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Improving access to finance

Malta has recently been lauded by the International Monetary Fund for its strong economic model. This success would not have been possible without the entrepreneurial perseverance demonstrated over the years by the business community.

However, more needs to be done to maintain and improve the good work achieved so far.

Our economic growth relies on the local business community’s propensity to invest and expand its commercial endeavours.

Yet local SMEs often struggle to find adequate means of financing during their life cycle.

Our economic growth relies on the local business community’s propensity to invest

Highlighting this fact is the MBB’s most recent study on ‘Market Gaps in Access to Finance’ in Malta, which shows that 30 per cent of SMEs find problems in raising credit to finance their development. The study demonstrates how the only feasible option for financing in Malta is the use of ‘traditional’ bank loans and overdrafts.

A total of 72 per cent of SMEs in the start-up phase have been forced to rely on these lending products, while the other 28 per cent raise capital primarily through trade credits and family funding.

Such lending products do not always provide the best solution for enterprises. This is because companies would be required to put up huge amounts of liquidity in loan and interest repayment, when companies would be better off investing this money in consolidating their business.

It is clear that Malta needs to diversify the financing options for SMEs to generate further business-driven economic development.

Greater and varied availability of business financing options is crucial to aid the development of promising sectors, such as research and development, and the creative industries, among others.

The study presents a number of alternative viable financing sources. Such options include tapping the potential for venture capital funds, increasing allocation of EU funds to the private sector, and expanding existing financial engineering instruments.

An attractive option for local enterprises, particularly those in the initial phases, is venture capital funds. High-risk private equity administered through a fund can offer high returns for both the investor and the enterprise benefitting from the financing.

For a small economy like Malta, re-establishing venture capital can provide a means of strengthening and complementing current efforts to attract foreign direct investment, which would further fuel business development.

Another recommendation made by the study is increased allocation of EU funds to the private sector.

Maltese enterprise has benefited from several EU-funded grants over the past years.

We firmly believe an increase in the allocation of EU funds to the private sector for the period 2014-2020 would result in higher economic growth. Further allocation of grants, coupled with a streamlined application and fund disbursement process would significantly increase the multiplier effect these grants have on the local economy.

This would provide a substantial source of financing for many companies, particularly in the tourism, manufacturing, research and development, creative industries, and the ‘green’ sectors.

The study looks into the issues that were encountered in the administration of EU funds that were directed to industry.

When organisations decide to isolate themselves and not collaborate with other players involved in the process, Malta stands to lose.

We made mistakes and, unfortunately, our consultations show we have not learnt enough from them.

The EU itself is encouraging member states to be innovative in leveraging EU funds to move away from the current economic crisis.

We should therefore not ignore calls to find innovative and efficient ways how to use what is available to obtain the maximum possible growth potential from EU funds.

The study identifies another key source of finance for local enterprises: the provision of other financial engineering products besides Jeremie.

This loan guarantee scheme, locally administered by Bank of Valletta, has proven a great success among Maltese firms, with around 500 SMEs benefiting from the initiative.

Jeremie offers three variants of credit assistance: loan guarantees, seed-loans, and equity guarantees.

So far, only loan guarantees are offered in Malta. The MBB study shows there is a clear demand for the other variants of financial engineering to be pursued within the next programming period.

With the potential loss of Objective 1 status, Malta will have a more restrictive set of rules to deal with when incentivising industry to invest in growth.

This calls for the combined effort of government and industry to work together and find the right instruments that would ensure the continued growth of Malta’s economy.

The MBB is willing to offer its full support to Government and local stakeholders in making untapped and innovative funding sources available to unlock this potential.

[email protected]

George Vella is president of the Malta Business Bureau

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