THE SME SECTOR
4. CONCLUSIONS AND POLICY RECOMMENDATIONS
4.3. PROPOSED CHANGES IN CURRENT PROCEDURES
Perhaps the most striking result is the fact that Albanian enterprises are more concerned about unfair competition from the unofficial economy than about other, more obvious constraints. This concern outweighs even the lack of finance as the most binding constraint they face, either in establishing or expanding a business. For many registered businesses, competition by the informal sector is a problem because of the high level of taxation, whereas for others, such competition is a problem independent of the tax burden.
Nevertheless, lack of finance is also a major issue and it prevents undoubtedly many potentially sound businesses from getting off the ground.
Our survey reveals that remittance flows and other funds provided by family/
friends tend to make up for the scarcity of available bank finance.
Some results suggest that action to help the SME sector can and should be taken by the Albanian authorities in two main areas.
First, the government should make a vigorous and sustained effort to reduce the size of the informal economy. Not only would this help improve macroeconomic imbalances (through higher tax revenues) but it would also reduce the importance of an unfair obstacle faced by legitimate businesses.
The positive experience of some Western countries in reducing the size of the gray economy through selective tax incentives can be a useful guide for Albania.
Second, the role of business advisory services could be expanded. Many companies in our sample reported that they would benefit from support in areas such as marketing techniques, cost management, and ways to improve output quality, but very few had received such help from business support groups. A better targeting of the provision of services and linking them to complementary forms of business support (e.g. provide assistance to prepare a business plan only to enterprises that intend to apply for a loan) would also be desirable. Furthermore, an effective business support system, perhaps through the Chamber of Commerce, could provide an incentive for firms in the informal economy to become registered, thus helping to alleviate the main problem identified in this paper.
Some of the current procedures have to be adjusted to better reflect the newly economic and environment conditions as well as the stage of development of Albanian SME sector. Among them could be dealing with the creation of a competitive financial market through:
• Expanding non-bank funding for the enterprises and for this purpose, developing the stock exchange.
• Developing capital markets by increasing their role in the redistribution of resources in the economy and complementing traditional banking procedures and instruments for accumulating capital and loans for municipal infrastructure development.
• Encouraging the credit activity of commercial banks by removing or limiting the risk on accumulating bad loans through:
• Creating a credit register jointly with the commercial banks.
• Creating a collateral register for committed funds.
• Improving the regulatory acts related to improving risk-assessment in compliance with EU standards.
There is a fair challenge for the commercial banks that will be lending to agricultural businesses and at a low risk and cost. Some ways of reducing risk could be the proper adoption of lending technology, financing of several activities, allocation of loans according to borrowers repayment capacity, better monitoring of contracts, etc. In addition to that, ways of cost reducing could be the use of scale economies, simplification of lending procedures, etc.
Another challenge faced by banks is teaching clients contractual task accomplishment. That is a particularly very important issue since it takes into account the fact that a lot of people in Albania think that they can and should not pay the loan received (perhaps thats the reason why some loans issued by government have never been collected). Donors finances have primarily supported agriculture and agro-food processing industry mechanism. Currently there are five guidelines supported by the World Bank. They are: ASAC project, rehabilitation and drainage project, rural development project, agro-processing project; forest project. Financing has been made by FAO, IFAD, the European Union through PHARE program as well as countries like US, Germany, Netherlands, Switzerland and Italy.
Semi formal institutions are not regulated through banking authorities. For instance Credit Unions and NGOs sometimes considered as part of semi formal sector often prevail as legally registered and are subject of some control forms or reports of some inquiries.
Semi-formal institutions provide goods and services that are to some extent between those offered by formal sector and institutions of informal sector.
The purpose of their credits and products offered has often a common feature from both sectors.
