SME Banking Development in Albania

Since the SME’s sector in Albania plays a significant role in the national economy, it is important to consider how SME banking system operates in Albania. For the SME’s sector is very important to get the capital at the moment thy needed it. Bank lending, initially was at low levels, but gradually began to turn into an important tool that encourage the development of a country especially for Albania; This study comprising all key players in SME financing on three levels i.e. microcredit institutions; commercial banks and equity funds, the main topic was intended to present an overview of the SME finance situation at this moment and the financial support they receive from Albanian banks. The study is based on the information collected from questionnaires distributed to Albanian SME’s. It also will show what part of the portfolio of credit is attributed to SME credit growth. At the end the paper will be closed with some important conclusion and recommendations.

1. CONCEPTS AND DEFINITIONS¹

1.1 What are SMEs?

Definition of SMEs²

According to Peterson et al. (1986), definition of SMEs is derived from the use of both quantitative and qualitative measures. Quantitative measures are the most popular tools to define the SMEs such as the number of employees and the annual turnover. Financial assets are also used to define the SMEs. Gunasekaran et al. (2000) suggest that the SMEs need to be defined within the context of the country in which they operate, as typically, the concept varies by the change of country.

Story (1994) defines the SMEs as follows:

(a) enterprises with a relatively small share of their market;

(b) managed by owners or part-owners in a personalized way, and not through the medium of a formalized management structure;

(c) acting as separate entities, in the sense of not forming part of large enterprise or group. In smaller firms, all the roles will either be performed by one manager or by a very narrow range of managers who may have been appointed because they are family members or friends rather than on the basis of ability or education.

Micro, small and medium-sized enterprises (SMEs) are the engine of the European economy. They are an essential source of jobs, create entrepreneurial spirit and innovation in the EU and are thus crucial for fostering competitiveness and employment.

The technical definition varies from country to country. Some countries have different definitions for SMEs in the manufacturing and services sector and may exempt firms from specialized industries or firms that have shareholdings by parent companies. But the European Commission has a recognized legal definition. According to this definition an SME must have less than 250 employees, a turnover less than 50 million Euros, and a balance sheet of less than 43 million Euros.

The definition of SME in Albana, is referred to Article IV of the law nr. 8957, date 17-10-2002 “On Small and Medium Enterprises”. According to this law, micro enterprises definition embodies only the staff headcount criteria – and states that entities employing fewer than 5 persons will be classified as micro enterprises. Small enterprises are those entities that employ 6-20 persons, and have an annual turnover that does not exceed 40 million Leks (around 320 thousand Euro). Medium enterprises are entities that employ 21-80 persons; the annual turnover of the entity does not exceed 80 million Leks (around 620 thousand Euro) and at least 25% of the capital of the firm does not belong to an enterprise that is not small and medium.

2. THE IMPORTANCE OF SME IN OVERALL ECONOMY

The only way to reduce poverty in a sustainable way is to promote economic growth, through wealth and employment creation. In developing countries, SMEs are the major source of income, a breeding ground for entrepreneurs and a provider of employment.

SMEs are important because on average, they comprise over 95 percent of the economy. The contributions of SMEs to employment and the countries’ gross domestic product (GDP) are by no means trivial. As of July 2006, close to 140 million SMEs in 130 countries employed 65 percent of the total labor force. Moreover, SMEs are the driver of economic growth and innovation.

The total number of SMEs in the economy depends on the rate of SME creation and rate of SME destruction. Profitable market opportunities increase the rate of SME creation. This increases the total number of SMEs in the country, which increases job creation and income per capita. As people become wealthier, they will increase their consumption, which in turn will open up new market opportunities that will entice the creation of more SMEs. Contrary to multinational corporations, the growth of SMEs directly benefits the country because most SMEs are domestic firms. This reinforcing dynamic generates economic growth. The reinforcing loop of innovation also drives economic growth. As the number of SMEs increases, their knowledge of their product and industry increases. Their knowledge allows them to innovate on the product or process, which helps them form a competitive advantage to generate more profits. Again, market opportunity as captured by the World Bank.

