Credit bureau - development bank - tax incentives - leasing
My day job is as one of the senior partners at Silver Levene, a London based accountancy practice dealing with over 6,000 SMEs in a number of different sectors.
I am passionate about the vital role SMEs have in almost every economy around the globe. They account in most countries for the majority of employment, and, output. Most countries owe much of their dynamism to small businesses with the potential for growth. Nearly every large company has originated from an SME.
This brings me to the matter at hand. Some European politicians say that the recovery in Cyprus has exceeded expectations – but look behind the macro figures, and a very different image emerges: 75% of the country’s output, and 81% of employment is due to small and medium sized enterprises.
In the medium-term, the economy here cannot recover any faster than SMEs can keep up with. And the sector’s ability to grow is, for better or worse, a function of its ability to access finance. In this respect, Cyprus SMEs are facing challenges that are truly unprecedented for a developed country.
The European Commission’s latest ‘SME Access to Finance’ survey, carried out between August and October 2013, and, looking back to the first six months of the postbail-in period, vividly demonstrated this reality.
Among other things, the Commission’s report looked at whether SMEs were able to obtain from the banks at least twothirds of the funds they had applied for. Fewer than half (47%) managed this in Cyprus - making this the toughest place in Europe, bar none, to get an overdraft, and, alongside neighbouring Greece, one of the hardest in which to get a loan. Strip out those applications where an existing facility was simply renewed, and, I suspect the numbers would be truly shocking.
As bad as the credit rationing of SMEs is, it is only the beginning of the problem. International experience teaches us, that, following financial crises, a large share of the small business population tends to disengage from the banking sector – they lose faith in the industry, and, try to limit their need for external finance.
SMES AFRAID OF BANK LOANS
The result is subdued investment, even among those businesses that have the capacity to grow, and, the mindsets created during such traumatic periods can stay with entrepreneurs long after the banking sector has got its house in order. We are seeing signs of this in Cyprus. Right now, only 35% of SMEs would prefer to finance future growth through bank loans, down from about half pre-crises. Similarly, only 30% of SME owners and managers on the island claim they would be comfortable speaking to a bank about their financial needs. Both figures are extraordinarily low by EU standards, and, they may fall further before they rise again.
The banking sector, too, risks disengaging from smaller clients; not by choice perhaps, but, as a result of the economics of lending.
Even those SMEs that are still engaged, now need only small amounts. Approximately 40% of would-be-borrowers in Cyprus need less than 25,000 Euros, making it uneconomical for banks to provide them with a high level of service. Furthermore, as we have seen in the UK, subdued demand, following a financial crisis, can make it less worthwhile for banks to compete with each other for SME business. The longer this vicious cycle is allowed to go on, the worse, and, more permanent the damage.
DECISIVE INTERVENTION NEEDED
Without decisive interventions from government and others to rebuild the market for SME financing, and without support from those professions that are still widely engaged with SMEs, it could take a generation for banks and financial regulators to regain the trust and custom of small business owners in Cyprus.
As SMEs’ most trusted advisers worldwide, accountants have to try to fill the service gap and bring SMEs and the banks closer together – to act as coaches, mentors, interpreters and mediators.
ACCA is trying to do the same thing at the institutional level – placing our own extensive network of members, partners and stakeholders at the disposal of policymakers. For this reason, ACCA issued earlier this year, a global ‘Call for Evidence’, on the financing of SMEs in Cyprus, and, commissioned local experts Talos to bring the evidence together into a report.
What I find particularly useful about the Talos report, is their insistence on getting the country’s financial infrastructure right, rather than simply throwing money at the problem. To this end, they make four recommendations, which ACCA has strongly endorsed:
First - building on existing initiatives, in order to create a fully functional credit bureau for Cyprus, complete with credit scoring capabilities, endorsed by the financial regulator.
Second - taking advantage of the government’s ownership of the Central Co-operative Bank, in order to create a publicly-owned development bank.
Third - using tax incentives and free access to credit data as catalysts, for the development of invoice auctioned platforms that can appeal directly, to sophisticated investors.
And finally - creating a legislative framework that will make true leasing products a possibility.
The idea of a development bank may grab more headlines of course, but, in the long run it is the access to high quality credit information that will do the most to change the fortunes of lenders and borrowers alike, and, to launch new alternative finance providers.
After all, financial information is the main building block of access to finance – accountants know this, but, it is good when others acknowledge the fact.
That said, given the intense liquidity crunch currently underway in Cyprus, it would be naïve to focus only on the medium and long-term. Talos’s report has a few ideas for the banking system to review urgently, which ACCA has also endorsed:
First - stepping up participation in EIB and EIF funded projects;
Second - i mplementing the Central Bank’s ‘Arrears Management Directive’ more fully and efficiently, in order to relieve over-indebted businesses, and, maintain their banking relationships;
And third - resisting the temptation to pay down ‘Emergency Liquidity Assistance’ early, at least as long as access to cheaper funding, remains problematic.
Clearly, banks are not the only ones with a role to play in releasing liquidity to SMEs. To the Cyprus government, Talos recommends:
First - creating tax incentives linked to investment, to allow businesses, to tap into the savings of business owners and high net worth individuals; and,
Second - accelerating the absorption of EU structural funds and building capacity within the banking sector, to support recipients from application to delivery.
A final recommendation which Talos have stressed and perhaps better pursued in the long term, is the development of a bank-led system for reconciling overdue payment obligations. It is certainly an interesting proposal building on Cyprus’ early adoption of the ‘Late Payment Directive’, and, the newly-endorsed ‘ European Account Preservation Order’. And it is worth exploring further.
In conclusion - this report is an impressive piece of work, and, brings together an incredible pool of expertise from Cyprus, Europe and beyond.
The very existence of this report is evidence that, despite its many unique circumstances, Cyprus is not alone, in the challenges it faces, and, does not have to go it alone when exploring solutions, either.