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Financing business in Malta

Charles Borg, Bank of Valletta’s chief executive officer, speaks about the challenges of financing the business in today’s economy.

Charles BorgCharles Borg

Financing business projects has always been core to banking. How does Bank of Valletta look upon its’ role in this regard?

The banking sector in Malta is one of the main contributors to Malta’s economic growth, seeking to support the country’s main economic sectors to expand through the responsible granting of credit.

We are pleased to be an important part of the country’s financial services development and are committed to continue contributing towards the sustainable growth of the local economy for years to come. In this regard, we intend to continue identifying and supporting new areas of economic growth, such as the aviation and maritime sectors, while sustaining the more indigenous sectors such as the tourism, manufacturing, retail and wholesale sectors.

When considering a financing project, what criteria does a bank look at?

Banks consider several variables. Featuring prominently on the list are the management behind the project, the cost and funding structure.

Sound management is crucial for the success of any venture undertaking. This is even more so in these types of undertakings where the elbow space to err is very restricted and the implications could be highly material. Hence the bank seeks insights on management’s experience, strategic orientation, marketing and sales abilities, operational capabilities and governance in general. We are giving corporate governance more importance in today’s business environment. The importance of a thorough understanding of the cost structure dynamics cannot be overemphasised. Financial leverage is also a factor that cannot be discounted – high leverage can easily wipe out the project’s gross operating profit while putting pressures on the company’s liquidity and solvency.

It is thus essential that entrepreneurs study the proposal well and arm themselves with facts, feasibility studies and market research to be fully convinced that the proposal will ultimately stand the test of time and will enhance their wealth in the process.

Sound management, good financial structure, focused and targeted marketing initiatives and effective and efficient cost management strategies will definitely be key ingredients for a successful recipe.

One must appreciate that commercial banks are just that: they are neither venture capitalists nor long-term financers. Therefore, when a group of investors presents a project to a bank, it must respect the commercial parameters of banking. In practical terms, the proposal needs to be sustainable in terms of financing, the contribution towards the debt as well as the gearing ratio and the debit service coverage ratio. The latter relates to the company’s ability to repay the financing from its cash flow.

Banks also look for fall back security, particularly when there is no credit history. The presence and extent to which a parent company can provide support to the project should the need arise, is also taken into consideration. The parent company’s support is not mandatory, however, should it be forthcoming, it will obviously have a positive bearing on the decision.

Another contributing factor is the sector involved. It would definitely help the project if it relates to a sector that the country is interested in nurturing. In this case, the project itself would also likely benefit from the support of policy makers.

We are pleased to be an important part of the country’s financial services development

How does the financing scenario look for start-ups and SMEs?

SMEs and start-ups represent over 95 per cent of the business entities in Malta. Access to finance for this sector can be particularly daunting because of a number of factors typically related to the innate characteristics of these players. For instance, one can mention their weak financial management, lack of proper governance and absence of succession plans, accentuated by information asymmetry, which is possibly the highest concern for banks as it can potentially lead to moral hazard.

However, a strong entrepreneurial spirit, backed by good planning and market research can make all the difference.

Bank of Valletta is encouraged to note that more and more SMEs are investing in proper corporate structures to ensure sustainable growth.

What does Bank of Valletta propose for this segment?

Bank of Valletta has always been a key player in the economic development of the country. Over the past five years, the bank positioned itself as the Maltese bank for SMEs. This process kicked off in 2011 when the bank launched a €62m revolving financial instrument called the Joint European Resources for Micro to Medium Enterprises developed by the European Investment Fund. Through Jeremie, the bank provided finance to over 650 Maltese SMEs and start-ups generating a total investment exceeding €100m in the Maltese economy.

In 2014, the bank consolidated its position in this market segment by successfully tapping into another EU guarantee instrument targeting start-up companies. The BOV Start Plus financial instrument offers start-ups a small loan to kick-start their business idea with no obligation to provide the bank with collateral.

The other tailor-made product for SMEs is the BOV4SME product. The bank tapped into the ECB targeted long term refinancing operations to provide SMEs in the growth phase of their life cycle with a financing facility that provides them with reduced interest rates and improved collateral terms. To date this has assisted over 200 SMEs and microenterprises to grow. The bank’s efforts to support SMEs is validated by statistics that show that 99 per cent of the bank’s clients are SMEs, constituting 77 per cent in terms of monetary exposure.

Our support for SMEs goes beyond financing. Through our community programme, we seek to collaborate with third parties to organise fora where topics of interest to this economic sector are discussed. This year, a business forum was organised specifically targeting family businesses and the challenges they face.

Bank of Valletta p.l.c. is a public limited company licenced to conduct banking and investment services business by the Malta Financial Services Authority.

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