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.