Financing SMEs in Cyprus: no stone left unturned?
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