The Role of Banking Sector in SME Lending

By July 19, 2017 Accounting

The endeavor demand finance in every stage of the concern ; whether they are in start-up stage or non, does non count. But for the authorities and the other histrions, for financing an endeavor, there exist some inquiries:

A national or regional SME policy? The chances of the national policy and

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regional policy may belie in which concern type should be promoted, which portion of the

land should but open for industrialisation, and how the financess should be allocated ( Armstrong

and Taylor, 2000 ) .

Question 2: Where to supply the aid: endeavor nodes or uniform aid? ( Armstrong and

Taylor, 2000 ) A spatially targeted country is normally advised by the policy shapers to accomplish one of the aims, which make SMEs formation an of import tool for regional and national growing, increasing the disablements of some developing parts, and differences along the state. Nevertheless, for an enterpriser, puting in an developing part and largely with is/her ain nest eggs is non easy because of the high-risk of low demand and non well-organized

substructure provided that there occurs a niche market.

Question 1 and 2 are most confusing jobs of national and regional invention systems.

The regional policy development is non one of the subjects of this thesis. Therefore, a elaborate

statement about regional policies is non made. However, Turkey ‘s Regional SME policy should

be mentioned here in brief.

Turkey has been implementing EU-supported regional development plan for SMEs as a

campaigner state ( hypertext transfer protocol: // ) . The SME undertakings, which are suiting

the demands of the fiscal alliance made with EU, are supported. The outlook is

that the undertakings satisfy the regional aims and precedences set frontward and deriving

comparative advantages in the sector. In this regard, the SMEs in fabrication, agricultural

and service sectors are credited with non-payment financess.

The sample activities are as followerss:

-The consultancy and preparation activities / plans for SME development ;

– Selling enterprises, just and advertizement ;

– Selling for agricultural merchandises ;

-Creating hallmark and raising gross in touristry sector ;

Technology transportation and advanced undertakings ;

– Human resources development undertakings.

( hypertext transfer protocol: // )

In September 2005, TOBB made the one-year publication about Turkey ‘s national economic system. It is

mentioned that the betterment of macro indexes does non retrieve all the parts. Harmonizing

to TOBB ‘s research, merely 6 of the 49 metropoliss claimed a positive consequence of the investing inducement

plan, however the remainder of the metropoliss under the plan and 32 metropoliss which are non under

the plan made ailments about the incentive ordinances. In general, the participant

endeavors cited that the investing inducement system needed to be redesigned with regard to

sectoral and regional development and resource indexes, so that the extra capacity in some histrions can be inhibited. In add-on, TOBB ‘s publication underlines the ill-balanced economic

state of affairs of the parts ( TOBB, 2005 ) .

Question 3: Who to assist: new starting motors or subsisters? Sing the belief that SMEs benefit to

the state most because of the occupation creative activity, this quandary is of import because there ever

exists a tradeoff between actuating the entrepreneurship in a concern environment which has

a high decease rate and acquiring the endeavors used to external funding for undertakings that may

ne’er acquire off the land ( Armstrong and Taylor, 2000 ) .

OECD study has concluded that budget-funded support plans to ease job-creating

activities need to be expanded. In order to guarantee the development and long-run endurance of

new technically and economically competitory concerns, enterprisers need entree to finance.

It is of import to give the smallest endeavors, which make up the bulk of Turkish SMEs,

entree to the support that can counterbalance for the operational resources they lack ( OECD, 2004 ) .

This decision is maintained by International Finance Corporation ( IFC ) SME dataset. Turkey

is in the upper-middle income group, and cost of get downing a legal concern ( % of income per

capita ) is 26.4 higher than the group ‘s norm of 19.9 and have the 2nd highest rank after

Lebanon ( IFC, 2006 ) .

In 2001 and 2002, the reform of the banking and fiscal system had inauspicious effects for

SMEs. The Bankss imposed retroactive and one-sided involvement rate additions that triggered

refund troubles and a crisp bead in the volume and usage of available recognition for losingss on

subsidised loans to shopkeepers, craftsmans and start-ups to cover the losingss ( OECD, 2004 ) .

KOSGEB provides fiscal inducements to promote entrepreneurial start-ups. These inducements

are for support of both fixed investing and operating disbursals. Whether it is paid back or non,

or the continuance of wage back are determined harmonizing to the intent of the recognition, the part or

the success of the prototyping ( for the engineering start-ups ) . Start-ups in developed parts are

expected to pay back more rapidly, while houses in less developed countries are given longer grace

periods and lower paybacks in early old ages. A non-payback footing for reding support, support

or R & A ; D applications and publication of R & A ; D findings, for renting infinite in a technopark, and for

export publicity intents are besides supplied by KOSGEB ( hypertext transfer protocol: // ) .

