Business Community and Guarantee Funds How guarantee funds are used to enhance entrepreneurship: An Italian Case Study

Section 1: Small and Medium Enterprises  SMEs represent the backbone of the economy.  Developing SMEs is determinant for economic growth and employment creation.  In Egypt SMEs represent over 90% of the companies

Problems facing SMEs  Limited access to finance  Difficulties in exploiting technology  Constrained managerial capabilities  Limited access to information, high input costs  Regulatory burdens  Inadequate Marketing Capabilities  Poor Networking  Human Resources problems  Lack of SMEs awareness while dealing with budgets

Small and Medium Enterprises in Egypt and their contribution to the Economy Small and Medium Enterprises in Egypt

Section 2: EJB Contribution Role in the Development of SMEs in Egypt 1. Corporate Governance 2. Entrepreneurship Unit 3. National Business Agenda 4. Competitiveness Council Report

General SMEs problems addressed between the EJB committees Challenge:  Facilitating and increasing access to loans for SME’s.  Enhancing the concept of Social Entrepreneurship  Linking SMEs with international markets

Section 3: A Success Story The Italian Case Study  Confidi incorporates more than one thousand companies in Rome and in Lazio regions.  They represent the 44% of artisans They work with and in agreement with banks Interest rates are the following: 6% for short term loans and 4.50% for medium-long term loans; Insolvency rate of loans guaranteed: 1.6%- 2%

Confidi as an instrument of the entrepreneurs’ association  Confidi were born in the Italian entrepreneurs’ associations  In Italy the associations of entrepreneurs play two main functions: Supporting the interests of entrepreneurs towards the State and the market (lobby); Supporting the business of entrepreneurs (administrative services, accounting, consulting, training, credit services, etc.)  Confidi support firms in the credit area, offering financial services.

Mission  The activities of Confidi are three: To guarantee loans allocated by banks to the members of the Confidi; To supply financial consulting services; To acquire public contributes (for interest and capital)

The relationship bank-confidi-firm  After the publication of New Capital Accord (Basilea2), banks evaluate firms using: Rating with data from the balance sheets (when there are these documents, and when they are correct and true); Patrimonial measures (collateral, securities and real guarantees)  For Small and Micro firms the main criterion used is the patrimonial one

The relationship bank-confidi-firm (2)  Firms became members of a Confidi : Because of the weak bargain power towards banks; Because they need consultants in order to plan critique phases of the business (start- up, investments, high debts); Because they need additional guarantee  Confidi supplies to firms: Consulting and assistance in the relation with banks; Guarantees for (usually) the 50% of the loan required

The relationship bank-confidi-firm (3)  Banks are interested for the activities of Confidi, because: Confidi is a new way to acquire clients (marketing); Confidi guarantee important and risky clients (they reduce risk to 50%) Confidi supply relevant environmental information of the firms, that are not provided in the balance sheets  Banks are interested in the collaboration with Confidi and they sign a contract (agreement) available and valid for each member

The contract (agreement)  The agreement with each bank is composed of two elements: Norms and rules (operative and formal relations, information and reports, forms of refund in case of insolvency) Financial conditions (products, typologies, pricing)  The agreement also has to define: The amount of the loans covered by Guarantee Fund (the multiplier effect is in Italy 1:20) The maximum amount of loan granted to each member.

Competences and resources  The capacity of Confidi to pursue the mission is connected to: The availability of human resources able to assist and to consult firms (specific financial competences are required); The availability of financial resources in order to guarantee loans and to refund banks in case of insolvency of members  The Net Worth of a Confidi is composed by: The shares of members (each firm pays an amount of money in terms of equity, proportional to the amount of loan guaranteed); Commissions realised from the activities of consulting and guarantees (usually they vary from the 0.20% to the 1% per year on the loan); The financial return of the Net Worth invested in bonds Public Funds from Chambers of Commerce, Central and Regional Governments)

Structure  Confidi are founded in form of cooperative or consortium Each member has the same power (one head, one vote), differently by the companies  Structure: Shareholders meeting; Board of directors President of the Board of directors; Board of Auditors  The operative structure is constituted by: The Manager (Director); Personnel for the administration and the secretary Personnel for the preliminary evaluation of the firms requiring guarantees

Financial consulting  The consulting is shared in three different activities: o The interview with the entrepreneur in order to identify the financial needs; o The analysis of documents (balance sheets, business plans, collateral and securities); o The financial planning and the release of the guarantee  In the preliminary evaluation of the financial needs, the confidi entertain relations with the member and with each bank of the member in order to individuate the best possible solution. o Confidi decides the release of the guarantee before the decision of the bank to grant the loan and send documents to the bank for its resolution  The duration of this process is variable from 20 to 60 days

Ethical and moral rules  Confidi is an instrument to help entrepreneurs (solidarity)  The mechanism is based on the principle of proportionality: costs are proportional to loans guaranteed;  The fundamental elements for the confidi are TRUST among members CREDIBILITY in the relationships with banks: information must be reliable, the preliminary evaluation must be correct, the refund of the insolvencies must be definite;  The guarantee can be denied when the preliminary evaluation shows a very difficult situation in the reimbursement of the loan;  Incorrect behaviours in order to grant too risky entrepreneurs must be rejected: it is a trade-off between solidarity and effectiveness  Each risk must be consistent with the Net Worth

Section 4: Cooperative Guarantee Fund EJB Cooperative Guarantee Fund Bank End User

EJB Role  The EJB is working on a project to adopt such model while cooperate with potential entities like government, NGOs, Industrial Federations, Financial Institutes and the Central Bank of Egypt so as to build on existing experience for the Egyptian environment.  The key challenges in this respect:  The perception of the cooperative schemes.  The governing Law of the cooperative scheme and adaptability of such schemes.  Support from banks and regulatory bodies.  We are welcoming input from other entities to launch this ambitious project.

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