Market Gaps on Access to Finance - Bank of Valletta

Malta Business Bureau – <strong>Market</strong> gaps in access to finance
April 2013
technology-driven industries, such as biotechnology, IT and software. Some venture capital funds
are also listed.
Investment in companies generally takes place after the seed lifecycle stage, with the exit strategy
being targeted at the growth stages (through an Initial Public Offering (IPO) or sale of the company).
Though more common in some countries, overall venture capital is estimated to be used by less than
10% of European SMEs 54 . In addition, according to the SAFE surveys carried out by the ECB, on
average about 60% of European businesses say that venture capital is not applicable to them.
Likewise, to operate profitably, a venture capital fund requires the attainment of a critical mass.
Given that most European SMEs fall under the “micro” category, a more applicable funding option is
provided by micro venture funds. These funds invest in enterprises whose projects are not
attractive enough for the attention of traditional venture capitalists but are too big or risky to
attract capital from traditional lending sources. Such funds strengthen a company's capital base
and develop entrepreneurs' business skills using coaching methods throughout the investment
period 55 .
For a small economy like Malta, venture capital can provide a means of reducing reliance on FDI
since such funds incentivise local acquisition. In addition, they promote a culture of openness and
lead to the setting up of professional management structures within local companies. In Malta, some
venture capital funds were launched in the past, as discussed in Section 2.4.4 of this report. In each
case, the targeted sectors were innovative and technology-driven companies, but take up/ success
was limited.
3.4.3 Microfinance
Microfinance shares many characteristics with microcredit and village banking 56 since they include a
revolving loan concept. In this funding mechanism, loans are provided to persons or groups of
people that do not qualify for traditional financial services or are otherwise viewed as being high
risk. Borrowers tend to be small producers of goods and services who might have no credit history
or access to other types of loans from financial institutions. Organizations that offer RLF lending
aim to help new project or business owners in becoming financially independent and eventually to
become eligible for loans from commercial banks.
In Malta there is an absence of the traditional microcredit providers, particularly those envisaged to
advance credit to vulnerable groups. This could also be attributable to the size of the Maltese
market and the reliance on bank financing. Nevertheless, there is a growing interest in Malta in the
microfinance sector both from non-bank institutions and from charitable organisations wishing to
enter the microcredit field 57 .
3.4.4 Mezzanine Finance
Mezzanine finance is a collective term for hybrid forms of finance that have features of both debt
and equity. Providers of mezzanine finance have claims that are subordinated to senior lenders and
possess priority over equity investors. Consequently, mezzanine investments generate returns that
are higher than traditional bank lending rates and lower than the returns required by most equity
investors.
There are various types of mezzanine finance, each having its own unique characteristics. The most
common forms of mezzanine finance include subordinated loans, participating loans, ‘silent’
54
European Parliament (2013), Report on improving access to finance for SMEs
55
European Economic and Social Committee (2012), Opinion – An action plan to improve access to finance for SMEs.
Financités (http://www.financites.fr/) is given as example of a micro venture fund.
56
Village banking is a microcredit model under which neighbours in a poor community form a borrowing group
57 Camilleri (2012), Microfinance - Access to Finance for SMEs within a European Context
Page | 28