Table 5. Characterization of Banks and other Financial Institutions
Name of
the Bank Year of
Establish ment
Credit Line
Fund (000) Max. Credit amount per client (000)
Collateral
requirement Annual
interest rate Grace Period National Commercial
Bank Savings Bank
Italian-Albanian Bank Dardania Bank Islamic Bank Tirana Bank
National Bank of Greece International Commercial Bank Alpha Credit Bank
American Bank of Albania FEFAD Bank
First Investment Bank Albanian
Development Fund International Finance Co-operation
Albanian American Enterprise Fund 1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
1995
1992
1998 1993 1992 1997
1996
1997
1998
1998
1999
1999 1993
-
1996
Public
Public
Joint Venture Private Private Private
Private
Private
Private
Private
Private
Private Foundation
Project Management Unit Enterprise Fund
Variable
Quarterly 200,000 Lek Variable Not available Not available Variable
Variable
Confidential information Confidential information Confidential information 120 DEM 10,000 Lek
Grand from donors Unlimited
20,000 USD
2,000 USD
70 ECU 172,000 Lek Variable - - 500USD 78,000 Lek 120,0000GRD
120 DEM 10,000 Lek 200 USD
-
-
7,000DEM 1,100 USD
2 USD 500 Lek Up to 2,500 USD
250 up to 1,500 100%
100-120%
150-200 % - -
Negotiable on 150%
of Real Property
150% of credit
150%
-
-
150% of Credit
House, cattle solidarity Negotiable
Minimum 100% of credit
35% for C in Leks 13% for C in USD 41-43% (Lek) 9.5% USD 14.5% in It. Lira -
-
10% in USD 33% in Lek
12% DEM 34% Lek 10% in USD 29% in Lek -
-
12% in DEM 34-36% in Lek
18-24 %
LIBOR + 3-5%
Not less than 15%
Up to one year
Max 6 months
6 months - -
Negotiable
Up to 6 months
-
-
-
Up to 6 months
1-2 months
1-3 Years
6 Months Legal
Status Terms of credit
They often receive donations or government support through technical assistance or subsidies on their activities. As we can notice from Tab. 1, those NGOs have financed both urban and rural areas businesses. The size of their credits has been relatively low or medium varying from USD 350 to USD 5,000. Larger part of them has covered northern and central parts of the country and only some of them have been focused on northeast of cities.
Those who invest in rural areas have a tendency to invest in livestock.
Moreover, in different cases we can observe that NGOs have used in-group lending technology. That means that loans have been given to individuals who set up a group as their guarantee.
USA, USAID
1. SME Development G TA 1995 5,050 5,050
2. TA to enterprises G TA 1992 655 655
3. Enterprise Fund G D 1995 22,600 21,600 Albanian American Enterprise
4. Commercial Law G TA 1992 2,565 2,440 Fund
WORLD BANK
1. Private Industry Recovery SL D 1998 10,250 2,020 Tirana Bank (4,100 USD)
2. Rural and Urban SL D 1993 24,548 11,415 FEFAD (4,100 USD) and ADF
Micro Credit Programs 1. Credit Lines forEIB
Private Enterprise Investment CL D 1995 5,521 2,807 Italian Albanian Bank
1. Durres Industrial ParkEBRD G D 1998 167 115
2. SME Recovery Credit Line CL D 1998 4,000 - Tirana Bank and Italian
Albanian Bank ISLAMIC DEVELOPMENT BANK
1. Rural and Urban SL D 1996 6,155 1,063
Micro-credit Programs EC Phare
1. Support for G TA 1992 5,103 5,067
Private Sector Development
2. Credit Lines for SME G D 1993 4,750 2,000
3. Rural and Urban G D 1994 3,000 3,000
Micro-Credit Programs
4. Durres Industrial Park G D 1995 1,213 29
5. Southern Cost Tourism Study G TA 1996 1,103 -
1. Computer Aided Design CenterUNDP G TA 1994 317 317
2. Promoting Foreign G TA 1994 413 390
Investments in Albania
3. Private Sector Development and G TA 1996 477 400
Job Opportunities in Albania
4. Enterprise Restr. & Development G TA 1998 983 -
of Competitive Conditions
1. Rural and UrbanIFAD SL D 1994 13,110 6,985
Micro-Credit Programs ITALY
1. Constitutional support to SME G TA 1998 1,138 -
2. TA for SME G TA 1993 569 -
3. Credit Line to SME SL D 1993 2,846 -
4. Commodity Aid SL CA 1998 9,108 -
AUSTRIA
1. Regional Tourism Master-plan G TA 1995 208 208
GERMANY
1. Credit lines SL D 1995 17,620 11,789 FEFAD(7 000 DEM)
2. Commodity Aid SL CA 1993 3,746 3,746 National Commercial Bank
3. Promotion of SME creation G TA 1993 5,377 2,970 National Commercial Bank
4. Support to Private Initiatives G TA 1999 545 -
in Rural Areas
5. Promotion of SME-s SL D 1993 6,042 2,098
JAPAN
1. Private Industry Recovery G D 1997 455 226
2. Micro credit G D 1998 400 190 ADF
GREECE
1. Private Sector Support SL D 1998 17,012 - Tirana Bank ( 5 million GDR)
TOTAL 177,241 86,725
Intermediary Institution DONOR /PROJECT Grants,
Loans,
Soft loans Aid type Year of Commitment
(starting from.) Total Budget Total disbursement
Table 6. External Financial Support to Private Enterprise Development