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Gaps in Business Access to Finance
Joe LowtherChief of PartyUSAID Business Enabling [email protected]
Approach: “Access” Defined
Proximity between lenders and SMEs, operating hours, ease of making and keeping in contact, etc.
Supply of funds, willingness of lenders to lend, etc.
Cost of finance, level of borrower risk, management burdens
Suitability of products and services to SME needs
Healthy SMEs have access to formal lenders who are able and willing to offer affordable and suitable financing.
Physical Access
Availability
Affordability
Suitability
The Situation in the Region: Access to Finance Rankings
Availability of financial services
Affordability of financial services
Ease of access to loans
Year2010 2011 2012 2010 2011 2012 2010 2011 2012
SERBIA 111 103 97 99 93 100 91 97 105
ALBANIA 128 108 108 113 99 125 90 121 136
BOSNIA 119 126 121 120 124 113 102 122 123
BULGARIA 95 106 110 111 119 123 62 48 40
CROATIA 83 88 91 94 105 104 81 84 94
MACEDONIA 122 127 107 112 118 116 122 96 70
ROMANIA 104 104 109 100 106 103 78 82 75
SLOVAKIA 38 39 42 47 66 67 43 55 58Source: World Economic Forum Global Competitiveness Report
The Situation in the Region: Financial Markets Rankings Financial market
development-sophistication Financing through
local equity marketVenture capital availability
Year2010 2011 2012 2010 2011 2012 2010 2011 2012
SERBIA 94 96 100 101 112 124 102 121 126
ALBANIA 100 107 120 137 140 143 107 124 132
BOSNIA 113 124 119 102 111 89 126 125 127
BULGARIA 91 75 80 90 88 84 71 66 58
CROATIA 88 87 92 96 102 105 108 108 112
MACEDONIA 87 82 79 85 83 90 72 65 91
ROMANIA 81 84 77 89 89 80 80 77 76
SLOVAKIA 37 47 48 110 118 117 61 68 60
Source: World Economic Forum Global Competitiveness Report
The Situation in Serbia
• 60% of SME’s are not borrowing from formal sources• 4 out of 5 SMEs report difficulty or have no wish to
access formal sources • Distribution is skewed: Largest 8% (> RSD 1mn in
revenue) hold > 50% of debt• Amounts small: 75% of loans less than EUR 50,000• Key sectors under-served: Production, agriculture,
construction < 30% of total• Banks are main credit source for 50-60% of SMEs, but
account for 30% of debt value• 20% or less of finance directed for investment
Serbia ranked 105 out of 144 countries in access to loans
In the hometown71%
In the region
11%
Na-tional
market12%
Markets of the neighboring countries
3% Other countries3%
Percentage of sales – Serbia (2012)
Average annual amount borrowed from the bank- SMEs sector (2011, 2012)
Up to 10 000 Eur 10 000 - 50
000 Eur 50 000 - 100 000 Eur 100 000 - 500
000 Eur Over 500 000 Eur
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
36.00%39.30%
10.50%11.60%
2.60%
50.80%
29.70%
10.40%
6.70%
2.40%
20112012
Suitability of available finance – Serbia (2012)% of surveyed enterprises
8
Interest rates and fees
Denomination of the loan in foreign currency
Collateral requirements
Duration of the loan approval process
Duration of loans
Reporting requirements by the bank
Quality of service and support of financial institutions / banks
Denomination of the loan in local currency (dinars)
0%10%
20%30%
40%50%
60%70%
80%90%
100%
6%
10%
13%
25%
26%
23%
25%
22%
68%
51%
53%
41%
40%
36%
37%
41%
26%
39%
34%
34%
34%
41%
38%
37%
Suitable Not suitable No opinion
Type of finance used – Serbia (2012)% of surveyed enterprises
9Term loans
Overdrafts
Guarantees
Revolving credit
Letter of credit
Issuance of shares
Corporate bonds
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
41%
33%
18%
21%
6%
2%
1%
59%
67%
82%
79%
94%
98%
99%
Used Not used
Supply-Side Constraints Enterprise-Side Constraints
Inefficient credit
enforcement
High costs of financing
Poor product suitability
Regulatory disincentives
Few alternative sources of finance
Weak supporting services
Limited effectiveness of state and donor funds
FINANCINGGAP
Weakened financial capacity
Borrower attitudes and risk aversion
Weak capacity to present business
Weak SME market leverage
Constraints to Access to Finance In Serbia: The Big Picture
Borrower Attitudes &
Risk Aversion
Information Asymmetry &
Legitimacy
Poor SME Market
Leverage
WeakenedFinancialCapacity
Liquidityissues
Inadequatecollateral
Low risk tolerance
Expectations of state support
Negative sentiment
Weak credit culture
Weak capacity
Informal economy
Co-mingling of finances
Weak national advocacy
Weak negotiating
position
Demand-side Constraints
WeakenedFinancialCapacity
LiquidityIssues
InadequateCollateral
Recommendations: Demand-side
Various measures to improve liquidity conditions – VAT tax payments, reduction of payment delays through public sector supply chain, etc.
Better education for SMEs on collateral management
Fast track permitting for qualified real estate collateral
Borrower Attitudes &
Risk Aversion
Low risk tolerance
Expectations of state support
Negative Sentiment
Weak Credit Culture
More communication and collaboration needed between lenders and SME’s (+professional services community)
Reduce politicization of state supportImprovements in credit enforcement will help to
reduce the personal exposures of borrowingPublic-private collaboration in improving public
awareness and helping to promote positive credit culture
Support for entrepreneurship and belief in SMEs needs to be explicit and promoted by government
Recommendations: Demand-side
Information Asymmetry &
Legitimacy
Weak capacity
Informal Economy
Training and support to business organizations to build capacity of members
More training and outreach by lenders and more engagement by the professional services community
Development of standardized guidelines and toolkits
Adoption of simplified accounting standards for SMEs
Targeted incentives to get businesses out of informal economy
Recommendations: Demand-side
Poor SME Market
Leverage
Weak National Advocacy
Weak negotiating
position
Business associations to take a more active role in advocating for specific reforms to improving access to members
Business associations to take on intermediary functions in working with banks and members to facilitate credit flows
More education for SMEs on how to organize and make joint approaches to lenders
Elevate the use of public institutions to identify and promote reforms – Council of SMEs, regional development organizations
Public-private initiatives to promote value chain-based financing
Large corporations should help with solutionsStrengthen knowledge about the SME sector
Recommendations: Demand-side
Recommendations: Key Legal Issues Improve banks’ ability to enforce loans
Amend mortgage law and cadaster rules to enable resolution of junior claims Strengthen court adherence to mortgage law; reduce un-merited debtor-led
motions to halt foreclosures; streamline appeals process Strengthen bankruptcy administration Improve enforcement to prevent avoidance and fraudulent transfer
Reduce regulatory barriers to SME lending Apply RIA to financial regulations; consider use of “SME test” Calibrate regulatory requirements to the risks of SME lending (e.g. banks vs.
leasing, SMEs vs. Large Corporates) Reduce reliance on minimum loan loss provisions based on payment status Consider expanding the definition of “acceptable” collateral and eliminate
regulatory differentiation between types of collateral Reduce credit file documentation requirements for SME lending Liberalize regulations to allow banks to innovate for SME lending
Enable NBFI expansion Legislation to allow new non-bank non-deposit taking lenders; adopt Law on
Factoring; strengthen the law on leasing
See our Study and White Paper “Financing the Growth of Small and Medium Sized Enterprises” at http://www.policycafe.rs/english/financial-research_en.php#access-to-finance