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Tuesday, 23 February 2021

MSMEs will have an easier time getting bank finance, thanks to the CBE

SMART POLICY- Banks are now required to increase micro, small, and medium enterprises’ share of their loan portfolios by five percentage points to 25%, under a Central Bank of Egypt (CBE) directive (pdf). The move is expected to translate into an extra EGP 117 bn in funding for 120k MSMEs by the end of 2022, the CBE said. Small enterprises alone will be allocated 10% of banks’ lending portfolios — or around EGP 55 bn. Banks will be required to set a plan to achieve these levels of funding distribution, and report their progress on a quarterly basis. The directive is part of the CBE’s financial inclusion strategy, launched in 2019, which outlines SME support as one of its key pillars.

MSMEs’ credit scores will also be evaluated and assigned using behavioral scoring models, rather than financial statements, under the CBE’s instructions. Banks will be required to devise their own behavioral scoring system, which should factor in risk, be adaptable to businesses providing different products and services, and be reviewed regularly. This model can only be used for businesses whose total annual sales are less than EGP 20 mn. Loans should also only be provided in EGP.

OTHER REGULATORY CHANGES FOR LENDING TO MSMEs: The CBE also decided to up the relative risk weight of banks’ investments in funds of funds and SME-focused funds to 20% from 0%, Hapi Journal reports. Under the new regulations, banks will only be allowed to invest up to 10% of their capital in a single fund. In the event that limit is exceeded, the excess must be deducted from its Tier 1 capital when calculating its capital adequacy ratio. Banks’ investments in SME-focused equity funds count toward fulfilling their quota of SME support, according to a 2019 decision.

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