In EU, the relentless spread in early phase finance makes it necessary that the populace sector

continues to work with the private sector to get the better of it ( EC, 2003 a ) .

Particularly for start-ups, venture capital is an effectual instrument. To further the demands of

venture capital, KOSGEB coordinated Turkey ‘s engagement in the European Community

plan, Multi-annual Programme for Enterprise and Entrepreneurship and in Particular for

Small and Medium-sized Enterprises ( 2001-05 ) . This was the first in which Turkey has taken

portion, for about EUR 4.5 million. Under the plan, Turkey aims to larn about and

quickly deploy the fiscal instruments and mechanisms – associating to seed capital, venture

capital, guaranteed loans and “ concern angels ” – developed by the European Union to back up

knowledge- and technology-based and advanced concerns. Turkey may miss some

specialised support mechanisms for start-ups and early-stage endeavors, but it does hold the

beginnings of an organized venture capital system. Venture capitalists by and large raise capital

through public or private stock issues ( private issues are made merely to “ sophisticated ” investors

who meet certain wealth demands ) which are so disbursed through a company that

specializes in back uping start-ups or early-stage enlargement houses. Merely about one in 200 houses

meets the investing standards specified by these houses. Such companies normally require an

expected compound growing rate of 25 % or more a twelvemonth for at least five to seven old ages. They

anticipate that one of every two investings will neglect and the invested capital will be wholly lost

( OECD, 2004 ) .

Question 3: Who to assist: fabrication or services? ( Armstrong and Taylor, 2000 ) The service

sector has non got much fixed capital like it is in fabricating because of the heavy equipment

or the machine park. However, the service sector is non efficient as the fabrication in longterm

stableness and occupation creative activity since to go out and the entryway into sector is easier.

Large endeavors are more advanced than SMEs in both sectors. From a sectoral point of position,

industry ( fabricating ) sector is more advanced than service sector in Turkey.

High Interest Rate Charges

Indeed, speaking about ‘the support job ‘ may be misleading for the reader, since the Bankss

intend to borrow but with high involvement rates for the SMEs. The smaller endeavors are

disadvantaged since they have to borrow from the same market with the larger 1s ; those can

afford to pay much for larger sum of support. Besides the rates rise because of the deficiency of the

collaterals, higher debt funding, and comprehending to be hazardous ( Bayraktar and Kose, 2004 ) .

Equity Contribution / Collateral / Guarantee

The study conducted with Zonguldak SMEs, has shown that the collateral is among the first

two grounds of why the houses does non mean to borrow from the Bankss ( Bayraktar and Kose,

2004 ) . The other top ground is the high involvement rates.

High Administrative Costss

Alternatively of working with many little client demanding small sum of credits, working with

the 1s which demand bigger sum of recognition sums is more profitable for the Bankss and

crediting organisations, sing the administrative costs. This sentiment, for a long clip,

directed the banking sector ‘s position about the SMEs. This manner of looking, that hampered the

SMEs being served in equal conditions with the bigger 1s, is emphasized by International

Bank General Manager Melih ARAS in an interview as follows: “ Tiny plants can non be

handled. Our organisation is non large, a missive of recognition of 1 million TL acquires the same manhours

and costs as it is for 1 million TL ” ( MuftuoAYlu, 1997 ) .

Today, this sentiment is invalid. The endurances learned many things from the experiences of the

collapsed 1s. The Bankss should make existent banking operations and seek to do money from the

committees of those operations since loaning to the province with high involvement rates in an

inflationist environment is over any longer, and seeking to avoid crediting which is a profession

geting existent sector experience and marking.

In the last few old ages, there exist an unbelievable race and merchandise development in the commercial

banking, which focuses on the SMEs. Comparing the 2001 and 2003 market portions of the first 9

Bankss in the sector, in the norm a rise of 73 % can be seen. SMEs are transporting high potency

of gross revenues for the bankers since it is expected them to hold 40-50 % portion in the Bankss recognition

portfolios shortly. However, that portion is below 5 % today. This is non so unrealistic due to the

SMEs export possible and investing capacity ( Levent, 2004 ) .

