Egypt's new regulations for SMEs are positive for economy, negative for banks

Recent regulations by Egypt's Central Bank that boost financing to small and medium enterprises are credit positive for the country but credit negative for banks, said international credit agency Moody's in a statement on Monday.

The CBE said earlier this month it would require lenders to apportion 20 percent of their total loaning portfolio for SMEs, with interest rates below 5 percent imposed on firms generating between LE1 and LE20 million a year in revenue.

"The CBE’s regulation will likely shore up the country’s fragile economic recovery, a credit positive for Egypt (B3 stable)," read the statement.

Boosting SME financing would positively impact unemployment, standing at 12.8 percent as of September 2015, as well as revive investments, which are expected by Moody's to "remain depressed."

However, "the rapid growth in SME loans necessary to reach the 20 percent target will likely weaken loan performance, a credit negative for Egyptian banks," said Moody's.

The commercial banks participating in the four-year programme, which will total an estimated LE200 billion, will be able to deduct the loans from their required reserves at the Central Bank.