sme access to finance market assessment for malta final report

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SME Access to Finance

Market Assessment for Malta

Final Report

06 November 2014

EIF – Research & Market Analysis

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Series Editor:

EIF Research & Market Analysis

15, avenue J.F. Kennedy

L-2968 Luxembourg

Tel.: +352 24851

http://www.eif.org/news_centre/research/index.htm

Responsible Authors:

PwC EU Services EESV

Woluwegarden - Woluwedal 18

B-1932 Brussels

Belgium

Contact:

European Investment Fund

37A avenue J.F. Kennedy

L-2968 Luxembourg

Tel.: +352 24851


Disclaimer:

This report has been drafted by PwC Malta, on the basis of guidelines developed by

the European Investment Fund (EIF) Research & Market Analysis. Any views

expressed herein reflect the current views of the author(s), and they do not

necessarily correspond to opinions of EIF or of the European Investment Bank (EIB).

Contents of this report, including opinions, are current at the date of publication set

out above, and may change without notice. Opinions expressed herein may differ

from views set out in other documents, including other research published by EIF or

by EIB. EIF cannot be held responsible for any use of the information contained

herein by any person other than EIF. This report has been prepared exclusively for

the Managing Authority. Nothing in this report constitutes investment, legal, or tax

advice to the Managing Authority (or to any other person), nor shall be relied upon

as such advice. Specific professional advice should always be sought separately

before taking any action based on this report. The contents of this report are, inter

alia, based on current market conditions and consequently any market changes

may have an impact on these contents.



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Table of contents

1 Executive Summary .......................................................................................................... 13

2 Introduction ....................................................................................................................... 23

Objectives and scope of the study ........................................................................................... 24 2.1

Relevant regulation ..................................................................................................................... 25 2.2

Structure of the report ................................................................................................................. 25 2.3

3 Methodology of the study ................................................................................................ 27

Literature review ........................................................................................................................... 27 3.1

Stakeholder interviews ................................................................................................................. 27 3.2

Online survey ................................................................................................................................ 28 3.3

Data analysis ................................................................................................................................ 28 3.4

4 The market environment .................................................................................................. 30

5 Existing SME financing instruments .................................................................................. 33

Financial Instruments available for SMEs in the country .......................................................... 33 5.1

Grant schemes ............................................................................................................................. 39 5.2

Historical use of structural funds ................................................................................................. 47 5.3

6 Priorities and policies of the Managing Authority for SME financing ............................ 53

Operational Programme I for 2014-2020 ................................................................................... 53 6.1

Operational Programme II for 2014-2020 .................................................................................. 56 6.2

EU programmes facilitating R&D and innovation among SMEs and Malta’s use of 6.3

the SME Initiative ..................................................................................................................................... 57

7 Market analysis and findings ........................................................................................... 59

Methodology used to compute supply .................................................................................... 60 7.1

Supply side analysis ...................................................................................................................... 61 7.2

Methodology to quantify the demand for finance ................................................................. 78 7.3

Demand for financing from micro-enterprises ......................................................................... 82 7.4

Demand for financing from small enterprises in Malta ........................................................... 99 7.5

Demand for financing from medium-sized enterprises in Malta .......................................... 108 7.6

Quantification of potential demand for financial products from small and 7.7

medium-sized enterprises in Malta in 2014 ........................................................................................ 115

Potential demand for equity financing from the SME population in Malta ....................... 116 7.8

8 Financing gaps, conclusions and recommendations ................................................. 121

Rationale behind financing gaps and methodology to compute them ........................... 121 8.1

Financing gaps ........................................................................................................................... 128 8.2

Access to finance from large companies in Malta ............................................................... 135 8.3

Conclusions and main findings ................................................................................................ 143 8.4

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Recommendations .................................................................................................................... 153 8.5

Annexes ................................................................................................................................. 157

Annex 1 – Article 37 (2 and 3) of the Common Provisions Regulation n°1303/2013

adopted on 17 December 2013 ......................................................................................................... 158

Annex 2 – Note on the sampling methodology of the online survey ............................................. 160

Annex 3 – Bibliography ......................................................................................................................... 162

Annex 4 – Detailed analysis of the market environment of Malta.................................................. 167

Annex 5 – List of interviews ................................................................................................................... 193

Annex 6 – Glossary ................................................................................................................................ 194

Annex 7 – List of indicators used for the AFMA study ....................................................................... 196

Annex 8 – Questionnaire for the online survey .................................................................................. 198

Annex 9 – Interview guide.................................................................................................................... 210

Annex 10 – Minutes of the interviews .................................................................................................. 212

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List of Acronyms

AFMA(s) Access to Finance Market Assessment(s)

ARPA Agriculture and Rural Payments Agency

BA(s) Business Angels Investors

BOV Bank of Valletta

CEBI Centre for Entrepreneurship and Business Incubation

CBM Central Bank of Malta

CIP Competitiveness and Innovation Programme

COCOF Coordination Committee of the Funds

CP Cohesion Policy

CPR Common Provisions Regulation

CSF Common Strategic Framework

DG REGIO Directorate General for Regional and Urban Policy of the EC

DSWS Department for Social Welfare Standards

EAFRD European Agricultural Fund for Rural Development

EC European Commission

ECB European Central Bank

EFF European Fisheries Fund

EIB European Investment Bank

EIF European Investment Fund

EMFF European Maritime and Fisheries Fund

ERDF European Regional Development Fund

ESF European Social Fund

ESIF European Structural and Investment Funds

ETC Employment and Training Corporation

EVCA European Venture Capital Association

EU European Union

FDI Foreign Direct Investment

FEI(s) Financial Engineering Instrument(s)

FI(s) Financial Instrument(s)

FIA Financial Institution Act

FOP Fisheries Operational Programme

FPD Funds and Programmes Division

FP7 European Commission’s Seventh Framework Programme

GAFMA Guidelines for SME Access to Finance Market Assessments

GDP Gross Domestic Product

GRTU General Retailers and Traders Union

HICP Harmonised Index of Consumer Prices

HF Holding Fund

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ICT Information and Communication Technology

IP Intellectual Property

IRD Inland Revenue Department

JEREMIE Joint European Resources for Micro to Medium Enterprises

KBIC Kordin Business Incubation Centre

MA Managing Authority(ies)

MCAST Malta College of Arts, Science and Technology

MCST Malta Council for Science and Technology

ME Malta Enterprise

MEAIM Ministry for European Affairs and the Implementation of the Electoral

Manifesto

MFI Microfinance Institution(s)

MFSA Malta Financial Services Authority

MITA Malta Information Technology Agency

MS(s) Member State(s) of the European Union

NFC(s) Non-Financial Corporation(s)

NPL(s) Non-Performing Loan(s)

NSO National Statistics Office

OP(s) Operational Programme(s)

PE(s) Private Equity Funds

PIS Proposed Investment Strategy

PPCD Planning and Priorities Coordination Division

RDP Rural Development Programme

R&D Research and Development

SBA Small Business Act

SME(s) Small and medium-sized enterprise(s)

TCU Tax Compliance Unit

TO Thematic Objective(s)

TSDU Tourism Sustainable Development Unit

UOM University of Malta

VC Venture Capital

VFGs Viable Financing Gaps

WB World Bank

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List of Tables

Table 1: Potential financing gap and viable financing gap for loan products for the total

SME population in Malta in 2014 ........................................................................................................... 16 Table 2: Potential financing gap for microfinance for micro-enterprises in 2014, including

social inclusion .......................................................................................................................................... 18 Table 3: Viable financing gaps for short-term loans, overdrafts and credit lines in 2014 .......... 18 Table 4: Viable financing gaps for medium and long-term loans in 2014 .................................... 19 Table 5: Potential financing gap for equity financing for all SMEs in 2014 ................................... 19 Table 6: Conditions and criteria for eligibility of the JEREMIE guarantee instrument.................. 34 Table 7: Conditions and criteria for eligibility of the BOV Start Plus programme ........................ 36 Table 8: Existing Financial Instruments in Malta .................................................................................. 38 Table 9: Grant schemes and programmes in Malta under the 2007-2013 programme ............ 39 Table 10: Progress indictors under Priority Axis 1 (OP I) – Take-up of initiatives by SMEs ............. 40 Table 11: Grant schemes under the 2007-2013 RDP and FOP programmes ................................ 42 Table 12: Funding provided under the 2004-2006 programming period ...................................... 47 Table 13: Funding Distribution by Operational Programme ............................................................ 48 Table 14: Fund absorption progress by Operational Programmes I and II ................................... 49 Table 15: Priority axes of Operational Programme I .......................................................................... 54 Table 16: Details of priority axes of Operational Programme I focusing on support to SMEs ... 55 Table 17: Priority axes of Operational Programme II ......................................................................... 56 Table 18: Details of priority axes of Operational Programme II focusing on support to

SMEs ............................................................................................................................................................ 57 Table 19: New loans to all non-financial corporate entities with the year-on-year change .... 65 Table 20: Estimate of loan disbursements to SMEs ............................................................................. 66 Table 21: Supply of financial products to SMEs in the previous years and estimate of the

annual supply in 2014 in Malta .............................................................................................................. 75 Table 22: Estimated annual supply of short-term loans to SMEs in 2014 in Malta ........................ 76 Table 23: Estimated annual supply of medium and long-term loans to SMEs in 2014 in

Malta .......................................................................................................................................................... 77 Table 24: Estimate of the annual supply of financial products in 2014 in Malta ......................... 78 Table 25: Number of micro-enterprises in Malta ................................................................................ 82 Table 26: Annual demand for financial products among micro-enterprises in Malta in

2014............................................................................................................................................................. 95 Table 27: Annual demand for microfinance in Malta in 2014......................................................... 97 Table 28: Annual demand for microfinance for financial inclusion in Malta in 2014 ................. 98 Table 29: Number of small enterprises in the Malta .......................................................................... 99 Table 30: Number of medium-sized enterprises in the Malta ........................................................ 108 Table 31: Annual demand for financial products by small and medium-sized enterprises

in Malta in 2014 ....................................................................................................................................... 115 Table 32: Annual demand for equity financing in Malta in 2014 ................................................. 120 Table 33: Potential financing gap for microfinance for micro-enterprises in 2014 ................... 128 Table 34: Potential financing gap for microfinance for micro-enterprises in 2014,

including financial inclusion ................................................................................................................. 129 Table 35: Potential financing gaps per financial product for micro-enterprises in 2014 ......... 130 Table 36: Viable financing gaps for micro-enterprises concerning loan products in 2014 ..... 131 Table 37: Potential financing gaps per financial product for small and medium-sized

enterprises in 2014 .................................................................................................................................. 133 Table 38: Potential financing gap for equity financing for all SMEs in 2014 ............................... 135 Table 39: New loans to all non-financial corporate entities with the year-on-year change .. 136 Table 40: Estimate of loan disbursements to large companies .................................................... 137

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Table 41: Number of large enterprises in Malta ............................................................................... 138 Table 42: Potential financing gap for microfinance for micro-enterprises in 2014,

including financial inclusion ................................................................................................................. 145 Table 43: Viable financing gaps for short-term loans, overdrafts and credit lines in 2014 ...... 146 Table 44: Viable financing gaps for medium and long-term loans in 2014................................ 146 Table 45: Potential financing gap for equity financing for all SMEs in 2014 ............................... 147 Table 46: SWOT analysis regarding access to financing for SMEs in Malta ................................ 150 Table 47: Stratification of respondents to the online survey for AFMA in Malta compared

to the population of SMEs in the country .......................................................................................... 161 Table 48: Malta – Map and key figures ............................................................................................. 167 Table 49: Contributions to growth in loans to private non-financial corporations .................... 174 Table 50: Number of inhabitants per region as of 2012 ................................................................. 179 Table 51: Absolute number of active SMEs per region across 2009 to 2012 and

percentage change year-on-year .................................................................................................... 183 Table 52: SME distribution by size of class of employment and number of employees ........... 183 Table 53: Enterprise distribution by sector and number of employees ....................................... 185 Table 54: R&D expenditure in 2012 as a percentage of GDP relative to EU-28 ........................ 186 Table 55: Total R&D expenditure in Malta as a percentage of GDP........................................... 187 Table 56: Number of patent applications filed under the Patent Cooperation Treaty

(PCT), in 2010 per billion GDP in comparison with the EU-27 ......................................................... 188 Table 57: Interviews conducted with the different stakeholder groups for the AFMA study

in Malta .................................................................................................................................................... 193 Table 58: Indicators used to perform the AFMA study in Malta .................................................... 196

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List of Diagrams

Figure 1: Principle of triangulation ........................................................................................................ 29 Figure 2: Budget distribution by Operational Programme ............................................................... 49 Figure 3: Total loans outstanding as a percentage of GDP among EU countries ...................... 63 Figure 4: The ladder of equity financing according to the development stage of

companies ................................................................................................................................................ 70 Figure 5: SMAF Sub-index on access to equity finance per country (2012) ................................. 71 Figure 6: SME population in Malta according to the size of companies ...................................... 82 Figure 7: Development stage of micro-enterprises in Malta ........................................................... 83 Figure 8: Sources of funding used by micro-enterprises between 2011 and 2013 ...................... 85 Figure 9: Feeling of lack of support among micro-companies when seeking finance ............. 86 Figure 10: Reasons for the difficulties for micro-enterprises in accessing finance over

2011-2013 ................................................................................................................................................... 88 Figure 11: Perception of change in the conditions of debt financing in 2011-2013 by

micro-enterprises in Malta ...................................................................................................................... 89 Figure 12: Obstacles to loan financing reported by micro-enterprises ......................................... 89 Figure 13: Type of collateral provided for debt financing by micro-enterprises ......................... 90 Figure 14: Use of funding by micro-enterprises in 2011- 2013 .......................................................... 91 Figure 15: Expected sources of funding in 2014 indicated by micro-enterprises ........................ 92 Figure 16: Expected use of funding of micro-enterprises in 2014 ................................................... 93 Figure 17: Categorisation assumptions for financial products for micro-enterprises and

financial inclusion ..................................................................................................................................... 94 Figure 18: Development stages of small enterprises in Malta ....................................................... 100 Figure 19: Feeling of lack of support among small enterprises when seeking finance ............ 101 Figure 20: Sources of funding used by small enterprises between 2011 and 2013 ................... 102 Figure 21: Perception of change in the conditions of debt financing in 2011-2013 by

small enterprises in Malta ..................................................................................................................... 104 Figure 22: Reasons for the difficulties for small enterprises in accessing finance over 2011-

2013........................................................................................................................................................... 104 Figure 23: Feeling of discouragement from seeking finance among small enterprises in

Malta ........................................................................................................................................................ 105 Figure 24: Obstacles to loan financing reported by small enterprises ........................................ 106 Figure 25: Use of funding by small enterprises over 2011-2013 ...................................................... 107 Figure 26: Expected sources of funding in 2014 indicated by small enterprises ....................... 107 Figure 27: Development stages of medium-sized enterprises in Malta ....................................... 108 Figure 28: Discouragement of medium-sized companies in Malta from seeking finance ...... 109 Figure 29: Sources of funding used by medium-sized enterprises over 2011-2013 .................... 110 Figure 30: Reasons for difficulties for medium-sized enterprises in accessing finance over

2011-2013 ................................................................................................................................................. 111 Figure 31: Reasons referred to as difficulties by medium-sized enterprises in receiving

loan financing......................................................................................................................................... 112 Figure 32: Perception of change in the conditions of debt financing in 2011-2013 by

medium-sized enterprises in Malta ..................................................................................................... 112 Figure 33: Use of funding by medium-sized enterprises over 2011-2013 ..................................... 113 Figure 34 Expected sources of funding in 2014 indicated by medium-sized enterprises ........ 114 Figure 35: Expected use of funding of medium-sized enterprises in 2014 .................................. 114 Figure 36: Potential financing gaps and viable financing gaps for micro-enterprises for

2014........................................................................................................................................................... 132 Figure 37: Development stages of large enterprises in Malta ....................................................... 138 Figure 38: Sources of funding used by large enterprises between 2011 and 2013 ................... 139

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Figure 39: Reasons explaining difficulties of large enterprises in accessing finance ................ 140 Figure 40: Obstacles to loan financing reported by large enterprises ........................................ 140 Figure 41: Use of funding by large enterprises over 2011-2013 ..................................................... 141 Figure 42: Expected sources of funding in 2014 indicated by large enterprises ....................... 142 Figure 43: GDP growth rates in Malta according to Eurostat forecasts ...................................... 169 Figure 44: HICP inflation for Malta including Eurostat forecasts .................................................... 171 Figure 45: Interest rates for loans up to and including EUR 0.25m and between EUR 0.25m

and EUR 1m (January to July 2013) .................................................................................................... 175 Figure 46: Interest rates for overdrafts in the Eurozone in 2012 (January to September) ........ 176 Figure 47: Non-Performing Loans as a percentage of total gross loans issued by core

domestic banks ...................................................................................................................................... 177 Figure 48: Projection of the total population of Malta in the long-term ..................................... 178 Figure 49: Estimated hourly labour cost for 2012.............................................................................. 180 Figure 50: Population aged 15 and over by highest level of education successfully

completed, 2011 .................................................................................................................................... 180 Figure 51: Tertiary education graduates by type of subjects studied ......................................... 181 Figure 52: Malta’s innovation performance compared with other EU Member States ........... 187 Figure 53: Corporate tax rate across countries in 2014 .................................................................. 192

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1 Executive Summary

The present Small and Medium-sized Enterprises (SME) Access to Finance Market

Assessment (AFMA) report for Malta has conducted a thorough analysis of the

existing market environment for SMEs, including lessons learned from existing

Financial Instruments (FIs) in the country and has implemented a methodological

approach, aiming to define the existing gaps regarding SMEs and their access to

finance. In order to draw conclusions reflecting the reality of the SME environment in

Malta and to provide recommendations for the future Proposed Investment Strategy

for Financial Instruments in the framework of the Operational Programme (OP) under

the ESI Funds, financing gaps have been identified across different financial

products and across three categories of SMEs according to their size, namely micro-

enterprises (0 to 9 employees), small (10 to 49) and medium-sized enterprises (50 to

249).

