Access to credit and competitiveness remain SMEs’ main challenges

Details of the survey on access to finance of enterprises (SAFE) in the EU, published in the Central Bank’s annual report [OPEN PDF] gas highlighted competition as the priority concern of SMEs in Malta, increasing from around 16% in 2011 to slightly less than 29% in 2014.

But access to finance is still an important problem: increasing from 4.7% in 2011 to 11.5% in 2014 as a problem highlighted by SMEs,

Some 99.8% of businesses in Malta, 30,500, are SMEs employing 98,000 people, or 78% of the total workforce.

They report having a harder time obtaining credit from banks than larger firms, usually because they don’t have high quality collateral, or relevant proof of their creditworthiness. In 2014 more than 70% of Maltese SMEs used external financing, compared with around 37% in the European Union.

Without access to credit, SMEs have to resort to retained earnings.

Credit standards were tightened considerably by banks in Malta in 2013, leading to a significant reduction in the number of firms who successfully applied for credit.

But the number of firms applying for bank loans, trade credit, overdrafts and credit lines gradually increased from 2011 to 2014. In 2014 between 25% and 33% of respondent firms applied for one of these types of financing instruments, with trade credit registering the largest demand.

An improvement in credit supply conditions was registered in 2014, with a rise in the percentage of firms that applied and got everything in all the three types of finance categories, compared with 2013. Meanwhile, the percentage of firms that only had a fraction of their original loan accepted fell slightly.

But credit conditions in 2014 were still somewhat tighter than those prevailing in 2011. A small percentage of firms also refused to take up a bank loan offer because costs were deemed to be too high.

The SAFE surveys show that in the EU as a whole, SMEs were charged a median interest rate of 5% on overdraft and trade credit between April and September 2014. On the other hand, interest rates on these facilities for Maltese SMEs stood at 5.70% during this period, which is at the higher end of the European range.

Interest rate developments differed significantly between countries, with the median interest rate being the highest in Greece and Cyprus, at around 8%, and the lowest in Luxembourg, at 2.00%. SMEs in Austria, Belgium, Estonia, Finland and France also paid a relatively low interest rate, with the median level standing at 3.00%.

23% of respondent firms also reported an increase in interest rates in 2014, while only 14% reported a decrease and, for the remaining 62.0%, interest rates remained unchanged – suggesting that the interest rate pass-through in Malta is sluggish and that the transmission of changes in policy rates to the retail rates charged by banks has weakened even further after the crisis.

In 2014, 44% of domestic firms reported an increase in banking costs, while only 7% reported a decline. In contrast, 39% of firms in the EU reported a rise in financing costs compared with the preceding year, while 9% reported a decrease in costs.