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Perspectives for SME Finance in Moldova

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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 ... – PowerPoint PPT presentation

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Title: Perspectives for SME Finance in Moldova


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

2
  1. Key Features of the Banking Sector
  2. Challenges for the Banking Sector
  3. Perspectives for SME Finance
  4. 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 creditors rights

11
Establishment of effective credit bureaus
  • As of today Two credit bureaus
  • IMC Infocredit (founded in 2004)
  • Biroul de Credit founded by the Banks
    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 creditors 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
i. Assessment of situation
  • 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 the growth
    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

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
    borrowers 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_at_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_at_get-moldova.de
  • www.get-moldova.de
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