The Maltese economy, driven by gaming, ICT and financial services, outperformed

the Eurozone average since the country joined the Union in 2004 and has proved

more resilient to the crisis than many of its European counterparts, partly thanks to

the strong domestic SME population. In 2008, the Maltese GPD contracted by 2.5%

percent (as compared with almost 4% for EU-28), and experienced a sharp recovery

in 2010 (4%, 2 percentage points ahead of the EU-28 average) (Eurostat, 2014). This

success is partly due to the recent regulatory adjustments and its attractiveness for

Foreign Direct Investments (FDIs) from EU Member States (73.2% of total FDI in 2013)

(NSO, 2014).

SMEs dominate the corporate landscape of Malta and are a key driver of its

economy. SMEs represent almost the entire population of enterprises: 99.8% in 2012,

in line with the EU-28 average (99.8%) (NSO, Eurostat, 2014). The population of active

SMEs declined by 1.1% in 2011 and by 3.7% in 2012, mainly because of the

implementation in 2011 of a new regulation exempting from VAT reporting SMEs with

a turnover under EUR 7,0001. Among these SMEs, approximately 95% are micro-

enterprises, i.e. 2.5 percentage points ahead of the EU-28 average. Small and

medium-sized enterprises accounted respectively for 4% and 0.9% (NSO, Eurostat,

2014). SMEs weight 78.6% of national employment, a higher proportion than in the

EU-28 (67.2%) (NSO, Eurostat, 2014). Between 2009 and 2012, the share of micro-

enterprises in the employed population decreased by 2.4%, establishing at 32.3% in

2012 (almost 2 percentage points above the EU-28 average). In the same period,

the share of small and medium-sized enterprises increased and reached,

respectively, 22.1% and 24.2% in 2012 (NSO, Eurostat, 2014).

1 Value Added Tax Regulations, 2010 (Exemption from Registration), coming into force on 1 January 2011, as

notified in the Legal Notice 524 of 2010.

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Because of the dominance of the banking sector, the supply almost exclusively

consists of bank loans, whereas equity and microcredit play a very marginal role in

the financing of SMEs.

The Maltese banking sector appears to be in a good position to step-up lending,

thanks to a strong capital basis and high levels of liquidities. Indeed, The World

Economic Forum rated Malta’s banking sector as the 12th soundest in the world out

of 144 countries, and placed Malta at number 15 for financial market development

(Malta Financial Services Authority, 2012). However, commercial banks apply

interest rates and collateral requirements that are relatively higher than the rest of

the Eurozone.

Taken together, young SMEs which often lack collateral and have no credit history

can face difficulties in their access to finance: bank loans are unaffordable,

whereas alternative products supply is not especially developed.

Bank-lending to private Non-Financial Corporations (NFCs) declined at a fast pace

during 2013, falling by 4.9%, after a drop of 0.7% in 2012. Apart from subdued

domestic private investment, this could be an indication of continuing tightness in

credit standards. The reduction in loans to private sector NFCs was broad-based,

but stemmed mainly from reduced borrowings by firms in the construction and

wholesale and retail trade sectors. For the first time since the onset of the financial

crisis, loans to private NFCs in Malta during the second half of 2013 contracted at a

faster annual pace than in the Eurozone as a whole.

On the demand side, the three size categories of SMEs were analysed in order to

provide insight into their needs. The findings are outlined in the following

paragraphs:

Micro-enterprises represent the vast majority of companies in the country (95% of all

SMEs). Micro-enterprises have financial needs for working capital and investment

purposes, but are experiencing problems in accessing the banking system. Access

to mainstream banking products tends to be limited to those micro-enterprises with

a good credit history of the owner, larger turnovers and lower levels of debt

financing and sufficient equity invested according to banks’ standards. Micro-

enterprises which cannot fulfil the bank’s requirements seek financing from informal

sources (family and friends) because they are not aware of the existing Financial

Instruments providing guarantees and lack knowledge of banking procedures.

Small enterprises’ share among all SMEs (4% of all enterprises) had been constantly

increasing since 2009 signifying that companies are growing within the local market,

in line with the growth in GDP. Small enterprises can rely on banking finance to a

much larger extent than micro-enterprises. According to the findings presented in

previous chapters, small companies have significant access to bank financing. They

are perceived by banks as clients of interest and for the most part have the

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experience and knowledge to apply for loans. The majority of small enterprises

indicated that they did not face obstacles when seeking finance; however, some

indicated that costs of financing and other terms and conditions imposed by

financial institutions are a growing cause of concern to them.

Medium-sized enterprises represent a very small but economically important

segment of the SME population in Malta (0.9% of all enterprises). The financial crisis

does not seem to have affected their prospects, leading to a nearly unchanged

population of medium-sized enterprises. Their relatively robust asset base allows

them easiest access to banking products for different uses and to diversify their

types of financing. Short-term loans, overdrafts and credit lines are the most used

products for this SME size. Medium-size enterprises are likely to be better educated

on the suitability of different products and show for example the highest use of

public guarantees.

In addition, the present report analysed large companies’ access to finance. Results

from the online survey indicated that only a small minority have insufficient access

to loan products. Overall, large companies in Malta do not face any material

difficulty accessing finance.

Following the description of Malta’s economic and business context and the

dynamics of supply and demand for SME financing, computations described in the

report were able to quantify the supply and demand for specific financing

products. The quantified total supply of each financial product has been estimated

for each of the three categories of SME size. The quantification of the potential

demand for finance from SMEs has been based on their future needs expressed in

the online survey, and past use of Financial Instruments. The financing gaps have

been computed, based on the potential total demand for various financial

products across the SME population. However, in order to provide a better picture of

the scale of unmet demand among viable companies, a second methodology was

implemented to compute financing gaps based on the viable demand (referred to

as Viable Financing Gaps or VFGs).

Following the computation methodologies, which will be described further on in the

present report, the ranges of the potential and the viable financing gaps per annum

for the total population of SMEs in the region are given in the table below. It has to

be borne in mind that, against the background of an environment of imperfect

information and uncertainty, there is no perfect solution to assess (ex-ante) SME

finance market gaps, and the correct quantification of these gaps is impossible.

According to the European Investment Fund’s Guidelines for SME Access to Finance

Market Assessments (GAFMA), which form the methodological guidance for this

report, “[t]he uncertainty and imperfect information refers not only to the

“measurement” of existing gaps (assessment of status quo), but also to the forward

looking elements as the market assessment has to consider the short and medium-

term future (e.g. impact of current changes in bank lending behaviour on the future

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access to finance for SMEs)”2. The quantification of financing gaps can only provide

indications and is only one element of the analysis; it has to be considered in

combination with the additional quantitative and qualitative assessments,

performed throughout the present report.

Table 1: Potential financing gap and viable financing gap for loan products for the

total SME population in Malta in 2014

Potential financing gap

range (mEUR)

Viable financing gap

range (mEUR)

Short-term loans3, bank overdrafts4 and credit lines5 123 - 136 21- 23

Medium and long-term loans 148 - 164 37 - 41

Total 272 - 300 58 - 64

Source: PwC analysis, 2014.

As presented in the table above, the computations first provided the total financing

gap based on the potential demand of loan products ranging from EUR 272m to

EUR 300m in 2014. This gap represents a potential request for the whole year. But

since SMEs tend to overestimate their needs, and the potential gap calculation is

based on the responses of all SMEs and not only the viable ones, they should not be

perceived by policy makers as amounts that should be covered in a single year or

as gaps which have to be bridged by Financial Instruments. They are only an

indication of financing needs in the regional economy, according to the

methodologies described in the present report and market constraints experienced

by SMEs. However, this indication confirms the need to apply Financial Instruments

as public support mechanisms, particularly in order to catalyse further private

financing for SMEs.

The estimated potential demand is based on the online survey answers provided by

SME owners and is related to their knowledge of their respective markets and the

perspective of their company. That is why the following points have to be taken into

account when considering the financing gaps based on potential demand:

• Potential demand may not actually translate into action;

• Lack of previous investment due to the crisis;

• Limited knowledge of financing sources and products; and

• Uncertain economic environment.

2 European Investment Fund (2014). Guidelines for SME Access to Finance Market Assessments (GAFMA). Working

Paper 2014/22. 3 Short-term loans are defined as loans to be repaid in less than one year and are most commonly used to

finance working capital needs.

4 Overdrafts are an extension of credit from a bank when an account reaches zero thus allowing a company to

continue withdrawing money even if the account has no funds; also primarily used for working capital

fluctuations. 5 Credit lines are defined as maximum loan amounts approved by a bank to a company where interest is

charged only to the used part of the loan.

17

The online survey conducted for the present report also allows an estimate of the

SMEs that are considered viable (i.e. exhibiting growth) but have previously been

unsuccessful in seeking loan financing: they represent circa 10.2% among micro-

enterprises and none among small and medium-sized enterprises. The Viable

Financing Gap (VFG) has been estimated at between EUR 58m and EUR 64m for all

loans for the total SME population in Malta in 2014. This gap will have to be bridged

partially by the financial system and partially by publicly supported Financial

Instruments, i.e. in order to catalyse private financing for SMEs.

The analysis furthermore highlighted how EU-funded Financial Instruments (JEREMIE,

JASMINE and CIP) have contributed, and keep contributing, to the improvement of

SMEs’ access to finance in Malta. These Financial Instruments partially cover the

scope of current SMEs’ needs (especially in terms of guarantees).

Overall, the existing Financial Instruments supported by public interventions have

positively impacted the financing conditions and environment of the national

market. They however allow room for improvement:

Involvement of different financial intermediary to enhance competition of

products and visibility among SMEs;

Creation of sufficient impact to address the lack of equity and microfinance

actors in the market.

The present AFMA report concludes that the impact of existing Financial Instruments

could be increased with the use of ESI Funds into diversified existing or new Financial

Instruments. This use would allow offering new products to better service SMEs’

specific needs.

The following paragraphs summarise the findings and conclusions per financial

product, and present high level recommendations for the formulation of a future

investment strategy.

Microfinance

Demand for microfinance covers both existing SMEs and people currently

unemployed and/or at risk of poverty who see themselves as potential business

creators if their access to finance were facilitated (financial inclusion, leading to

social inclusion).

There is practically no microfinance market in Malta. The few existing initiatives focus

on supporting targeted populations, through charity rather than microfinance for

business purposes.

In the case of Malta, the potential financing gap for existing micro-enterprises in

2014 ranges between EUR 108m and EUR 120m. Concerning microfinance for

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financial inclusion, a financing gap has been estimated around EUR 6m. The

microfinance financing gap may be partly explained by:

High demand from micro-enterprises (especially 0 employee) facing

difficulties when seeking financing from financial institutions, notably

commercial banks;

The absence of microfinance in Malta;

Difficulties for potential beneficiaries in identifying microfinance products.

The table below summarises the financing gap for microfinance.

Table 2: Potential financing gap for microfinance for micro-enterprises in 2014,

including social inclusion

Financing gap for existing

micro-enterprises (mEUR)

Financing gap for social

inclusion (mEUR)

Total financing gap for

microfinance (mEUR)

Microfinance 108 - 120 6 114 - 126

Source: PwC analysis, 2014. See Boxes 1 and 2 for detailed descriptions of the methodology.

Demand for microfinance products will increase as the number of newly created 0

employee micro-enterprises is expected to continue increasing.

Short-term loans, overdrafts, credit lines

On the supply side, the analysis has highlighted that commercial banks do not face

liquidity issues but still apply relatively high interest rates on SMEs’ loans, due to their

conservative approach toward financing SMEs leading. Local stakeholders believe

that most of Maltese SMEs are under-capitalised when compared to their EU

counter-parts.

On the demand side, the priority for SMEs of all sizes is to secure the financing of

working capital in order to remain operational in the short-term.

The study reveals viable financing gaps for short-term loans for micro-enterprises, but

not for small and medium-sized companies, as illustrated in the table below.

Table 3: Viable financing gaps for short-term loans, overdrafts and credit lines in

2014

Viable financing gap for



small and medium-sized

enterprises (mEUR)


SMEs (mEUR)

Short-term loans,

bank overdrafts

and credit lines

21 - 23 - 21 - 23


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Medium- and long-term loans

All sizes of SMEs use medium and long-term debt financing in Malta. These loans are

sought to finance equipment renewal as well as investment and business expansion.

In the short run, micro-, small and medium-sized companies intend to continue

investing in their equipment and machinery as well as launch new activities.

According to the analysis, micro-enterprises have more difficulties to access

collateralisation than small and medium-sized enterprises. Bridging these gaps would

foster investment and job creation in the region.

Viable financing gaps were calculated and are presented in the table below.

Table 4: Viable financing gaps for medium and long-term loans in 2014





enterprises (mEUR)


SMEs (mEUR)

Medium and

long-term loans 37 - 41 - 37 - 41


Equity

A potential financing gap was calculated for equity financing for all SMEs in Malta,

and needs to be read as indicative for reasons explained further in the present

report. The table below presents the financing gap for 2014.

Table 5: Potential financing gap for equity financing for all SMEs in 2014

Financing gap for equity financing (mEUR)

Equity financing 35 - 174


The analysis highlighted that equity financing should be considered as key for the

support of SMEs in their future access to finance in view of supporting their growth

strategies. However, in the design of any FI, consideration needs to be given to the

presence of a sufficient critical mass in demand from specific targets for equity

investment, their attractiveness to private investors and the ability of the financial

intermediary to leverage existing networks and stakeholders (incubators, Chamber

of Commerce) to facilitate matchmaking and provide the required mentoring and

support to the SMEs.

Recommendations

The use of Financial Instruments is relatively recent in Malta. In recent years some

initiatives to implement FIs and support business enterprises through loan guarantees

20

and direct loans have been introduced, primarily though Malta Enterprise and

JEREMIE.

However, the specific nature of the Maltese economy and more specifically the

dominance of the banking sector have created some limitations to the use of FIs

that need to be overcome.

As an EU member state, Malta has for a number of years been benefiting from

various EU funding programmes, particularly grants. The launch of the JEREMIE

guarantee instrument in 2011 provided another dimension towards how EU funds

could be used to support SMEs in Malta. Given the take-up to date, JEREMIE has

been a relative success in Malta and is considered to be a best practice example

amongst other member state regions. In going forward, the challenge for Malta will

be to understand how EU and national funds can be combined to foster further

support for SMEs through the use of FIs. The diversification of FIs beyond guarantees,

the involvement of more intermediaries, and the launch of instruments in fields that

are still non-existent in the country such as microfinance and equity have to be

investigated.

The key recommendations from the analysis conducted in the present AFMA report

are detailed below:

a. Support and expand the implementation of JEREMIE.

The implementation of the JEREMIE guarantee instrument during the 2007-2013

programming period was successful and demand for the product will continue. It

stands to reason that this instrument should be further supported during the

upcoming EU programming period.

The Managing Authority (MA) should consider expanding the allocation of EU

funds for the next programming period towards this instrument, given that the

new instrument would span the full duration of the programming period. The MA

should consider expanding the allocation of EU funds and diversifying the

available Financial Instruments beyond the current JEREMIE guarantee. This

could be in the form of risk sharing facilities and/or equity instruments, subject to

further investigation and the prerequisites mentioned in Recommendation e).

Diversification should also allow JEREMIE to design Financial Instruments more

dedicated to start-up or micro-enterprises.

In implementing JEREMIE instruments going forward, it is also important to

consider appointing more than one financial intermediary, recognising that a

certain critical mass will be required for each, particularly for low-leverage

instruments such as risk sharing loans or equity.

21

b. Consider developing specific guarantee instruments or complementing the

existing instruments to facilitate access to short-term debt for working capital

purposes and long-term debt for investment purposes.

The analysis has revealed that financing gaps exist for short-term and medium

and long-term loans for micro-enterprises. Moreover, it was established that an

increasing need for working capital financing is appearing in the market. The

main barrier to debt financing for SMEs, especially micro-enterprises, is related to

the collateral requirements imposed by commercial banks. Taking into account

the lack of microfinance institutions in the country, Financial Instruments in the

form of guarantees and other risk mitigation products to support micro-

enterprises without collateral could be developed or could complement existing

guarantee products.

c. Considering the introduction of a risk sharing loan facility.