1. The role of SMEs in European Economy.

SMEs are the D.N.A. of the European economy. They are the basis of our future growth and prosperity. Why? Because, in Europe, that growth and prosperity must be based on knowledge and it is SMEs that are most capable of turning knowledge into growth, of turning bright ideas into commercial success, of turning research into rewards.

Using the said definition the importance of SMEs in Europe is undeniable:

- There are 23 million SMEs in Europe: some 99% of all businesses.

- They employ 100 million people: some 70% of the workforce.

It is precisely SMEs that are considered to form “the backbone” of the European economy. They are a key source of jobs and a breeding ground for business ideas. Europe’s efforts to usher in the new economy will succeed only if small business is brought to the top of the agenda.

Because of this importance the SMEs have on European Economy, the Commission is considering how to improve the ways in which the research and innovation policies and programmes at all levels – regional, national and European - can help SMEs to innovate, improve and grow. In June 2008, the Commission launched the Small Business Act (SBA). This sets out the overarching framework for future SME related policy. A framework – based on the principle of “think small first" - that promises to place SMEs in the mainstream of European policy making.

The SBA already includes a number of specific measures. But it is also a serious political commitment to ensure that policies at EU and Member State level are designed to provide the best environment and the best opportunities for SMEs to grow and flourish.

The impact of these initiatives needs to be improved by better coordination between programmes and initiatives at regional, national and European levels. There are 70 different national cluster policies around Europe and hundreds of regional ones. Each of these is doing a good job but in order to argue for more resources it’s necessary to improve their impact through better coordination.

In the global economy, SMEs cannot compete on the basis of just cutting costs; they must compete on the basis of knowledge and value-added. The role of European Research Area is to effectively convert taxpayers' Euros into that knowledge at the best possible exchange rate. It is businesses, especially innovative SMEs that have the job of turning that knowledge back into Euros at a good rate of return. In the future, regions, countries and the EU must work even more closely together to develop a true partnership between them.

3. MAIN FINANCIAL FACILITIES FOR ALBANIAN SMEs³

The World Bank Group adopted a Country Partnership Strategy (CPS) for Albania for the period The Bank support to Albania development is ongoing for nearly two decades, allowing positive performances that enabled Albania to transform itself from a low income to an upper middle income country as of July 2010 and having weathered the global financial and economic crisis reasonably well, maintaining a positive, albeit significantly reduced, growth rates in 2009 and a sound banking sector. These achievements have been possible thanks to substantial structural reforms aimed at building market economy mechanisms and institutions and a sound macroeconomic framework. The present policy is focused on priorities as maintaining stability on a vision of long-term development, improving governance and strengthening institutions, maintaining a stable macroeconomic framework; improving the business environment, upgrading public infrastructure, improving effectiveness and targeting of social services and strengthening management of water, land and other critical natural resources.

• Europian Union

On November 18, 2010 came to an end an €1 million EU-funded project that had the objective to help Albanian SMEs to improve their businesses supporting economic growth in the country. Successively, a €2.2 million project launched in February 2010 and funded by the European Commission (EU SME Project Albania38) intends to help Albania's SMEs by facilitating access to innovation and technology that give firms a competitive edge in the market. Through this assistance, Albanian SMEs will be better prepared to face competition in the EU market.

In order to help Albanian SMEs, this project enabled the establishment of a 'Business Relay and Innovation Centre' – a focal point to coordinate and deliver business innovation and technology services and initiatives for SMEs. The project also supports the development of an Albanian Business Innovation and Technology Strategy, a National Competitiveness Programme for SMEs, an Albanian SME Development Programme, and a training needs analysis for Albania’s SMEs. Through these measures, Albanian SMEs will have easier access to new production methods and technology available in the EU that help companies improve the quality of their products, efficiency, and marketing.

