EPI Report: Mapping SME Understanding of Banking and Non-Banking Products

The crucial role of Small and medium-sized enterprises’ (SMEs’) development in the economy is well described in number of publications, books, articles, papers etc. SMEs play a vital role in the economic growth of developing countries, typically accounting for over 90% of business establishments and about half or more of output and export shares. However, in Georgia only 40% of Labor Force is working in SMEs. Despite the importance of SME development majority of companies are facing significant constraints for their development: internal and external. SMEs in Georgia are facing similar problems to those that are companies in other countries: lack of managerial resources, inability to hire experienced or professional staff, low marketing resources as well as high barriers to access to capital: high interest rates, collateral requirements, reluctance of Banks to work with SMEs especially in agricultural industries.

SMEs in Georgia are still at the beginning stages of development. Global statistics show that SMEs account for up to 90% of jobs in a given country; however, in Georgia, SMEs made up only 42.4% of jobs created in 2009. Currently, SMEs face problems common to those in other developing countries (including Eastern Europe): undercapitalization, high barriers to financing, poor corporate governance practices, high interest rates and excessive collateral requirements from financial institutions. Although there are many real, significant barriers that prevent SMEs from accessing financing, some exist due to
erroneous preconceptions held by SME owners/managers.

Based on the survey responses, there are several conclusions about the barriers to SMEs ability to access financing through the Georgian commercial banking and nonbanking financial institutions. The perception-related issues that are barriers for SME borrowers can be summarized as follows:

For larger SMEs that already have previously established relationships with commercial banks in Georgia, the variety of banking products and level of service are more or less satisfactory. However, even representatives of these companies noted that the main barriers to financing are the currently high interest rates and the perception that commercial bank are risk adverse.

SMEs believe that commercial banks make decisions based on collateral requirements (where the average required collateral ratio equals 1.3 times liquidation value to a loan amount) rather than a cash flow analysis. Because of this collateral issue, many SMEs do not qualify for credit at commercial banks.

Another issue that is challenging for SMEs is the transparency of banks’ commissions, as a loan’s effective interest rate is unknown until the final stage of the process, when a borrower signs the loan agreement.

Due to real and perceived bank requirements, many SMEs are limited to personal loans, self-financing or MFI loans or simply opt out of taking a bank loan.

Below is a summary of the SMEs perception of banking and non-banking lending requirements:

  • High interest rates for banking loans.
  • High collateral requirements.
  • Difficult bureaucracy and lengthy procedures for new customers.
  • Lack of information (in Georgian) on getting financing, business development and relevant legislation, such as the Tax Code of Georgia.
  • Banks have limited experience in financing projects/loans for agriculture.
  • Availability of information on non-banking financial institutions (i.e. leasing) is limited.