Business Plan

In the instance of medium size endeavors, the enterprisers are normally business communities or

professionals with considerable industrial experience, whereas for little workshops the proprietors

originate from the store floor. Industrial experience may non be plenty to provide a concern program

to a loaner. Besides in most SMEs in Turkey, the concentration of managerial and production

maps is in the individual of the proprietor ( http: // ) . A

concern program is like an advertizement stating people the house ‘s chances and future programs, and

depicting the recognition need explicitly to an foreigner. So, the rawness in such programs will do

negative feeling about the borrower. The loaner has to surmise every point to vouch the

recognition return and apportion the resources every bit whether this loaner is from a private bank or

province bank.

The enterpriser of the SMEs are largely non eager to turn and put in new thoughts, and prefer

the traditional ways non merely in maintaining fiscal records but besides in technological and

managerial manner, which are beyond the most of import things the Bankss care while administering

already scarce financess.

For an investing recognition demand, a feasibleness survey must be included in the concern program, but

this is besides largely missed. The bank with its professional recognition scorers and sector experts may

look into the feasibleness to procure the investing and therefore the recognition return.

Apathy of Financing SMEs

It can be said that for the last few old ages at that place exits an unbelievable development in support SMEs

with recognition. Therefore, apathy of funding SMEs has decreased, but still occurs.

Turkey ‘s first 9 Bankss are eager to work with the SMEs, but with the stronger 1s, while the

micro 1s can non easy happen funding, except the European Fundss.

Since 1999 the European Commission has been back uping capacity edifice in the fiscal

markets of the accession and campaigner states through the SME Finance Facility, which has

been funded by the Phare and Meda programmes. This installation has been managed by the

European Bank for Reconstruction and Development, the Council of Europe Bank in

cooperation with the KfW banking group, and by the EIB, which have offered recognition lines to

local Bankss for SME loaning. These Bankss have besides received fiscal inducements to develop their

forces and to impart to SMEs. The acceptance of the organic structure of European Union statute law and the

execution of the Financial Services Action Plan will assist the accession and campaigner

states to solidify their legal environment, which will ease the development of fiscal

markets ( EC, 2003 a ) .

The Bankss try to acquire in the SME market foremost with the merchandises like sedimentations or missive of recognition

transporting less hazard. In that sense, the SME crediting through the sector Chamberss are besides more

preferable for the Bankss. It is obvious that the banking sector is non really willing to put in the

venture capital market. It is stated in the KOSGEB-HALKBANK express SME support recognition

plan, the SMEs which have a history in the sector the house has been in

( hypertext transfer protocol: // ) .

Bureaucratic Hindrances

It is mentioned about the character of the enterpriser in Turkey while reasoning about the

concern program. For the same grounds, the bureaucratism is a hinderance for them. The proprietor does

non hold much knowledge about the work flow in these sorts of applications, and this is why the

loaners turn down most of their recognition applications. The scarce budget of the little houses does

non allow the occupation description and enrolling the employee harmonizing to professions. Most of the

fabrication houses outsource or do non use any one for the selling or the organisation


KOSGEB serves the SMEs in these professions and confer with them for their applications for the

European financess.

Short-run Lending That Does Not Match The Maturity Of The Investing

The enterprisers are in demand of funding largely in the start-up stage ( Bayraktar and Kose,

2004 ) . At that phase, it is difficult to happen funding from the Bankss, since venture capital is non a

mature merchandise for them and it is hazardous. Even if they find some credits demoing their ain

nest eggs as warrant, they face the mismatch between the recognition adulthood and merchandise life rhythm.

Banks prefer short-run loaning whereas an thought, turning into a merchandise and devising net income, takes

longer than 3-6 months period.

Lack of Consultancy and Information in Financial Decision-making

This is one of the top grounds why the houses are standing off from the bank credits ( Bayraktar

and Kose, 2004 ) . Traditional recognition loaning is non the lone manner to finance a house. The SMEs are

relatively off from the information beginnings due to unqualified employee, finance and

managerial mistakes. In this mode, Bankss are seen as the intervention in informing the

enterprisers about the recognition chances, types and demands. This is because the SMEs

hold already an interaction for day-to-day fiscal operations with the Bankss, and this relationship is

unfastened to be improved for prolonging long-standing cooperation. In EU, the EIB relies on a

web of commercial Bankss that are in direct contact and have broad spread subdivisions already

with the SME clients, alternatively of utilizing its ain employee covering straight with the SME

clients spread throughout the EU ( EIBG, 2004 ) .

