Access-To-Finance: an Analysis of Egyptian Firms

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by Ayman Ismail

Access-to-finance is a key aspect of entrepreneurial development as well as economic growth in emerging economies. As entrepreneurs grow their new ventures into larger companies, they need capital, beyond what can be provided through their personal and family savings. However, our analysis of Egyptian firms shows that the majority have limited access, especially small, fast-growing entrepreneurial firms.

So what’s the profile of companies that have greater access-to-finance and hence opportunities to grow?

We analyzed the Egyptian market as an example of the limitations that companies in the MENA region face, using data from the World Bank Enterprise Survey(1). In the following analysis, we profile the companies that have access-to-finance – defined as ability of companies to raise long-term commercial debt from commercial banks - in Egypt by variables such as the firm size, ownership, industry, location, and exporting status, and provision of training to employees to evaluate the impact of each factor on the ability of the firm to raise long-term finance.

 

Firm size: overall, 21.1% of firms in Egypt have access to long-term bank credit compared to 78.9% of that do not have access. Among the former, larger firms are more likely to have access (41.5%), compared to medium sized (19.1%) and smaller (13.7%) firms:

Table 1: Access-to-finance by firm size

 

Access-to-finance*

 

Firm size**

Yes

no

Percent of all firms

large(100 and over)

41.5%

58.5%

19.2%

Medium(20-99)

19.1%

80.9%

37.6%

small(<20)

13.7%

86.3%

43.2%

Grand Total

21.1%

78.9%

100%

*   defined as companies that have long term debt.
** defined by the number of employees per company.

 

Firm ownership: foreign private firms and government/state owned enterprises have much higher access-to-finance (48.4% and 36.0% respectively) compared to domestic private firms (19.9%). However, since the domestic private firms constitute more than 95% of the total sample, it is likely that they represent mostly small and medium enterprises that have limited access-to-finance.

Table 2: Access-to-finance by firm ownership

 

Access-to-finance

 

Percentage of firm owned by:

Yes

no

Percent of all firms

Domestic private firms

19.9%

80.1%

95.2%

Foreign private firm

48.4%

51.6%

2.7%

Government/state

36.0%

64.0%

1.7%

Other types of owner

49.2%

50.8%

0.3%

Grand Total

21.1%

78.9%

100%

 

Industry: large capital-intensive industries such as chemicals, pharmaceuticals and food have better access-to-finance compared to industries such as leather, garment or furniture which are often managed as small and medium enterprises.

Table 3: Access-to-finance by industry

 

Access-to-finance

 

Industry

yes

No

Percent of all firms

Other manufacturing

32.6%

67.4%

4.4%

Food

29.5%

70.5%

16.0%

Chemicals and pharmaceutics

27.7%

72.3%

6.7%

Textiles

22.0%

78.0%

14.4%

Metals and machinery

20.8%

79.2%

17.2%

Non-metallic and plastic materials

20.7%

79.3%

17.3%

Auto and auto components

15.4%

84.6%

1.3%

Wood and furniture

13.8%

86.2%

5.9%

Garments

12.5%

87.5%

12.3%

Leather

4.5%

95.5%

4.5%

Grand Total

21.1%

78.9%

100.0


Firm location: firms in large cities (other cities>1 million) have better access-to-finance than the capital! This is contrary to our initial hypothesis that firms located in the capital have better access. A possible explanation is that the capital city includes a large number of small and medium firms that have limited access, compared to other cities that have more “industrial zones” and larger size companies.

Table 4: Access-to-finance by firm location

 

Access-to-finance

 

Location

yes

no

Percent of all firms

Capital city

14.4%

85.6%

29.2%

Other city >1 mln

23.3%

76.7%

20.2%

250k-1 mln

20.5%

79.5%

16.1%

50k-250k

15.9%

84.1%

4.4%

(blank)

27.2%

72.8%

30.2%

Grand Total

21.1%

78.9%

100%

 

Exporter status: firms that export have more than twice as much better access-to-finance than non-exporters. This is consistent with our hypothesis because exporters tend to deal more often with banks to receive letters of credit and other instruments related to the exporting process.

Table 5: Access-to-finance by firm exporter status

 

Access-to-finance

 

Exporter status

Yes

no

Percent of all firms

Exporter

39.9%

60.1%

15.2%

Non-exporter

17.7%

82.3%

84.8%

Grand Total

21.1%

78.9%

100%

 

In terms of the firm providing training for permanent employees: firms that provide training to their employees have significantly better access-to-finance (42.1% vs. 18.4%). This may be a proxy to how professional their operations are, and may also be a proxy to firm size.

Table 6: Access-to-finance by firm-provided training

 

Access-to-finance

 

Firm provides training for permanent employee

Yes

No

Percent of all firms

Yes

42.1%

57.9%

12%

No

18.4%

81.6%

88%

Grand Total

21.1%

78.9%

100

 

So what does this profile mean? While we can not conclude causal relationships from these distributions, it is obvious that access-to-finance is limited; with large companies, especially foreign and state-owned, having a strong advantage. SMEs and small entrepreneurial ventures, especially ones in rural areas and in labor-intensive industries are disadvantaged. These companies with no access-to-finance are likely to have slower or limited ability growth, and hence to generate more jobs and higher economic growth level at the macro-level. This analysis does not even include the informal economy, which constitutes a significant part of the GDP and employment in Egypt, and is likely to have no access-to-finance whatsoever.

 


(1) The World Bank Enterprise Survey was conducted in Egypt as part of an “investment climate assessment” study conducted by the World Bank for the Egyptian government in 2004/5, and surveyed a random sample of ~1,000 Egyptian companies covering both manufacturing and services sectors. http://www.enterprisesurveys.org.

 

Ayman IsmailDr. Ayman Ismail is a Co-Founder and Managing Partner in Enovio, a management consulting firm operating in the US and the Middle East. Enovio advises clients in areas of strategy, technology and operations. In addition, he is a Co-Founder and member the Board of Directors of Nahdet El-Mahrousa, a leading NGO incubating social entrepreneurs and social ventures targeting economic and social development issues in Egypt.

Prior to that, Ayman was a consultant in McKinsey & Company’s Business Technology Office, based in New York for several years. He has advised clients in leading Fortune 100 companies, government agencies, and non-profits, serving senior management on key organization, operations and technology issues. Ayman has also consulted and conducted research for international organizations such as the World Bank and UNCTAD, as well as multiple US government agencies.

Ayman received his PhD in International Economic Development at the Massachusetts Institute of Technology (MIT), and he is also currently a Research Fellow at the Kennedy School of Government in Harvard University, where he conducts research on financial and economic development in Egypt and the MENA region.

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