Background

The Alexandria Business Association (ABA) is non-profit foundation that uses an innovative approach to supply small and micro enterprises (SMEs) with credit and to support their growth. In 1988, USAID endowed ABA with a collateral fund of $8,000,000 against which the foundation could borrow Egyptian pounds to on-lend to clients, and provided it with a grant of $2,000,000 for operating expenses until the foundation could cover its own costs loan recovery. The ABA has tailored its methodology to best meet the special needs of SMEs: the foundation offers small loan sizes with few prerequisites, flexible loan repayment conditions with short loan terms, and hands-on technical assistance to clients.

Narrative

While small and micro enterprises constitute a substantial sector of the Egyptian economy representing at least 40% of total industrial employment, the paucity of credit available to micro-entrepreneurs has significantly constricted their potential for growth. These micro-entrepreneurs, who work primarily in the areas of wood and metal works, the production of leather and textile goods, and the manufacturing of building materials, consistently list limited access to credit as a major obstacle to the growth of their businesses. In fact, a study initiated and financed by USAID in 1988 on SMEs in Alexandria revealed that the primary hindrance to the productivity of this sector was a lack of access to formal credit. A later survey of 323 SMEs in Egypt, conducted in 1992, corroborated this finding: over 95% of both male and female respondents singled out a lack of working capital as either the most important or second most important constraint faced at business start-up.

In response to this situation, USAID sought to launch an SME project that would provide credit and business management assistance to SMEs. The Alexandria Business Association (ABA), a private non-profit NGO, run by a Board of Directors from the local business community, volunteered to act as the institution anchor for the program. ABA was an ideal location to initiate the SME program because, as an organization that began as a committee to promote business interests and then expanded to take on community service projects, it combined business know-how with institutional commitment to community development.

In mid-1989, USAID and ABA signed a cooperative agreement in which USAID agreed to endow ABA with a U.S. dollar collateral fund of $8,000,000 against which ABA could borrow Egyptian pounds from local banks to on-lend to SMEs. An additional grant of $2,000,000 was provided to finance operating expenses and project management until ABA could cover its operational costs from loan recovery. USAID also agreed to contract both a US and an Egyptian consulting firm, NCBA and EQI respectively, to provide ABA with the technical support necessary to carry out the project.

Productivity and Efficiency

To build ABA into an institution productive and efficient in its delivery of credit and business assistance to SMEs, the consultants worked closely with ABA to streamline its organizational and management structure to make it an agile and responsive provider of micro-finance services. To develop ABA's already rich human resources, the consultants offered training in the skills required for the most successful completion of the project. The training addressed a variety of topics ranging from accounting to public relations. The foundation was also equipped with management information systems (MIS) to monitor loan disbursement and repayment levels.

To fashion the foundation into an effective tool for the promotion of the SME sector, the consultants and ABA collaborated to develop a methodology for the disbursal of loans tailored to best meet the special credit and business needs of small and micro entrepreneurs. Small loan sizes with few collateral conditions, flexible loan repayment conditions with loan terms spanning an average of six to seven months, and hands-on assistance to clients characterize ABA's approach. Additionally, the foundation was careful to set interest rates on loans high enough so that the revenue they generated would cover operating costs. However, the rates are still much lower than those available from the traditional lending sources in the SME community, such as pawnshops or loansharks.

ABA extension officers are key to the foundation's methodology and success. They are responsible for conducting outreach and identifying SMEs that would benefit from the foundation's micro finance services. They evaluate each SME's potential for growth, assess its financial and business needs, and determine the appropriate loan size and loan repayment schedule. They then assist SMEs with the relevant paperwork, and monitor and collect repayment installments. The payment of extension officers represents one of the most innovative aspects of ABA's operations: they are given a basic salary supplemented by an incentive package. These incentives, which encourage extension officers to extend a large number of loans while maintaining a superior repayment rate, benefit all parties involved: the SMEs, the extension officers, and the foundation.

The efforts of ABA and the consultants have translated into the remarkable success of this micro finance operation. Several indicators point indisputably to its effectiveness. The foundation is efficent enough to deliver loans within 14 days for first-time borrowers and within 72 hours for returing clients. The average number of borrowers per loan officer at ABA is high, averaging at 100. The current borrower growth rate at ABA is impressive, hovering at around 140% per year, and ABA has achieved an outstanding repayment rate of about 99.2%. Due to ABA's success in these areas, it began covering its operating costs from the revenue generated from loan recovery in 1992, two years ahead of schedule.

Outreach

For its outreach program, ABA capitalized on the tight social networks in densely populated Alexandria and used word of mouth to publicize its micro finance services. To complement this strategy, a company logo and brochure for the foundation were designed, and a documentary on the importance of credit to the expansion of the SME sector in general was produced as an advocacy tool.

Since ABA first began its SME program, it has achieved a range of outreach comparable to those of the most successful micro finance ventures in the world: in the last five years, the ABA program has served over 20,000 clients. It has extended over 47,000 loans amounting to almost Egyptian LE 122,024,750. However, although the foundation has reached a significant number of clients, the share of the available market that it serves is less than two percent, and significant room for expansion remains.