The Information Environment

The information substructure probably has a important consequence on the handiness of recognition to

SMEs. The more the loaners portion information about public presentation, the more credits are ailable or endeavors ( Jappelli and Pagano 2001, Love and Mylenko 2003 ) . The of import facet of the

information substructure is the accounting environment. For illustration, fiscal compacts are

non executable if the fiscal ratios calculated from bank fiscal statements are non dependable. The

other of import facet of the information substructure is the handiness of information on

payment public presentation. Third-party information exchanges or concern recognition agency provide a

formal organisational mechanism for the exchange of commercial payment public presentation

information. Furthermore, they have been shown to hold power in foretelling steadfast failure beyond

fiscal ratios and other descriptive information about the house ( Kallberg and Udell, 2003 ) .

Survey informations besides indicate that without recognition bureaus the clip to treat loans, the cost of

doing loans, and the degree of defaults would wholly be higher ( Miller 2003 ) . These exchanges can

be in private owned – such as the universes largest, Dun and Bradstreet – or they can be publically

owned – such as the national recognition registers in Italy and Argentina ( Berger and Udell, 2004 ) .

In the United States, to standardise all the accounting installations, The General Accounting Office

serves SMEs. The US Small Business Administration has an Inspector General, whose staff

behaviors both programmatic and financial audits and ratings within the bureau, and is capable

to probe by the General Accounting Office, which is an arm of the US Congress and

which conducts programmatic ratings as requested by the Committees of the Congress to

back up their inadvertence of the Executive Branch ( OECD, 2004 ) .

SMEs need reding and aid to bring forth the information required by the loaners. Small

endeavors normally have really little accounting sections and frequently they have no accounting

section at all. The entrepreneurs themselves may miss fiscal administrative accomplishments and

they are so involved in daily concern affairs that the paperss required by the bank

( e.g. cost accounting paperss or concern programs ) are frequently neglected. In some states

standardized concern programs, simulation package, etc. are provided by Bankss to back up SMEs in

fixing loan applications and concern programs ( EC, 2003 B ) . In Turkey, many Bankss offer these

sorts of services ( hypertext transfer protocol: // ) .

In Turkey, the standardisation for accounting systems and information sharing has non been

managed yet. In Turkey, to measure payment public presentation, and to supply the exchange of information among fiscal establishments for the intent of monitoring and controling of

consumer credits information ( including credits cards ) KKB A.Az . ( Credit Bureau of Turkey )

was established in 1995. KKB was established one of the most of import and the largest

databases of Turkey. Credit Reference System ( CRS ) is an Information Sharing System

developed by KKB A.Az . ( Credit Bureau of Turkey ) in line with its aim of foundation

through which its 28 members can portion information on personal recognition operations

( hypertext transfer protocol: // ) . This agency covers merely consumer credits, and can be enlarged for the

endeavors ‘ payment public presentation database, every bit good, in future. Works taking at enabling the

sharing of information required for the monitoring and control of corporate credits within the

KKB have besides been started ( TBB, 2005 a ) .

The Tax and Regulatory Environment

SMEs ‘ maintained net incomes are the best signifier of funding for growing and investing. However,

retained net incomes frequently suffer from unequal revenue enhancement intervention, therefore, a reappraisal for financial agreements

on revenue enhancement is needed to advance steadfast growing. Furthermore, experience shows that investings

by informal hazard investors like friends, household and concern angels can efficaciously be promoted

through revenue enhancement interruptions ( EC, 2003 a ) . This ordinance besides promotes establishments like concern angels,

every bit good.

In Turkey, to advance investing, revenue enhancement decrease is implemented by the Undersecretariat of

Treasury. This ordinance works in the same manner both for local endeavors and for foreign 1s.

“ Specific elements vary depending on the location and size of the house every bit good as the nature of

the investing. Location standards define three classs: developed parts, first-priority

development parts and normal parts. Investment aid takes a assortment of signifiers:

freedoms from imposts responsibility, VAT freedom for machinery and equipment imported or

purchased on the domestic market, and recognition allotment from the budget. The investing

allowance, which is the type of aid most appreciated by concerns, and the freedom

from certain revenue enhancements, responsibilities and fees were antecedently among the inducement steps offered under

the General Investment Encouragement System. The investing allowance, which is a signifier of corporate revenue enhancement tax write-off, has been automatically available since April 2003 and the freedom

from certain revenue enhancements, responsibilities and fees, which are levied on minutess associating to the procedure of

obtaining investing credits through Bankss, has been available automatically since January

2004 and therefore, no longer carries the duty to hold an inducement certification ” ( OECD, 2004 ) .