• European Investment Bank (EIB)

The EIB is a lead player in implementing EU priority objectives in the Balkan area. Active in Albania since 1994, the EIB has contributed over €240 million towards projects of key importance for the economy, such as various infrastructure investments including energy and transport.

First EIB Loan for SME-s: The EIB and Tirana Bank have signed in December 2009 a €10 million loan targeting small and medium-sized enterprises and infrastructure projects promoted by local authorities in Albania.

This is the first EIB loan for SMEs in Albania.This operation will finance small and medium-scale projects located in Albania in the fields of industry, infrastructure improvements, environmental protection, health and education, energy efficiency as well as services including tourism. A minimum of 70pc of the loan will be allocated to the SME sector.

The EIB funding will cover up to 100% of the investment cost of projects implemented by SMEs, in line with standard EIB criteria. The operation will have a financial leverage effect since the EIB requires that the intermediary, Tirana Bank owned by Piraeus Bank, grows its total SME portfolio by double the amount of the EIB loan. Some €20 million are to be invested in Albania to boost the economy and help the country’s progress towards economic recovery. The financial intermediary, Tirana Bank will also undertake to transfer the advantage of EIB funding to SMEs and local authority investors through lower interest rates and longer maturities.

• EBRD

The EBRD is one of the most active private-sector financiers in Albania with a recent focus on small production enterprises, development of natural resources, as well as improving infrastructure. It is also engaged in policy dialogue with the Albanian government, with the potential to invest in key public sector projects, along with the implementation of numerous donor-funded projects in the country. Since initiating operations, direct EBRD financing in Albania exceeded €500 million, with a further €1.1 billion from sponsors and co-financiers. Bank’s focus over the current strategy period (2009-2012) is to strengthen state institutions, invest in infrastructure, including upgrading of national, regional and local road transport networks, further strengthen the banking system, support MSMEs and bank financing of these companies to improve competitiveness.

• Banka Popullore supportSMES

The EBRD and Banka Popullore, a private bank in Albania, have signed in August 2006 a €5 million long-term loan to give small and medium-sized enterprises more access to finance to build or develop their businesses. The loan falls under the Western Balkans SME Finance Facility, a €50 million framework approved by the EBRD to finance local SMEs in different West Balkan countries. This is the first project under this Facility in Albania. The loan will enable Banka Popullore to further develop its activities with the SME clients by offering longer maturities, facilitating the growing demand for loans of between three and five years.

Banka Popullore was established in March 2004 and has become the seventh bank in Albania. Moreover, the bank has built a strong network covering the whole country with a strong focus on the SME sector. Previously, the only EBRD project in favour of Albania’s SMES has been in 1999 the Lek 140 million (up to € 1.2 million) equity investment in ProCredit Bank Albania (formerly Foundation for Enterprise Finance and Development - FEFAD), a financial specialised institution, based in Tirana, which focuses on providing financial services to Albanian micro and small enterprises in the private sector.

• Titana Bank- €40 million credit line

The EBRD has signed investments worth a €40 million with Tirana Banka, a Piraeus Group subsidiary in Albania as part of a larger €200 million multi-country package approved in July 2010for South-Eastern countries. The aim is to provide medium and long-term debt financing through Piraeus Group subsidiaries in support of SMEs and corporate organizations for investment and working capital needs. The credit lines will contribute to the transition process by maintaining an essential flow of lending to enterprises at a time when the availability of credit, particularly to SMEs, has been constrained.

