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 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 Page | 8
Malta Business Bureau – <strong>Market</strong> gaps in access to finance April 2013 potential reduction in grant co-financing rates following Malta’s move from an Objective 1 country to a non-assisted region, the potential for various financial instruments, not only loan guarantees, needs to be further explored. The experience of JEREMIE in Malta shows that the same number of enterprises can be assisted with a lower amount of resources, thus increasing efficiency and effectiveness of public funding. 1.1 Study objectives The objectives of this study are to: a) Assess the existing market gaps for Malta-based SMEs (according to different segments and different firm lifecycles) to obtain financing beyond the traditional bank facilities; AND b) Establish the feasibility or otherwise of a wide array of financial instruments not currently available on the Maltese credit market. This study adopts a mix of qualitative and quantitative research tools, including telephone interviews, one-to-one interviews with key stakeholders and desktop research. 1.2 Organization of study This report is structured as follows: Chapter 1 provides an introduction to the Study, including the main scope and objectives of this Study Chapter 2 sets the background for this Study, including an assessment of SMEs, related policies and SME-related initiatives, in both the EU and in Malta Chapter 3 discusses in greater detail the financing needs of SMEs, including an analysis by firm lifecycle, and related sources of finance Chapter 4 presents the Study’s methodology, namely a survey amongst SMEs and stakeholder consultation Chapter 5 presents the results of the survey Chapter 6 builds on the results of the survey, the desktop research and the stakeholder consultation to establish the feasibility (by market segment) of other financial instruments not currently available on the Maltese credit market. This chapter also delves into the local market potential for more SME support through revolving instruments funded by the European Social Fund (ESF), the European Agricultural Fund for Rural Development (EARDF), and the European Maritime and Fisheries Fund (EMFF). Finally, this chapter concludes this Study by providing best practice examples from other Member States which can be applied to the local context. Appendices A, B and C provides information on the survey Page | 9
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Economic sectors Current financing
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Economic sectors Current financing
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Lifecycle stage Current financing n
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Structural Funds. Specifically, the
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6.3.6.5 Credit guarantees: In many
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European Economic and Social Commit
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D5 - How would you classify the cur
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Please provide your comments for Qu
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- Oħrajn (Speċifika) ____________
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Q1 - Who are the owners of your fir
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B: EU funds- Economic Sector Manufa
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E: Trade Credit- Firm Size 1 - 9: M
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G: Leasing/ hire-purchase/ factorin
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A: National Grants/Pu blic aid C: B
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Market Gaps on Access to Finance - Bank of Valletta

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