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 consideration further recycling of funds). This guarantee thus enables loans to be offered at favourable interest rates and lower collateral requirements. The main JEREMIE benefits for Malta and its SMEs relate to 79 : Sustainability of funding: SMEs are supplied with sustainable funding on market-friendly terms Recycling of funds: The Holding fund is of a revolving nature, receiving payments for further investments in the SME sector. This ensures sustainability of SME support by rolling over recycled funds over the longer term. Leverage: JEREMIE has a potential ability to engage the financial sector either at the Holding Fund level with additional capital from financial institutions, or at the level of financial instruments through co-financing. In the case of Malta, a guarantee of €8.8 million generated a loans portfolio of €51 million, which is a sizeable pot for the local market. Benefits of a portfolio approach: The umbrella fund approach will allow a diversification of risks and expected returns due to the pooling of different default rates, as well as active cash flow management to allow for a swift response to changing market requirements. Expertise: Apart from external funding, SMEs very often also require additional professional assistance to be able to utilise funding in the most efficient and effective way. The involvement of a financial institution allows for the leverage of the bank’s expertise – the bank has an incentive to get involved in understanding the business because it retains the sole direct client credit relationship. In the case of BOV (and other commercial banks in Malta), a large part of its existing customers would already be SMEs – in this regard, banks have a competitive advantage for projects involving SMEs 80 . Requirements: JEREMIE also allows for lower collateral requirements and favourable interest rates for SMEs, making bank financing more affordable. Institution building: since there is no guarantee society in Malta, a European counterguarantee scheme is thus important to provide the possibility for local financial institutions to boost their volumes in the early stage, and facilitate the creation of such schemes. Cash flow: this scheme provides finance to final recipients before actual project expenditure. This is an added benefit compared to the reimbursement process applicable in most grant schemes The Holding Fund is also able to re-allocate the resources to one or more financial products in a flexible way, depending on the actual demand over time. This benefit is however not applicable to the initial local JEREMIE initiative as it is based on one financial product only. The following table provides further information on the Malta JEREMIE scheme. Table 2: JEREMIE Parameters JEREMIE Parameters Eligible SMEs Micro, Small or Medium sized enterprises as per EU Definition Excluded Industries Industries related to Fishing, Agriculture, Construction, Real Estate, Transport (specific) Type of Facility Only loans - overdrafts are not eligible Purpose of Loan Capital expenditure purposes (i.e. investments which enhance the company’s value) Repayment Structure Amortising or bullet type Maturity Period Minimum: 1 year/ Maximum: 10 years 79 Bank of Valletta (2012), JEREMIE presentation for Accountants; European Investment Fund (2012), JEREMIE 80 European Bank Coordination (“Vienna”) Initiative (2011), The role of commercial banks in the absorption of EU funds, pg. 10 Page | 36
Malta Business Bureau – <strong>Market</strong> gaps in access to finance April 2013 Default Definition In line with Basel II 81 - 90 days in arrears means default Concentration No particular industry is to exceed 20%, and low single name concentration with average loans being less than €100,000 Coverage 75% of credit losses at a facility level, up to the cap rate Cap rate 23% of total fund at a portfolio level Implementation 36 months (6 th April 2011 – 5 th April 2014) Source: Bank of Valletta (2012) As at the end of December 2012 82 , that is, after approximately twenty-one months of implementation, about 80% of the available funds have already been sanctioned through the granting of c. 480 facilities to about 430 SMEs. There is a good sector distribution of SMEs, but as expected traditional sectors take up a large portion of the sanctioned facilities. These facilities have been used for various purposes, including: Assistance to start-ups in relation to working capital costs Upgrading of tourism product Upgrading of manufacturing processes and operating processes Investment in energy efficiency Investment in ICT Investment in R&DI, and creativity Initiatives related to internationalisation Compliance to EU regulations No JESSICA funds are currently being utilised in Malta. The EIB has also implemented various loan programmes aimed at improving access to finance for SMEs. These programmes are mainly funded by the EIB’s resources and without any funding from the EU budget. 3.5.4 Innovative financial instruments for the 2014-2020 financial framework With the new 2014-2020 Programming Period, the EU is pushing towards complementing grant funding with other forms of interventions, especially innovative financial instruments such as loans, equity and guarantees. Under the new common provisions covering all five EU funds, financial instruments are being advocated to support investments which are expected to be financially viable but which do not give rise to sufficient funding from market sources. These common provisions also take into consideration a combination of financial instruments and other forms of support, including grants since these stimulate the design of well-tailored assistance schemes that meet the specific needs of Member States or regions 83 . In contrast to the 2007-2013 programming period, the rules proposed for 2014-2020 financial instruments are non-prescriptive in regards to sectors, beneficiaries, types of projects and activities that are to be supported. Member States and managing authorities may use financial instruments in relation to all thematic objectives covered by Operational Programmes and for all Funds, where it is efficient and effective to do so. 81 Basel II, initially published in June 2004, is the second of the Basel Accords, (now extended and effectively superseded by Basel III), which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. 82 Bank Of Valletta (2013), Access to finance – points for discussion 83 European Commission (2012), Elements for a Common Strategic Framework 2014-2020: ERDF, ESF, CF, EAFRD and EMFF; European Commission (2012), Financial Instruments in Cohesion Policy Page | 37
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Market Gaps on Access to Finance - Bank of Valletta

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