DEVELOPING SME SECTOR: RECOMMENDED FINANCIAL INSTRUMENTS

Strengthening the financial sector is the most important issue for enabling Albanian SMEs to perform successfully. The Albanian financial sector is still at an early stage of development. It has already been strengthened by the arrival of several foreign banks. There are some foreign financial institutions such as EBRD, the World Bank etc. that participated in the creation of the private banks of Albania. EBRD participated in the establishment of the first private bank in Albania, Banca Italo-Albanese, which started operating in 1993. The EBRD will continue to strengthen the financial sector by encouraging strategic investors to invest in Albania. In particular, the EBRD:

• participates in the capital of the Albania Reconstruction Equity Fund;

• has extended a credit line to two private banks to support the development of small and medium-sized enterprises (SMEs);

• has made an equity investment in FEFAD Bank;

• cooperates with the Government and a strategic investor to participate in the privatization of the National Commercial Bank;

• considers the assistance it may provide, along with other international financial institutions, for the restructuring and eventual privatization of the Savings Bank.

3.1. SUGGESTED TYPES OF INSTRUMENTS

Other Governments of Eastern European Countries have applied the mechanism of SME Guarantee Fund. They have analyzed and implemented such a mechanism with the help and advice from donors or International Finance Institutions (IFIs). The intention here was to alleviate the perceived high risk problem in investments through introducing a targeted “SME Loan Guarantee Scheme”.

Commercial banks in Albania could be reluctant to provide loans from own banking funds to SMEs. In this case, the investment will be used mainly by SMEs for short-term working capital at high interest rates and predominantly to the trade sector. Actually, commercial banks in Albania are not so interested to provide long-term investment loans to SMEs, because of perceived high risks and also high overhead costs for monitoring these loans.

The main consideration is simply that by reducing the credit risk, the participating commercial banks could be induced to become actively involved in providing long-term investment credits from their own funds to the SME sector.

This has long-term benefits for the banks, as well as for the SME beneficiaries

and for the country’s economy as a whole: the banks get new clients, the SMEs get long-term credit at normal market rates, the economy gets new investments in productive activities.

Basically the mechanism consists of setting up a kind of special insurance scheme. The fund is established mostly from a grant from Government, from a Donor – sometimes with contributions from local financial institutions

– or a combination of all these.

This fund is put often at the country’s Central Bank, as the technical and moral guardian for the good use of the fund.

The fund is not supposed to cover 100% of the risks. The coverage is often limited to around 70%. The reason is that the participating banks should share a part of the risks. Otherwise they might wrongly be encouraged to lend haphazardly and not to follow sound banking lending practices.

Suitable commercial banks are then invited to participate at the scheme by signing a special agreement with the Guarantee Fund managing institution (e.g. the Central Bank) concerning acceptance of the Fund’s special rules and regulations and the payment of an agreed insurance fee. They could also be encouraged to take a small share in the Fund’s capital, eventually.

In case of bad loans, which could not be recovered in full – after normal and proven efforts by the bank itself, the latter may start proceedings with the Fund’s management to be reimbursed for the agreed percentage of risk covered by the Fund.

It has been observed that the multiplier factor is usually around 4, so that the multiplication effect related to actual credit disbursement is quite high.

A US$ 5 M Fund might thus result in around US$ 20 M loans disbursement over a few years of time.

The Fund’s mechanisms, rules and regulations, although being basically the same in most countries, may have to be redesigned in some cases.

This is to take into account special local economic and financial circumstances. Still, there is a need to take into account some other conceptual elements like: i) Objectives of the fund, ii) Administration and fees’ structure, iii) Lending Terms and credit disbursement schedule, iv) Criteria for project evaluation and v) Guarantees/claims mechanism and other special conditions.

Government will take steps to alleviate present gaps and lending problems by expanding present (micro-banks/development fund) and/or initiating new credit tools, such as SME Loan Guarantee Fund/seed capital/leasing etc.

All these actions will make possible the improving of the SME credit system.

There is a need for SME promotion in order to obtain a more balanced regional and sector development. This could be done by: using fiscal incentives for SME creation in poor areas; studies on regional SME investment opportunities; the creation of SME Industrial Estates/Business Incubators in collaboration with local governments etc. Also by providing the right incentives to promote production instead of trade and thus kick- start once again processing of local agro-production, wood and other raw materials.

3.2. IMPLEMENTING NEW FINANCIAL INSTRUMENTS

Implementing the Loan Guarantee Fund means setting up a special insurance scheme. The fund is established from a grant from the Government, from a Donor—sometimes with contributions from local financial institutions—or a combination of all these.

The Fund is often deposited at the country’s Central Bank, as the technical and moral guardian for the good use of the fund. This fund is not supposed to cover the risk 100%. The cover is often limited to around 70%. The reason is that the participating banks should share a part of the risks; otherwise they might wrongly be encouraged to lend haphazardly and not follow sound bank lending practices.

Suitable commercial banks are then invited to participate at the scheme by signing a special agreement with the Guarantee Fund managing institution (e.g. the Central Bank) concerning the acceptance of the Fund’s special rules and regulations and the payment of an agreed insurance fee.

In case of bad loans, which could not be recovered in full—after normal and proven efforts by the bank itself—the later may start proceedings with the Funds management to be reimbursed for the agreed percentage of risk covered by the Fund.

The Funds mechanisms, rules and regulations, although being basically the same in most countries, may have to be redesigned in some cases.

This is done in order to take into consideration special economic and financial circumstances.

On the other hand, in order to establish a proper Incubator/Estate program, special funds have to be reserved. There is need of capital resources for establishing the incubator in order to build new premises or to transform an existing building, to install or upgrade utilities, to purchase common office equipment and some basic machinery. Operating funds are needed to pay for staff, utilities and other operating costs for the initial 3 years starting up period – later to be covered progressively by increasing tenants’ rent on fee-based services. Renting out machine-time from the beginning however, should cover the use of common machinery. Seed money may be required for some tenants to cover initial working/investment capital needs.

This could be covered partly by special credit schemes and by normal commercial credit from the banks. Funding may be dependent on the objectives of each center. Non-profit incubators may receive funding from the state, from the local community, from donors, community groups, NGOs or foundations who take shares in the venture. The State or the municipality could also contribute by providing rent-free buildings, while the local higher institutes or research centres could assist by in kind support services, staff expertise and students help.

3.3. THE POTENTIAL INFLUENCE OF THE

SUGGESTED INSTRUMENTS TO