Creating the right business environment for SMEs: Bringing SMEs and the banking system closer to each other by fine-tuning rules and approaches.

• Author: Spivak, Ruslan

There is nothing new in the concept that small and medium-sized enterprises (SMEs) are the backbone of every economy, especially in developing countries. While being one of the main contributors to employment and providing sufficient share in GDP and trade balance, SMEs are highly dependent upon macroeconomic conditions. They represent the most vulnerable part of the business environment, although the most adaptive. Thus, financing of SMEs relies on specific factors that can sufficiently improve bank readiness for providing needed resources.

During the decade that was framed as one of the longest world economy growth periods, developing countries including Ukraine suffered several deep crises and recession periods. Negative impact undermines the appetite for risk in financing SMEs because of their low survival rate (less than 50%), crisis-prone nature, fragility and lack of resilience.

Thus, despite their importance to the economy, SMEs are constantly experiencing constraints in access to finance compared to larger segments. Official statistics usually hardly edge the 35% share of SMEs using loans, which is simply insufficient to cover demand and to maintain proper development and scalability.

Based on this I have figured out four main pillars for creating an SME financing readiness index that can reflect financial opportunities for the sector:

* Macroeconomic and internal market dynamics

* Regulatory environment

* Institutional capability

* Customer readiness and corporate culture

MACROECONOMIC AND INTERNAL MARKET DYNAMICS

The majority of developing countries demonstrate moderate GDP growth of 3%-4%, have quite high inflation of over 10% and conduct tight monetary policy reflected in a high interest rate environment. The last factor triggered low access to finance since EBITDA/total sales only in selected booming industries can provide positive advantage out of using external financing, especially in long-term projects. This also explains why the share of mid- and long-term loans in total is usually less than 30%, bringing down working capital injections. Hence, the regulator's key rate policy is one of the most crucial, motivating or limiting tools for SME lending in the country.

REGULATORY ENVIRONMENT THE BANKING-SECTOR

Currently more than 52,000 regulations all over the world are stipulating banking sector activity with a one-size-fits-all approach. Rarely do developed national regulations favor banking policy for SMEs. In the vast...