Tax is an effectual tool among SME development policies and demo its consequence in the short

tally. The SME policy shapers can utilize this tool to straight impart the endeavors towards

specific fiscal instruments.

Turkish authoritiess have besides used revenue enhancement inducements as province assistance for investing to SMEs. Those

inducements are as followerss:

– The VAT paid in machinery purchases shall be reimbursed to the investor. For the

reimbursement of the VAT, the machinery must be bran-new.

-Fund-based loan minutess will be exempt from cast and responsibilities.

– If natural stuffs, machinery and equipment are imported for the realisation of the

undertaking covered by the inducements, such imports will be exempt from imposts revenue enhancements

( SoAYut, 1997 ) .

The fiscal systems of the accession and campaigner states supply less equity investings

and bank loaning than in the current Member States. The mean ratio of domestic bank

loaning to GDP in the accession states is about 40 % , whereas the norm for the euro country

is 140 % . Small houses suffer most from developing fiscal and legal systems, including

ill-defined bankruptcy Torahs. In peculiar, if corporate public presentation is non crystalline and creditor

rights are weak, collateral-based loaning is non attractive for Bankss. Weak legal protection besides

discourages the usage of trade recognition and long-run loaning, which is at a low degree in the

accession and campaigner states.

Recognition restraints limit the growing of SMEs in most accession and campaigner states, but at that place

are differences. In states that have a concern environment favourable to funding, besides the

SME sector is numerically stronger. Furthermore, foreign bank incursion has improved

funding conditions for all houses, including SMEs. Venture capital markets in the accession and andidate states suffer from the weak and illiquid stock markets that limit investors ‘ issue

possibilities and the preferable issue option of venture capital financess in these states is to happen

foreign strategic investors. The venture capital investings have concentrated on later phase

investings, mature endeavors and low-tech companies. The states lack hi-tech

entrepreneurship, but the foreign dominated and immature venture capital industry might besides miss

the agencies like local cognition and informal webs to happen possible enterprisers.

Furthermore, there are administrative and cultural barriers to entrepreneurship emanating from

universities and research establishments and links between them and concerns are weak. Overall,

the accession and campaigner states need to pay attending to the farther development of their

fiscal systems. This includes capacity edifice throughout the fiscal sector doing it

easier for Bankss to go more acquainted with SMEs and more willing to supply medium

and long-run loaning. Furthermore, a gradual outgrowth of an equity civilization will open the manner

for a more developed venture capital industry ( EC, 2003 a ) .

Particularly the province Bankss, have been offering relatively low rate credits. Not merely in

Turkey, but besides in many developing states, the conditions of these sort of credits were

ever argued ( hypertext transfer protocol: // ) . Direct public support ways prohibit the SMEs to

take disciplinary action in investing, and inhibit accomplishing a sustainable SME support fiscal

environment in the long-run. Today, the fund allotment is done by KOSGEB intervention, to

maintain the record of the credited endeavors more healthy and driving the endeavors along the

development policy.

“ In Turkey, Bankss do non impart money accounting to the feasibleness survey or the work program of the

start-up companies ” ( hypertext transfer protocol: // ) . Many start-ups enter into

the concern with their ain nest eggs or relations ‘ or friends ‘ and can non entree credits due to

deficiency of path record. This is besides true for many states like Ghana

( hypertext transfer protocol: // ) and China, and the Eastern Europe

( Allende, Klapper and Sulla, 2002 ) , where the World Bank have set up some undertakings to do

accessing finance easier for the little endeavors, every bit good as Europe, where the starting motors are

supported as a scheme of European Investment Bank ( EIBG, 2004 ) .

The writer determined the loaning substructure indexes of Turkey and evaluated those

determiners harmonizing to OECD informations. Among upper in-between income states, the indexes are

as followerss:

– Get downing a Legal Business: This index is evaluated with regard to “ clip to get down a

concern ( yearss ) ” and “ Cost ( % of income per capita ) ” . The values are, 9 and 26.4,

in turn. In Turkey, the bureaucratic applications take shorter clip than the same

group OECD states ( about 40 yearss ) , whereas, the cost to set up a

concern is higher than the norm, 18 % of income per capita ( IFC, 2006 ) .

– Recognition Markets: The recognition adequateness is evaluated on “ Private recognition as % of GDP

( 2003 ) ” , “ Private agency coverage ( borrowers per 1000 capita ) ” and “ Cost to make

collateral ( % of income per capita ) ” . The values are, 16.3, 300, and 19.9, in turn.

