The finance gap faced by Maltese SMEs : an assessment

SMEs are the backbone of the Maltese economy because they account for a significant portion of local private sector employment and of the total value added in the Maltese economy. However, while the ability of SMEs to generate employment and wealth is generally acknowledged, there is less awareness of the challenges faced by SMEs to access finance. This dissertation attempts to identify the existence of a finance gap in SME finance, its extent and the factors contributing to it. The key objectives of this research study, therefore, are: - to identify the gap between demand for funds and availability of finance and in which sectors of the economy it is most apparent; - to assess the reasons for imperfections and discrepancies in the financial marketplaces where SMEs raise finance, namely the debt and equity markets; - to evaluate the dimensions of relationship lending in Malta; - to examine ways to bridge the finance gap and facilitate access to finance for SMEs. An electronic survey and a number of personal in-depth interviews were used to collect data for this study. The electronic survey yielded responses from 266 SME owners. Semi-structured interviews were conducted with 6 SME owners, 4 bank representatives and a Malta Enterprise representative. This research study has found that a 'finance gap' exists between demand for funds on the part of SMEs and the provision of finance to meet this demand. This has to be examined in the context of the current credit crunch, which has worsened an already difficult situation. In fact, this study reveals that a significant number of SMEs do not obtain the entire amount requested from the banks. Small firms in the real estate, manufacturing and hospitality iii industry seem to find access to finance more difficult than firms in other industries. The most credit-constrained are start-ups enterprises that are unable to provide collateral or evidence of trade record. The study also reveals the SME perception of the factors contributing to the finance gap. SMEs cite the adverse terms and conditions under which credit is made available. In addition, they consider as hurdles the high interest rates, the duration of the loan application, the bureaucracy involved in the process, and the excessive information requested by the banks. However, the biggest obstacle to bank financing, according to SME respondents, is that the property guarantees requested by banks are far in excess of the loan amount. This study shows that the relationship between SMEs and banks plays a role in financing. According to most of the surveyed SMEs, their firms make use of only one bank for all their banking requirements and resort to this bank when the need for funds arises. Banks, on the other hand, are, in the main, relationship lenders in the sense that they base their modus operandi on the 'Know Your Customer' model and rate the owner's characteristics very high in their decision to forward funds. This study also reveals the pervasive presence of an equity gap in the Maltese economy. Venture This suggests that our business culture and financial circles are still averse towards equity as a result of which many Maltese SMEs remain under-capitalised. This study concludes by making recommendations to stimulate SME growth by trying to narrow the finance gap faced by Maltese SMEs.

Grantor dc:publisher.institution

University of Malta

Year dc:date.issued

2009

• Credit ratings -- Malta
• Small business -- Finance -- Law and legislation -- Malta
• Finance -- Research
• Credit control -- Malta

Statement dc:rights

• info:eu-repo/semantics/restrictedAccess

Language dc:language.iso

en

Repository record dc:identifier.uri

https://www.um.edu.mt/library/oar//handle/123456789/2985

OAI identifier oai:identifier

oai:www.um.edu.mt:123456789/2985