1. Gaps in Business Access to Finance Joe Lowther Chief of Party USAID Business Enabling Project jlowther@bep.com

2. Approach: “Access” Defined Proximity between lenders and SMEs, operating hours, ease of making and keeping in contact, etc. Supply of funds, willingness of lenders to lend, etc. Cost of finance, level of borrower risk, management burdens Suitability of products and services to SME needs Healthy SMEs have access to formal lenders who are able and willing to offer affordable and suitable financing. Physical Access Availability Affordability Suitability

3. The Situation in the Region: Access to Finance Rankings Availability of financial services Affordability of financial services Ease of access to loans Year 201020112012201020112012201020112012 SERBIA1111039799931009197105 ALBANIA128108 1139912590121136 BOSNIA119126121120124113102122123 BULGARIA95106110111119123624840 CROATIA83889194105104818494 MACEDONIA1221271071121181161229670 ROMANIA104 109100106103788275 SLOVAKIA383942476667435558 Source: World Economic Forum Global Competitiveness Report

4. The Situation in the Region: Financial Markets Rankings Financial market development- sophistication Financing through local equity market Venture capital availability Year 201020112012201020112012201020112012 SERBIA9496100101112124102121126 ALBANIA100107120137140143107124132 BOSNIA11312411910211189126125127 BULGARIA917580908884716658 CROATIA88879296102105108 112 MACEDONIA878279858390726591 ROMANIA81847789 80 7776 SLOVAKIA374748110118117616860 Source: World Economic Forum Global Competitiveness Report

5. The Situation in Serbia 60% of SME’s are not borrowing from formal sources 4 out of 5 SMEs report difficulty or have no wish to access formal sources Distribution is skewed: Largest 8% (> RSD 1mn in revenue) hold > 50% of debt Amounts small: 75% of loans less than EUR 50,000 Key sectors under-served: Production, agriculture, construction < 30% of total Banks are main credit source for 50-60% of SMEs, but account for 30% of debt value 20% or less of finance directed for investment Serbia ranked 105 out of 144 countries in access to loans

6. Percentage of sales – Serbia (2012)

7. Average annual amount borrowed from the bank- SMEs sector (2011, 2012)

8. Suitability of available finance – Serbia (2012) % of surveyed enterprises 8

9. Type of finance used – Serbia (2012) % of surveyed enterprises 9

10. Supply-Side Constraints Enterprise-Side Constraints  Inefficient credit enforcement  High costs of financing  Poor product suitability  Regulatory disincentives  Few alternative sources of finance  Weak supporting services  Limited effectiveness of state and donor funds FINANCING GAP  Weakened financial capacity  Borrower attitudes and risk aversion  Weak capacity to present business  Weak SME market leverage Constraints to Access to Finance In Serbia: The Big Picture

11. Borrower Attitudes & Risk Aversion Information Asymmetry & Legitimacy Poor SME Market Leverage Weakened Financial Capacity Liquidity issues Inadequate collateral Low risk tolerance Expectations of state support Negative sentiment Weak credit culture Weak capacity Informal economy Co-mingling of finances Weak national advocacy Weak negotiating position Demand-side Constraints

12. Weakened Financial Capacity Liquidity Issues Inadequate Collateral Recommendations: Demand-side  Various measures to improve liquidity conditions – VAT tax payments, reduction of payment delays through public sector supply chain, etc.  Better education for SMEs on collateral management  Fast track permitting for qualified real estate collateral

13. Borrower Attitudes & Risk Aversion Low risk tolerance Expectations of state support Negative Sentiment Weak Credit Culture  More communication and collaboration needed between lenders and SME’s (+professional services community)  Reduce politicization of state support  Improvements in credit enforcement will help to reduce the personal exposures of borrowing  Public-private collaboration in improving public awareness and helping to promote positive credit culture  Support for entrepreneurship and belief in SMEs needs to be explicit and promoted by government Recommendations: Demand-side

14. Information Asymmetry & Legitimacy Weak capacity Informal Economy  Training and support to business organizations to build capacity of members  More training and outreach by lenders and more engagement by the professional services community  Development of standardized guidelines and toolkits  Adoption of simplified accounting standards for SMEs  Targeted incentives to get businesses out of informal economy Recommendations: Demand-side

15. Poor SME Market Leverage Weak National Advocacy Weak negotiating position  Business associations to take a more active role in advocating for specific reforms to improving access to members  Business associations to take on intermediary functions in working with banks and members to facilitate credit flows  More education for SMEs on how to organize and make joint approaches to lenders  Elevate the use of public institutions to identify and promote reforms – Council of SMEs, regional development organizations  Public-private initiatives to promote value chain- based financing  Large corporations should help with solutions  Strengthen knowledge about the SME sector Recommendations: Demand-side

16. Recommendations: Key Legal Issues  Improve banks’ ability to enforce loans Amend mortgage law and cadaster rules to enable resolution of junior claims Strengthen court adherence to mortgage law; reduce un-merited debtor-led motions to halt foreclosures; streamline appeals process Strengthen bankruptcy administration Improve enforcement to prevent avoidance and fraudulent transfer  Reduce regulatory barriers to SME lending Apply RIA to financial regulations; consider use of “SME test” Calibrate regulatory requirements to the risks of SME lending (e.g. banks vs. leasing, SMEs vs. Large Corporates) Reduce reliance on minimum loan loss provisions based on payment status Consider expanding the definition of “acceptable” collateral and eliminate regulatory differentiation between types of collateral Reduce credit file documentation requirements for SME lending Liberalize regulations to allow banks to innovate for SME lending  Enable NBFI expansion Legislation to allow new non-bank non-deposit taking lenders; adopt Law on Factoring; strengthen the law on leasing

17. See our Study and White Paper “Financing the Growth of Small and Medium Sized Enterprises” at http://www.policycafe.rs/english/financial- research_en.php#access-to-financehttp://www.policycafe.rs/english/financial- research_en.php#access-to-finance