In order to stimulate lending to small and medium enterprises (SMEs), the Central Bank of Egypt (CBE) has required commercial banks in Egypt to allocate 20% of their loan portfolios to SMEs. Nonetheless, Egyptian banks have struggled to rapidly develop sufficient SME lending capacity, including the ability to identify clients, assess credit risk, and offer suitable products. At the same time, Egyptian microfinance institutions (MFIs) face liquidity constraints and regularly work with smaller SME (VSE) clients who will eventually require financial services that only banks can provide. In this context, the Credit Guarantee Company (CGC) of Egypt identified an opportunity to develop a mechanism that would increase bank exposure to VSE loans while increasing the flow of capital from banks to MFIs.

SANAD is a fund initiated by the German development bank KfW and advised by Finance in Motion that provides debt and equity finance to partner institutions in the Middle East and North Africa to support growth and employment creation in the MSME sector. SANAD contracted IPC to assist the Egyptian Credit Guarantee Company (CGC) in conceptualising a tripartite partnership model between CGC, microfinance institutions (MFIs), and banks, covering the key legal, administrative, procedural, financial, and operational aspects of their co-operation.

The aim of this co-operation is to facilitate portfolio transfers from MFIs to banks with guarantees provided by CGC, freeing up MFIs to utilise capital to lend to additional clients.

In order to develop this partnership model, IPC’s experts implemented the following tasks:

• reviewing the existing working model and guarantee mechanisms at CGC in their co-operation with MFIs and banks
• reviewing local legal and regulatory requirements associated with microloan portfolio securitisation or buy-out, including end-borrowers’ client rights stipulated in their loan contracts with MFIs
• assessing the appetite among MFIs and banks to enter into a tripartite partnership model with CGC
• evaluating the effects of the envisaged portfolio transfer on the client-MFI relationship and on the positioning of MFIs overall
• conducting a cost-benefit analysis for each of the three parties involved in the envisaged portfolio and client transfer, to determine an ideal pricing structure