“Smalls” are not forgotten

mrc_fin16Annual Assembly of the European Fund for Southeast Europe.

Out of 900 million Euros as planned for the entire region over the next five years, the European Fund for Southeast Europe will set aside 200 million for financial institutions working with small businesses and entrepreneurs in Serbia. This amount could be higher, if the demand for such loans is demonstrated.

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In the next five years the European Fund for Southeast Europe will spend approximately EUR 900 million in financing small and micro enterprises. This money should initiate a cycle of funding in which the banks could grant about 350,000 loans, with a total value of EUR 2.3 million. This assessment, presented at the annual EFSE meeting by Klaus Glaubit, the president of the board of directors of the fund, was made based on past performance of the Fund, which managed to collect six Euros from private sources per every Euro collected from donors.

Out of EUR 900 million as planned for the entire region over the next five years, the Fund will place EUR 200 million to small enterprises, micro enterprises, and entrepreneurs in Serbia. This amount could be larger, says EFSE, if it appears that the demand for these loans is higher.

Growth of Uncollectible Claims

EFSE is an investment fund that operates on the principles of public-private partnerships, and brings together donors, international financial institutions, and private investors. The target groups are micro and small enterprises, as well as households with limited access to financial services, where the amount of loans approved through local partners should not exceed EUR 100,000.

Since the inception of the Fund in December 2005, and until the end of 2009, EFSE placed USD 684 million through commercial banks and microfinance institutions in South Eastern Europe, and the total loan amount is EUR 1.1 billion. Last year, the entry of new private investors increased the equity to EUR 728.1 million. Activity of the Fund was expanded to 14 countries, including Armenia, Georgia, Belarus, and Azerbaijan, while the decision of EFSE’s Board of Directors of EFSE regarding the entry on the Croatian market is expected soon.

At the annual meeting held last week in Ohrid, the need to increase local funding sources and loans in the local currencies, and realization of sustainable growth based on responsible relations towards the clients and partners had been listed as the main challenges for the upcoming period.

In the past year, small business has proved to be more resistant to deterioration in business conditions than many expected. The fact that the crisis “has taken its toll” is best seen in an increase of uncollectible claims. The percentage of small companies with problems in repayment of loans, that was approximately two percent before the crisis, grew to 5.5 percent, says Sylvia Wisniwski, manager of EFSE.

The reason for the growth in uncollectible claims, however, is not only due to the recession; it is a confirmation of long-term unsustainability of the growth model based on multiple loans at the expense of the quality of the loans. Director of ProCredit Holding, Helen Alexander, has announced that in the future the bank will not approve loans smaller than 2,000 Euros to micro enterprises.

“Our intention is to focus on small enterprises that have greater capacity to invest in business and have better chances to realize revenue from which they will pay back their loan,” explained Helen Alexander for Ekonom: east.

Not much Use from Savings

From the beginning of the crisis, banks have been noticeably more cautious in assessing their clients, and many of them slowed down the release of money from the credit lines for the sake of their own liquidity, says Wisniwski for Ekonom: east. According to her, the last 18 months had been lost somehow because companies hesitated to buy machines or enter into long term investments.

“Now we are slowly moving away from that phase and the entrepreneurs are considering new investments that will compensate for that delay,” she added.

On the other hand, Dragan Santovac, Deputy CEO of Commercial Bank, which signed a loan contract of 20 million Euros with EFSE in Ohrid, believes that the loans to finance liquidity and for permanent working capital will still be in the highest demand.

“Unfortunately, small businesses still do not show a significant courage and willingness to invest into or expand their businesses,” says Santovac for Ekonom: east.

“EFSE primarily sees its role, in providing long-term loans of up to ten years, which are necessary to finance long-term investments”, says Wisniwski.

“We notice a growing demand for these types of loans, but it is difficult for the banks to cover it from the domestic savings, because they are short-term, one year at the most. It is difficult to expect banks to provide long-term loans from such sources”, she said.

Miodrag Džodžo, Director of Risk at Opportunity Bank, believes that the credit lines of organizations such as EFSE, EBRD, World Bank, and subsidized loan program of the Government of Serbia, certainly offer the best conditions for clients in terms of deadline, indexing, amount, and the variability of interest. “However, these funds are not enough for all the enterprises and entrepreneurs who have a need for such loans, and the commercial banks are much less willing to approve loans in Dinars on a long-term basis, primarily due to the instability of the Dinar exchange rate, so business loans in Dinars are mostly short-term in Serbian banks”, says Džodžo.

Low level of local deposits is characteristic for the entire region, and in some countries, pressure on debtors had increased with the weakening of the local currencies. In Serbia, for example, between March 2008 and April 2009, Dinar had lost 21.5 percent of its value in relation to Swiss Franc, and 16.2 percent in relation to Euro. At the same time, in Romania, Leu devalued just slightly less, 19.3 in relation to Franc, and 14.1 percent in relation to Euro.

As foreign funds are not allowed to offer Dinar loans in Serbia, the only option for EFSE to influence the offer of long-term Dinar loans is, according to Wisniwski, the possibility of buying Dinar bonds that would be issued by the banks operating in the country.

The presence of international creditors, such as EFSE, is important not only because of the loan supply maintenance, but also because of the positive impact on banking practices and responsibility towards clients, believes the Governor of the National Bank of Serbia, Radovan Jelasic.

For Helen Alexander, this responsibility means, among other things, that banks focus to increasing the domestic savings, and the shareholders are required to be realistic and not expect excessive profits.

Michael Kortenbusch, consultant for banks and microfinance institutions from the Swiss company Business & Finance Consulting, is of opinion that “although the pressure on financial institutions to think about their own sustainability will increase, this goal should be achieved by increasing internal efficiency, rather than at the expense of social interests of promoting microfinancing”.

The amount of loans distributed by the partner institutions of EFSE to small and micro enterprises in Serbia since the establishment of the Fund, 2005.

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Source: EFSE