Market Gaps on Access to Finance - Bank of Valletta

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consideration the importance of “relationship banking” when dealing with SMEs, which is already being done in the local market 129 . BOX 6.3.3 Greater role for local banks in an intermediary role Bank lending is the main source of SME financing in Malta and will remain crucial. It needs to be made more accessible and facilitated, and the role of banks within the whole spectrum of SME financing needs to be strengthened. However, this does not rule out supporting alternatives for bank lending. Survey results and discussions with key stakeholders indicate that loan finance is and will remain one of the most widely used instruments for local SME development. Regulatory and financial measures should therefore be aimed at reinforcing debt finance for local SME growth. Credit guarantee instruments are one such example (discussed in Box 6.3.2.1). Additionally, greater involvement by banks in the whole funding process is often advocated – given their specialist knowledge, banks have a significant role to play in various aspects, including information and education campaigns, proposal evaluation and selection, and monitoring. Any financing of the additional administrative burden where this is considered unfair would also need to be taken into consideration. The majority of Member States have decided to manage EU funds directly or through state agencies. As advocated through the Vienna Initiative 130 , however, commercial banks can play a crucial role in further increasing national absorption of EU funds. Banks and other private financial actors could contribute to leverage EU grant funds through their knowledge of local sectors and ongoing search for innovative entrepreneurial concepts and financial instruments. Banks can also provide prefinancing (in anticipation of the disbursement of the EU grants) and co-financing (especially where not all expenditure related to a project is eligible), thereby leveraging grants available. Banks are also in a position to assist in project selection/ evaluation and eventual monitoring. Best practice examples in channelling funds to SMEs include the intermediary role adopted by Italian commercial banks, the setting up of profit-oriented companies in Hungary 131 , and the involvement of banks in the design of new EU co-financed programmes in Latvia and Poland. At the same time, issues related to the potential discrepancy between bankable projects and public-interest projects need to be taken into consideration 132 . Locally, feedback obtained on both the Micro Guarantee and MicroCredit schemes show the involvement of banks at an early stage of the process. In the former scheme, some SMEs expressed their disappointment at their bank application being rejected despite having a letter of intent from ME. On the other hand, in the latter scheme, the bank was the first recipient of applications and any decisions were based on the bank’s creditworthiness assessment. The KBIC is another local example of the important support role of banks. The centre provided financial consultancy to start-ups in collaboration with a local bank, through three full-time advisors and a part-time advisor appointed by the bank. This was in addition to the assistance provided by ME 129 BOX This is 6.3.4 also linked Investor to the readiness lack of credit bureaus in Malta – the local banking market is dominated by two large players that have their own credit rating systems, thus reducing any scope for the setting up of such bureaus. 130 European Bank Coordination (“Vienna”) Initiative (2011), The role of commercial banks in the absorption of EU funds 131 The needs of local entrepreneurs might be met through bank financing, and this could be the Ibid, pg. 11. The Hungarian Managing Authority has an intermediary body as well as a financial body acting as profit- main reason why alternatives are not sought. However, lack of awareness on available alternative sources, and their respective application and advantages, might be another reason. Entrepreneurs require further investor readiness training programmes. oriented companies. 132 Ibid Page | 76
usiness mentors and officials to help start-ups to assess their needs, financing requirements and draw up a business plan 133 . Such programmes would tackle: Optimal use of overdraft and loans, and related cash management Business planning Understanding project viability and formal appraisal techniques Stocking As outlined earlier, an investor readiness programme carried out locally by ME had a considerable take-up and there is interest in repeating this programme. In addition, local banks have also carried education seminars for investors. Apart from the owners, another important player in various local micro firms is the external accountant, who generally takes over various tasks in those firms not employing such a professional. This accountant needs to be made aware of the different funding options/ schemes available for SMEs, so that he/ she will be in a position to advise his own clients. The financial institution implementing the JEREMIE scheme in Malta took this approach when providing a tailor-made presentation on JEREMIE for accountants. The 2013 Budget Speech referred to the launch of short and intensive weekend courses for those interested in starting up their own business. BOX 6.3.5 Private sector equity funding Malta lacks any equity funding alternatives. Previous attempts at creating a market for venture capital have been far from successful. Understanding the reasons for these outcomes is key in future attempts at re-launching such schemes. For instance, where investors are unwilling to dilute ownership, exit strategies might provide for a buy-back clause that allows the recipient to re-purchase their own shares after a stipulated period of time or attainment of certain financial targets. Banks’ risk appetite might not provide adequate financing for particular ventures as at the end of the day a bank is in the business of lending, not investing. This provides further scope for equity funding from non-bank sources. There are various options that can represent a complementary option to bank lending, rather than a competing alternative. The options below can be supported through the involvement of the EIF, local banks and other new financial players, as well as financial intermediaries that provide business advice to local SMEs: 133 Malta Business Weekly (2006), From a concept to market success Page | 77
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Market Gaps on Access to Finance - Bank of Valletta

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