Besides the need for guarantee schemes and collateral support, Maltese SMEs

could also benefit from a Financial Instrument which would target a reduction in

the cost of lending. It was highlighted in the analysis that interest rates, including

bank charges and fees in Malta are high thus affecting the overall cost of

financing. With the introduction of a risk sharing loan facility, for example, SMEs

and especially small and medium-sized companies willing to expand, could

benefit from reduced interest rates.

However, when designing and implementing FIs, several factors have to be

taken into account, such as, the leverage effect and the capacity of the market

to benefit from these FIs. In the case of Malta, the priority should be put on

guarantees which are mostly needed by SMEs and have a higher leverage

effect.

d. Support the provision of microfinance for existing and potential entrepreneurs.

The supply of microfinance in Malta is still very limited and is often provided in the

form of standard bank loans. Micro-enterprises are exposed to excessive interest

rates and bank charges and often rely on personal assets, such as their personal

properties, as collateral. The promotion of a microfinance facility provided by a

non-banking institution, to support existing and potential entrepreneurs should be

considered. In lack of such a specialised institution, the provision of (collateral-

free) microfinance through a risk sharing scheme with commercial banks could

also be considered.

e. Create the conditions for the development of an environment that will support

equity financing and an active Business Angel community.

The equity market and business angel environment in Malta have a very weak

presence. Early-stage investments in the technology and knowledge-based

sectors in Malta are scarcely financed. The investment gap is particularly

apparent for companies in their start-up phase, where risk and uncertainty are at

their highest.

22

A Financial Instrument could be used to cultivate a new business mentality and

raise awareness among SMEs on the benefits of equity financing. Experience in

other countries has shown that equity investments in SMEs through public

assistance schemes tend to attract private investors and Business Angels. With

the creation of a co-investment fund acting as a lead investor, for example,

private investors could be encouraged to invest in companies, especially

technology and knowledge-based start-up companies, and such a fund could

ultimately encourage the creation of an organised private investment

community in Malta.

However, in the design of any FI, priority should be given to develop an

adequate business environment as an efficient equity market does not solely

depend on sufficient supply – particularly given previous attempts in Malta which

have created only limited impact in the market.

f. Consider an appropriate combination of grants and FIs for investment purposes

or mentoring and training support to SMEs.

Malta has implemented several grant programmes in recent years that have

proved successful. A combination of grants and FIs for investment purposes

could help SMEs complement their financing with banking loans and facilitate

the implementation of their business plans. A combination of grants and FIs could

also be envisaged in initiatives to mentor SME owners. It has been mentioned in

the analysis that SMEs do not have experience in negotiating with financial

institutions and in preparing business plans. Mentoring initiatives would support

SMEs in applying to banks but also to grant programmes. When setting up such

initiatives it is vital to keep the balance between tailoring them to the needs of

SMEs and maintaining a scope sufficiently broad to ensure a reasonable take-

up. As illustrated by several unsuccessful grant schemes in the programming

period 2007-2013 (e.g. on vocational training of farmers or development of new

farming products), too specific a programme, however well-meaning, may be

inefficient, with only a handful (if any) SMEs using it.

23

2 Introduction

Finding appropriate ways to finance Small and Medium-sized Enterprises (SMEs) is a

priority for the European Union (EU)6. Since the early 1990s, policy recommendations

at global, European and national level have highlighted the need for the adoption

of a coherent approach to improve SMEs’ access to finance. In the EU’s 2007-2013

programming period, Structural Funds support to SMEs was provided via Financial

Engineering Instruments (FEIs) in addition to grant finance. DG REGIO’s Summary

Report 2012 reported that FIs for enterprises had invested in more than 160.000 SMEs

across Europe7 between 2007 and 2012.

The 2014-2020 programming period foresees an increased use of Financial

Instruments (FIs) for all Thematic Objectives (TO) and across all sectors 8 . The

objective is to move away from grant mechanisms towards Financial Instruments,

namely revolving funds focused on productive investment. Furthermore, there is a

wide interest in ensuring the strong commitment of private sector financial

intermediaries in taking the role of bodies implementing FIs, in order to increase

efficiency in the delivery of funds and leverage the amount of funds made

available through private participation.

Financial intermediaries are limited by solvency constrains, particularly during the

financial crisis, and by the need to apply strict risk management standards. This may

increase the difficulties for SMEs to comply with the conditions for access to finance.

For Malta, access to finance is a key priority towards addressing Thematic Objective

n°3 related to SMEs’ competitiveness. The national Planning and Priorities

Coordination Division (PPCD) within the Ministry for European Affairs is entrusted with

directing the future European Structural and Investment Funds (ESIF) resources

towards SME competitiveness. In fact, the use of FIs has developed over the past

few years at a national level and some instruments have already been designed

and implemented. However, the use of FIs in Malta can still be considered limited

and solely adapted to the banking sector which remains the dominant formal

source of financing for SMEs. That is why, in a constantly changing environment, an

updated and more detailed overview of the SME environment is necessary in order

to improve, adjust and produce new policies and instruments catering to the needs

of SMEs. The preparation of ex-ante assessments becomes, therefore, necessary

and, according to the relevant regulation, also mandatory, to assess the conditions

and existing barriers SMEs have to face.

6 Think Small First - A Small Business Act for Europe (COM(2008) 394 of 23.6.2008). 7 European Commission, Summary of data on the progress made in financing and implementing financial

engineering instruments reported by the MAs in accordance with Article 67(2)(j) of Council Regulation (EC) No

1083/2006. Programming period 2007-2013 (situation as at 31 December 2012). 8 European Commission, Factsheet - Financial Instruments in Cohesion Policy 2014-2020.

24

The present study assesses the existing supply and demand of funds supporting SMEs

in Malta, analyses if and to what extent weaknesses and financing gaps exist in

particular markets for SME finance, and proposes high-level recommendations to

decrease these gaps and weaknesses given the proven market failures, suboptimal

investment situations and financing needs.

Objectives and scope of the study 2.1

This SME Access to Finance Market Assessment (AFMA) study presents the

assessment of the existing supply and demand for SME financing in Malta. It serves

to feed a Proposed Investment Strategy (PIS) to be developed for Malta to address

SMEs’ access to finance. Together they constitute the ex-ante assessment required

by the European regulation on European Structural and Investment Funds9.

The AFMA study will identify and - where possible - quantify the market failures or

suboptimal investment situations and investment needs for small and medium-sized

enterprises in the country10. It also takes into account the innovation sector in Malta,

in conformity with the “Guidelines for SME Access to Finance Market

Assessments” (GAFMA) developed by the European Investment Fund (EIF)11. Aligned

with the preamble of the Common Provisions Regulation (CPR) adopted on 17

December 2013, it is meant to establish “evidence of market failures or sub-optimal

investment situations and the estimated level and scope of public investment

needs, including types of Financial Instruments to be supported”12.

Specifically concerning Malta, this ex-ante market assessment results from the desire

of the Managing Authority (MA) - the Priorities and Planning Coordination Division

within the Ministry for European Affairs and the Implementation of the Electoral

Manifesto (MEAIM) - to enhance and improve its portfolio of Financial Instruments in

order to address difficulties which SMEs are currently facing. The present AFMA study

is aimed at supporting the MA in preparing its investment strategy for the design and

implementation of FIs that will facilitate access to finance for SMEs in Malta in the

next programming period, through European Structural and Investment Funds (ESIF)

as well as investment returns to the Joint European Resources for Micro to Medium

Enterprises (JEREMIE) Holding Fund (HF). According to the Coordination Committee

of the Funds (COCOF) Guidance Note on Financial Engineering Instruments13, these

JEREMIE funds shall be allocated to the same type of actions for the benefit of SMEs

9 See Annex 1 for details (Common Provisions Regulation adopted on 17 December 2013). 10 In that framework, the present AFMA study is aligned with the European Court of Auditors (ECA)’s

recommendation to base future ERDF operations on a “sound assessment of the financing gap”, including its

quantification. 11 European Investment Fund (2014). Guidelines for SME Access to Finance Market Assessments (GAFMA). Working

Paper 2014/22. 12 See Common Provisions Regulation adopted on 17 December 2013 (Article 37 in Annex 1). 13 European Commission – Directorate-General Regional Policy (2012). Revised Guidance Note on Financial

Engineering Instruments under Article 44 of Council Regulation (EC) No 1083/2006. COCOF_10-0014-05-EN.

25

and used beyond the end of the current programming period (i.e. 2007 – 2013) until

exhaustion.

Following the GAFMA methodology14, the main activities conducted for the present

financing gap analysis in the field of access to finance for SMEs in Malta have been:

• The analysis of demand and supply of SME finance by type of financial

product taking into account nationwide specificities; including a link with the

2014-2020 Operational Programme (OP) currently prepared by the Managing

Authority;

• The identification and - where feasible - the quantification of the financing

gap per financial product as well as per category of SME size.

Relevant regulation 2.2

The Common Provisions Regulation lays down provisions for the ESIF. According to

these provisions, ESIFs may be used to support Financial Instruments under one or

more Programmes to be implemented during the programming period 2014-2020.

FIs are consequently becoming necessary tools for the successful implementation of

Common Strategic Framework (CSF) policies as well as for achieving the Europe

2020 Strategy objectives for smart, sustainable and inclusive growth. They are seen

as a valuable complement to traditional grant schemes and are meant to leverage

existing experience with the use of Financial Engineering Instruments acquired

during the programming period 2007-2013.

Member States (MS) and MAs will be allowed to use FIs for all the 11 Thematic

Objectives covered by CSF programmes and part of the future Cohesion Policy (CP)

for the new programming period 2014-2020. As a result, the structure of CSF

programmes will have to be aligned with the Thematic Objectives, including the

third Thematic Objective aimed at […] enhancing the competitiveness of small and

medium-sized enterprises, the agricultural sector (for the EAFRD) and fisheries and

aquaculture sector (for the EMFF)”15.

According to the adopted CPR for the future Cohesion Policy 2014-2020, FIs shall be

set up on the basis of ex-ante assessments that address the local needs and

potential of SMEs.

Structure of the report 2.3

This report is structured so as to bridge recent trends with foreseeable developments

in access to finance for SMEs in the country and draw specific conclusions on the

market financing gaps. The report begins with the presentation of the methodology

(Chapter 3) that details the approach taken in collecting and analysing relevant

14 European Investment Fund (2012). Guidelines for SME Access to Finance Market Assessments. June 2012. Mimeo. 15 See Common Provisions Regulation adopted on 17 December 2013 (Article 37 in Annex 1).

26

data. The methodology is followed by the description of the market environment in

Malta (Chapter 4). It consists of the overview of the economic situation and

detailed description of the SME market, including a snapshot of the institutional and

legal framework. Subsequently, the report describes the existing SME financing

instruments available in the Maltese market, including the Financial Instruments

(Chapter 5) and provides an overview of the existing government support schemes

and the historical use of Structural Funds. In Chapter 6, the report presents the policy

priorities of the Managing Authority (the Ministry for European Affairs and the

Implementation of the Electoral Manifesto) for SME financing during the next

programming period 2014-2020.

In Chapter 7, the supply of SME finance is analysed for each category of financial

product and each category of SME size. The analysis then focuses on the demand

side, by category of SME size. It also provides insights on the demand for financing in

the future per financial product and category of SME size. SMEs have been

categorised by size according to their number of employees, taking into account

the EU’s SME definition; namely from 0 to 9 employees, 10 to 49 and 50 to 249

employees. This categorisation is important in order to highlight several

characteristics of the Maltese market such as the dominant presence of micro-

enterprises. The categorisation by company size is an additional tool used to

distinguish the different problems and related needs within the SME population in

the country. Following this description, in Chapter 8, financing gaps have been

identified and analysed for each of the above categories and lessons learned from

previous initiatives are summarised so as to draw conclusions on the needs of SMEs

in terms of financing and substantiate recommendations for a Proposed Investment

Strategy to be developed for the Managing Authority.

27

3 Methodology of the study

Various data sources on the financing of SMEs in Malta were used:

• Literature review, including the analysis of SME-specific indicators developed

in various previous studies;

• Interviews with key stakeholders in SME finance in Malta. Three groups were

defined: financial institutions and supply side representatives, policy-makers

and actors representing the demand side;

• An online survey conducted among SMEs in the country.

Literature review 3.1

A literature review was conducted, aimed at gathering the majority of the existing

information on SME financing in Malta to identify and analyse:

• Information on the economic and political environment of Malta;

• Insights on the policy priorities of the Managing Authority for the next

programming period 2014-2020;

• Information on the regulatory environment relevant for SMEs and FIs in Malta;

• Existing indicators and information on SME financing (on both the demand

and supply sides) in Malta;

• Insights on the successes, failures and lessons to be learned about the use of

FIs in the past.

The documentation used for the literature review is indicated in Annex 3. The

literature review enabled the sourcing of qualitative and quantitative indicators that

were used to analyse the context and situation of SME financing in Malta. These

indicators, along with their sources and definitions, are presented in Annex 7.

Stakeholder interviews 3.2

A total of 1816 face-to-face interviews with stakeholders involved in SME financing

were carried out to complement the literature review. When selecting the relevant

stakeholders. Three groups of stakeholders were identified:

• Financial institutions and supply side representatives (such as commercial

banks, financial institutions and investment managers);

• Policy makers; and

• Demand side representatives (such as representatives of professional

associations representing Maltese SMEs).

Specifically, this includes representatives of finance suppliers, such as commercial

banks, financial institutions and investment fund managers, as well as

representatives of professional associations representing Maltese SMEs.

28

Online survey 3.3

An online survey among Maltese SMEs, consisting of 22 questions17, was launched on

22 May 2014 and closed on 09 July 2014. A questionnaire was sent to a sample of

SMEs covering 2.8% of the total SME population in Malta with a stratification

corresponding to the nationwide SME population in terms of sectors18. In an effort to

ensure a robust response rate the questionnaire was further distributed to over

10,000 SMEs in Malta which are members of the Malta Chamber of Commerce,

Enterprise and Industry and of the General Retailers and Traders Union (GRTU)19 and

beneficiaries of grant schemes (funded by the EU) that were administered by Malta

Enterprise (ME), the Tourism and Sustainable Development Unit (TSDU) and the

Department for Social Welfare Standards (DSWS). Overall, more than 580 SMEs

answered the online survey, of which 217 SMEs provided valid answers that were

used for the analysis of the present AFMA study. The distribution of respondents is

aligned with the overall Maltese SME population to the largest extent possible, as

shown in Annex 220.

Data analysis 3.4

All the data and information collected through the literature review, stakeholder

interviews and the online survey was used and assessed in order to validate the

study’s findings. The methodology used is based on the principles of triangulation

which ensures that all findings presented in the AFMA report are supported, to the

largest extent possible, by evidence from these three data sources. Information

obtained through these data sources has been compared in order to identify trends

or contradictions in the findings. The principle of triangulation is illustrated in Figure 1

below.

17 The questionnaire used for the online survey is presented in Annex 8. 18 According to the OECD definition, stratification consists of “dividing the population into subsets (called strata)

within each of which an independent sample is selected” (OECD, 2013). The stratification conducted for the

AFMA study divides the SME population of Malta into sectors. A detailed presentation of the sampling

methodology used for the AFMA study is provided in Annex 2. 19 The Malta Chamber for SMEs. 20 The methodology conducted for the stratification of the Maltese SME population and the distribution of

respondents to the online survey are presented in Annex 2.

29

Figure 1: Principle of triangulation

Source: PwC.

The above-mentioned approach enabled tendencies for access to finance to be

identified amongst SMEs in Malta.

Findings

Interviews

Literature

Online

survey

30

4 The market environment

This chapter presents a snapshot of the market environment relevant to SMEs in

Malta. A more elaborated description of the market environment is provided in

Annex 4.

Over the last few years, despite the turbulence experienced in the global and

European economic environment, Malta has maintained a degree of stability and

avoided many of the difficulties experienced by some other EU countries. This is

partly due to the nature of the Maltese economy which remains isolated from

external influences and has limited SMEs exports. The banking system remained

strong and liquid while the continuous efforts of government and policy makers to

maintain the pace of economic performance have also resulted in sustained

positive market conditions and no fundamental issues were observed for Malta’s

SMEs. Except for 2009, the Maltese economy recorded growth rates above the EU-

average, amounting to a total Gross Domestic Product (GDP) of EUR 6.8bn in 2012.

One of the critical success factors of Malta is its ability to attract Foreign Direct

Investments, especially from the EU.

With regard to the business population in the country, there were 40,573 active SMEs

and 61 large enterprises in Malta in 2012. This implies that 99.8% of the total active

companies were SMEs of which 95.1% were micro-enterprises, which is slightly above

the EU-28 average of 92.2%. Small and medium-sized enterprises account for 4.0%

and 0.9% of the total SME population respectively. Further analysis of the SME

distribution by region shows that 93% of the SMEs in the Maltese islands are

concentrated in Malta, while the remaining 7% operate from Gozo, the second

largest island.

