Market Gaps on Access to Finance - Bank of Valletta

Table 6: Mapping of financial instruments with selected local economic sectors
Economic sectors Current financing needs Current financing options Scope for financial instruments
Manufacturing
The manufacturing industry has faced (and still
faces) the need to upgrade and restructure in
order to better compete at international levels
(especially with emerging markets) and at the
same time face challenges brought about by the
dismantling of protective measures.
Many companies are now adopting leaner
approaches, looking into higher value-added
activities through R&D activities and product and
process (re-) design. This sector is becoming more
capital intensive and requiring increasingly
specialised HR – this necessitates further
investment to upgrade and acquire such
equipment and recruit new talent, as well as
finance investment to enable local companies to
move up the value-chain. Other plans relate to
internationalisation efforts, the efficient use of
resources and the environment.
According to the survey results, manufacturing
firms find it more difficult to finance specific
projects/ investments from internal sources.
Significant external challenges – retraction in
protectionism, and increasing competition from
emerging countries
Re-structuring process underway
Shift from low cost manufacturing towards
higher value added
Significant restructuring expenditure
Commercial bank loans represent the current main
source of finance (survey results show highest
sectoral reliance on bank loans). In some cases,
however, the premises would not be owned by the
company (e.g. MIP estates) and cannot therefore
be used as collateral. The local market has also
provided soft loans, interest rate subsidy schemes,
and loan guarantees (c. 15% of the Microcredit
scheme has been taken up by this sector; survey
results show highest sectoral take up for national
schemes). Other traditional sources include lines
of credit, trade credit and leasing.
Government has stepped in during the economic
crisis to provide various forms of in/direct
assistance, and is likely to continue adopting this
policy in order to safeguard local jobs. The Maltese
industrial policy also provides scope for further
assistance to selected manufacturing sectors.
However, given the ongoing international
economic crisis, the loss in competitiveness
compared to other (especially low cost
manufacturing) countries, government budget
constraints and the increased banking regulatory
requirements, manufacturing firms might need to
look elsewhere for additional (cheaper) financing.
Others are postponing their investment decisions.
Reliance on one main source of financing – banks
Strong banking relationships
Important take-up by sector for JEREMIE loan
guarantee
Government has provided support, through
policy and direct financial assistance
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This sector’s current financing needs are largely
met by bank financing. However, new innovative
projects from existing SMEs (e.g. business process
re-engineering, internationalisation initiatives) as
well as innovative start-ups, especially in the high
value added sub-sector, would require additional
financing which might be considered too risky by
traditional providers of finance, even though these
companies do provide a “tangible” product (and
might hence be deemed less risky than service
companies). In addition, the current economic
climate might have brought a tightening of credit
conditions for the sector.
There is therefore further scope for grants and
financial instruments providing loan/ loan
guarantee options, especially given that c. 15% of
the Microcredit scheme has been taken up by this
sector. The survey results also show a higher
sectoral interest in national/ EU grants. And
average interest in bank financing.
Financial instruments providing a combination of
grants and loans would also be applicable. Box
3.5.4.1 and 3.5.4.2 provide examples of financial
instruments from the upcoming MFF.
In terms of equity, the setting up of a VC fund for
innovative start-ups in high value added
manufacturing in Malta is unlikely to provide the
critical mass needed, and hence such fund would
need a wider scope covering other sectors. An
alternative is to be part of a pan-European VC
fund. According to the survey results, about 25%
of manufacturing firms expressed an interest in
other forms of equity financing.
Further scope for grants
Further scope for financial instruments –
given reliance on bank financing, loans and
loan guarantees are likely option
Equity instruments for high value-added
manufacturing