Fi­nanc­ing SMEs in Cyprus: no stone left un­turned?

Financial Mirror (Cyprus) - - FRONT PAGE -

A re­port com­mis­sioned by the in­ter­na­tional ac­coun­tants body ACCA paints a rather glum pic­ture of the SME sec­tor in Cyprus, show­ing how rapidly small businesses are shut­ting down due mainly to the lack of fund­ing as less than half suc­ceeded in get­ting an over­draft fa­cil­ity re­cently.

But the con­clu­sions are some­what op­ti­mistic, if only the govern­ment would adopt, or at least con­sider key points from the sur­vey that has con­struc­tive sug­ges­tions of how to di­vert money from pub­lic funds into new en­ti­ties, but not bur­den the state with in­ter­ven­ing in the pri­vate sec­tor.

The re­port, con­ducted by the re­search com­pany RTD Ta­los looked into ways of im­prov­ing SMEs’ ac­cess to fi­nance, as well as ACCA’s re­sponse and pol­icy rec­om­men­da­tions. It is based on a se­ries of stake­holder in­ter­views and mem­ber in­put fol­low­ing a global call for ev­i­dence by the ACCA.

“Cyprus is fac­ing a credit and liq­uid­ity crunch un­prece­dented among de­vel­oped coun­tries, as the coun­try’s dis­pro­por­tion­ately large, in­ter­na­tional fi­nan­cial sys­tem col­lapsed in early 2013,” the re­port said, adding that “the bail-in of March 2013 was orig­i­nally aimed at re­cap­i­tal­is­ing the banks in or­der to re­turn them to health, while strict cap­i­tal con­trols (pre­vi­ously con­sid­ered im­pos­si­ble in the Eu­ro­zone) were aimed at pre­serv­ing their de­posit base.

“Nei­ther worked quite as en­vis­aged, with ev­i­dence of sharply re­duced lend­ing, ris­ing delin­quen­cies and con­tin­ued de­posit flight through­out the coun­try. The com­bi­na­tion of a bank­ing sys­tem and a govern­ment pow­er­less to as­sist businesses has ex­ac­er­bated what was al­ready a very dif­fi­cult sit­u­a­tion.”

In re­sponse to these chal­lenges, the ACCA rec­om­men­da­tions based on the study by Ta­los sug­gests that Cyprus banks should im­prove the im­ple­men­ta­tion of the Cen­tral Bank’s Ar­rears Man­age­ment Di­rec­tive and in­crease their par­tic­i­pa­tion in Euro­pean In­vest­ment Bank funded projects.

It also sug­gests that the banks limit the re­pay­ment of Emer­gency Liq­uid­ity As­sis­tance (ELA) and use part of the un­al­lo­cated ELA to en­sure con­tin­ued liq­uid­ity.

On the other hand, the govern­ment should con­sider cre­at­ing a de­vel­op­ment bank ex­clu­sively for SMEs, pos­si­bly by con­vert­ing any one of the 18 Co­op­er­a­tive banks that came out of the state bailout of 1.5 bln eu­ros.

“To fund such a de­vel­op­ment bank with, say, a cap­i­tal of 1 bln eu­ros, the govern­ment could re-al­lo­cate funds from ex­ist­ing sources, such as the 600-700 mln eu­ros it ex­pects to re­ceive from the Euro­pean Bank for Re­con­struc­tion and De­vel­op­ment (EBRD), as well as some 150 mln eu­ros from the Euro­pean In­vest­ment Bank and pos­si­bly a fur­ther 200 mln from funds such as the de­vel­op­ment-specialist KfW,” ex­plained Mark Gold, a past pres­i­dent of ACCA who was in Cyprus to present the rec­om­men­da­tions to ACCA mem­bers, stake­hold­ers and govern­ment of­fi­cials.

“This would al­low there to be pub­lic own­er­ship of the bank and its fund­ing pro­ce­dures, but out­side of govern­ment,” Gold said.

The most that the govern­ment would be ex­pected to do, would be to un­der­write loans, he added.

The ACCA/Ta­los rec­om­men­da­tions also in­clude cre­at­ing a credit bureau and a na­tional credit scor­ing sys­tem, as very of­ten, credit rat­ing is far more im­por­tant than the fund­ing it­self, “as on many oc­ca­sions, small com­pa­nies may re­sort to other sources of fund­ing, such as ‘cash for eq­uity’,” added Gold.

He said that credit ra­tioning “is only the be­gin­ning of the prob­lem. Only 35% of SMEs would pre­fer to fi­nance from bank loans, down from 50% be­fore, while at present that fig­ure could fall even fur­ther.”

To put the prob­lem of cash-strapped com­pa­nies into per­spec­tive, Gold said that “ap­prox­i­mately 40% of would-be bor­row­ers need less than 20,000 eu­ros.”

Go­ing back to rec­om­men­da­tions for the govern­ment, the ACCA/Ta­los re­port sug­gests de­vel­op­ing an en­hanced le­gal frame­work to en­able leas­ing, tak­ing steps to ac­cel­er­ate the ab­sorp­tion of EU struc­tural funds, look­ing into the pos­si­bil­ity of rec­on­cil­ing pay­ment obli­ga­tions aris­ing from the Late Pay­ments in Commercial Trans­ac­tions law of 2012 and pro­vid­ing tax in­cen­tives for in­di­vid­ual in­vest­ment into SMEs.

The re­port con­cluded that with ap­pro­pri­ate govern­ment sup­port, credit providers can lead the de­vel­op­ment of on­line in­voice auc­tion­ing plat­forms, and on­line prod­uct and ser­vice bar­ter­ing mar­ket­places, an area where ACCA has ex­pe­ri­ence with the UK govern­ment’s Busi­ness Part­ner­ship, which did just that.

Panayi­o­tis Sav­vides, chief re­searcher at RTD Ta­los who headed the project, said that the vast ma­jor­ity of some 3,100 ac­tive SMEs are try­ing to find new ways of liq­uid­ity.

On the one hand, banks keep giv­ing the ex­cuse that “we have too many” bor­row­ers, but on the other hand, the Bank of Cyprus has only been able to con­sider 85 ap­pli­cants through the JEREMIE fund­ing scheme, Sav­vides said.

“Banks should con­sider hir­ing ac­cred­ited ex­ter­nal in­de­pen­dents for their ar­rears man­age­ment work and not rely on in­ter­nal com­mit­tees, mem­bers of whom may be un­qual­i­fied to deal with such is­sues,” Sav­vides said.


From left – Panayi­o­tis Sav­vides, Chief Re­searcher, RTD Ta­los; Dr Alexan­dros Michaelides, CEO, RTD Ta­los; Bar­bara Lil­lykas, ACCA Cyprus Rep­re­sen­ta­tive, Mark Gold, Past Pres­i­dent, ACCA

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