Close to 70% of SMEs are active in six sectors. The three activities with the highest

number of SMEs are “Wholesale and retail trade, repair of motor vehicles and

motorcycles” (26.0% of SMEs), “Construction” (10.9% of SMEs) and “Professional,

scientific and technical activities” (9.8% of SMEs). However, SMEs operating in the

largest sectors do not necessarily contribute towards higher employment. Even

though the wholesale and retail sector does in fact account for the most employed

persons (24.6%) within the SME population, the accommodation and food services

and manufacturing sectors employ 11.9% and 11.6% of the SME workforce

respectively. Overall, Maltese SMEs employ 80% of the total workforce, which is

higher than the EU average of 66.5%. This highlights the importance of these

enterprises in terms of their contribution to economic activity and economic growth.

Despite the global financial crisis, the Maltese banking sector remains resilient due to

its strong capital base and bank liquidity. The World Economic Forum rated Malta’s

banking sector as the 12th soundest in the world out of 144 countries, and placed

Malta at number 15 for financial market development. The banking sector in Malta

consists of 26 credit institutions, of which three are owned by Maltese shareholders

31

exclusively. The Maltese banking sector appears to be a dominant financing source

for Maltese enterprises21.

Regarding access to finance, the World Bank “Doing Business report 2014”, despite

the strong banking sector in the country, ranked Malta 180th out of 189 countries

with respect to getting credit. This is the effect of the dominance of the banking

sector and the lack of other specialised institutions that could be more focused on

SME financing. Moreover, according to the Central Bank of Malta (CBM) in January

2014, Malta had the fifth highest rate of bank lending interests after Cyprus, Greece,

Portugal and Slovenia, thus increasing the cost of finance for SMEs. Lending to SMEs

declined by 3.1%, following an increase of 5.6% in 2012, while the ratio of Non-

Performing Loans (NPLs) from resident non-financial corporations increased from

nearly 9% in 2009 to almost 16% in the first half of 2013. This increase is mainly due to

the fact that only specific companies and sectors are eligible for bank loans in the

country which often leads to an over-indebtedness of some companies while other

companies have no access to financing. Moreover, a slowdown of the construction

and real estate sectors contributed almost 50% to this increase of NPLs. Nevertheless,

the overall amount of disbursed loans increased substantially during the first 6 month

of 2014.

According to the 2013 Maltese Small Business Act (SBA) fact sheet, certain indicators

measuring SMEs’ access to finance in Malta demonstrated that overall, Malta scores

below the EU average. This is above all the case for the legal environment and the

share of EU structural fund financing reserved for SMEs. It is furthermore a challenge

for SMEs to attract financing from alternative funding sources outside the traditional

banking sector, with only 19% being fully successful in applying for non-bank finance

as compared to a near 80% average for the EU-28 (SAFE survey, 2013).

In Malta, a friendly legislative environment has attracted investment funds in the

country. Relevant stakeholders observed that even though there is a number of

investment funds registered in Malta, their focus is to invest in larger external markets,

especially given the lack of deal flow in the local market. Therefore, such investment

funds do not tend to provide Venture Capital, which is necessary to support the

needs of innovative companies. The absence of legislation, of organised networks

and public intervention schemes that could motivate private investors to invest are

missing in the country. Such initiatives would protect and motivate investors to

support local SMEs.

21 The SAFE survey confirms the predominance of the banking sector in SMEs’ access to finance in Malta: 67.7% of

interviewed SMEs indicated that they used bank products, far above the EU average (51.5%). According to the

SAFE Survey, no respondent has seen his credit application rejected (12.6% on average in the EU). Banks rather

appear to leave room for negotiation of the amount: only 55.6% of applicants got the entire amount they

requested (64.5% in the EU), whereas a significant proportion (27.6% against 7.3% on average in the EU) got a

limited part of it. This shows that Maltese banks try to adjust an intermediate credit proposal in line with their risk

profile rather than rejecting a demand.

32

With respect to Malta’s overall legal framework and fiscal policy, the Government

has introduced a series of legislative frameworks to improve competitiveness, cut

red tape and reduce the costs of regulation on enterprise. Nevertheless, these

reforms might still be not sufficient for SMEs. When asked about the five most

important factors limiting further business growth, unfair competition and the

regulatory framework were named among the most limiting factors in the short-,

middle and long-term 22 . In the longer term, regulatory and tax reforms at the

European or global level could potentially erode Malta’s competitiveness as its

dependence on sectors such the financial and gaming industries, which have

greatly benefitted from a business-friendly tax and regulatory regime in the past,

allowing them to offset a corporation tax rate of 35% which is otherwise among the

highest in Europe.

Malta’s innovation performance, over the last decade has been very poor, mainly

as a result of insufficient Research and Development (R&D) spending, along with the

almost non-existent linkages between research and the needs of the productive

sector. As indicated during stakeholder interviews, there are a number of SMEs that

have come up with an innovative product/service but experience difficulty in taking

the product to market. A further concern in Malta is the lack of an effective

Intellectual Property (IP) rights framework, which has been identified by the market

as a necessity for incentivising investment in R&D. In this light, initiatives and policies

were recently introduced in Malta to create linkages between research (specifically

the University of Malta), market needs and the country’s innovation system.

Malta’s market environment is also influenced by its changing demographics.

Demographics affect most domestic social indicators, and may have an impact on

the local business environment, and the development of SMEs. On the one hand,

the wide availability of a well-educated labour force represents a competitive

advantage for the country, serving as a lever to attract investment. On the other

hand, the ageing population is a cause for concern for the long-term prospects of

SME development in the country.

In conclusion, despite the favourable economic growth rates, SMEs are still exposed

to several challenging factors, in terms of market conditions and regulation, high

interest rates as well as demographics, including an ageing population and a low

participation rate of women in the labour force. The lack of alternative financing

sources, increasing levels of corporate debt and the tightening credit conditions

remain two of the main factors undermining business confidence which are

expected to influence the growth of SMEs.

22 In fact, the survey conducted for the present AFMA study showed that SMEs perceive price competition/small

margins as the most limiting factor for further business growth in the short-, middle- and long-term. The SAFE

survey shows the same result as competition was chosen as the most pressing problem for SMEs in Malta.

33

5 Existing SME financing instruments

Throughout the present report, the market environment related to the financing of

SMEs, and the analysis of supply and demand, highlight the dominant position of the

banking sector in the country. As there are currently no alternative potential

financial intermediaries for FIs, this limits the potential of public sector intervention

and Malta has implemented FIs in the past that are adapted to the banking system,

namely in the form of loans (including micro-credit) and guarantees. Other FIs in the

form of equity or microfinance have not been implemented yet. In recent years,

financing tools in the form of grants have been widely used. These include direct

grants, interest rate subsidies, and tax subsidies. In this chapter the existing FIs and

grant schemes will be presented as well as a presentation of the historical use of

structural funds in the country.

Financial Instruments available for SMEs in the country 5.1

This section presents the Financial Instruments available for SMEs in Malta, financed

by European and national funds. The main FIs in Malta are implemented by the

JEREMIE initiative and Malta Enterprise.

a) EU funded Financial Instruments

The paragraphs below describe the FIs implemented in Malta under the 2007-2013

programming period.

The JEREMIE Initiative in Malta

The JEREMIE initiative was designed in Malta with the purpose of increasing

awareness of the use of FIs and improving access to finance for SMEs. In this context,

the Maltese authorities created a Malta JEREMIE Holding Fund, managed by the EIF

and funded by Operational Programme I (OPI) “Investing in Competitiveness for a

Better Quality of Life”.

Currently one product is fully operational under the JEREMIE initiative in Malta,

namely the First Loss Portfolio Guarantee (FLPG) instrument which guarantees up to

75% of loans to SMEs. At the inception of the guarantee instrument, EUR 10m were

allocated with the aim of creating a loan portfolio of EUR 51m. The demand for

these guarantees was significant, leading to a top-up of EUR 2m in August 2013 and

increasing the maximum loan portfolio to over EUR 60m.

34

Table 6: Conditions and criteria for eligibility of the JEREMIE guarantee instrument

Conditions / Criteria for eligibility

Purpose Capital expenditure purposes

Maximum

loan term

10 years (minimum maturity of 1 year)

Interest rate Discounts average 1%

Security 75% covered by JEREMIE. Maximum collateralisation cover at portfolio level of

37.5%

Charges No early repayment penalty

Type of

company

Micro, small and medium-sized enterprises as per EU definition

Scope of

business

All SMEs except:

- SMEs in difficulty;

- SMEs active in arms production and trading, gambling, tobacco,

human cloning, genetically modified organisms, fishery and

aquaculture sector, primary production of agricultural products;

- SMEs presented in article 1 (c-g) of De Minimis regulation; and

- Real estate and construction sectors

Source: BOV presentation: Local Best Practices (Financial Incentives in Malta) - JEREMIE.

As of the end of August 2014, 761 loans were granted to 649 SMEs (total loan volume

committed reached EUR 62,1m, while loans disbursed reached EUR 53m) through

the JEREMIE portfolio guarantee. On average, 20 loans per month were granted

with an average value of EUR 1.8m per month. This initiative resulted in over

EUR 100m worth of investment23, being a leverage of 5.8x.

The guarantee instrument supported SMEs of all size groups. More specifically, 75% of

total facilities were taken up by micro-enterprises, 21% by small companies and 4%

by medium sized enterprises and the average loans sought were less than EUR

100,000. 44% of facilities were granted to start-ups having a total value of EUR 18.2m.

Under the JEREMIE initiative start-ups are defined as those SMEs that have carried

out their main business for a period not exceeding 24 months24.

The loans covered by the guarantee were granted for various purposes including

the setting up of premises for new catering establishments, offices and retail outlets,

the purchase of tangible assets such as machinery, hardware and other equipment,

and the purchase of energy efficient equipment. The SMEs were mostly active in the

sectors dominating Malta’s economy: wholesale and retail, accommodation and

23 Information provided during stakeholder interviews. 24 Bank of Valletta presentation – The JEREMIE Initiative in Malta.

35

food service activities and the manufacturing industry. These sectors combined

represent 67% of the companies supported by JEREMIE25.

Despite Malta’s limited experience with financial engineering instruments, this

instrument seems to be successful in terms of absorption of funds, as it was well

targeted, covering the existing, realistic needs of SMEs, especially micro-enterprises.

However, it has to be noted that the guarantee covers loans originating from a

single financial intermediary namely the Bank of Valletta (BoV), which was selected

following a public Call for Expression of Interest. The implication of further

intermediary banks has to be considered in order to increase the impact of JEREMIE

in the country and take further advantage of the strong banking system.

BoV Start Plus

BoV was selected as an intermediary in the European Commission’s CIP

(Competitiveness and Innovation Programme) which is implemented by the EIF and

had previously participated in JASMINE. Under this scheme called “BoV Start Plus”,

the BoV is providing loans in the form of microcredits that are partially guaranteed

by CIP. Through this programme BoV is committed to create a portfolio of EUR 6m of

microloans (i.e. up to EUR 25,000) for start-ups over a three year period. These micro-

loans are characterised by low interest rates and lack of collateral and can support

investment and working capital needs.

After Malta Enterprise under the previous programming period 2001-2006, this is the

second time that a Maltese financial intermediary took advantage of centralised EU

financing opportunities. BOV signed the agreement with the EIF in November 2013

and officially launched the initiative in January 2014. While the closing date was set

for 16 December 2014, the major part of the funds has already been spent as of

September 2014. Such interest confirms that the scheme was well tailored to the

needs of Maltese start-ups.

In fact, BoV making use of JASMINE and using Technical Assistance to maximise its

success can be seen as a good practice of how technical assistance supports

intermediaries in branching out into new Financial Instruments/markets. This example

is in contrast to the unsuccessful cooperation of Malta Enterprise and the European

Commission's Multiannual Programme for Enterprise (MAP): In 2004, the EIF provided

a counter guarantee covering the loan guarantee activities of Malta Enterprise

(including innovative start-ups). The cooperation was planned to support the

establishment of an SME loan guarantee scheme in Malta. This agreement was the

first contract under the MAP facility with an intermediary in Malta, although this

failed and came to an end 7 years ago. The reasons for its failure are arguably in

25 Bank of Valletta presentation – The JEREMIE Initiative in Malta.

36

the lack of ownership and promotion by ME, but also in the lack of interest from

SMEs.

Table 7: Conditions and criteria for eligibility of the BOV Start Plus programme

Conditions / Criteria for eligibility

Maximum amount EUR 25,000

Purpose To support capital investment and working capital directly related with a

capital investment project

Eligible sectors All sectors excluding agriculture / fisheries (some restrictions on transport)

SME Contribution 20% of total investment

Maximum loan

term

5 years (minimum maturity of 1 year)

Interest rate 4.65% (as at 13 June 2014)

Security No collateral requested

Charges No annual processing and early repayment fees

Type of company Start-up (micro-enterprises only)

Scope of business Most sectors

Source: BOV presentation: EU Financial Instruments BOV Start Plus 2014.

As at the end of June 2014, 33 microloans have been granted to 32 micro-

enterprises with a total value of over EUR 480,00026.

b) National funded Financial Instruments

Malta Enterprise is the national development agency with the legal basis in the

Malta Enterprise Act. It is responsible for promoting and facilitating international

investment in Malta by offering investors business opportunities and other services.

This institution implements initiatives that promote Malta’s economic growth and

attractiveness. It is also responsible for the growth and development of Maltese

enterprises, especially SMEs. The institution was created with the objectives of

supporting the local companies in:

• Setting up their business;

• Expansion of their existing operations;

• Innovation, Research and Development; and

• Access to international markets.

Malta Enterprise also designs and implements FIs for SMEs, financed mostly from the

national budget as presented below.

26 Stakeholder interview with Bank of Valletta.

37

Loans

Malta Enterprise provides direct loans (often referred as soft loans) to SMEs and large

enterprises offered at low interest rates. The main objective of this incentive is to

support new investment projects undertaken by enterprises mostly engaged in the

manufacturing industry. These loans usually cover 33% of investment expenditure

and do not exceed 75% of the cost of plant, machinery and equipment. Since its

inception, EUR 10m have been provided as loans to enterprises in Malta27. This is an

important amount, however, and it should be noted that direct loans such as the

ones provided by the Malta Enterprise fail to create leverage. By working in isolation

from the market, they limit their overall impact as FIs.

Loan Guarantees

Malta Enterprise also guarantees loans provided by commercial banks through two

schemes.

Micro Guarantee Scheme: This guarantee scheme was launched in 2013 and

targets companies employing up to 50 employees. Companies can benefit from a

guarantee between 65% and 80% (mostly depending on the sector of activity) of

loans up to EUR 100,00028 , which may be used to finance a range of business

projects. The Micro Guarantee Scheme has the objective of accelerating growth by

facilitating access to debt financing for smaller businesses.

The Micro Guarantee Scheme would appear to have a higher level of acceptable

risk than that imposed on projects under the JEREMIE scheme. However, up to the

third quarter of 2014 there has been no detailed information available since this is a

new scheme and only one approval has been granted by Malta Enterprise. The

reason for this poor performance is not evident and could be related to the low

awareness among microenterprises and their lack of experience in seeking finance.

Loan Guarantees: This scheme is addressed to all SME sizes. The main objective of

this incentive is to support new investment projects undertaken by enterprises

engaged in the manufacturing sector. It is estimated that on average EUR 3m to

EUR 5m of loan guarantees are issued by ME per annum. The uptake of soft loans

and guarantees are largely dependent on the projects submitted as such schemes

are not call driven. Moreover, these loan guarantees apply specifically to

manufacturing companies. By providing a number of incentives specifically to the

manufacturing industry, Malta intends to safeguard the industrial sector as a result of

intense competition from developing countries such as China and India.

27 Data provided by ME during stakeholder interviews. Estimates are based on annual approvals by ME. 28 The figure provided by the institution during the interview includes guarantees provided to both SMEs and large

companies.

38

Table 8: Existing Financial Instruments in Malta29

Institution Source of

financing Scheme

Instrument

name

Instrument

type

Financial

intermediary

Budget

(mEUR)

Leverage by

intermediary

(mEUR)

Disbursemen

ts (mEUR)

Eligibility

criteria

Main objective of

product

Number of

SMEs

supported

Start date End date

1

EIF

JEREMIE

Holding

Fund

ERDF JEREMIE

First Loss

Portfolio

Guarantee

Guarantee Bank of

Valletta 10.8 62.630 53 All SMEs

Support capital

investment 649 Apr 2011 Mar 2015

2 EIF CIP BOV Start

Plus

First Loss

Portfolio

Guarantee

Guarantee Bank of

Valletta 0.6 631 0.5

Micro-

enterprises

Support capital

investment and

working capital

32 Dec 2013 Dec 2016

3 Malta

Enterprise State Funds

Malta

Enterprise

guarantees

Micro

Guarantee

Scheme

Guarantee Commercial

Banks n/a n/a n/a

All business

undertakings

including start-

ups that satisfy

eligibility

criteria

Finance projects

leading to

business

enhancement,

growth and

development

n/a 2013 n/a

4 Malta

Enterprise State Funds

Loan

Guarantees

Support new

investment

projects in

manufacturing

Guarantee Commercial

Banks n/a n/a n/a

Enterprises

engaged in

manufacturing

sector

Facilitate access

to finance to

assist enterprises

in the acquisition

of capital assets

n/a n/a n/a

5 Malta

Enterprise State Funds Direct loan

Financing

investments in

qualifying

expenditure

Soft loan - n/a n/a n/a

Enterprises

engaged in

manufacturing

sector

Support

enterprises

through loans at

low interest rates

n/a n/a n/a

Sources: BOV presentation: EU Financial Instruments BOV Start Plus 2014 and Malta Enterprise.

