Promoting entrepreneurship in Europe is a core objective of the EU. In fact, the European Commission has incorporated the promotion of entrepreneurship in its Europe 2020 strategy, which recognises entrepreneurship and self-employment as one of the key enablers of sustainable and inclusive growth.
Given the reduction in ERDF funding and the potential reduction in grant co-financing rates following Malta’s move from an Objective 1 country to a non-assisted region, the potential for various financial instruments, not only loan guarantees, needs to be further explored
Not only is entrepreneurship a driving force for job creation, competitiveness and growth, but it also contributes to personal fulfilment and the achievement of social objectives. The EU aims to encourage entrepreneurial initiatives and unlock the growth potential of its businesses.
To this effect, the European Commission’s Directorate-General Enterprise and Industry has been studying the development of entrepreneurship in EU member states for over a decade.
The latest ‘Entrepreneurship in the EU and beyond’ survey reveals that self-employment has become less popular, with a majority of respondents in the EU favouring work as an employee.
In Malta, only a third of respondents prefer self-employment, which is slightly below the EU average of 37 per cent.
A lack of capital or financial resources is seen as a barrier to self-employment in the EU. Moreover, a quarter of respondents in Malta state that they do not have enough skills to be self-employed.
A large majority of EU respondents, who have started a business, specify that having an appropriate idea and having the necessary financing were important factors in their planning. The survey also shows that the key difficulties related to starting a business are a lack of available financial support as well as complexities of the administrative process.
Survey results show that in Malta, more than a fifth of respondents reported that their main fears are those of the possibility of suffering a personal failure, the amount of time and energy needed to devote to their own business and the risk of losing their home or property. When compared to the survey conducted in December 2009, more people in Malta have started a business or are planning to do so. Yet, the survey reveals that this percentage is still below the average of the EU 27.
Recently, another joint assessment study undertaken by the Malta Business Bureau and BOV focusing on the SME financing gap was carried out by Ernst & Young.
This study focused on the current and future potential sources of funding for Maltese SMEs, and the scope for the application of additional financial engineering instruments in Malta.
This report revealed that while SMEs are the backbone of the Maltese economy, they need continuous access to finance to expand their operations and continue generating jobs.
Yet, due to the size of the local market and its unique characteristics, Maltese SMEs often complain of a lack of financing options that can result in the slowdown of their growth potential.
The study shows that 72 per cent of SMEs in the start-up phase are currently using traditional lending products such as loans and overdrafts when these are not necessarily the best solution for companies that are going through their stage of development.
The findings of such surveys sustain the initiatives currently being implemented in Malta in relation to the further development of the Maltese SMEs. In fact, during the current EU Programming Period which spans the period from 2007 to 2013, the Maltese authorities have already directed a portion of Structural Funds to assist SMEs.
This was achieved through grant schemes as well as guarantee schemes such as JEREMIE.
The JEREMIE Malta Fund is based on a loan guarantee scheme and was set up for the first time in Malta in 2011.
Following a call for expression of intent in November 2010, BOV was appointed sole Maltese financial intermediary for the management of the JEREMIE initiative.
The JEREMIE Fund, managed by the European Investment Fund (EIF), injected €8.8 million in the JEREMIE Malta Holding Fund.
Against this guarantee of €8.8 million, BOV added further capital to reach a loan portfolio of € 51 million. JEREMIE is particularly advantageous to SMEs since it reduces their difficulties in accessing finance through the provision of credit risk protection.
This guarantee makes bank financing more affordable since it enables loans to be offered at favourable interest rates in addition to reduced collateral obligations. The full take up of the JEREMIE Scheme a year prior to its planned completion provides a clear signal that such financial instruments are needed to address the SME financing gap.
Indeed, over 500 SMEs benefited from Jeremie which should translate in over €80 million of new investment in the local economy. About 45 per cent of the companies benefiting from JEREMIE were start-up companies.
Another noteworthy statistic is that micro SMEs were the predominant beneficiaries of JEREMIE being 85 per cent of the entire successful applicants and benefitting from circa 70 per cent of the available funds.
The JEREMIE implementation in Malta is certainly a success story, being labelled as “best practice” and a case study for other EU member states.
BOV’s commitment in ensuring that Maltese SMEs can fully exploit all the opportunities that the EU Internal Market has to offer goes beyond the JEREMIE initiative.
It has also been translated in the setting up of a specialised EU Business Development office, aimed at facilitating the local business community to avail itself of EU funding opportunities supported by the opening of an EU Representative Office in Brussels.
In addition, in recent months, BOV has also applied for an EU Centralised Micro-Credit Facility for Micro Loans, particularly for start-ups.
This is a first for a Maltese-based financial institution to embark on such a project.
We expect to announce further information on this new scheme in the near future.
Given the reduction in ERDF funding and the potential reduction in grant co-financing rates following Malta’s move from an Objective 1 country to a non-assisted region, the potential for various financial instruments, not only loan guarantees, needs to be further explored.
The experience of JEREMIE in Malta shows that the same number of enterprises can be assisted with a lower amount of resources, thus increasing efficiency and effectiveness of public funding.
Moreover, the planning and budgeting of the new 2014-2020 Programming Period plays a critical role in the future financing of Malta’s economic development, particularly in the area of SMEs.
The EU is pushing towards complementing grant funding with other forms of interventions, especially innovative financial instruments such as loans, equity and guarantees.
Albert Frendo is Chief Officer Credit at Bank of Valletta.