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IMPACT OF THE FINANCIAL CRISIS ON CREDIT AVAILABILITY FOR SMEs WORLD WIDE

Guest post by: Norbert Knoll von Dornhoff

Article Overview: With a view at the global economic slowdown, it became apparent that economies in all regions of the world have significantly begun to lose momentum. In October and November 2008 extensive surveys have been undertaken as well in industrialised and in less developed Countries on the impact of the financial crisis on credit policy by lending banks and the wider impact on the near future of SME business, exports, investments and development. As a general result of such surveys approximately one third of the SME entrepreneurs briefed, stated that they are currently experiencing a tightening of credit policy by their banks (extreme restrictions have been decided e.g. in Iceland and in Central-and East- European Countries.

IMPACT OF THE FINANCIAL CRISIS ON CREDIT AVAILABILITY FOR SMEs WORLD WIDE

SMEs in Countries with weak credit ranking

The World Bank Group “Ease of Doing Business” recently issued the annual report 2010 investigating regulations tha tenhance business activity and those that constrain it across 183 economies. A set of regulations affecting 10 stages of abusiness’s life are measured : starting a business, dealing with construction permits, employing workers, registering property,getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business. Data inDoing Business 2009 are current as of June 1, 2008.The indicators are used to analyze economic outcomes and identify what reforms have worked, where, and why. It must be expected that the global financial crisis will further downgrade those Countries in their ranking which were 2008 among the last third in the stage “Getting Credit”. Firms consistently rate access to credit as among the greatest barriers to their operation and growth. Credit registries, institutions that collect and distribute credit information on borrowers, can greatly expand access to credit. By sharing creditinformation, they help lenders assess risk and allocate credit more efficiently. And they free entrepreneurs from having to rely on personal connections alone when trying to obtain credit.

Indicators to measure the sharing of credit information

• Information index, which measures the extent to which the rules of credit information system facilitate lending based on the scope of information distributed, the ease of access to information and the quality of information.
• Public registry coverage, which reports the number of individuals and firms covered by a public credit registry as a percentage of the adult population.
• Private bureau coverage which reports the number of individuals and firms, covered by a private credit bureau as apercentage of the adult population.

The strength of legal rights index measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders and thus facilitate lending. It is interesting to note that Malaysia offers SMEs the world best conditions for „Getting Credit” and ranks No. 1 in this stage. On top of the World Bank rating are also Singapore (No. 5) and the Republic of Korea (No. 12). It would be worth to analyse in detail the structure and methods which these Countries applied for achieving such excellent ratings.

Urgent international actions required: A stability package for the financial markets

The government’s ability to deal efficiently with financial crisis can be improved by establishing an effective regulatory bodyin order to reduce high-risk lending practices of financial institutions.To reduce liquidity problems, the central banks may require high liquid reserve in the form of higher required reserves, low risk assets, and cash. Higher required reserves would reduce banks’ return on deposits, would reduce the risk of the bankingsector and would cause the loss of some of the local deposits to the banks abroad. Tax on capital inflows to reduce speculations, interest rate ceilings on deposits to reduce competition by risky banks to attract deposits, and limits on the percentage of lending to the real estate sector would reduce the probability of having a financial crisis. Finally, redirecting financial capital inflows toward direct investment and equity finance and away from debtfinancing will serve developing countries better in the long run. Also redirecting finances will reduce liquidity problems and potential financial crisis.The World Union of SMEs (WUSME propsed the implementation of unilateral "SMEs Trust Funds for Crisis Prevention and Development - SMETFED", being funded by a SCTL - Social Currency Transaction Levy of 0,005% of currency transactions mad by Banks and other money remitting institutions, e.g. Western Union. The total annual proceeds of such a levy would amount up to 15 billion USD annually.

Austria’s Stability Package

A positive example for other economies. The package puts up a "risk protection umbrella" and guarantees that the Austrian financial institutions will be able to fulfil their important economic functions. It also protects their customers and thus strengthens the level of trust in Austria as a financial centre. The package to stimulate the economy and to encourage future investments the Austria has also laid emphasis on measures for SME promotion in the years 2009 and 2010. Those measures include:

• Additional budget for growth projects
• Provision of additional low interest loans: existing volume will be extended; as most of the enterprises in Austria are small an additional program will provide small loans for these companies; for all SME mezzanine capital will be provided via the European Investment Bank (EIB) as mezzanine capital.
• Increase of the frame for guarantees
• Additional budget for the internationalization of businesses to strengthen exports
• Additional means in the fields of energy efficiency and environment activities.
• infrastructure projects will be preferred to stimulate the economy.

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Article Tags: crisis, financing, loan, small medium enterprises, sme



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