29 Information for EU funded financial instruments is as at June 2014. 30 Leverage of 5.8x. 31 Leverage of 10x.

39

Grant schemes 5.2

This section presents the grant schemes available to SMEs in Malta. These include

schemes supported by EU funds, namely under the Operational Programmes I and II,

the Rural Development Programme (RDP) and the Fishery Operational Programme

(FOP) as well as grants supported by national funds.

a) EU funded grant schemes

For the 2007-2013 programming period, Malta was allocated funds through the

Operational Programme I (OP I), “Investing in Competitiveness for a Better Quality of

Life” and Operational Programme II (OP II), “Empowering People for More Jobs and

a Better Quality of Life”. These Operational Programmes (OPs) have introduced

several grant programmes in Malta, which have supported numerous enterprises,

especially SMEs, in obtaining funding for specific needs and requirements. These

grant schemes were introduced under priority axes 1, 2, 4 and 6, which supported

SMEs through state-owned intermediaries such as Malta Enterprise (ME), the Tourism

Sustainable Development Unit (TSDU) and the Department for Social Welfare

Standards (DSWS). Grant schemes that are no longer available are also presented in

the table below in order to highlight the previous use of grants.

Table 9: Grant schemes and programmes in Malta under the 2007-2013 programme

Operational

Programme /

Priority Axis

Grant Programme / Measure Status Committed

Funds32

(mEUR)

Inter-

mediary

OPI / PA1 "ERDF Small Start-up Grant Scheme" Closed 1.4 ME

OPI / PA1 "ERDF Innovation Actions Grant Scheme (Innovation)" Closed 6.1 ME

OPI / PA1 "ERDF Innovation Actions Grant Scheme (Environment)" Closed 1.0 ME

OPI / PA1 “ERDF e-Business Development Grant Scheme” Closed 2.2 ME

OPI / PA1 "ERDF International Competitiveness Grant Scheme" Closed 3.9 ME

OPI / PA4 “ERDF Energy Grant Scheme” Closed 10.9 ME

OPI / PA6 “Grant Scheme for Child Care Facilities” Closed 0.5 DSWS

OPI / PA1 "Research & Development Grant Scheme". Closed 2.8 ME

OPI / PA2 “Grant Scheme for Sustainable Tourism Projects by

Enterprises” Closed 8.9 TSDU

OPII / PA2 “Training Aid Framework” Closed 8.8 ETC

OPII / PA3 “Employment Aid Programme” Closed 14.1 ETC

Total 60.6

Sources: PPCD – List of Aid Schemes of EU Funding through Structural Funds for OPI and OPII

(updated June/July 2014).

32 Amounts include EU and national eligible public funding and exclude private contributions.

40

The grant schemes under the 2007-2013 programming period proved relatively

successful and have yielded positive results in many areas. By the end of 2012, 259

projects were supported by Malta Enterprise, under Priority Axis 1 (OP I), with a total

value of EUR 15m. In total 238 projects have been completed. The MA has published

some performance indicators, as shown in Table 10 below. While several indicators

exceeded targets, it is of note that the number of supported start-ups remains

relatively low at 17 as compared to the target of 40. This suggests that in the new

programming period more attention should be paid to fostering the emergence of

new businesses, on top of supporting the existing ones.

Table 10: Progress indictors under Priority Axis 1 (OP I) – Take-up of initiatives by SMEs

Indicator Target Result

No. of projects (direct investment aid to SMEs) 450 326

No. of SMEs launching new or improved product or processes 40 62

No. of SMEs improving their use of ICT for e-business 49 62

No. of SMEs improving their market penetration efforts 55 63

No. of start-up businesses supported (core indicator) 40 17

No. of SMEs assisted in environmentally sensitive technologies,

operating systems and processes 35 19

Source: PPCD Annual Implementation Report 2013, June 2014 (OPI).

Throughout the implementation of OP I during the 2007-2013 programming period,

the MA identified various problems encountered in the management and

administration of such aid schemes including33:

• Considerable time spent on the project selection process;

• Bottlenecks in the public procurement process during the selection and

vetting of EU funded tenders; and

• Untimely payments and verification processes.

Measures were undertaken to mitigate these problems and included among

others34:

• Ensuring maximum availability of the selection committee for project

selection meetings to ensure that time spent on project selection is minimised

to the extent possible;

• Setting up a special unit to prioritise the vetting of EU-funded tenders and

improving the capacity of the Department of Contracts to increase

efficiency in the awarding of tenders and to reduce bureaucracy; and

33 PPCD Annual Implementation Report 2013, June 2014 (OP I). 34 Ibid.

41

• Simplifying templates used for payment verification purposes and increasing

the workforce at the Treasury Department35, to improve the timeliness of

payments.

Also under priority axis 2 (OP I) there were 100 projects supported by TSDU with a

total value of EUR 7.1m. A further call was issued in 2013, where an additional 88

applications were submitted. Malta Enterprise has also supported 178 projects under

priority axis 4 in relation to the energy grant scheme with a total value of EUR 10.7m.

Approximately EUR 5.4m have been paid out to eligible enterprises36.

As at 2013, 1,569 SMEs benefitted from the Training Aid Framework, where EUR 8.8m

were allocated from the ESF and targeted specific sectors such as transport,

wholesale and retail, financial intermediation, real estate, manufacture of food and

beverage products and post and telecommunications. In total EUR 5m has been

paid out to enterprises. Another EUR 14.1m were allocated from ESF funds to the

Employment Aid Programme, which was fully absorbed by enterprises aiming to

improve employment37. Initially, Malta had some problems in absorbing ESF funds;

however the process improved after the involvement of private enterprises in the

implementation. Given that both schemes were oversubscribed, there is great

potential for such funds to be fully exploited by employers if these are made

available in the next programming period38.

During the same programming period, there were another two operational

programmes, the Rural Development Programme (RDP) and the Fisheries

Operational Programme (FOP) that were administered and implemented by the

Agriculture and Rural Payments Agency (ARPA) and the Funds and Programmes

Division (FPD) respectively. These operational programmes were funded by the

European Agricultural Fund for Rural Development (EAFRD) and the European

Fisheries Fund (EFF) and provided grants to enterprises. These programmes are

presented in the table below.

35 The Treasury Department is responsible for effecting disbursements. and managing the Government’s debt

portfolio. 36 PPCD Annual Implementation Report 2013, May 2014 (OPII). 37 PPCD Annual Implementation Report 2013, May 2014 (OPII). 38 Report published by Malta Business Bureau - Allocation of EU Funds in Aid of Private Enterprise: Programming

Period 2014-2020, July 2013.

42

Table 11: Grant schemes under the 2007-2013 RDP39 and FOP40 programmes

Operational

Programme /

Priority Axis

Measure Objective of measure No. of SMEs

assisted

Intermediary

RDP / PA1 Measure 111

“Vocational Training and Information

Actions”

To provide the opportunity and means for

farmers and others involved in agricultural

activities and the agro-food industries to

be trained. Training was limited to the

managers or owners of micro-enterprises.

5 ARPA

RDP / PA1

Measure 114

“Use of Farm Advisory Services”

This measure was aimed at directing

farmers, through the use of advisory

services, to adopt sustainable practices

and to facilitate access to farmers to rural

development measures.

Assistance was

indirect as a

result of funding

the setup of

Farm Advisory

Services

ARPA

RDP / PA1

Measure 115

“Setting up of Farm Advisory Services”

To aid in the setting up of farm advisory

services bodies.

Assistance was

indirect as a

result of funding

the setup of

Farm Advisory

Services

ARPA

RDP / PA1

Measure 121

“Modernisation of agricultural holdings”

To support farm investment and assist

agricultural holdings to improve their

economic performance through better

use of new technologies, organic

products and on farm diversification.

390 Awarded ARPA


“Adding value to agricultural products”

This measure was specifically orientated

at facilitating improvements in processing

and marketing of agricultural products.

49 ARPA


“Cooperation for development of new

products, processes and technologies in

the agriculture and food sectors”

The general aim of this measure was to

increase the competitiveness of the

farming sector and of the agro-food

processing industry through the

development of new products (goods

and services), processes and

technologies.

6 ARPA

39 ARPA website: https://secure2.gov.mt/MRRA-PA/rdproj_tm?l=1. 40 FPD website: https://secure2.gov.mt/fpd/fish_results.

43

Operational

Programme /

Priority Axis


assisted

Intermediary


“Infrastructure related to the development

and adaptation of agriculture”

To facilitate the development of

agriculture by supporting the

development of the necessary

infrastructure to address water scarcity

and farm accessibility.

0 ARPA


“Participation of farmers in food quality

schemes”

To encourage farmers to participate in

Community and national food quality

schemes through financial support.

4 ARPA


“Setting up of producer groups”

Support under this measure is limited to

cover the setting up and administrative

operation of producer groups.

3 ARPA

FOP / PA1 Measure 1.1

“Public aid for permanent cessation of

fishing activities launch 1”

Contributes to financing of the

permanent cessation of fishing activities

of fishing vessels.

13 Awarded

27 On reserve FPD




Contributes to financing to financing of

the permanent cessation of fishing

activities of fishing vessels.

6 FPD







5 FPD


“Public Aid for Permanent Cessation of

fishing activities Scheme 4”




5 FPD


“Investment on Board Fishing Vessels and

Selectivity launch 1”

Contributes to financing of equipment

and the modernisation of fishing vessels of

five years of age or more.

45 FPD

44

Operational

Programme /

Priority Axis


assisted

Intermediary


“Productive Investments in Aquaculture”

Support investments in the construction,

extension, procurement of equipment

and modernisation of production

installations.

2 FPD


“Aqua-environmental measures”

Supports granting compensation for the

use of aquaculture production methods

that help to protect and improve the

environment and to conserve nature.

0 FPD


“Investments in Processing and

Marketing”

Support investments in processing and

marketing of fisheries and aquaculture

products.

2 FPD

Source: ARPA website and FPD website.

b) National funded grant schemes

Besides the schemes that are offered under OPs I and II, the RDP and the FOP which

are principally funded through ERDF, ESF, EARDF and EFF, Malta Enterprise offers

many other incentives in the form of grant schemes, interest rate subsidies,

investment tax credits and other support measures. In some cases these have a

special focus on SME development and growth, as described in the following

sections41.

Grant schemes

Business Development scheme: The scheme is intended to facilitate typically larger,

high value-adding projects that are likely to offer a significant contribution to the

regional development of Malta through substantial job creation. The scheme may

support various activities such as initial development phase of enterprises

establishing an operational base in Malta. The total aid per enterprise cannot

exceed EUR 200,000 over a period of three years. This scheme is mostly applicable to

large firms but SMEs can also apply.

Network Support Scheme: Business Networks are made up of between 3 and 10

independent enterprises working together to achieve a specific business objective.

Through the sharing of resources, enterprises forming part of the network can benefit

41 ME website: http://www.maltaenterprise.com/en/support.

45

from transfer of knowledge, combined capacity, improved business prospects and

achieve higher competitiveness. Malta Enterprise is supporting approved network

projects with a grant up to EUR 60,000. This scheme provides support mainly to

associations and does not provide any direct assistance to SMEs.

Gozo Transport Grant Scheme: The scope of this scheme is to support manufacturing

undertakings operating from Gozo by reducing the additional inter-island transport

cost incurred for transporting materials, goods and finished products between Malta

and Gozo. This scheme proved to be quite popular, particularly amongst SMEs. In

2012 and 2013 Malta Enterprise granted total aid of EUR 481,000 and EUR 309,000

respectively, mainly to SMEs42.

Improving Market Entry and Internationalisation of companies: This incentive is used

to facilitate access to foreign markets by allowing enterprises to explore growth

opportunities, establish business contacts and consolidate existing markets. This

scheme provides part-financing to business undertakings that participate in

international trade events, fairs and trade missions. Malta Enterprise also provides

various initiatives that prepare entrepreneurs for entering new markets. The total aid

that may be granted to a single undertaking is limited to EUR 30,000 in any fiscal

year. Malta Enterprise may part-finance eligible costs at a rate of 50% in the case of

small or medium-sized undertakings. The uptake for this scheme in 2013 was slightly

over EUR 539,00043.

Innovative start-ups Programme: This scheme supports new enterprises engaged in

existing markets but introducing innovative products and services and having the

potential to compete in international markets and enterprises engaged in new

markets, new technologies, novel products or services and in knowledge based

industries that demonstrate a potential for job creation and growth. This incentive is

implemented by Malta Enterprise in cooperation with the Kordin Business Incubation

Centre (KBIC). The grant is available to enterprises that have submitted a business

plan approved by Malta Enterprise. The maximum grant under this incentive is

EUR 15,000; however, the actual value granted to a beneficiary varies according to

the level of innovation of the start-up. The uptake of this scheme has varied over the

years, with an average of around six start-ups per year with grants of roughly

EUR 100,000 per annum. In 2013 over EUR 56,000 were provided as aid to start-ups44.

This scheme is currently closed but will be revised on the basis of the updated State

Aid regulation.

Royalty Income from Patents: The objective of this scheme is to encourage

researchers to exploit intellectual property through the licensing of patented

knowledge. The scheme should also encourage investment in research and

42 Data provided by ME during stakeholder interviews. 43 Data provided by Malta Enterprise during stakeholder interviews. 44 Ibid.

46

knowledge creation and exploitation of intellectual property. The incentive gives

fiscal benefits to persons (individuals and enterprises) that own the rights to

patented intellectual property and are receiving income in the form of royalties.

Grants for Cross-Border Collaborative Research and Development: The collaborative

R&D Grant Scheme supports Maltese enterprises that carry out an industrial research

or experimental development project in collaboration with other enterprises. The

project should lead to the development of innovative products, processes and

services based on advanced technologies. Projects may only be funded if they are

endorsed by the EUREKA network or approved through the Eurostars Programme.

This scheme is currently under review. The uptake of this scheme did not exceed

three projects per annum. This scheme is currently closed but according to meetings

held with Malta Enterprise, there is the possibility that it will be updated to re-

commence in October 2014.

Interest Rate Subsidies

Interest Rate Subsidies: The main objective of this incentive is to support new

investment projects undertaken by enterprises engaged in manufacturing. This

scheme offers grants to cover a percentage of the finance costs incurred by

enterprises with the aim of reducing the effective rate of interest paid.

Refurbishment of Hotels, Accommodation Facilities and Restaurants: These grants in

the form of interest rate subsidies aim to support hotels, restaurants and holiday

accommodation owners in upgrading their operations. Approved projects may

receive an interest rate subsidy of between 1% and 3% during the first five years of a

loan period. To date EUR 800,000 in subsidies were allocated to Maltese enterprises

engaged in the accommodation and food services sector45. This scheme is currently

closed. According to meetings held with Malta Enterprise, due to changes in State

Aid regulation, it is currently in the process of updating relevant schemes on a

priority basis. Since this scheme was relatively popular amongst enterprises it is likely

possibility that this well be extended.

Investment Tax Credits

Malta Enterprise also provides grants in order to subsidise the tax payments of

companies or labour costs.

MicroInvest: This scheme provides tax incentives to micro-enterprises (employing

fewer than 10) and the self-employed for development projects. All undertakings,

with few exceptions are supported through a tax credit representing a percentage

of the eligible expenditure and wages of newly recruited employees and/or

45 Data provided by ME during stakeholder interviews.

http://www.eurekanetwork.org/

https://www.eurostars-eureka.eu/

47

apprentices. This scheme entitles eligible companies to a tax credit equivalent to

45% of the eligible expenditure incurred (this percentage increases to 65% for

undertakings operating from Gozo). The maximum eligible amount cannot exceed

EUR 30,000 over a period of 3 consecutive years and these tax credits must be

utilised within a period of 3 years. This scheme attracted around 2,000 applications

with around EUR 7m worth of support annually. In 2013, Malta Enterprise received

962 applications (on average around 900 applications are processed annually).

Investment Aid Tax Credits: This scheme supports enterprises in investment and job

creation and is one of the most popular forms of support utilised by enterprises. The

scheme is mainly focused on attracting new investment projects and eligible

enterprises can benefit from tax credits. The principle beneficiaries are enterprises

engaged in manufacturing, ICT, call centres, pharmaceuticals, biotechnology, and

audio-visual industries. Annual aid provided through this scheme reached around

EUR 50m; however, this scheme is currently under review since Malta is no longer

considered as an “a” area (GDP per capita <75% of the EU average) in terms of the

Regional Aid Guidelines, but as a “c” area (where aid can only be granted to

facilitate the development of certain economic activities). The incentives claimed

by all enterprises during the last three years amounted to circa EUR 49m per annum.

Get Qualified: Get Qualified is an initiative that supports the personal development

of individuals for the achievement of qualifications and certifications required by

industry. The incentive is applicable to individuals following a course of studies

leading to a certification, diploma, degree or post-graduate degree courses. Upon

successful completion the student will benefit from a tax credit thus recovering part

of the costs incurred.

Historical use of structural funds 5.3

Since Malta’s EU accession in 2004, the country has been granted access to a

number of EU Financial Instruments and schemes. In 2004, Malta began to

implement and participate actively in the following programmes for the period from

2004 till 2006 outlined in Table 12 below.