4. Some instruments of financing SMEs in Albania

• Overdrafts and loans

Overdrafts and bank loans are the most known sources of finance for SMEs. Loans are used to purchase equipments, machineries, buildings that are able to generate revenues in the long term period. The terms of a loan are negotiated between the bank and the entrepreneur and usually it cost less than the other forms of financing but at the other side they it is more difficult to provide it, need personal guarantee and are not flexible in payment of interest and principal. At the other side overdrafts are used to pay short term obligations, are more expensive than loans and the banks can request to close it if the firm is not capable to pay. Commercial mortgages They are long term agreements and are used when the business will bye a property. This property will be the guarantee in cases of non payment of interest and principal from the buyer. In most cases the bank doesn’t finance 100% of the value of the property. Leasing or buying assets A lease is a written, usage agreement by the lessee to pay rent to the lessor for a specified time for the use of vehicles, equipments etc. Leasing give the opportunity to the business to repay the cost of a equipment, machinery etc, not immediately but in form of rents. There are two forms: finance leasing and operational leasing. In finance lease the business will pay all the costs of maintaining the asset which will be shown on the balance sheet as capital. In operational lease the leasing company is responsible for all the maintenance cost and it will take back the equipment at the end of the agreement time. The asset will not be shown in the balance sheet.

4.1 Some Difficulties and problems in Financing SMEs

The difficulties that SMEs have when they try to have additional financing are because of:

• Lack of information between the bank and the SME. Start ups and very young firms are considered more risky than large ones.

• SMEs have greater variation of their earnings and the possibilities of bankrupts are greater then those of the larger firms.

• Small firms usually don’t have managerial targets and strategic plans because their future is uncertain.

• SMEs often can’t offer collateral because they don’t have many long term investments.

• Their financial statements are not audited and are not very credible for the banks.

• They don’t have credit history (a bank doesn’t know if this business is believable in paying the loan).

• Many proprietors of SMEs don’t go to banks (cultural barriers or lack of information).

In order to improve the financial climate of SME-s during the last years, there are some of the measures taken, linked mainly with the application of the new schemes, concerning the safeguarding of the SME credit which are implemented, thanks to the five-year- partnership between USAID and Commercial Bank. These funds have been partly guaranteed, because of the support done only for some categories and field defined, leaving outside most of them.

The problems that are brought out from SME-s, in connection with their possibilities for credits from the banks are:

1. The cost of the credit is estimated as relatively high and this later aggravates the expenses that the business is going to do

2. Some of the conditions that the banks require are not favorable for the businesses, the required collateral from their side varies in the levels of 120-150%

3. The credit interests are seen as financing problem from the businesses side.

4. The new businesses have less possibility for giving credits from the bank institutions.

5. There exist a bank culture which is orientated towards the use of the immovable properties as collaterals and secondly a way of purchasing of the businesses, where the majority of the transactions are performed in an informal way, in order to avoid the investments to the state.

Taking in consideration all these sharp problems we dare say that the SME-s needs a financial and an assisting revitalization.

Almost all banks helps the existing businesses, especially those who are exercising their activity for more than 6 months, but neglect the new businesses, because of the fact that they have lack of trust in the new businesses for returning the credits as the Albanian banks have a high rate of unpaid credits.

The SME’s demand for credits from the banks is in considerable number and they try to express their goals and plans for their further development. But against this fact, there exist a disproportion between the offer and the demand for credits.

Some of the reasons why many request of businesses are reject from the banks are:

1. They are in lack of real estate which may serve as their collateral

2. They are in lack of information for the financial position of the applicant

3. The non-existence of the suitable reason for the use of the credit

4. The applicant may have other credits elsewhere, received from the other institutions and they may not be able to face with this additional one

5. The businesses do not have the necessary experience within the sort of the activity where they want to invest.

In 2009 in Albania we have a reduction of economic activity of the business sector and a tighten loan policy from banks .This happened because depositors started to take their deposits back from the banks causing lack of liquidity and the second reason for taking this policy was the financial crisis in international markets at the end of the year 2008.

Another risk was that of reducing the quality of loan portfolio of banks. At the second half of 2009 the tighten standards of approving loans and the decrease of the economy brought to cut the demand for loans. Followed by the depreciation of the national currency the growing of the loans according to Bank of Albania was only 4%. While current bank deposits have reported surpassed precrisis levels and bank liquidity has improved, the demand for credit is still low.

In December 2009, the growth rate of loans dropped to 12% from 33% in 2008. In general, the banking sector remains viable, well capitalized, and able to further finance the economy, as the ratio of loans to deposits, approximately 65%, is still low compared to the other countries. During the first period of 2010 the Albanian banks still used a tighten policy for loans approval. This is because of the non performing loans of the sector and macro economy situation of Albania.

