Market Gaps on Access to Finance - Bank of Valletta

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Malta Business Bureau – <strong>Market</strong> gaps in access to finance April 2013 2. Study background This section provides the context within which this Study is being prepared. Specifically, this section provides background information on the importance of SMEs for both the EU and the Malta economies. This section also details a number of SME-related initiatives. 2.1 The role of SMEs in the EU and in Malta The growth of SMEs is a key driver of EU growth given that Europe’s 23 million SMEs currently contribute more than 50% of the total value added in the non-financial business economy and about two-thirds of total employment. In addition, SMEs provided 80% of all new jobs in Europe in the past five years 2 . Small businesses are particularly important since they bring into the markets innovative products or techniques to the market. The role of SMEs in Malta is even more pronounced. In Malta almost all businesses (c. 99.9%) fall under the EC definition of an SME 3 . Moreover, Malta accounts for the largest share of micro-firms out of all firms in the EU, since micro-firms represent 95 out of every 100 local businesses. These micro-firms account for slightly more than one third of the private sector employment. In fact, with an average of about 3 persons per business, Malta is referred to by the EC as being “quintessentially a small business economy” 4 . Malta’s SMEs contribute to about two-thirds of total value added, which is notably higher than the EU-27 average of c. 58% as shown in Table 2 below. Micro enterprises contribute circa 26% of total Malta GDP. Table 1: Share of SMEs Number of Enterprises - 2011 Employment - 2011 Value Added - 2011 Malta EU27 Malta EU27 Malta EU27 Number Share Share Number Share Share Billion (€) Share Share Micro 28,468 95.1% 92.2% 39,922 34.4% 29.6% 1.0 26.3% 21.2% Small 1,170 3.9% 6.5% 24,211 20.9% 20.6% 1.0 14.7% 18.5% Medium 239 0.8% 1.1% 24,290 20.9% 17.2% 1.0 23.6% 18.4% SMEs 29,877 99.9% 99.8% 88,423 76.3% 67.4% 3.0 64.5% 58.1% Large 44 0.1% 0.2% 27,535 23.7% 32.6% 2.0 35.5% 41.9% Total 29,921 100.0% 100.0% 115,958 100.0% 100.0% 5.0 100.0% 100.0% Source: European Commission (2012), Annual Report on EU SMEs; European Commission (2012), SBA Fact sheet 2012 – Malta Note: Estimates for 2011, based on 2005-2009 figures from the Structural Business Statistics Database (Eurostat) 5 2 European Commission (2011), An action plan to improve access to finance for SMEs 3 According to the EC, an enterprise must meet the stipulated headcount and satisfy either the ‘annual turnover’ or the ‘balance sheet total’ criterion in order to be considered an SME. Category Employees Annual turnover EUR OR Page | 10 Balance sheet total EUR Micro
Malta Business Bureau – <strong>Market</strong> gaps in access to finance April 2013 2.2 Why access to finance Various European and national reports have shown that to sustain the contribution provided by SMEs to the European and Maltese economies, these SMEs need to be assisted in achieving their growth potential. At the same time SMEs are known to often face significant difficulties in meeting their financing needs 6 . The EU has set the facilitation of access to finance for SMEs as one of its key priorities in its Europe 2020 vision, the EU's growth strategy for the coming decade. According to the European Central Bank (ECB)’s 2012 survey on Access to Finance of small and medium-sized enterprises in the euro area (SAFE), “Access to finance” was a key concern for a large number of euro area SMEs (18%), and was only second to “finding customers” as the dominant concern for euro area SMEs (27% of SMEs mentioned this as their most pressing business problem). Other areas such as “Competition” and “Availability of skilled staff or experienced managers” were mentioned somewhat less frequently (11% and 13%, respectively). Younger firms also claimed to have bigger access to finance issues than their larger and more established counterparts 7 . On the other hand, the 2012 SAFE Malta report shows that access to finance is only a concern for 4.6% of respondents 8 . Additionally, over 50% of Maltese respondents claimed that their largest source (by usage) of financing were the ‘traditional’ bank sources of financing, primarily bank overdraft, credit line or credit cards overdraft and bank loans 9 . Financing instruments were generally deemed ‘irrelevant’ to local SME business needs. Malta based respondents to an additional survey on access to finance carried out by the General Retailers and Traders Union (GRTU) in January 2012 ranked access to finance as their fifth most pressing problem facing them. When asked to identify the sources of finance for any planned capital investment, most referred to use of own funds (including internal profits) and bank financing. Most were also satisfied with the external financing being used, and were aware of schemes that help finance investments through loans at lower collateral and guarantees, even though only 20% actually made use of such schemes 10 . of using Eurostat data is that the statistics from different countries have been harmonised and are comparable across countries. The disadvantage is that for some countries these data may be different from data published by national authorities. 6 SMEs are a riskier sector than larger corporate, as the profitability ratio, activity ratio and ability to pay interest expenses are generally higher in larger corporations. Data available at the European Banking Authority also show that the probability of default is on average 55% higher for the SME retail portfolio than in the corporate one and 72% higher than in the entire asset class. On the other hand, data from the ECB Bank Lending Survey show that lending constraints are shared by both large and smaller firms, but since 2007 the tightening of lending standards has been stronger for smaller firms than large firms (European Banking Authority (2012), Assessment of SME proposals for CRD IV/CRR). 7 European Central Bank (2012), Survey on the access to finance of small and medium-sized enterprises in the euro area – April to September 2012. This survey also shows that the economic and financial situations related to the ongoing (2012) crisis are more likely to hit younger firms: SMEs up to 5 years old mentioned “Finding customers” and “Access to finance” similarly often as their most pressing problem. For large firms, “Access to finance” (mentioned by 14%) was less of an issue, while “Finding customers” (22%) and “Competition” and “Cost of production or labour” (16%) were their dominant concerns. 8 European Central Bank (2012), SAFE tables – 2011 (Excel file). In a Eurobarometer survey carried out in 2009, 8% of Maltese respondents said that access to finance was their most pressing problem. The EU27 average in this survey was 16% (European Commission (2009), Eurobarometer: Access to finance – analytical report). 9 In the above Eurobarometer survey, Malta registered the highest response in relation to bank loans as the most preferred external financing to realise growth ambitions (86% vs. 64% for EU27) (Ibid). 10 GRTU (2012), Access to finance. In a 2008 survey carried out through a joint collaboration between BOV and GRTU among a number of GRTU members, only 57% of SMEs surveyed said they had sufficient financing to see their projects through. 78% of those interviewed made use of overdrafts as their predominant type of financing (compared to the EU15 average of 49%; Times of Malta (2008), Banks geared to serve SMEs better). Page | 11
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