In Turkey, private recognition use is lower than the same group OECD states

( about 42 % ) . Private agency coverage ratio is besides under the norm of the

income group, 211 borrowers per 1000 capita. The collateral job is disputing.

The higher cost to make collateral, over the norm of 9.1 % per capita, supports the

thought claimed before ( IFC, 2006 ) .

– Option Support instruments: The usage ratios of leasing and factorization for the twelvemonth

of 2003 constitute a position for Turkey ‘s alternate support index. Renting as % of entire

private recognition factorization as % of GDP, are 3.76 and 1.94, in turn. Turkey has

ranked higher than the other OECD states. Most of the states does non hold informations

in these classs, therefore the norms are non taken into history for the rating ( IFC,

2006 ) .


Fiscal establishment construction means the market presence of different types of fiscal

establishments that provide recognition, every bit good as the competition among these establishments. The

differences in the fiscal establishment construction and lending substructure may significantly

impact the handiness of financess to SMEs by impacting the feasibleness with which fiscal

establishments may use the different loaning engineerings in which they have comparative

advantages to supply financess to different types of SMEs ( EC, 2003 a ) . The Bankss are the most

of import histrions of national fiscal substructure.

Turkish banking sector, under the fiscal liberalisation policies of after 1989 period, had a

mission of financing the province, which has lost the ability to borrow abroad straight. This mission

was really profitable in those yearss ‘ inflationist environment and has caused the sector to free

the mission of the supply financess to the existent sector. The part of the credits of the sedimentation Bankss

in the GDP was non as expected for an industry supposed to better under the broad policies,

back uping the import and export installations ( Yeldan, 2001 ) .

Not merely for the banking sector, but besides for the existent sector, the bad harangue methods to

earn money were popular and turned the state of affairs into a rhythm without any issue. In that period,

the existent sector was besides doing money non from their nucleus installations, but from the money

market. These two participants, the banking sector and the existent sector, manus in manus gave rise to the

bad salvaging alternatively of existent economic system net incomes ( Yeldan, 2001 ) .

With the crisis the Turkish economic system went through, both sectors shrank and could non happen any

other manner than executing the nucleus installations, for the bankers, crediting, and for the endeavors

puting in nucleus installations and financing their investings. This is why the development policies

are so popular for all the histrions of the economic system ; the province, the endeavors, the bankers, and the

other fiscal or non-financial organisations and the establishments.

Today, the banking sector is in a haste to beef up its place in funding the SME

development, but the portfolios of the Bankss have been coercing them to maintain the adulthood short

since the unstable market conditions let the bankers collect nest eggs with less than annual for a

long period since 1980s. With regard to the statistics of June 2006, 70 % of entire assets, and

72 % of entire liabilities have shorter adulthood than 1 twelvemonth ( TBB, 2006 ) . With the premise that

the investors are in a manner the rescuers, the orientation towards short-run is non the mistake of the

banking sector entirely. As it is said before, the money supply from the endeavors, which keeps

the money in state-bonds or short-run sedimentations with high involvement rates instead than puting the

money into concern ( hypertext transfer protocol: // ) . Therefore,

this thesis claims that the fiscal job of SME is non merely as a deficiency of recognition with low

involvement rates, and besides the direction failings are restricting their ability to utilize recognition efficaciously

The Role of Banking Sector in SME Lending

In the history of today ‘s developed state, Germany, there is an of import bank: the German

GroI?banken. In literature, this bank is told to hold a great function in industrialisation of the

Germany before the World War II. This was achieved by prolonging great support to the

endeavors, depending on the theory that in the universe of perfect information and no bureau

costs, houses can borrow and put optimally ( Paulet, 1999 ) .

Basically, the money market agents can be listed as: The bank, the stockholders of the bank ( the

rescuers in a manner, concern angels, and the stockholders of the bank ) and the endeavors. A bankfirm

relation is considered to be profitable for both parties in a big portion of the broad theories,

“ because:

1. The bank prevents the house from set abouting undertakings that are excessively hazardous

2. The house signals its repute to the market by holding a regular relation with a

bank ” ( Paulet, 1999 ) ;

3. The bank signals its repute to the market by holding more recognition clients with

extremely executing credits ;

4. The stockholders earn net income in a less bad environment and in a unafraid manner.

“ Financing SMEs is a local concern. ” ( EIBG, 2004 ) . SMEs need direct entree to the fiscal spouses with high quality local and sectoral information that is able to supervise closely the altering demand and carry out assessments of proposes undertakings. The failings of the SME direction and its effects were mentioned earlier. Therefore, with the qualified employee trained for the fiscal activities and their impact on the concern, the Bankss are proper to be used as mediators, sing their broad subdivision web. The point here is that analysing the quandary of the loaner and doing proposals to get the better of these troubles.

