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Perspectives for SME Finance in Moldova

Policy Briefing Series [PB/05/2010]. Perspectives for SME Finance in Moldova. German-Moldovan Forum on SME Finance Dr. Ricardo Giucci German Economic Team Moldova / Berlin Economics Chişinău, 30 November 2010. Key Features of the Banking Sector Challenges for the Banking Sector

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Perspectives for SME Finance in Moldova

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  1. Policy Briefing Series [PB/05/2010] Perspectives for SME Finance in Moldova German-Moldovan Forum on SME Finance Dr. Ricardo Giucci German Economic Team Moldova / Berlin Economics Chişinău, 30 November 2010

  2. Key Features of the Banking Sector Challenges for the Banking Sector Perspectives for SME Finance Conclusions

  3. 1. Key Features of the Banking Sector

  4. Domestic credit to private sector (% of GDP, 2008) Aspect No. 1: Low degree of financial intermediation Source: World Bank

  5. Aspect No. 2: High Interest Rates Nominal and real interest rates on corporate loans, % Source: NBM and own calculations

  6. Low degree of financial intermediation and high interest rates: Typical symptoms of under-developed financial markets • Market implications: • General view: Limited access to finance • SME: Very limited access, since banks usually prefer lending to corporates rather than to SME → Perspectives for SME finance depend on: • General development of banking sector • Specific issues concerning SME finance

  7. 2. Challenges for the Banking Sector

  8. Reasons for low intermediation and high interest rates i. Macroeconomic environment ii. Cost of loan default iii. Administrative costs

  9. i. Macroeconomic environment CPI, 2005-2010, yoy, % • Relatively high and volatile inflation rate in the past • But: NBM adopted an inflation targeting framework • Decisive step to reduce interest rates in the long-term Source: NBS

  10. ii. Cost of default • When one borrower does not pay back (default), this cost is passed through to other borrowers • Empirical research: Cost of default as a crucial determinant of high interest rates resp. margins • Policy measures: • Establishment of effective credit bureaus • Improvement of creditor‘s rights

  11. Establishment of effective credit bureaus • As of today: Two credit bureaus • IMC Infocredit (founded in 2004) • ”Biroul de Credit” founded by the Bank’s Association of Moldova • But: Databases of credit bureaus are very poor; institutions de facto not working • Reasons: • The mechanisms for data collection are not working properly • The banks and other financial institutions are reluctant to share the information about their borrowers

  12. Improvement of creditor‘s rights Necessary: • Improvement of legislation on corporate involvency/bankruptcy • Shorter court procedures related to problem loans • Improvement for execution of collateral Remark: Progress in this field as a condition in the IMF program

  13. International experience Bank interest rate spread and judicial efficiency Source: Laeven and Majnoni (2004) Conclusion: Clear correlation between judicial efficiency and interest rates spreads

  14. iii. Administrative cost Necessary approach to reduce administrative costs: • Foster competition • Attraction of FDI into banking sector (i.e. competition from foreign-owned banks) • Moldova: Large room for both measures

  15. High concentration Share of assets of 5 largest banks in total assets, % Source:NBM

  16. Concentration – International Comparison Market share of top five banks in % of assets as of end 2009 Source: Local central banks, Raiffeisen RESEARCH

  17. Low level of FDI attraction Share of foreign owned banks' assets in total banking assets, % (2008) Source: EBRD

  18. 3. Perspectives for SME Finance

  19. A detailed quantitative assessment of SME lending is not possible due severe data constraints This also extends to SME-related activities by nonbank financial institutions (NBFIs) However: Based on selected evidence a number of points can be raised SME seem to have benefited little from thegrowth in bank lending before the crisis Lack of long-term funding makes medium-term loans risky for banks and increases the costs of lending Almost all loans with maturities above one year are financed by programs of international donors The role of nonbank financial institutions (NBFIs) in this field is limited i. Assessment of situation

  20. Conclusions: Situation of SME finance not satisfactory Improvement of SME access to finance is very important But also: Establishment of analytical tools to assess the access to finance in general and in particular for SME would be an important step Concrete: Establishment of a bank lending survey with a supplement for the SME sector Benchmark: ECB/EC „SME access to finance survey”

  21. ii. Selected Problems and Solutions Problem: Excessive collateral requirements for loans Generous collateral (100-150% of loan sum) Conservative evaluation Preference for fixed asset collateral (real estate) SME: Typically lack of capital and thus also of collateral Solution: Effective guarantee fund As of today: Two guarantee funds But: Extremely limited resources and institutional problems Necessary: Reform and substantial recapitalisation of existing funds or establishment of new institution Possible: Participation of foreign donors with both technical and financial assistance

  22. Problem: Lack of adequate technology for SME-lending • For "traditional" bank: Lending to SME not very attractive due to high administrative costs, but low credit volume • Besides: Bookkeeping, financial records, etc. of SME often not as professional as bigger companies • Thus: Little pursue of this market segment • But: SME-lending can be profitable • Best example from international experience: ProCredit Bank, EFSE • Flexible and less bureaucratic loan decision procedures reduce administrative costs • Necessary: Use of specific technology for providing loans to SME; different approach than for bigger companies

  23. Solution: Risk-based (i.e. non-collateralised) lending should be significantly extended, especially when dealing with SMEs Necessary: Flexibilisation of collateral requirements This would be a first step towards risk-based lending Banks should relax their overly restrictive collateral requirements and become more flexible in accepting other forms of collateral But also: Gradual shift to risk-based loan decisions Loan analysis and decisions should ideally be based on the concrete specifics of the project and its cash-flow, not on available collateral This puts less weight on the checking of borrower’s books, which are often not kept in a proper way More training of bankers necessary

  24. 4. Conclusions

  25. Restricted access of SME to finance is a severe economic and social problem in Moldova Dual roots of the problem: Underdeveloped banking sector Specific impediments for SME Policy implications: Both issues need to be tackle simultaneously Perspectives for SME finance? If good policy → Positive perspectives If inadequate policy → Mixed perspectives Foreign donors: Important role to play

  26. Contact Dr. Ricardo Giucci giucci@berlin-economics.com German Economic Team Moldova c/o BE Berlin Economics GmbH Schillerstr. 59, D-10627 Berlin Tel: +49 30 / 20 61 34 64 0 Fax: +49 30 / 20 61 34 64 9 E-mail: info@get-moldova.de www.get-moldova.de

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