Gaps in Business Access to Finance

1. Gaps in Business Access to Finance Joe Lowther Chief of Party USAID Business Enabling Project jlowther@bep.com

2. Approach: “Access” Defined Healthy SMEs have access to formal lenders who are able and willing to offer affordable and suitable financing. • Proximity between lenders and SMEs, operating hours, ease of making and keeping in contact, etc. • Supply of funds, willingness of lenders to lend, etc. • Cost of finance, level of borrower risk, management burdens • Suitability of products and services to SME needs Physical Access Availability Affordability Suitability

3. The Situation in the Region: Access to Finance Rankings Source: World Economic Forum Global Competitiveness Report

4. The Situation in the Region: Financial Markets Rankings Source: World Economic Forum Global Competitiveness Report

5. The Situation in Serbia • 60% of SME’s are not borrowing from formal sources • 4 out of 5 SMEs report difficulty or have no wish to access formal sources • Distribution is skewed: Largest 8% (> RSD 1mn in revenue) hold > 50% of debt • Amounts small: 75% of loans less than EUR 50,000 • Key sectors under-served: Production, agriculture, construction < 30% of total • Banks are main credit source for 50-60% of SMEs, but account for 30% of debt value • 20% or less of finance directed for investment Serbia ranked 105 out of 144 countries in access to loans

6. Percentage of sales – Serbia (2012)

7. Average annual amount borrowed from the bank- SMEs sector (2011, 2012)

8. Suitability of available finance – Serbia (2012)% of surveyed enterprises

9. Type of finance used– Serbia (2012)% of surveyed enterprises

10. Constraints to Access to Finance In Serbia: The Big Picture

11. Demand-side Constraints • Borrower Attitudes & • Risk Aversion • Information Asymmetry & • Legitimacy • Poor • SME Market Leverage • Weakened • Financial • Capacity Liquidity issues Low risk tolerance Weak capacity Weak national advocacy Expectations of state support Inadequate collateral Informal economy Weak negotiating position Co-mingling of finances Negative sentiment Weak credit culture

12. Recommendations: Demand-side • Various measures to improve liquidity conditions – VAT tax payments, reduction of payment delays through public sector supply chain, etc. • Better education for SMEs on collateral management • Fast track permitting for qualified real estate collateral • Weakened • Financial • Capacity Liquidity Issues Inadequate Collateral

13. Recommendations: Demand-side • More communication and collaboration needed between lenders and SME’s (+professional services community) • Reduce politicization of state support • Improvements in credit enforcement will help to reduce the personal exposures of borrowing • Public-private collaboration in improving public awareness and helping to promote positive credit culture • Support for entrepreneurship and belief in SMEs needs to be explicit and promoted by government • Borrower Attitudes & • Risk Aversion Low risk tolerance Expectations of state support Negative Sentiment Weak Credit Culture

14. Recommendations: Demand-side • Training and support to business organizations to build capacity of members • More training and outreach by lenders and more engagement by the professional services community • Development of standardized guidelines and toolkits • Adoption of simplified accounting standards for SMEs • Targeted incentives to get businesses out of informal economy • Information Asymmetry & • Legitimacy Weak capacity Informal Economy

15. Recommendations: Demand-side • Business associations to take a more active role in advocating for specific reforms to improving access to members • Business associations to take on intermediary functions in working with banks and members to facilitate credit flows • More education for SMEs on how to organize and make joint approaches to lenders • Elevate the use of public institutions to identify and promote reforms – Council of SMEs, regional development organizations • Public-private initiatives to promote value chain-based financing • Large corporations should help with solutions • Strengthen knowledge about the SME sector • Poor • SME Market Leverage Weak National Advocacy Weak negotiating position

16. Recommendations: Key Legal Issues • Improve banks’ ability to enforce loans • Amend mortgage law and cadaster rules to enable resolution of junior claims • Strengthen court adherence to mortgage law; reduce un-merited debtor-led motions to halt foreclosures; streamline appeals process • Strengthen bankruptcy administration • Improve enforcement to prevent avoidance and fraudulent transfer • Reduce regulatory barriers to SME lending • Apply RIA to financial regulations; consider use of “SME test” • Calibrate regulatory requirements to the risks of SME lending (e.g. banks vs. leasing, SMEs vs. Large Corporates) • Reduce reliance on minimum loan loss provisions based on payment status • Consider expanding the definition of “acceptable” collateral and eliminate regulatory differentiation between types of collateral • Reduce credit file documentation requirements for SME lending • Liberalize regulations to allow banks to innovate for SME lending • Enable NBFI expansion • Legislation to allow new non-bank non-deposit taking lenders; adopt Law on Factoring; strengthen the law on leasing

17. See our Study and White Paper “Financing the Growth of Small and Medium Sized Enterprises” at http://www.policycafe.rs/english/financial-research_en.php#access-to-finance