Table 12: Funding provided under the 2004-2006 programming period

(mEUR)

The Structural Funds Programme for Malta 2004-2006 63.19

The Structural Funds Community Initiative Interreg III 2.37

The Structural Funds Community Initiative Equal 1.24

The Cohesion Fund Programme for Malta 2004-2006 21.9

Total 88.7

Source: PPCD website.

48

For the 2007-2013 programming period, Malta experienced a large increase in its

allocation, to EUR 855m in total. These funds were made up of EUR 444m under the

European Regional Development Fund, EUR 284m under the Cohesion Fund, EUR

112m under the European Social Fund (ESF) and another EUR 15m under the

European Territorial Cooperation Programmes.

By 2012, the EU Structural and Cohesion Funds had become the primary pool of

public funding for the modernisation and improvement of Malta’s economic

environment. The National Strategic Reference Framework 2007-2013 (NSRF),

approved by the European Commission in December 2006, provided guidelines for

the use of EU Structural Funds through two OPs namely OPI ‘Investing in

Competitiveness for a Better Quality of Life’ and OPII ‘Empowering People for More

Jobs and a Better Quality of Life’. These programmes were designed with four

objectives in mind:

• Strategic objective 1 – Sustaining a growing knowledge based competitive

economy;

• Strategic objective 2 – Improving Malta’s attractiveness and the quality of

life;

• Strategic objective 3 – Investing in human capital; and

• Strategic objective 4 – Addressing Gozo’s regional distinctiveness.

a) At a glance: Operational Programmes and Structural Funds

Structural Funds and the Cohesion Funds have supported SMEs mainly through grant

schemes but also through the use of FIs. Malta has been using the provisions of the

two EC Operational Programmes co-financed in various portions by the European

Regional Development Fund (ERDF), the European Social Fund (ESF), and the

Cohesion fund (CF) to ensure the availability of funding.

Table 13: Funding Distribution by Operational Programme

As at 20/07/2013 National Funding

(EUR)

EU funding (EUR)

Total Budget

(EUR)

ERDF ESF CF

OPI

Investing in

Competitiveness for

a Better Quality of

Life

128,492,304 443,978,031 - 284,145,020 856,615,354

OPII

Empowering People

for More Jobs and a

Better Quality of Life

19,764,705 - 112,000,000 - 131,764,705

Total 148,257,009 443,978,031 112,000,000 284,145,020 988,380,060

Source: PPCD website.

49

Figure 2: Budget distribution by Operational Programme

OPI in line with the National Strategic

Reference Framework (NSRF) – Budget

distribution

OPI - Investing in Competitiveness for

a Better Quality of Life

OPII in line with the National Strategic

Reference Framework (NSRF) – Budget

distribution

OPII - Empowering People for More

Jobs and a Better Quality of Life

Source: eufunds.gov.mt, Structural Funds and Cohesion Fund 2007 - 2013.

Table 14: Fund absorption progress by Operational Programmes I and II

As at 03/06/2014 Total budget

(EUR)

Contracted

(Grants) (EUR)

% of

budget

Actually paid

(EUR) % of budget

OP I

Investing in

Competitiveness for a

Better Quality of Life

856,615,355 701,600,000 82% 480,700,000 56%

OP II

Empowering people for

more jobs and a better

quality of life

131,764,705 99,520,000 75.5% 77,800,000 59%

Total 988,380,060 801,120,000 81% 558,500,000 56.5%

Source: eufunds.gov.mt, Operational Programmes (Monitoring Committees).

Despite the numerous grant schemes implemented under the 2007-2013, the

absorption rates have been moderate. As of June 2014 only 56.5% of the funds

reached the beneficiaries. Fortunately, more than 80% of the funds have been

contracted but it is uncertain whether these projects will be implemented.

50

b) OP I “Investing in Competitiveness for a Better Quality of Life”

(2007-2013)

On 26 June 2007, The European Commission gave the go-ahead for a major

development programme in Malta for the period 2007-2013, namely the

Operational Programme for "Investing in Competitiveness for a Better Quality of Life"

(OP I). This scheme involved EC support with the primary objective of achieving a

higher degree of convergence across Member States. The total budget of the

programme was EUR 856m where Community assistance through the ERDF and

Cohesion Fund amounted to EUR 444m and EUR 284m.

The Operational Programme “Investing in Competitiveness for a Better Quality of

Life” was the principal programming document aimed at improving the

competitiveness of the Maltese economy. Through ERDF and the Cohesion Fund,

OPI aimed to develop and generate economic growth based on encouraging

competitive economic activities and strengthening Malta’s physical infrastructure,

leading to a better quality of life for Maltese citizens. The OP’s main objectives

defined through seven priority axes:

Priority Axis 1: “Enhancing knowledge and innovation”: to promote and strengthen

high value-added economic activity, including attraction of Foreign Direct

Investment, support of the re-structuring process of local industry and explore the

potential for renewable energy sources. Therefore, the objective for this priority axis

was largely targeted at assisting SMEs in starting-up, launching new products or

services, expanding or enhancing their businesses and improving their market

penetration efforts.

Priority Axis 2: “Promoting sustainable tourism”: intended to promote the Maltese

Islands as a prime tourist destination and improve the competitiveness of tourism

and culture operators.

Priority Axis 3: “Developing the trans-European network for transport”: to improve

journey-time reliability and road safety through upgrades to parts of the TEN-T road

infrastructure and improve maritime accessibility (also inter-island) by upgrading

TEN-T ports and related infrastructure.

Priority Axis 4: “Climate change and resource efficiency”: to improve and

strengthen Malta’s mitigation and adaption measures (strategies) in response to

climate change as well as measures intended to ensure the best and efficient use of

available resources.

51

Priority Axis 5: "Safeguarding the environment": to continue with the upgrading

process of the country’s environment infrastructure, particularly in the areas of solid

waste management and risk prevention.

Priority Axis 6: "Urban regeneration and improving the quality of life": to safeguard

and value the country’s urban heritage and promote an overall improvement in

quality of life through better accessibility, enhanced education, social and health

systems and increased environmental monitoring capacity.

Priority Axis 7: "Technical assistance": to facilitate the overall implementation of OPI

and to reinforce the administrative capacity of the public administrations

concerned.

The overall objective of this OP and the specific objectives of sustaining a growing,

knowledge-based, competitive economy and improving Malta’s attractiveness and

the quality of life are being measured and assessed through an overall impact

indicator of increasing nominal exports of goods and services. This is based on the

NSRF Strategic Objectives of Sustaining a growing, knowledge-based, competitive

economy and improving Malta’s attractiveness and the quality of life. It is also

based on the National Strategic Reference Framework’s (NSRF) core target and

impact indicator: increasing nominal exports of goods and services by 4% over the

2007-2013 programming period.

More specifically, the goals of the OP and the seven priority axes are, amongst

others, to increase Research and Development expenditure from 0.52% of GDP in

2004, up 0.85% by 2013, to increase earnings from tourism by 1% per annum over the

2007-2013 programming period, and to increase manufactured export earnings with

an average rate of 2.7%46. Another important objective is to create 1,400 jobs by

2015, as a direct result of interventions financed through the ERDF and CF47.

In particular, the objectives of priority axis 1 were mostly focused on the set-up and

development of SMEs in Malta. Certain schemes introduced under priority axes 2

and 4 were also targeted at helping SMEs obtain funding from available Financial

Instruments, albeit to a lesser extent than priority axis 1. There were several grant

schemes and FIs introduced under these axes aimed at improving SMEs’

competitiveness. The most successful initiative implemented in Malta was the

introduction of the JEREMIE Fund scheme, implemented under priority axis 1, with

EUR 12m in funds committed from the ERDF with an objective to facilitate over

EUR 51m in investment into SMEs.

46 Baseline data 2004 (excluding extraordinary items) with an average growth calculated over a 7 year reference

period. 47 Operational Programme I Cohesion Policy 2007-2013, November 2013.

52

c) OP II “Empowering People for More Jobs and a Better Quality

of Life” (2007-2013)

Operational Programme II was originally approved by the Commission on the 22nd

June 2007. This was subsequently updated and approved in July 2012. 48 The

programme was co-financed by the European Social Fund, through which it aimed

to strengthen social and economic development by improving employment and

job opportunities, encouraging a high level of employment, and more and better

jobs. It supported initiatives that aim to increase employment and quality and

productivity at work, promote financial inclusion and encourage disadvantaged

people to join the work force.

OP II addressed the following five key priority axes agreed upon between Malta and

the European Commission:

Priority Axis 1: “Improving Education and Skills”, to invest in human capital in order to

increase the overall participation rates in education at all levels, thereby increasing

and upgrading the knowledge and skills levels of the labour force.

Priority Axis 2, to “Investing in the Employability and Adaptability of the Workforce”:

invest in human capital to ensure that the working age population and enterprises

become flexible enough to respond to the needs of the economy, whilst reducing

unemployment levels.

Priority Axis 3, to “Promoting an Equal and Inclusive Labour Market”: promote the

uptake of stable and quality employment by persons who find difficulty in

participating in the labour market.

Priority Axis 4, to “Strengthening of Institutional and Administrative Capacity”: invest

in human resources development and mechanisms in order to strengthen

institutional capacity and efficiency of public administrations, local government,

social partners and civil society.

Priority Axis 5, to “Technical Assistance”: facilitate the overall implementation of the

Programme in order to optimise the programme’s quality and efficiency, whilst

ensuring effective application of regulations and procedures.

48 PPCD website.

53

6 Priorities and policies of the Managing Authority for SME

financing

The Planning and Priorities Coordination Division (PPCD) within the Ministry for

European Affairs and the Implementation of the Electoral Manifesto (MEAIM) is the

Managing Authority of the two OPs developed in Malta for the next programming

period 2014-2020. The first OP (OP I) is entitled “Fostering a Competitive and

Sustainable Economy to Meet our Challenges” and will be financed through the

European Regional Development Fund (ERDF) and Cohesion Fund (CF) 49 . The

second OP (OP II) is entitled “Investing in Human Capital to Create More

Opportunities and Promote the Wellbeing of Society” and will be financed through

the European Social Fund (ESF)50.

In May 2014, the EU Programming Unit within the MEAIM initiated a consultation

process by issuing the preliminary drafts of the Operational Programmes covering

Cohesion Policy for 2014-2020. The following two sections derive from the

consultation documents issued by the MEAIM.

Malta has also applied for the SME Initiative proposed by the European Commission

(EC), the European Investment Bank (EIB) Group and the European Council. The

rationale behind the SME Initiative and the envisaged use of Malta’s future ERDF

resources within the SME Initiative are presented in the last section of this chapter.

Operational Programme I for 2014-2020 6.1

OP I is focused on achieving the three funding priorities set out in Malta’s Partnership

Agreement, namely to:

• Foster competitiveness through innovation and the creation of a business-

friendly environment;

• Sustain an environmentally friendly and resource-efficient economy; and

• Create opportunities through investment in human capital and improving

health and well-being.

The OP outlines Government’s strategy for the measures necessary to contribute

towards the Europe 2020 targets for smart, sustainable and inclusive growth.

The Operational Programme is subdivided into eleven priority axes with underlying

investment priorities and strategic objectives. The table below provides an overview

of these priority axes, the indicative financial allocations and the rationale

supporting each priority axis.

49 Operational Programme I 2014-2020 - Fostering a competitive and sustainable economy to meet our

challenges, Consultation Document, May 2014. 50 Operational Programme II 2014-2020 – Investing in Human Capital to Create More Opportunities and Promote

the Wellbeing of Society, Consultation Document, May 2014.

54

Table 15: Priority axes of Operational Programme I

Priority Axis

Indicative

Financial

Allocation

Comments

PA 1: Investing in

research,

technological

development and

innovation

EUR 72m This axis focuses on Malta’s need to attain its Research and

Innovation (R&I) targets primarily through the development

and enhancement of R&I infrastructure.

This priority axis also targets the promotion of R&I investment

within the private sector through specific financial incentives.

PA 2: Consolidating

investment within the

ICT sector

EUR 38m ERDF funds are being targeted towards the private sector to

increase the use of ICT and e-based solutions as a mean of

enhancing Malta’s competitive offering.

This priority axis also addresses the need to strengthen public

sector ICT applications covering e-government, e-health and

other related e-services.

PA 3: Enhancing

Malta’s

competitiveness

through investment

in SMEs

EUR 53m ERDF funds are being envisaged for the creation of clusters

and business parks and for the enhancement of enterprise

infrastructure. To complement this, financial incentives are

also being earmarked to encourage start-ups and existing

SMEs to invest further in national strategic areas such as

product development, internationalisation and niche

tourism.

PA 4: Shifting towards

a low-carbon

economy

EUR 57m To achieve its 2020 renewable energy targets, Malta needs

to adopt a number of measures. This priority axis focuses on

the financial incentives to be provided to households and to

the industrial and commercial sectors to invest in energy

efficiency and renewable energy. These measures will also

be complemented with energy efficiency and RES measures

to be undertaken within the public sector.

PA 5: Protecting our

environment -

investing in natural

and cultural assets

EUR 72m Tourism is a key economic pillar and in this regard this priority

axis focuses in part on the preservation, development and

promotion of cultural heritage and tourism assets of Malta.

ERDF funds are also being earmarked towards the

conservation of Malta’s natural environment.

PA 6: Sustainable

Urban Development

EUR 24m This priority axis focuses on the sustainable urban

development within the Harbour area. Through an

integrated approach, interventions under this priority axis will

focus on the preservation, development and promotion of

cultural heritage and commercial tourism assets, cultural

services for SMEs as well as housing infrastructure.

PA 7: Shifting towards

a more low carbon

transport sector

EUR 35m This priority axis is focused entirely on promoting and

facilitating sustainable transport systems and mobility across

the islands thereby contributing towards reduced journeys

times and the increased use of greener fuels.

PA 8: Investing

towards a more

socially-inclusive

society

EUR 59m An active labour market participation and economic

prosperity is highly dependent on having a socially-inclusive

society. Investments in community based healthcare and

social infrastructure, as well as the regeneration of deprived

communities will be supported under this priority axis.

PA 9: Developing our

future through

education, training

and lifelong learning

EUR 33m This priority axis complements measures within OP II with a

view to providing education, training and research facilities

for tertiary education and Vocational Education and Training

institutions.

55

Priority Axis

Indicative

Financial

Allocation

Comments

PA 10: Investing in a

more

environmentally

friendly society

EUR 166m Two thirds of CF funds are being directed towards waste

management and the sustainable use of water resources.

This is particularly relevant given the high levels of waste still

being landfilled and the need to ensure the islands’ long

term availability of potable water.

PA 11: Investing in

TEN-T infrastructure

EUR 89m This priority axis is focused primarily on further developing the

Trans-European Transport Networks (TEN-T) road network and

maritime transport infrastructure to enhance Malta’s

competitiveness.

Source: Operational Programme I 2014-2020 Public Consultation Document on the

Programming of European Funds for Malta, Fostering a competitive and sustainable

economy to meet our challenges, 2014.

Financial incentives for enterprises are contemplated specifically within the first four

priority axes. At this preliminary stage, no specific decisions have been taken on the

forms of support. The table below provides an overview of these financial incentives

being envisaged for SMEs.

Table 16: Details of priority axes of Operational Programme I focusing on support to

SMEs

Priority Axis Investment Priority Rationale

PA 1: Investing in

research, technological

development and

innovation

IP 2: Promoting business

investment in R&I

Incentivise enterprises to invest in the

R&I sector

PA 2: Consolidating

investment within the ICT

sector

IP 1: Developing ICT products

and services, e-commerce and

enhancing demand for ICT

Incentivise enterprises to invest further

in the use of ICT and e-based solutions

PA 3: Enhancing Malta’s

competitiveness through

investment in SMEs

IP 1: Promoting entrepreneurship Foster entrepreneurship and start-ups

IP 2: Supporting the capacity of

SMEs to grow in regional,

national and international

markets and to engage in the

innovation process

Incentivise enterprises to innovate

their processes in areas covering R&D,

environment, quality certification,

resource efficiency and niche tourism

PA 4: Shifting towards a

low-carbon economy

IP 2: Promoting energy efficiency

and renewable energy use in

enterprises

Incentivise enterprises to invest in RES

and EE measures

Source: Operational Programme I 2014-2020 Public Consultation Document on the

Programming of European Funds for Malta, Fostering a competitive and sustainable

economy to meet our challenges, 2014.

56

Operational Programme II for 2014-2020 6.2

Similar to OP I, OP II is focused on achieving the three funding priorities set out in

Malta’s Partnership Agreement, namely by:

• Fostering competitiveness through innovation and the creation of a business-

friendly environment;

• Sustaining an environmentally friendly and resource efficient economy; and

• Creating opportunities through investment in human capital and improving

health and well-being.

OP II also outlines Government’s strategy for the measures aiming at contributing to

the Europe 2020 strategy. OP II is subdivided into four priority axes with underlying

investment priorities and strategic objectives. The table below presents an overview

of these priority axes, the indicative financial allocations and the rationale behind

each priority axis.