Actually the loan approval for the business sector is realized mainly through: increasing the profit margin for the high risky business especially for SMEs, (the percentage of interest is high even in cases when the loan is requested for investments in equipments and machinery for a medium term period) increasing the demand for collateral, (the level of collateral requested is 120%- 150% of the investment increasing of loan maturity.

In 2010 the demand for loans from SMEs is increased, otherwise the application for a loan from different corporation is decreased in the first months of 2010. The businesses take loans especially to finance the floating capital and the investment expenditure. The future expectation for credit activity is a facilitation of the procedures and standards in order to increase the number of small and medium business to be partners of financial institutions.

Conclusions

SMEs play a catalytic role in the development of any country being the engines of growth in developing and transition economies. They are considered as job generators and vital for the economic growth.

Entrepreneurship is at the heart of the national advantage and small businesses are particularly important for bringing innovative products or techniques to the market. Albanian economy, by large relies, on microbusinesses.

Nearly all enterprises in Albania fall into the category of small and medium enterprises SMEs. More than 90 percent of Albanian enterprises can be classified as small or medium size according to our INSTAT data.

In both developed and developing countries, the financial problem of under capitalization is considered as a very significant factors influencing SMEs failure. The situation in Albania is problematic because we don’t have very developed financial sectors and also SMEs have difficulties to access international financial markets.

Other problems of Albania are:

• the macroeconomic situation (low growing of GDP)

• unclear property rights (banks don’t accept real estate as

• mortgage if it hasn’t the right property documents)

• absence of a land market we still suffer from instability of economic policies

• high level of informal economy(the reports that businesses give to banks not always are true) absence of adequate information for the businesses

• SME-s make up the bases of the development of the region of Elbasan ,

that’s why; the increase of the credit-givers for them, not only from the banks but also from the non-banking foundations is a very vital demand which will guarantee a sustainable development of the region and the increase of its competitive capability and capacity, in order to ensure the inter-border integration, regional and all over the area.

• The increase of the demand for credit from the businesses is stimulated by such factors as: the economic and monetary stability, the need for the increase of the investments and the extensions of businesses, creation of the new, serious and trustworthy businesses etc

• Some of the factors that restrain the credits are; the high level of risk, the high level of credit interest, the difficulties and problems that have to do with the registration of the real properties (mainly the registration of the land); the lack of the banks in rural areas etc.

• The structures for giving credit, the financial services and those which have to do with the technical assistance for the farmers in rural areas, are insufficient.

• In order the financial institutions play their auxiliary role, it is required some changes in the businesses practice of the banks in the rural areas, such as: the promotion of the banks in order to enter the rural areas with financial services, the extension of the network of SHKK and maybe the establishment of a farmer bank which we consider actually a serious and suitable solution.

Competitiveness of economy is affected by factors at enterprise level as well as overall environment on which the companies operate. In particular, this paper stresses the importance of factors at micro level which is enforced by the restructuring processes of the economy.

Strengthening of the competitiveness is affected by private investment and deepening of the structural reforms which were partially covered and analyzed by this paper. Summing up, the improvement of business environment and the minimization of informality in the business enterprise, coupled with strengthening of the financial sector, could be important elements in enhancing the competitiveness of the economy and provide a strong incentive for strengthening the SME’s development.

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3. www.world bank

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5“Barriers and the incitements for the economic inter-border development”

6.www.bankofalbania.al_ Role of Banks in the Monetary Policy Transmission in Albania June 2007

7.www.smealbania.tk_doing _business.

8. www.instat.org.al

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10. ICT IN SMALL AND MEDIUM ENTERPRISES(CASE OF ALBANIA)

11. Journal of Information Technology and Economic Development 2(1), 9-19, April 2011 The impact of ICT use in competitive advantage in SME-s within service sector in Albania Prof. As. Albert Qarri, Ph.D Evelina Bazini