Gaps in Business Access to Finance

Joe LowtherChief of PartyUSAID Business Enabling Projectjlowther@bep.com

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 112MACEDONIA 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