Table 17: Priority axes of Operational Programme II

Priority Axis

Indicative

Financial

Allocation

Comments

PA 1: Investing in the

employability and

adaptability of

human capital

EUR 26m This axis focuses on improving the employment prospects of

job seekers and inactive persons and providing the

necessary support to enhance job mobility. Besides

addressing the overall employment rate, this priority axis

seeks to increase female, elderly, and youth worker

participation in the labour market. Addressing the needs of

these populations is actually essential for Malta’s socio-

economic development.

PA 2: Towards a

more inclusive

society

EUR 40m This priority axis addresses financial inclusion and combating

poverty. The first investment priority focuses on active

inclusion measures for vulnerable sectors of the population

and for which EUR 35m have been allocated. The ultimate

target is to lift around 6,560 persons out of the risk of poverty

and exclusion. The second investment priority deals with the

provision of health care and social services to vulnerable

groups. Health issues are particularly pronounced within

these groups, and obesity is particularly prevalent among

children and adults alike.

PA 3: Investing in

people through

education, training

and lifelong learning

EUR 47m Malta faces particular issues with early school leavers and

illiteracy rates. Approximately EUR 15m of this priority axis will

be directed towards enhancing the education experience.

This priority axis also deals with lifelong learning, for which EUR

15m has also been allocated. The strategic rationale behind

the priority axis is two-fold: firstly, to ensure that the workforce

remains employable over time and adapts skills to a

dynamic world, and secondly provides the opportunity for

enterprises to enhance their competitive edge. About

EUR 15m has been allocated towards lifelong learning

initiatives. The priority axis also considers the tertiary

education sector and the need to encourage more students

to take up their studies at a tertiary or equivalent level. Lastly,

there are also initiatives being considered to strengthen

participation levels for vocational education and training.

57

Priority Axis

Indicative

Financial

Allocation

Comments

PA 4: Building the

institutional

administrative

capacity

EUR 11m An efficient and cost-effective public sector is necessary for

Malta’s continued socio-economic development. This priority

axis deals specifically with strengthening the capabilities of

public administration.

Source: Operational Programme II 2014-2020 Public Consultation Document on the

Programming of European Funds for Malta, Investing in Human Capital to Create More

Opportunities and Promote the Wellbeing of Society, 2014.

Financial incentives for SMEs are contemplated specifically within Priority Axes 1 and

3. The table below provides an overview of the financial incentives being envisaged

for enterprises and more specifically SMEs.

Table 18: Details of priority axes of Operational Programme II focusing on support to

SMEs

Priority Axis Investment Priority Rationale

PA 1: Investing in the

employability and

adaptability of human

capital

IP 1: Access to employment for

job seekers and inactive people

Incentivise enterprises to contribute

towards achieving an inclusive labour

market

IP 2: Sustainable integration in

the labour market of youth

Incentivise enterprises to provide

youths with the necessary labour

market exposure

PA 3: Investing in people

through education,

training and lifelong

learning

IP 3: Enhancing equal access to

lifelong learning, upgrading the

knowledge, skills and

competencies of the workforce

Incentivise enterprises to invest further

in their workforce through training

measures

Source: Operational Programme II 2014-2020 Public Consultation Document on the

Programming of European Funds for Malta, Investing in Human Capital to Create More

Opportunities and Promote the Wellbeing of Society, 2014.

EU programmes facilitating R&D and innovation among SMEs and 6.3

Malta’s use of the SME Initiative

In June 2013, the European Commission and European Investment Bank (EIB) Group

submitted to the European Council an initiative to complement and utilise synergies

between existing SME support programmes at national and EU level. More

specifically, this refers to a joint-instrument: the SME Initiative. This initiative involves

the blending of existing EU instruments available under COSME, Horizon 2020 and

ESIF resources with EIB Group’s own resources, with the aim of providing additional

lending to SMEs. Such initiative is set to promote faster action and achieve a

significant impact on stimulating SME financing and economic growth, fight

fragmentation and develop non-banking financing for SMEs.

58

This is a positive development, inter alia since the 2020 programme for innovation,

introduced by the European Commission (Horizon 2020 - New Research Framework

Programme) is set to be considerably more competitive than for the previous 2007-

2013 programming period, with SME consortia competing with consortia in other EU

Member States to benefit from the EUR 80bn available for R&I. Also, SMEs will only be

able to apply for funding once every two years, further reducing the likelihood of

success in obtaining this funding51.

In parallel to Horizon 2020, COSME is the EU programme for the Competitiveness of

Enterprises and SMEs over the 2014-2020 programming period with a planned

budget of EUR 2.3bn52. COSME will support entrepreneurs and their new businesses

through the promotion of entrepreneurship and entrepreneurial culture. Some

initiatives to be supported by COSME include: exchanges among European

educators and trainers, experts to develop recommendations on the best support

for businesses throughout their lifecycles and groups such as young people and

women or senior entrepreneurs to benefit from mentoring or other tailored

programmes. COSME also aims to lighten the administrative burden on businesses

by removing unnecessary reporting and information requirements.

In considering the indicative financial allocations in the next programming period,

one needs to consider that the Government of Malta has pledged EUR 15m from its

ERDF resources specifically for the SME Initiative53. The nature of possible public

intervention and the level to which assistance is needed by Maltese SMEs is the

focus of the next chapters.

51 Interview carried out with the Malta Council for Science and Technology (MCST). 52 See: http://ec.europa.eu/enterprise/initiatives/cosme/index_en.htm. 53 Presentation on Joint SME Initiative - European Commission, July 2013.

59

7 Market analysis and findings

This chapter aims to identify the existing supply and potential demand of selected

financial products available in Malta for micro, small and medium-sized enterprises.

Section 7.1 presents the methodology used to calculate the supply of the main

financial products available in Malta. This methodology has been applied for the

calculation of all financial products unless stated otherwise in the respective

paragraph.

Section 7.2 provides an overview of the current supply of the main financial

products. This overview focuses on supply trends observed in recent years. The

section will then present a quantification of the estimated potential annual supply of

these financial products in 2014. It has to be noted that the annual supply and

annual demand of financing products quantified in the present report are

considered as average figures that also apply for the next two years, thus 2015 and

2016. Experience with other similar AFMA studies has shown that, especially for the

demand side, business owners provide similar amounts when asked to provide their

financing needs for the next three years.

Section 7.3 presents the methodology used to quantify the demand of financial

products among SMEs. The analysis is carried out by describing the demand needs

of companies according to their size (defined by number of employees) and

answers provided in the online survey carried out within the scope of this study. The

methodology which will be described has been applied for the calculation of the

potential demand of all financial products unless otherwise mentioned. Where data

from other surveys and studies is available, it has been used for triangulation.

Sections 7.4 to 7.6 provide elements on the demand for financial products in 2014 as

expressed by SMEs in Malta according to their size.

Section 7.7 provides the quantification of the demand for financial products in 2014

for both small and medium-sized companies. As mentioned above, this figure is also

representative for the next two years.

Section 7.8 looks at the potential demand for equity finance in Malta for 2014. This

will not be analysed by category of SME size, due to its limited application, but will

rather be provided for the total population of SMEs in Malta.

Section 7.9 highlights the demand for financial products expressed by large

companies In Malta. Although this study focuses specifically on SMEs some fieldwork

was also undertaken with large companies to assess how these enterprises were

impacted with access to finance difficulties.

60

Throughout the analysis, both supply and demand of financial products are

presented in ranges, unless more accurate figures are possible to provide, and these

refer to the potential annual supply and demand anticipated in 2014.

Finally, Chapter 8 summarises the results of the analysis. The demand for financing

from “viable” SMEs meaning those that are growing but have failed to secure

finance will also be taken into consideration in order to provide a quantification of

the existing gaps, and to summarise the main considerations for the definition of the

future investment strategy.

Methodology used to compute supply 7.1

The anticipated annual supply of the main financial products available to SMEs in

2014 has been calculated based on numerous sources of information, market trends

and projections, allowing for a comprehensive and complementary approach.

While specificities have been highlighted for each product, including where

additional factors have been used, the general approach for the calculation of

supply is described in the following steps:

• First, the analysis considers all the amounts provided to SMEs in Malta for the

products where data is available for recent years. The supply information

used only concerns SMEs, excluding large companies.

• Within the supply of financial products to SMEs, amounts provided to each

size category: (1) micro, (2) small and (3) medium-sized companies are also

estimated. This is done by using information provided by both the literature

and stakeholder interviews.

• The amounts to be provided in 2014 are determined by taking into account:

– Available data for 2014. When data was available for the first months of

2014, assumptions have been made to compute the total supply of

financial products for the whole year of 2014; and

– The market dynamics as perceived by market stakeholders, for the future,

for each market has been used in order to define high and low scenarios.

This trend analysis is a necessary component of the methodology since the

development of the future supply of financial products depends to some extent on

the supply characteristics in the past, unless there are known or assumed reasons to

believe there will be a discontinuity in the historical trend (e.g. exceptional growth in

financial intermediaries due to market liberalisation, strong new industry

development, and other shocks) that can be identified or predicted. Economic

growth is also taken into account as an important indicator of the economic

performance of Malta.

Finally, the perception of the market developments provided by the interviewed

stakeholders is a more subjective element. Insights from relevant financial institutions

have been used to estimate the growth of their finance offer.

61

Supply side analysis 7.2

The analysis of the supply side is divided into two parts. The first part presents an

overview of the current supply of various financial products. The second part

presents the quantification of the anticipated supply of key financial products in

2014 in Malta.

a) Overview of financial product supply

The paragraphs below give an overview of the supply of the following financial

products in Malta:

• Microfinance;

• Loans (including short-, medium and long-term loans, credit lines and

overdrafts);

• Leasing;

• Factoring;

• Bank guarantees; and

• Business Angel investing, Venture Capital and Private Equity.

Microfinance

The EU definition describes microfinance as loans up to EUR 25,000, offered

specifically to micro-enterprises, entrepreneurs and other individuals who may

encounter difficulties when applying for a conventional loan. Microfinance is,

therefore, an important incentive to encourage the development of micro-

enterprises as well as job creation. Moreover, the efficient provision of microfinance

tends to play a crucial role in mitigating the effects of financial and economic

crises.

In Malta, the concept of microfinance is still underdeveloped with an absence of

microfinance providers. This absence of specialised institutions that would be able to

provide microfinance is an important market failure in Malta that has to be taken

into account. In the present report, the computation of supply of microfinance

includes the financing scheme “BoV Start Plus” provided by BoV. However, a

distinction has to be made between micro-credits provided by a commercial bank

and microfinance provided by a specialised institution. Under normal circumstances

these micro-credits would not have had been considered as microfinance

products. However, because of the dominance of the banking sector and the lack

of MFIs in Malta, and taking into account the fact that these micro-credits are

guaranteed by CIP, they are included in the supply for analytical reasons.

As shown in Section 5.1, BoV Start Plus is partially guaranteed by CIP and provides

loans under the amount of EUR 25,000 to start-ups. Admittedly, the bank does not

demand collateral under this scheme and loans are only provided to companies

which have no credit history with the bank. But as a purely commercial loan only

62

bankable projects are financed. As at the end of June 2014, 33 micro-loans have

been granted to 32 micro-enterprises with a total value of over EUR 480,000. The BoV

anticipates disbursing approximately EUR 1.3m of loans until the end of the year

2014.

Recently a growing interest in Malta for the supply of microfinance has been

observed, mostly originating from charitable organisation, but the current legislation

framework hampers the development of such supplying organisations. Even non-

profit organisations are legally registered as limited liability companies with the

Malta Financial Services Authority (MFSA) and as such subject to high licence fees.

The limited access to the banking system combined with increasing social needs to

support the less fortunate, has created a new niche for short-term, unsecured

financing which could be provided by specialised institutions if the legal context for

microfinance organisations and social enterprises can be improved54.

An example is Microfinance Malta Ltd. In November 2013 MicroFinance Malta was

registered with the MFSA and issued its first loans. This institution is wholly owned by St

Andrew’s Scots Church and is a not for profit company55 and will give interest free

loans up to a maximum of EUR 2,400 to disadvantaged persons (with particular

emphasis on women and migrants) to start income generating projects 56 or to

provide advances to pay a deposit, initial operating or to acquire training in a trade

and buy a set of tools to work as a skilled tradesman.

The company is about to issue its first two business loans of ca. EUR 800 each. If the

issues are successful it is estimated that in one year around 20 loans will be issued at

an average of EUR 1,000 each. As these plans are indicative and as the total

amounts will not have a relevant impact in the market even if realised, the amounts

will not be considered for the calculation of microfinance supply in 2014.

Loans (short, medium, and long-term loans57)

Currently, the banking sector in Malta consists of 26 credit institutions, three of which

are owned by Maltese shareholders exclusively. However, at present, the banking

54 For more information and suggestions on how Malta has the opportunity to develop its model of social

enterprise respecting its unique characteristics of a small market economy and its tradition in the social

volunteering sector see: APS Consult Limited, Social Enterprise Project, MFEI, 2012.

http://mfin.gov.mt/en/home/social-enterprise/Documents/Social%20Enterprise%20Initiative%20-

%20Final%20Report.pdf. 55 The institution is funded by the World Communion of Reformed Churches and the Church of Scotland Guild

project "Out of Africa into Malta”. 56 The company only charges an arrangement fee on each loan granted. This is currently a fixed fee of 12% for

one year business loans (27.18% APR) and trade loans (26.75% APR), and 6% on six month rent loans (23.83%

APR), the fees being payable at the time the loan is approved. 57 In the present report it is considered that short term loans also include bank overdrafts and credit lines. Short-

term loans comprise tenors of up to one year, while medium and long-term loans comprise tenors of over one

year.

63

sector is dominated by Bank of Valletta and HSBC Bank, which have the majority of

market share in relation to retail and commercial lending activities.

Figure 3 below indicates the outstanding loans to all companies in EU countries as a

percentage of GDP (without non-performing loans) in order to establish a

comparison of loan supply. Outstanding loans in Malta correspond to 83% of GDP,

which is significantly higher than most other EU countries. If Figure 3 includes loans

provided to both SMEs and large companies, because of the dominance of SMEs it

nonetheless indicates the extent to which companies - including SMEs – are already

indebted in the country. This may cause difficulties for them to negotiate with banks

and obtain further loans, either for working capital needs or investment.

Figure 3: Total loans outstanding as a percentage of GDP among EU countries

Source: DG Enterprise, 2013.

Short-term loans are defined as loans to be repaid in one year or less and most

commonly used to finance working capital needs. In the present report, it is

considered that short-term loans include credit lines and bank overdrafts. Credit

lines are defined as maximum loan amounts approved by a bank to a company

where interest is charged only to the used part of the loan. Overdrafts are an

extension of credit from a bank when an account reaches zero thus allowing a

company to continue withdrawing money even if the account has no funds. These

financial products are usually characterised by smaller collateralisation than longer-

term products. Nonetheless, collateral remains a key concern both for banks (in

terms of the value of collateral required) and SMEs (due to lack of assets that could

be collateralised). Medium and long-term loans have maturities longer than a year

and usually finance investment.

64

Nearly all commercial banks in Malta offer short-term loan products, mainly to small

and medium-sized enterprises. The supply of medium and long-term loans is boosted

by financing facilities from public institutions, particularly Malta Enterprise which

have significantly facilitated bank financing, collateral requirements and overall

attractiveness. The JEREMIE facilities, BOV Start Plus, Loan Guarantee Schemes, soft

loan products, and other national and EU funded grant schemes have all improved

access to debt financing for SMEs. In addition, Malta’s resilience in the face of

financial turmoil, economic recession and debt crisis has strengthened its position as

a global financial services centre and the banking sector in Malta remained robust,

retaining adequate liquidity, capitalisation and profitability levels. However, this

sector is being faced with tougher regulatory and capital requirements emanating

from the implementation of the new European Union directives.

Information on the total new loans issued to resident non-financial corporations was

provided by the Central Bank of Malta for the period 2011 up until May 2014, and

was not publically available.

A break-down of these new loans in terms of repayment period and size of business

is also not available from public sources, thus information on outstanding loans

issued by the Central Bank of Malta was used as a proxy. This gave a ratio of 27 / 73

of short-term loans (maturity < 1 year) to medium/long-term loans (maturity > 1 year)

for 2011 and 2013. This number is consistent with the loans and advances to

corporations found in the financial statements of the two main local commercial

banks58.

The total amount of loans provided by Maltese banks to non-financial corporations

is presented in Table 19, along with the estimate for 2014. As illustrated, the provision

of loans in 2014 is expected to increase for both short-term loans and medium/long-

term loans by around 26% and is in line with the volatility of the market during the

last years. They will be more deeply analysed in the following Section 7.2 b.

58 These two banks are the two main national commercial banks and are key financial players in the country. They

are “core domestic banks” (as described in Annex 4). Those loans and advances that were repayable on call

and at short notice were used to represent short-term loans whereas term loans and advances were used to

represent medium and long-term loans.

65

Table 19: New loans to all non-financial corporate entities with the year-on-year

change

Loan Type 2011 (mEUR) 2012 (mEUR) 2013 (mEUR) 2014 (e)59 (mEUR)

Short-term (up to 1 year) 331 388 361 454

y-o-y % - 17% -7% 26%

Medium/Long-term (more than 1 year) 879 1,044 955 1,199

y-o-y % - 19% -9% 26%

Total 1,210 I,432 1,316 1,653

Source: Central Bank of Malta, PwC analysis, 2014.

