Market Gaps on Access to Finance - Bank of Valletta

Malta Business Bureau – <strong>Market</strong> gaps in access to finance
April 2013
1. Introduction
The Malta Business Bureau (MBB) acts as a direct link between the Maltese business community and
the European Union (EU) by representing the members of the Malta Chamber of Commerce,
Enterprise and Industry (Malta Chamber) and the members of the Malta Hotels and Restaurants
Association (MHRA) in Brussels and Malta. The MBB provides business advisory services with
regards to evolving EU legislation and policies which may hinder business development and growth
by providing tailor-made guidance. In this respect, the MBB is interested in understanding and
gauging the existing market gaps that hinder the opportunity for micro, small and medium-sized
enterprises (SMEs) in Malta to access finance, and the feasibility of new EU financing instruments
addressing the credit needs of Maltese business. This Study is aimed at both Maltese and EU policy
makers, as well as the members of the respective MBB parent organisations.
SMEs are the engine of the Maltese economy. They employ about two-thirds of the private sector
workforce, and contribute more than half of the country’s value added. This situation is similar to all
countries in the EU, where SMEs provide an essential source of jobs, create entrepreneurial spirit
and innovation, and foster competitiveness.
Easier access to finance is needed for these enterprises to be continuously able to expand their
operations and therefore generate additional jobs. One of the commonly identified main issues small
businesses encounter is a financing gap where SMEs are unable to raise enough capital to support
their business venture. There are multiple causes for such access to finance obstacles – some are
cyclical while others are of a more structural nature, such as the information asymmetry that
inevitably exists between suppliers and demanders of funds.
Maltese SMEs also experience this gap, and this scarcity in finance may actually be magnified due to
the small size of the domestic market, and the lack of providers of risk capital and/ or lenders.
Specifically, the inability of Malta’s SMEs to raise capital may stem from a number of reasons,
including a non-existent venture capital market, limited presence of business angels, adverse
collateral requirements and debt pricing. Malta’s small size also makes the capital market not
economically viable for small ventures. As a result commercial banks remain the main (and in the
case of some sectors the only) source of finance despite not providing risk capital. Such retail banks
are, however, unable to provide extensive support because they are fundamentally lenders not
investors, especially since they have to ensure that the depositors’ funds are adequately
safeguarded.
Within this context, the EU has always put SME assistance at the forefront of its agenda. 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 1 .
This shift is influenced by the contractionary fiscal policy being adopted by most Member States’
governments, as well as the experience to date with such instruments. The main advantage of
financial instruments is their multiplier effect, whereby risk coverage (in the case of loans and
guarantees) or risk participations (in the case of equity) induces investors to invest, and whereby the
repayments of capital or interest and proceeds of an investment can be reused for the instrument in
subsequent cycles. In addition, such instruments require less administrative controls compared to
grants.
In Malta, take-up for the various grant schemes and for the JEREMIE loan guarantee financial
instrument have in general been satisfactory. However, given the reduction in ERDF funding and the
1 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
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