Market Gaps on Access to Finance - Bank of Valletta

Malta Business Bureau – <strong>Market</strong> gaps in access to finance
April 2013
Figure 2: SME development and funding instruments
Source: Ernst & Young (2012), Funding the future – access to finance for entrepreneurs in the G20
3.2 Small size constraints
Apart from the inherent difficulties associated with each lifecycle stage and which are faced by
SMEs across all Europe, local SMEs have additional daily constraints arising from the national
territory’s small size. These constraints are likely to magnify any access to finance issues.
The size of the domestic market is too small and acts as a limiting factor on competition
possibilities. This might facilitate market dominance by firms, but there are also very competitive
markets (potentially new entrants are attracted by a misconception of the market profitability) that
make it very difficult for existing companies to make an adequate return on capital. As a result many
companies close down causing negative repercussions on these sectors as a whole.
Another constraint relates to barriers to entry. Natural barriers exist due to the poor chances of
success of new businesses in products and services already supplied by existing firms. For instance,
importation in bulk is often required to avoid excessive fragmentation and reduce (unit) transport
costs, especially in the case of raw materials. This requirement limits the number of potential
players in the market. Moreover, the additional transport costs end up being included in the price of
imported industrial supplies and finished goods. Apart from high costs of transport per unit,
insularity may also lead to additional problems related to time delays and unreliability of transport
services, creating risks and uncertainties in production. To cater for sudden changes in demand,
therefore, firms end up keeping (relatively) large stocks and incurring additional costs related to
tied-up capital, warehousing and other storage costs.
Moreover, in a small domestic market like Malta, market failure due to social and environmental
externalities is more likely to take place. In Malta this often leads to the need to limit the number of
products. In addition, the poor natural resource endowments and low inter-industry linkages result
in high import content, again increasing local SMEs’ vulnerability. In the same way, Malta’s market is
highly dependent on exports and therefore on economic conditions in the rest of the world. Even
though this high degree of export orientation is a safeguard for maintaining competitiveness, it also
implies potential volatility in earnings as has been the case with the recent financial and economic
crisis.
Small size also renders the exploitation of economies of scale advantages difficult, leading to a high
cost per unit of production. It is thus often the case that a local SME will find it difficult to reach the
critical mass required to enable it to successfully compete in the international market. Likewise, the
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