SME and Entrepreneurship Policy in Egypt

Egypt’s business population is dominated by MSMEs, and its MSME population is dominated by retailers. There are strong opportunities to raise the productivity of the MSME population by fostering a shift towards more productive sectors, reducing the size of the informal sector and increasing innovation and export performance. In terms of entrepreneurship, Egypt has a healthy stream of high potential start-ups as measured by the number of new businesses that are successful in obtaining venture capital investment. However, outside of these top performers, there is a large gap between entrepreneurial intentions and entrepreneurial actions, suggesting more can be done to enable Egyptians to create and sustain new businesses.

Despite the young and skilled population, rising public investments in education and research, and a burgeoning venture capital industry, the realisation of Egypt’s considerable entrepreneurial potential is being limited by bottlenecks in the business environment. Reducing the cost of regulatory compliance is key to encouraging the creation of new businesses and the formalisation and growth of existing businesses. It is also important to acknowledge the difficulties that current macroeconomic challenges are bringing to MSMEs and entrepreneurs. Other priorities for policy include further reducing the role of state-owned enterprises to enable more competition and private sector development, building on the government’s state ownership policy, and deepening and diversifying financial markets to enhance MSMEs’ and entrepreneurs’ access to finance. It is important to note that the public authorities are taking steps to address these issues, for example through the government’s state ownership policy, as well as the continued efforts of the Central Bank of Egypt (CBE) and the Financial Regulatory Authority (FRA) to support access to finance for MSMEs and entrepreneurs.

Many public entities in Egypt are active in supporting MSMEs and entrepreneurs. The overall effectiveness of this support provision can be improved by establishing governance structures that increase alignment and co-ordination in the design and delivery of SME and entrepreneurship policies. A Ministerial Group for Entrepreneurship has recently been established with a mandate to co-ordinate government efforts to implement supportive policies for start-ups, assist start-ups in accessing international markets, and link innovative solutions provided by new businesses to sectoral challenges. However, its mandate does not address SME policy issues, per se. Further emphasis on the policy agenda for start-ups was solidified by the establishment of the Permanent Entrepreneurship and Startup Unit in the Prime Minister’s Office, chaired by the General Authority for Investment and Free Zones (GAFI). Additional efforts may be needed to ensure cross-government co-ordination on SME policy issues and to strengthen the effective realisation of MSMEDA’s policy co-ordination role, given the horizontal nature of SME development policies across ministries, agencies and departments.

Egypt has introduced a range of different support programmes targeting MSMEs and entrepreneurs. In particular, there is an impressive number of initiatives and programmes to foster the innovation ecosystem and support innovative start-ups. However, in some areas, for example SME greening or workforce training, programme support could be further developed. The biggest overall area for improvement in most of the MSME programme areas is in co-ordination. Improved co-ordination could be achieved by designating umbrella organisations or encouraging the formation of industry and professional associations, such as an association of incubators and accelerators, or an association of SME business advisors, mentors and consultants. These associations can become important institutional partners with the government.

The geographical size and diversity of Egypt results in widely varying conditions for SME and entrepreneurship development. This spatial differentiation warrants a locally-sensitive policy approach. MSMEDA’s network of regional offices provides the potential framework for delivering policies and programmes that are more tailored to local conditions and potential, though they require greater autonomy and resources than they have currently in order to do this.

Egypt's digital readiness is commendable, especially compared to other countries in the MENA region. This can be attributed to advancements in internet speed, technology absorption by firms, and the expansion of government online services. However, the use of digital tools varies significantly among businesses. While a majority use computers and the internet for basic operations, more sophisticated uses like research and development or human capital development are less prevalent. This uneven digital readiness signals the need for strategic initiatives focused on specific sectors and regions.

Fintech products and services hold promise as an avenue for closing the SME financing gap in Egypt. The development of the fintech sector is accordingly a key priority for the CBE and the FRA, with the former having established a dedicated department for fintech and innovation. Fostering the expansion of the fintech sector will require a more adaptive and agile regulatory framework, which should take into account enterprises’ size and contribution to system risk when defining their regulatory and licensing requirements. It is also important to grow the digital payments ecosystem in order to provide the data and digital footprint needed to facilitate the development and uptake of fintech solutions.

A broad range of recommendations are offered in the report. Some of the key recommendations from each of the chapters include:

• Develop reliable and recurring statistics on SME and entrepreneurship performance and characteristics, to be published on an annual basis.

• Introduce a mandatory “SME Test” to determine the impacts of proposed regulatory or legislative changes that could impact SMEs and entrepreneurs and reinstate the regulatory guillotine to review, eliminate and streamline the existing stock of business regulations.

• Increase the capacity of the Egyptian Regulatory Reform and Development Activity (ERRADA) to provide the required support to public entities in conducting SME tests and regulatory simplification.

• Establish an entity responsible for evaluating universities and research institutions, with “third mission” activities integrated into evaluation criteria and incentives, including promotion of entrepreneurship and knowledge transfer to SMEs.

• Create a mechanism for monitoring the implementation of the MSME Law and the take-up of its various incentives and prepare an annual implementation report with inputs from the relevant ministries and programme administrators.

• Enhance co-ordination in the design and delivery of MSME policy by establishing a system in MSMEDA for ensuring full co-operation of ministries and agencies in the implementation and monitoring of the new MSME strategy.

• Review the capitalisation base of the Egyptian Credit Guarantee Company (CGC) with a view to expanding access to credit guarantees among micro and small enterprises. Consult on diversifying the CGC’s guarantee product offerings to align with government priorities, for example to stimulate innovative start-ups, SMEs in priority sectors, e-commerce or digitalisation.

• Introduce tax incentives to financial investors and venture capital firms to reduce their risks in investing in new start-ups and early-stage enterprises.

• Improve the competency levels of Egyptian incubators by working with experienced incubators to develop a set of standards and certification processes for incubators at different levels of development that ensures quality while still facilitating innovation within incubators.

• Develop a women’s entrepreneurship strategy within the National MSME Strategy that is under development, outlining the related targeted actions under each pillar of the strategy. The targeted actions should include the digitalisation of women-owned/led MSMEs and the greening of their businesses. This should be done jointly by MSMEDA and NCW.

• Increase the number of branches, resources, and staff working within MSMEDA’s regional offices. This increase in staff should be accompanied by training, particularly in the application of diagnostic skills to better understand the needs of local MSMEs and entrepreneurs.

• Introduce and evaluate a pilot capacity building programme to support less developed regional offices to improve their capabilities in supporting local MSMEs and entrepreneurs.

• Establish a national SME digitalisation strategy that can provide a comprehensive roadmap for SMEs in Egypt to embrace digital technologies effectively, led by MSMEDA.

• Provide incentives for traditional MSMEs to digitalise, including financial support programmes (digital vouchers) and tax incentives.

• Pilot a financial support programme to encourage MSMES to undertake advanced digitalisation projects and provide targeted financial assistance to MSMEs that are pursuing digitalisation initiatives with a higher level of risk or complexity.

• Improve the regulatory environment for fintech companies, including by implementing tiered regulatory and licensing procedures for fintech companies to facilitate market entry and enabling a lower regulatory burden for smaller financing providers.

• Foster the digital payments ecosystem, including by providing incentives for the use and acceptance of digital payments or the digital payment of utility bills, as well as digital financial literacy training or education programmes, particularly for women and MSMEs.