Could increase exports, but to be run by government (2)

Financial Leasing 3 (12%) Nil -- Table 23: SMEs’ Awareness and Usage of Support Institutions, Export-Organizations and Regional Trade Programs

Institution / Program

# Respondents

aware of it

#Respondents that use it

Views International Trade Point (ITP)

12 (50%)

4 (16%)

The 4 users benefited by getting information on foreign importers

EXPOLINK 6 (24%) 2 --

21

Export Promotion Center

14 (55%)

2

--

Egyptian Union of Exporters

4 (16%)

nil

--

ECGE

18 (72%)

3

-the 18 cases heard of ECGE but unaware of the provided support.

CGC -- -- -- Isl.DBank 1 (4%) -- -- other programs mentioned earlier

--

--

--

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.

12

Prices are not competitive in foreign markets (most considered it as the most serious constraint, including some that reduced their exports as a result).

9

Better prices in the local market. 5 Lack of information about foreign markets. 5 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.

8

High custom duties on imported components. 1 Small production capacity. 1 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 half-tanned (or raw) rather than tanned, because the latter has higher value added.

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

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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 know-how 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

23

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.

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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

25

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.

26

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.

27

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 Can-EDC 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

28

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 out-of-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

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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.

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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.

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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).

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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 to provide pre-shipment short-term financing to first-time exporters, and only if they were existing producers. Same with post-shipment finance instruments like discounting/ forfaiting.

EDCs’ owners / managers are highly experienced with export business and can deal with the banks on behalf of the SMEs.

3. Lack of collateral for pre-shipment finance: Most interviewed banks said they required an export L/C as a condition for providing short-term 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

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banks, there is a need for investment banks. -More partnerships and joint ventures are needed, for opening up foreign markets.

investors for facilitation of joint-venture establishment in specific sectors. -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. -EDCs would be more suitable clients for ECGE, and more able to understand its procedures.

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.

11. Weak utilization of AFREXIM’s services by the banks due to inadequate export business in general, inadequate awareness of their

-Better export marketing in low-risk countries i.e. in advanced economies (which would also be more feasible by

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services, and unacceptable bank guarantees and/or unacceptable country risk.

EDCs than by SMEs). -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 banks due to inadequate export business in general, and inadequate awareness of their services by both banks and exporters.

-Awareness enhancement of ATFP’s services for 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 awareness-enhancement in areas of: innovative financial services, country risk, longer-term 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

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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.

18. Counter trade is not applicable to SMEs. -Buyback agreements are not possible through SMEs, they lack the necessary negotiation skills.

-Counter trade is possible through EDCs i.e. to import the inputs and export the final goods. -Government pressure needed for buyback agreements, as the government is a significant importer.

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 familiar with the new Export Law.

Awareness-enhancement for SMEs is needed.

3. Some interviewed organizations said the export law should stipulate the establishment of EDCs that are tax-exempted, as large joint 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.

(Note that the importance of EDCs was highlighted above in a number of items in this table.)

4. Most of the interviewed export-related organizations criticized the new Export Law for not stipulating tax exemptions for exports.

Tax issues are to be addressed by the Tax Law now under modification. 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 and easing tax collection procedures, as well as

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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 re-activate 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 rights to borrowers’ money, immediately next to the rights of the Treasury.

It is recommended to remove the seniority rights clause because it places the other lenders in inferior security-position. Thus 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 price-competitiveness 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

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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-products lack quality competitiveness in foreign markets.

-Again, EDCs are capable of studying the foreign market needs and providing SMEs with advice 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.

6 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).