Cairo - Mubasher: Regulations to boost SME lending, issued by the Central Bank of Egypt (CBE) early January 2016, could weaken the quality of loans extended by Egyptian banks in the medium term, said Fitch Ratings.

Other measures announced by the central bank on 11 January 2016 are moderately credit positive but are unlikely to significantly affect the banks' overall risk profiles, pointed out Fitch.

The Egyptian government's aims to increase bank lending to the SME sector over four years to end-2020 by EGP 200 billion($25 billion) equivalent to 26% of end-3Q15 total banking sector loans.

Fitch believes that the drive to stimulate the domestic economy is ambitious and could - if implemented - force banks to lend to weaker borrowers to fulfill the lending quotas.

The impact of the SME stimulus package on overall loan quality will ultimately be determined by how adequately banks price in the incremental risk of lending to smaller, higher-risk customers, noted the rating agency.

The central bank set a 5% annual maximum lending rate for SME loans, which is well below both the current yield on local treasury bonds (around 13% for a five-year bond) and normal commercial lending rates.

Risk weights on SME portfolios will be reduced, but details have not yet been released and any shift away from 0% risk-weighted government bonds, which represented over 40% of sector assets at end-September 2015, will be costly for capital levels, pointed out the report.

banks may well seek greater incentives to support the SME lending scheme to compensate for low returns, higher capital charges and the higher default rates normally associated with SME lending, added the report.