In addition to the number of clients, the composition of the loan portfolio speaks to the effectiveness of the foundation's outreach activities. While manufacturing and processing were initially the primary targets of the SME program, ABA has diversified its portfolio so that it now includes loans to SMEs involved in trade and to those specializing in the service industry, representing 20% and 8% of all loans respectively. The activities of the loan recipients are varied and can be divided into five main categories: garments and ready-made clothing, including woven and knitted clothing; leather products, including the manufacture of shoes, handbags, belts, jackets, and other specialty items; wood products, including the fabrication of doors and windows and of furniture items like chairs, tables, beds, and dressers; metal products, including the manufacture and repair of aluminum, steel, brass and iron products; and a category for miscellaneous activities in commerce and the service industry. Furthermore, ABA has been very effective in reaching lower income entrepreneurs. In fact, approximately 80% of its loans go to micro enterprises.

To provide non-financial support to SMEs, the ABA has established the Alexandria Small Business Center (ASBC) as a technical assistance facility. The Center compliments ABA's credit delivery mechanism by offering training to micro entrepreneurs in areas such as pricing, accounting, production planning, quality control, and marketing. At the Center, micro entrepreneurs also have access to a library and to a showroom to display samples of their products.

Future Goals

In ABA's early stages of development, it has managed to create a very sustainable model for the provision of credit to SMEs, a model that encompasses high levels of productivity, a strong borrower growth rate, interest rates high enough to enable cost recovery, responsible loan practices, and support for SMEs. During the next phase of the foundation's growth, it plans to expand its operations in neighboring governorates. Furthermore, the ABA is currently exploring the possibility of converting from a non-profit foundation to a for-profit financial institution. It is undertaking a study to examine the financial feasibility of such a transition and to detail the legislative hurdles that might arise. ABA is extremely interested in this conversion because, as a bank, it will be able to mobilize the savings of small and micro entrepreneurs. This added capability will be beneficial both to the business owners, who will save capital that they can then reinvest in their SMEs, and to the foundation by providing it with an additional source of funds that it can then lend to clients.

Impact

Impact Assessment

Total Amount Lent: LE 122,024,750
Total Active Loans: LE 40,964,155
Oustanding Balance: LE 25,858,173
Average Loan Size: LE 2,641
Number of Active Loans: 11,066
Total Number of Loans: 47,139
Total Number of Clients: 20,991
Borrower Growth Rate: 140%
Average Interest Rate on Loan: 17%
Repayment Rate (as of 30\11\95): 99.2%
Average Number of Clients per Extension Officer: 100
Number of jobs created: 59,580
Loan size creating one new job: LE 2,048

Sustainability

Through ABA's provision of credit and technical assistance to SMEs, the foundation has made an important contribution to economic development in Alexandria. SMEs represent a significant proportion of private sector activity in that city and by supporting agile, innovative, fast-growing small businesses, the ABA has helped strengthen the city's economic base. In fact, as of December 31, 1995, ABA had extended loans to almost 21,000 small businesses, providing them with the capital necessary to expand and upgrade their services. Additionally, ABA's support of SMEs has resulted in the creation of many new employment opportunities. The foundation estimates that due to its program, 59,580 new jobs have been created. Furthermore, ABA's program has helped improve the standard of living in the low and middle income communities where the SMEs they serve are located. Along with the employment opportunities and revenue generated in these communities through flourishing SMEs, these small businesses meet the needs of residents by providing them with products and services at prices that they can afford given their often limited incomes.

As a completely self reliant project, the ABA is an excellent model of a practice that can be effectively sustained. The foundation covers the costs of its micro finance and technical assistance services entirely through the revenue generated from loan recovery. The association has developed that capacity through several means: it charges an appropriate but reasonable interest rate on loans; it extends loans with a high degree of efficiency; and it selects borrowers with care so that their repayment rate is above 99%. Furthermore, because of the high level of client satisfaction, the demand for their services and their client base is continually expanding, ensuring a dependable and growing source of revenue.
ABA's project structure and methodology of implementation has actually been replicated by a number of foundations throughout Egypt that have also been established for the delivery of micro finance services and technical assistance. In Cairo, Port Said and Assiut, the foundations are already operational and are showing strong indicators of success, and there are plans to create similar foundations in Zagazig and Mansoura.

Contact

Alexandria Business Association (ABA)
52, El Horreya Avenue
Alexandria
Egypt
(203) 482 5518, (203) 483 2282,

Sponsor

Environmental Quality International (EQI) Cairo, Egypt
Environmental Quality International EQI
3B, Bahgat Ali St., Zamalek
Cairo
Egypt
(202) 341 7879, (202) 340 8284
EQI@POWERMAIL.INTOUCH.COM

Partners

United States Agency for International Development (USAID), Cairo
Nabil El Shami, Executive Director
52, El Horreya Avenue
Alexandria
Egypt
(203) 482 5518

Environmental Quality Internatioanl (EQI), Cairo
Mohammed Ragab, Chairman of Board
52, El Horreya Avenue
Alexandria
Egypt
(203) 482 5518

National Cooperative Business Association (NCBA), Washington DC