Nurturing innovation

After almost three years in the pipeline, “Egypt’s Nasdaq” has begun trading. The Nile Exchange, or “Nilex”, is designed to provide a new financing mechanism for small- and medium-sized enterprises in the country, as well as to provide an exit route for potential investors into an underserved market segment.

The exchange framework was developed after examining examples from around the world, including South Africa’s Altx and South Korea’s KRX. Nilex will share many characteristics with the latter, says Mahmoud Mohieldin, Egypt’s investment minister and the main architect of the initiative. Ten enterprises are currently listed on the exchange, ranging from Masria Card, which produces plastic ATM cards, to Utopia, a real estate and tourist investment company. Mr Mohieldin anticipates this number to grow by over 100 percent in the coming year.

The market itself would only be considered viable by the ministry if its total market capitalisation reaches 5 percent of GDP and if it garners sufficient liquidity. The phone calls from interested participants are coming in, he says, and the ministry has held discussions with potential investors from the Middle East and Far East.

Nilex is one of a number of initiatives taking place across the region to try to energise local small- and medium-sized enterprises. Across North Africa, SMEs – and the entrepreneurs that build them – face many challenges that are common to the rest of the emerging world.

The economies of the region have continued to show impressive GDP growth and attract significant amounts of foreign direct investment. A slowdown in European growth has not dramatically reduced the flow of businesses into the region, although persistent debt worries in the Eurozone are causing some jitters. However, unemployment rates remain high, ranging from 9.7 percent in Egypt to 14.7 percent in Tunisia. Recent figures from Libya are unavailable, but estimates from 2004 suggest rates as high as 30 percent. While FDI creates jobs directly and indirectly, foreign companies are not the principal employers in these markets.

Notwithstanding the developmental and economic potential of the SME class, preventing the build up of a large pool of unemployed and potentially disaffected youth is a concern for governments worldwide. As part of its aid programme, the US Government has begun a push to fund and train entrepreneurs in the Arab world, in part to improve relations and in part, analysts say, to reduce the sense of economic disenfranchisement amongst Arab youth that Washington believes could spill over into security threats.

Egypt has overseen a significant expansion in the number of corporate entities, which have doubled in number since 2004 to around 69,000, according to the ministry of investment. More than 90 percent of these companies have issued capital of less than $2m, putting them firmly in the SME bracket. This is, Mr Mohieldin says, a major achievement in itself given the country’s recent history. “There were only two options in the country at one stage – either to be a civil servant or a farmer,” he says.

A wave of nationalisation in the 1960s saw many third and fourth generation businesses brought under state control. A reversal of this policy over a decade later saw many new businesses spring up, but with many companies still in their first generation of family ownership, the necessity to find mechanisms for accelerating entrepreneurial development is all the more pressing.

Mr Mohieldin believes that Nilex is one such mechanism, and that it could have significant benefits for the 10 companies currently listed. The lack of exit routes for potential investors in Egyptian SMEs, and those in the wider region, is a barrier to enterprise growth. “If any of these companies want to have a capital increase tomorrow, they can have it. If they want to transfer assets as cheaply as they can manage, they can do it,” Mr Mohieldin says.

This approach assumes a certain base level of corporate growth, and given the absence of a venture capital community in Egypt and the thin availability of bank financing for start-ups and small companies looking to grow, it seems hopeful. The government has made several attempts to alter this, creating a $175m fund for early stage businesses and waiving the reserve requirements for banks lending in the sector.

Some banks are looking at expanding their presence in the space. Barclays in particular is importing credit scoring technology from its international operations in order to make SME lending more efficient in the hope of being able to expand its portfolio. As Khalid Elgibaly, the MD of Barclays Egypt says, the SME segment is simply “too big, too important to the economy for us to ignore.” Even so, service provision remains weak across the industry.

Some analysts, including Ahmed Ezzat, the managing director of Endeavor Egypt, a non-profit which advises entrepreneurs in the country, are not convinced by top-down approaches to private sector development, nor indeed by Nilex. “The modern literature of the venture ecosystems, even as big as Silicon Valley or San Diego or of course the pharmaceutical or biotechnology, or even India, it’s all private placement memorandums. There’s nothing wrong with that,” says Mr Ezzat. “There have only been four initial public offerings in four years in Egypt: that should tell you that’s not the way things happen in Egypt. I think that top down development will not support entrepreneurship, except in the areas of lifting hurdles and barriers, red tape and corruption, and of course legislation.”

That legislation, he says, needs to be modernised to make it easier to fail. “You can open a business in Egypt in two weeks or 10 days, but then it will take you 10 years to unfold. And again, a big part of the entrepreneurship ecosystem is to permit failures. Failure has to be in some instances a positive metric. That’s how it is with a private venture ecosystem.

“It’s a very hard thing to change very ancient legislation that would accept failure. It is not easy, legally. I was at the [American University of Cairo] a couple of months ago, addressing a few of the potential entrepreneurs. And I told them, ‘you’ve spent your whole life being threatened with getting low grades or failing. In the world of entrepreneurship, failure is a positive metric, you’d get an A+ if you’ve failed twice before.’ That’s a cultural change.”

Cultural change is difficult to achieve. Across the region, university programmes, funded by a mix of international and domestic public and private actors, are trying to instil business knowledge into technical graduates. It is a development welcomed by business, but only one step on the path to creating a culture of entrepreneurship and innovation.

“We need to create 700,000 jobs per year, and many of these jobs are just not coming,” Mr Ezzat says. “We don’t want these young Egyptians, or even middle-aged Egyptians, to start a business because of need only. It has to be because of opportunity. This is the difference. Innovation is the difference between building a business because of need and building a business because of opportunity.”