Assessing the Red Tape in Egypt
What challenges do young entrepreneurs face in the MSE sector?
By Emma Broholm
With the Ye! Awards Egypt just around the corner, the Ye! team has taken the time to address why so many young entrepreneurs fail at starting up and formalizing their enterprises in Egypt. While this article focuses on Egypt, these issues are not unique to the country. Below we assess the main barriers to entry and what steps can be taken to alleviate these issues.
While the number of young entrepreneurs is growing across the globe, the numbers in Egypt seem to be growing exponentially. In Egypt only 28% of young people work in private of public sector jobs and the vast majority of the rest works in the MSE sector. One of the biggest reasons for this is the lack of employment opportunities in the formal sector. Unemployment in Egypt is an estimated 31% among people aged 15-24 compared to an estimated 13% globally.
The issue of unemployment amongst youths increased in the early 1970s, when universities eased their admission criteria. This allowed more students to attend University, resulting in an increase in the number of graduates. The lack of public sector employment opportunities, alongside the stagnant growth of older and larger private firms meant the formal sector was not able to provide jobs for all the graduating students. High unemployment amongst youth in Egypt was deemed one of the contributing factors to the 2011 Arab Spring Uprising.
Today this remains an issue, as most young people are unable to find work in the formal sector. As a result approximately 70 to 75% of the young people turn to the MSE sector. While this sector offers one option for young people to gain meaningful unemployment, the vast majority will end up working in the informal MSE sector. If they are able to work in the formal MSE sector, only 10% will actually set up or own their own enterprise.
How can it be that so many young people are facing this exact same problem? Unfortunately, there are a couple of obstacles holding these young people back from starting thriving businesses.
1. Legal obstacles
The first obstacle young entrepreneurs are confronted with are the legal obstacles in Egypt that hinder the start-up of a new enterprise. This includes general things such as the increasingly high tax rates for SMEs and difficulties when registering the company.
Between 2004-2010 the government embarked on a massive deregulatory transformation of its economic reform program. One of the reasons to change the process was to simplify registering one’s business. However, entrepreneurs continue to find the process cumbersome, signaling that the deregulation and simplification measures are not being applied by the bureaucracy. On top of this, entrepreneurs in Egypt face challenges entrepreneurs in the West would not, such as not being able to pay employees with stock options. These obstacles alone would make it extremely difficult for young entrepreneurs to start a business. Unfortunately, these are not the only challenges they face.
Entrepreneurial skills, which are an essential aspect of starting a successful, sustainable enterprise, are not taught in most public schools. Private schools are slowly adopting measures to teach young people about entrepreneurship; however, students enrolled in public education do not have access to these programs. Other organizations outside of the traditional educational institutions have started similar programs, teaching entrepreneurial skills and raising awareness for the obstacles surrounding starting enterprises. These organizations include Injaz Egypt and Masr Ta3mal, both of which offer a unique perspective on teaching youths in Egypt how to start a business that fits with their skills and mindset. However, programs like these mainly target well-educated, English-speaking individuals, as they are often quite expensive and competitive.
3. Access to Funding
The final problem that young people face when starting a sustainable enterprise is their lack of access to funding. The main source of the start-up capital available to youth-led enterprises is personal savings. However, not many young entrepreneurs are able to fund their businesses solely on their own or family savings. This is when a loan from a bank or financial institution is necessary. Here another problem occurs. Financial institutions tend to be biased, often questioning the creditworthiness, level of experience or sustainability of a young person’s enterprise. Furthermore, commercial banks in Egypt require more collateral then banks in other countries for MSEs requesting a loan, increasing the barriers to accessing finance for young entrepreneurs. This creates a problem for young entrepreneurs, for if they do not have savings or access to a loan from a financial institution, they are left with few other options than to forgo the start-up of their enterprise.
Now that the hindrances young entrepreneurs face have been ascertained, we can offer potential solutions to at least some of these challenges. The legal obstacles young people in Egypt face are, unfortunately, not unique to Egypt. In many countries across the Arab world, young entrepreneurs face similar obstacles. Fortunately, there are some other ways to aid young entrepreneurs in starting up and formalizing their enterprises. To start, it would benefit young entrepreneurs of every level in Egypt if education on entrepreneurial skills was no longer focused solely on English speakers situated in Cairo, but also included public university students, Arabic speakers, and young people outside of Cairo who lack access to the same resources in their rural communities. This way, all young people have access to equal opportunities. Finally, organizations, other than traditional financial institutions, are starting to fund enterprises in Egypt, such as IFC. This will allow young people to fund their enterprise, even if they do not have access to traditional funding.
Many young people in Egypt work in the MSE sector. While they continue to face challenges, they are not discouraged in starting up new, exciting and innovative enterprises. In order to offer all young entrepreneurs an equal chance to thrive, let’s continue to support them by easing red tape and working with the government to facilitate ease of business policies and programs.
Emma Broholm graduated from Leiden University with a degree in Law. She is currently an intern with Child and Youth Finance International. She is an alumni of the European Youth Parliament and has previously had articles published in Microfinance Gateway.