Harmonizing to the studies of the World Bank and the European Union, funding through the banking sector is the most proper manner to back up the SME development in the EU, in the developing, and in the passage states, and this support method is parallel with the liberalisation policies applied in the economic systems of those states ( World Bank, 2005 ; hypertext transfer protocol: // ; EIBG, 2004 ; World Bank, 2000 ; Allende, Klapper, and Sulla, 2002 ) .

In EU, fundamentally two funding SME systems can be observed: A bank-based system, as in Germany and Austria, and a market-based fiscal system as in the United Kingdom. The importance of bank funding varies among the member provinces, while the bulk of European SMEs depend on bank funding and the other support resources are non wide-spread ( EC, 2003 B ) .

For the Turkish SMEs, the recognition funding from the Bankss are among the first two methods for funding their investings. This order may alter harmonizing to which phase the endeavor is in – start-up or growth- and the schemes of the enterpriser. But most SMEs have direct relationships with the local bank offices and see the bankers non merely as a beginning of finance but besides as a beginning of information ( Bayraktar and Kose, 2004 ) .

In Turkey, chiefly two chief groups perform the SME banking:

1. Public sector banking: Halkbank leaded this sector for long old ages. “ Halkbank was established in 1933 to move as a fiscal agent for junior-grade bargainers, craftsmans and little industries. Following 1963, by which Turkey has marched into planned periods Halkbank has begun to play a more marked function in giving fiscal support to SMEs. ” There are besides other public Bankss with some other non-banking fiscal organisations giving fiscal support to the SMEs ; VakA±fbank, TKB, TSKB, and Eximbank ( hypertext transfer protocol: // ) . However, there have been some jobs of the range of those financess, and the public presentation of the credits distributed in political side, and economical side. Halkbank is crediting the SMEs, which demand the KOSGEB financess ( hypertext transfer protocol: // ) . As it is in other states like India, the Turkish public sector banking besides faces cardinal challenges ; spread outing the loans while bettering the quality of the portfolio and taking supportive actions while non suppressing the private sector development in the SME market with lower involvement rates or direct support.

2. Private sector banking: These commercial Bankss, though they were non sing the SMEs for long old ages, happening them excessively hazardous, position SME loaning as a profitable concern and offer them many merchandises in a wide-range ( KOSGEB, 2004 a ) . In the study conducted with the 1200 SMEs in Turkey, the usage ratios and popularity of those fiscal services ( look into book, cheque cashing, look into aggregation, transportation, EFT, personal recognition cards, concern recognition cards, missive of warrant, missive of recognition ) is really high ( Gungen, 2002 ) . However, SME portfolio is under % 5 in the all recognition volume of the banking sector. The sector is really selective and cautious in their SME loaning because the Bankss want to maintain their record of good quality loan while keeping a larger portion in the SME market.

European Investment Bank ( EIB ) , besides manages financess with local Bankss and joins its forces to back up SMEs in Turkey as the Community ‘s funding establishment. Since December 2005, EIB is imparting to 5 national Bankss, viz. TSKB, VakA±fbank, TKB, Ziraat Bank and Halkbank a sum of EUR 250 million to enable SMEs to derive entree to more finance to construct or spread out xisting or new concerns ( hypertext transfer protocol: // ! Publish/en/PR % 20- % 202005-PressRelease 73.doc ) .

EIB is a sweeping supplier of capital EU capital market financess, but it reaches SMEs through a web of commercial local Bankss. The advantages of planetary loans are as followerss:

– By runing with local Bankss in Turkey, the EIB is advancing competition that will profit

the banking sector every bit good as the clients.

– The loan will be available across the whole of the state to finance undertakings in the

industry, touristry, and services sectors, including wellness and instruction ( EC, 2003 a ) .

– Assuming the planetary loans will be used wide-spread, because of the desirable loaning conditions ; the banking sector utilizations and widens its experience in monitoring, hiting and sectioning SMEs through recognition lines.

The Hazard Factors for Banking Sector in SME Lending:

In EU, in favour of invention and new engineerings, planetary loans, the contracted Bankss in association called European Investment Fund have distributed seed capital and venture capital financess. The Fund uses the Bankss, particularly due to the Bankss ‘ web of subdivisions. There are other advantages of such fund allotment and take parting such organisations for the Bankss, like experient addition, particularly trained forces and fiscal net income, information sharing via recognition hiting with the other participant Bankss ( EIB, 2004 ) .

