Credit bureau - de­vel­op­ment bank - tax in­cen­tives - leas­ing

Financial Mirror (Cyprus) - - FRONT PAGE -

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.


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.


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.

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