Egypt's new law on entrepreneurship and microbusinesses elicits mixed feelings

"This law marks a very encouraging leap. Is it enough? Of course not, but we can say it is a good start" said Hassan El Shafei, the head of the SME committee at the Egyptian Businessmen’s Association

  
Image used for illustrative purpose. Businessman show analyzing report.

Image used for illustrative purpose. Businessman show analyzing report.

Getty Images/ Boonchai Wedmakawand

Recent legislation aimed at boosting entrepreneurship and microbusinesses as well as small and medium-size enterprises has met with mixed reactions in Egypt’s business circles.

In July, the Egyptian parliament passed a 109-article bill that lays out a detailed regulatory framework for MSMEs, promises a set of new incentives for entrepreneurs and investors, and formalizes Egypt’s prolific informal microbusinesses.  

“This law marks a very encouraging leap. Is it enough? Of course not, but we can say it is a good start,” said Hassan El Shafei, the head of the SME committee at the Egyptian Businessmen’s Association. 

The much-awaited legislation stipulates that MSME owners must be granted exemptions from tax and registration fees. It also grants them easier access to real estate and promises a full refund of infrastructure expenses for manufacturing businesses.  

“I believe the most important thing about the law is that it grants tax cuts to any businessman or ordinary individuals who decide to invest their profits in SMEs. This will automatically encourage investors to invest in that sector,” said El Shafei. He added that his group hopes to raise the SMEs currently “meagre” contribution to Egypt’s GDP from 25 to 60 percent over the course of the next five years.  

In the new law, Egyptian lawmakers acknowledged entities such as accelerators and incubators for the first time, granting them special monetary privileges in order to promote entrepreneurship.  

“The law is timely and needed, but it is not as customized to different business sectors as it should be. I am a businessman who works in service; the law does not cater to me,” said Abdellatif Olama, Chief Growth Officer at Altibbi, a telehealth company. “In Egypt, if you do not produce a physical product, you receive less attention.”

Olama also argued that the law fell short of stressing the role of the state in contributing to creating business unicorns. “The law is missing that extra push that can make local or regional champions. … [Entrepreneurs] need a lot of support and resources as well as alliances that can only be built through states.”  

In recent years, Egypt’s monetary policies have been geared towards promoting SME growth. In 2015, the Central Bank of Egypt launched a four-year initiative that obliged banks operating in the Egyptian market to direct at least 20 percent of their loan portfolio to SMEs. The CBE also capped rates for SME lending at low levels, ranging from 5 percent to 12 percent, depending on the firm’s size. Earlier this year, the CBE’s governor, Tarek Amer, announced that the initiative would be extended for another four years. 

The new law provides a precise definition of microbusinesses and SMEs based on annual turnovers or, in the case of manufacturing enterprises, assets value. 

“We did not have any solid definitions for these groups before that,” said El Shafei. “The CBE did not give clear instructions as to who these groups were. Each bank was coming up with its own definition of what is ‘small’ and what is ‘medium’.”   

However, El Shafei noted that the law has been silent on the hefty loan conditions set by banks. “We need a change of mentality. Anyone who shows potential and comes up with a good business plan should be assigned a bank consultant and granted a loan with no collateral.” 

To draw more investments into SMEs from local non-bank financial entities, the law has given investors priority in asset distribution in case an enterprise is liquidated.  

“Under previous laws, sovereign debts, including tax and tariffs, had top priority, followed by mortgage debt,” Mostafa Moussa, a corporate lawyer, explained. “Investors’ share always came last.”  

Moussa added that the law can encourage funding agencies to lower their collateral requirements and hence reduce pressure on entrepreneurs by minimizing investment risks; however, many of Egypt’s most active venture capital firms might not benefit from these privileges because they do not meet the legal definition of investment funds as coined by the law.  

To ease bureaucratic hurdles, the law grants the Micro, Small, and Medium Enterprises Development Agency (MSMEDA), the government body in charge of overseeing MSMEs, a full mandate to issue all required licenses to newcomers.   

Moussa, however, noted that that the registration process currently takes at least 18 months. “The agency will act as a one-stop shop. However, the law will be put to the test when people actually start applying for licenses. We will see how long it will take them to receive approvals.”

(Reporting by Noha El Hennawy, editing by Seban Scaria)

(seban.scaria@refinitiv.com)

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