In Ghana, India and Kosovo, the World Bank set a undertaking to better a private banking sector, first exciting the financess through the province and the public Bankss, but at the terminal aiming a stable banking sector, supportive for SME development, portion of these states national development programs ( World Bank, 2000 ; World Bank, 2005 ) . In Turkey, the banking sector part has been bettering ( KOSGEB, 2004 a ) ; besides international financess like SELP ( Small Enterprise Loan Program ) have been set out in many commercial Bankss. Besides these betterments, the OECD studies reference that the province directed AIDSs are non governed expeditiously. Halkbank distributes KOSGEB credits ; while the private Bankss distribute the Eximbank credits. Besides the confederations occur between TTGV and the private Bankss like TEB ( Turkish Economy Bank ) ( hypertext transfer protocol: // id=102 # ) .

However, the topics mentioned below cause the banking sector approach the SMEs as more hazardous borrowers:

– Corporate public presentation is non crystalline ;

– Low degree of productiveness ;

– Lack of historical records of the SMEs ;

– Lack of better legal protection for both side ;

– Lack of standard fiscal coverage system ;

– SMEs largely do non hold criterion and proper accounting system ;

– High hazard that SME loaning carries due to high failure rate ;

– Low SME employee making and direction accomplishments.

The effects of Basel II criterions are going more of import at this point. In Turkey, the development of hazard direction, accompanied by structural alterations, like intensified competition and the banking sector development, has forced Bankss to pay more attending to measurement and pull offing their recognition hazards and their capital adequateness with regard to put on the line taken, as it is in the other developed and developing states. In the position of these developments, the Basel Committee for Banking Supervision decided to reform the model about capital adequateness ordinance. Since the loaning conditions of the Bankss are undergoing a alteration, SMEs are besides confronting with a transmutation, like all the other borrowers. In short, under the new Basel II model, the minimal sum of capital that Bankss are required to put aside will no longer entirely depend on the sum of the loan, but besides and significantly on the hazard of the loan. For SMEs, the expected effects are:

– More attending to put on the line appraisal and evaluation of SMEs ;

– Ranging monetary value and recognition conditions harmonizing to the hazard of loan, SMEs demand.

The evaluation will make up one’s mind on the sum, payment period, involvement or the collateral required. And this evaluation is depended on the information about the borrowers ‘ current fiscal status and historical payment public presentation ( EC, 2005 B ) .

Under this ordinance, it is obvious that for opaque SMEs, entree to finance is indurating. However, it can be expected that the 1s willing to portion information and have more consecutive information and accounting construction can impart in better conditions.

However, A-zdemir concludes in his survey that the good rateable recognition portfolio is non relevant. The province bank, Halkbank, which is in the procedure of being privatized, makes most of the loans to little endeavors. During the crisis, the authorities assisted little concerns, including those in the agricultural and SME sectors, utilizing public Bankss ( Halkbank for SMEs and Ziraat Bank for agribusiness ) , which offered subsidised loans. These led to heavy losingss for the public Bankss, thereby worsening the jobs of the fiscal sector. One of import factor for SME funding in Turkey is that with go oning attempts to command authorities outgos and cut down rising prices rates, the authorities will be obliged to restrict further its current SME funding plans, whose range is non really big and Halkbank does non look to be able to go on with its current mission. Banks who will desire to profit from the lower capital demands of Basel II attack may supply retail concerns with attractive inducements such as larger recognition lines and smaller involvement borders. A-zdemir claims that the Bankss can non give up corporate portfolios because eligible retail borrowers do non represent plenty possible. Besides, Halkbank ‘s portfolio, made up of SMEs, has a worse public presentation than the mean commercial loan portfolio in the system. The commercial loans are non merely bigger in size but besides accepted more unfastened to fraud. A-zdemir besides claims that the developed states have similar jobs. Harmonizing to the studies conducted by KfW two-thirds of the SMEs in Germany are estimated to be of non-investment class, stated in Basel II ( A-zdemir, 2004 ) .

In add-on, since smaller endeavors by and large do non hold either the collateral or hard currency flows of their larger rivals, they will hold less funding chances. In Turkey, since alternate fiscal instruments such as venture capital, concern angels and equity funding through the stock exchange are non good developed ( OECD, 2004 ) . Thus the loaning chances may non widen particularly for little endeavors, even can contract.


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