To analyse the data further, the short-term and medium/long-term categories of

new loans were further broken down into loans relating to SMEs and large

companies. No data is available on the level of new loans provided exclusively to

SMEs in Malta. In order to consider exclusively the amount of new loans to SMEs,

assumptions on the percentage of new loans to SMEs of total loans was made

based on information available on outstanding loans. The outstanding loans to SMEs

as a percentage of total outstanding loans was applied to determine the split

between new loans to SMEs and those to large companies. From information

gathered on outstanding loans from the CBM and local banks, the percentage of

outstanding loans to SMEs stood at 78% and was consistent over 2011 and 2012. The

portion of new loans provided to SMEs may consequently be considered as 78% of

total new loans.

The new loans provided to SMEs then have to be further analysed into new loans to

micro, small and medium-sized enterprises. Information provided by two local

commercial banks60 revealed that 25% of loans are provided to micro-enterprises,

32% are provided to small enterprises and 43% are provided to medium-sized

companies. As a whole, small and medium-sized enterprises consequently obtain

75% of the loans provided by banks in Malta. These percentages are applied to

both short-term loans on the one hand and medium/long-term loans on the other

hand (Table 20).

59 Estimates for 2014 are based on actual data until May 2014 and were pro-rated to project figures until year end

2014. 60 These two banks are the two main national commercial banks and are key financial players in the country. They

are “core domestic banks” (as described in Annex 4).

66

Table 20: Estimate of loan disbursements to SMEs

Financial product 2011 (mEUR) 2012 (mEUR) 2013 (mEUR) 2014 (e) (mEUR)

Short-term loans to SMEs 257 301 280 335 - 370

Micro-enterprises 63 74 69 82 - 91

Small enterprises 83 97 91 108 - 120

Medium-sized enterprises 111 129 121 144 - 159

Medium and long-term loans to SMEs 682 810 741 884 - 977

Micro-enterprises 168 199 182 218 - 240

Small enterprises 221 262 240 286 - 317

Medium-sized enterprises 293 348 319 380 - 420


From information acquired in conducting stakeholder interviews and other

information provided by the Central Bank of Malta it appears that although SMEs

constitute the majority of businesses, accounting for 99.8% of enterprises in Malta,

only 78% of new loans relate to SMEs. Moreover, Table 20 above indicates that,

micro-enterprises, which account for 95.1% of SMEs in Malta, only receive 25% of

loan supply. In parallel, small and medium-sized companies which represent a

smaller fragment of the total population of SMEs would benefit from a very

significant part of the total supply. Consequently, the loans supplied to micro-

enterprises appear low compared to their share among SMEs.

Leasing

Leasing is the method of acquiring goods by making instalment payments over time.

Under this type of contract, the buyer is leasing the goods and does not obtain

ownership until the full amount stipulated in the contract paid.

In Malta, unlike most other EU countries, no leasing products are currently provided

by local financial institutions but instead leasing and hire purchase is used to acquire

equipment, machinery, IT and vehicles directly from the respective suppliers.

According to interviews held with financial institutions, sale-and-leaseback is seldom

provided by financial institutions. It may also be unpopular with SMEs due to

restrictive legislation, unattractive tax implications and high costs to enterprises.

Factoring

Factoring is the use of company receivables to finance current working capital

needs. This instrument is used mostly in a supply chain environment by SMEs that

suffer from delayed payments from clients.

67

Due to its small market size, business in Malta is conducted in a traditional style,

where the relationship between buyer and seller is personal and more focused on

sales and the relationship with the customer, rather than on collections or risk

assessment. Effective payment terms are long and often with significant delays after

the due date. Standard credit terms in Malta tend to be of around 60 to 90 days but

many payments are effected between 90 to 120 days, and even longer in certain

industries such as tourism or certain government institutions. As a result, companies

are forced to acquire further debt financing in the form of overdrafts and other short

terms loans to finance the necessary day-to-day expenditure.

Although factoring remains at an early stage of development in Malta, the results

being achieved are positive and this financing product is slowly gaining popularity.

Since 2006, when factoring services were first introduced, volumes have been rising

consistently. In 2011, the factoring industry in Malta continued to grow, with global

turnover increasing by 48% on the previous year, reaching EUR 201m. The boom in

factoring volume can be primarily attributed to businesses increasingly turning to

factoring as an alternative to traditional bank loans61.

The uptake of factoring solutions has received a boost as a result of the presence of

more multinational companies on the island. International companies tend to be

more aware of factoring’s advantages and consequently adopt factoring as an

alternative financial solution from the outset. Ultimately, the adoption of factoring in

Malta as a mainstream financing option is down to awareness and confidence in

the product. Factoring is covered by local legislation, and providers of factoring

services must be registered as financial institutions, which are in turn regulated and

supervised by the Malta Financial Services Authority.

In Malta, recourse62 business is the norm, representing 89% of total factoring business.

However, where export business is concerned, the proportion of non-recourse63

factoring doubles to 22% of the total. This reflects customers’ increasing attraction to

the extensive advantages of factoring risk protection covers, together with those of

international collection services.

With a representation of a bit more than 3% of GDP, factoring still has good

prospects for growth in Malta. On the product side, one can see the potential

development both in the domestic and the export markets of the supply chain

61 Article from the Times of Malta: Factor It In, 2014.

(http://www.timesofmalta.com/articles/view/20120314/business-news/Factor-it-in.411104). 62 In recourse factoring, a company selling an invoice to a factor bears full risk of non-payment of the invoice by

the debtor. Since it is more risky to a company than non-recourse factoring explained below, the amounts lent

by factors are also higher. Recourse factoring resembles a loan: a company receives certain amount from a

factor in return for an invoice. If the factor is not able to collect the invoiced amount in full, they can demand

the outstanding amount from the company. Recourse factoring is a desirable financing solution when a

company knows its clients well and the repayment is highly probable. 63 In non-recourse factoring, the risk of non-payment of the invoice sold is borne by a factor who can be

compared to a buyer of financial assets (accounts receivable). In comparison with recourse factoring, amounts

received by a company are smaller and risk protection higher.

68

finance/reverse factoring offer, following on the trend established in other European

countries where factoring generally represents more than 10% of GDP.

Bank guarantees

SMEs in Malta are gradually embracing the use of bank guarantees. Entrepreneurs

and managers have developed better knowledge of these financial products in

recent years and awareness of their benefits. A combination of the overall liquidity

problems of companies and the delayed, or failed, collection of the receivables has

made these financial securities more attractive than before. Credit institutions in

Malta offer a comprehensive range of bank guarantees, which include:

Payment Guarantees: This form of guarantee provides security to a supplier for

goods or services provided and applies mostly to import and export business.

Tender Guarantees: These guarantees apply to companies tendering for services,

works or supplies and guarantee compensation should a company fail to accept

award of tender.

Advance Payment Guarantees: This guarantee mostly applies to companies that

make advance payments for goods or services and provides protection to the

importer when trading on open account terms. Therefore, this product guarantees

repayment of an advance payment in the event that the supplier fails to deliver.

Performance Guarantees: This product is suitable for companies wanting to expand

their business and supports their ability to perform in accordance with contractual

obligations. Therefore a performance guarantee secures claims by the buyer on the

seller arising from default.

Shipping Guarantees: This product is suitable for importers whose goods have arrived

prior to shipping documents. A shipping guarantee will enable a business to take

control of goods arriving by shipment, in the absence of shipping documents.

Guarantees securing a credit facility: These guarantees enable businesses to secure

their liabilities and secure claims by the lender on the borrower, in respect of a credit

such as a loan or bank overdraft.

To quantify the supply of bank guarantee products in Malta the balance of

commitments from the principal five credit institutions that operate in the local

market was analysed from public financial statements. The five credit institutions

considered were HSBC Bank, Bank of Valletta, Banif Bank, Lombard Bank and APS

Bank. In 2013, the total amount of guarantees issued by these credit institutions to

third parties amounted to EUR 291m (EUR 293m in 2012).

69

Business Angels - Venture Capital - Private Equity

In Europe between 2007 and 2011 more than 20,000 SMEs64 have benefited from

equity investments made by Private Equity Funds (PEs), Venture Capital Funds (VCs)

and Business Angel Investors (BAs). These three categories of investors have different

and specific goals, preferences and investment strategies; however, together they

provide financing in order to nurture expansion, new-product development, or

restructuring of the corporate operations, management, or ownership.

PE funds often target established and mature companies to invest in and at times

they acquire majority stakes in these companies. PE Funds usually are generalist;

therefore they are investing in various industry sectors, and/or various geographic

locations.

On the other hand, VC funds and BAs typically invest in young, growing or emerging

companies, and rarely obtain majority control. In terms of sectorial orientation VC

funds are usually specialist (specialising in a few industry sectors where the

management of the Fund has expertise in or investing in only a limited geographic

area) investors. Venture Capital funds generally:

• Finance new and rapidly growing companies with scalable potential;

• Purchase equity shares, i.e. become shareholders in the underlying company;

• Invest in companies having innovative products or services and developing

intellectual property (IP);

• Assist in the development of new products or services though their expertise,

contacts and knowledge;

• Add value to the company through active participation alongside the senior

management;

• Take higher risks with the expectation of higher rewards and thus are able to

finance companies which banks would never consider; and

• Have a pre-defined period within which they want to liquidate their

investment.

The different types of equity financing, namely BA, VC, and PE can be categorised

according to five stages of company development, although these definitions will

vary within the industry:

• Seed stage, i.e. first stages of the life of a company, which is mostly financed

by Business Angels, family, friends, microfinance.

• Start-up stage refers to the start of revenue generation, often financed by

Business Angels and Venture Capital.

• First success stage corresponding to the set-off of the company, usually

financed by Venture Capital.

64 “The little book of private equity”, European Venture Capital Association (EVCA), 2012.

70

• Growth stage when the company expands, targets new products and/or

markets, provided most often by later-stage Venture Capital funds and

Private Equity funds.

• Buy-out when a company is sold for the new development.

The positioning of each type of capital with respect to the company lifecycle and

needs is presented in Figure 4 below.

Figure 4: The ladder of equity financing according to the development stage of

companies

Source: North East Access to Finance65, PwC Analysis, 2014.

In Malta, the equity market is underdeveloped compared to other EU Member

States. Furthermore, there is very little information available on the formal supply of

equity. Interviews with key stakeholders indicate that few SMEs in Malta are financed

by equity and there is little awareness on how to pursue such avenues of financing.

While on one hand, the small market size of the Maltese market itself is limiting

investment possibilities, Maltese business owners, on the other hand, tend to be risk

averse and prefer using funding sources they are familiar with. Stakeholders

commented however that private placements are common in Malta when business

owners find it difficult to obtain funding from financial institutions. But these private

placements are more often limited to friends and family. The culture of equity

funding from third party investors is not a common practice locally, and may be

most relevant only for young, high growth companies.

The sub-index on access to equity finance of the SME Access to Finance Index

shows that the Maltese equity finance environment ranks above the average of the

Eurozone and the European Union. While the EU sub-index value is 98 in 2012, Malta

attained a value of 103, which is close to the score of Latvia (104) and Hungary

65 See: http://www.nea2fguide.co.uk/wp-content/uploads/2012/11/NEA2F-Guide-Funding-Ladder-for-illustrative-

purposes.pdf.

Seed Start-up First success

Early growth

Take-off Sustainable growth/

Maturity

EUR 5k

EUR 500k

EUR 1m

EUR 50m

Capital needed

(single ticket)

EUR 10m

Higher risk

Lower risk

Family and friends

Seed funds

Business Angels

Start-up funds

Investment funds

Business Angels

Venture Capital funds (public

and private)

Banks

Growth funds

Buy-out funds

Private Equity funds

Banks

Time

71

(101). However, this is not representative of the local equity market for Maltese SMEs,

as this merely reflects high density of investments funds in the country.

Figure 5: SMAF Sub-index on access to equity finance per country (2012)

Source: SME Access to Finance Index (SMAF), 2013.

Research and interviews indicate that at present there are no formal Venture

Capital funds or Business Angel networks in Malta. Furthermore, at present there are

no formal Venture Capital funds or Business Angel networks which could support

innovative start-ups.

Set out below are a number of initiatives and schemes that were introduced in

Malta to encourage enterprises to seek alternative measures to finance their

business. Several attempts were made to set up formal Venture Capital schemes,

with the intention of filling a perceived financing gap that was present in Malta and

to encourage Maltese enterprises, especially start-ups and companies in the

development phase of the business cycle to finance their operations using equity,

rather than traditional forms of financing. However, the take up of these schemes

was not sufficient and the funding schemes were eventually liquidated.

Possible reasons for the very limited success of these Venture Capital initiatives may

include among others66:

• Targets and investments from Government were too high;

• Lack of interest from Maltese entrepreneurs (the provision of equity seems not

enough to guarantee take-up);

• Company structure not ideal;

66 MBB report on Market gaps in access to finance and the feasibility of new financing instruments in the EU

addressing the credit needs of Maltese business and Stakeholder interviews.

72

• Lack of willingness to dilute ownership of business;

• Maltese culture is not conducive to facilitating formal approaches to Venture

Capital; and

• Administrative difficulties within the fund set-ups.

These schemes are listed below.

Investment Finance Bank (IFB 1991-1993): During this period the IFB managed a

EUR 4.7m loan facility (provided by the EIB) for venture capital initiatives in Malta.

The objective of this financing instrument was for preference shares to be offered to

the bank, which in turn would have been given representation on the Board of

Directors. At the time a few projects had benefitted from this facility.

Technology Venture Fund (TVF 2001-2003): This fund was set up by the Maltese

Government through the Malta Development Corporation to support the

development of technology and innovation for SMEs. The objective of the fund was

to partly finance the setup of innovative enterprises to improve their rate of success

during the start-up phase of a business in selected sectors, such as biotechnology,

ICT, multimedia, software development, e-Business and waste management,

among others. EUR 2.3m was allocated by the Government with further funding

planned from the EU and private sector. Apart from seed funding, another objective

of the fund was to assist SMEs in negotiations with banks and share potential credit

risks with them. Initially, approximately ten applications from potential start-ups were

received; however, only a few of these were actually assisted through this fund due

to problems with administration. Between 2004 and 2005, efforts were made to

stimulate this fund which was renamed the Technology Innovation Fund providing

seed capital for start-up businesses.

Malta Business Angels Network (MBAN 2003): In 2003, a network was set-up through

an initiative from the private sector to promote informal equity investment in Malta.

The network’s main function was to introduce new Maltese entrepreneurs to

established business owners who actively seek to invest in new, innovative

businesses with growth potential. The network has had limited activity.

Malta Venture Capital plc (2006): In 2006, the Maltese Government set up a venture

capital fund through its investment arm Malta Investment Management Company

Limited (MIMCOL), with the intention of licensing it as a collective investment

scheme. The objective was to assist entrepreneurs to find the required finance to

develop new projects. It also aimed to encourage the Maltese private sector to

provide finance on a small scale to regenerate Maltese private enterprise, and

provide finance for innovative ideas and new technologies. Government initially

committed approximately EUR 2m, with the intention of obtaining more funding

from private investment. It appears that this initiative never materialised.

73

Research, Innovation and Development Trust (2012): As an early example of crowd

funding, the University of Malta set up this EUR 0.5m Trust in 2012, to allow individuals

and companies to donate money to the fund, either by channelling their donations

to particular projects or allowing the Board of Trustees to manage the funds67.

Equity Financing Programme: In 2009, Malta Enterprise intended to launch an Equity

Financing Programme to support local businesses, in particular local SMEs with the

development of their business proposals and to help with their initial investor search.

Despite talks held about the launch of this programme, this never took-off for

reasons which are unknown.

Although the Malta Stock Exchange has been set up since the early 1990s, only a

few companies to date have gone public and listed their securities – a

characteristic which can be observed in most of the European markets due to the

lack of liquidity. As at August 2014, there were 22 companies, that have equity listed

on the Malta Stock Exchange and 22 companies with listed corporate bonds.

However, when applying the European Commission SME definition, the majority of

these companies do not classify as SMEs and six of these companies are financial

institutions engaged in the financial and insurance services sector.

Fifteen years ago, the Alternative Companies List was introduced at the Malta Stock

Exchange to give companies the opportunity to issue equity that did not fulfil all the

conditions for an Official List Admission, namely having three-year track record to

participate in the Maltese market (Second Tier Market securities). This could be an

attractive source of financing for SMEs, which are in the initial stages of the business

lifecycle. However, it is under-used and currently, only one entity is listed on the

Alternative Companies list, which is primarily engaged in the ICT industry and

another two companies have corporate bonds listed on this platform.

Last but not least, crowd funding has been gaining momentum as an alternative

funding opportunity in other European countries that could be explored for start-

ups68. The idea behind it is to use a web platform to collect funding from the general

public in the form of loans, equity investment or donations. In making investment

decisions, the lenders follow their own judgment. Financed projects are most often

entrepreneurial (in particular, with a solidarity dimension), innovative or artistic.

The small size of Malta makes it an ideal environment for crowd funding to work as it

is usually carried out on a regional level in other countries. In this way, start-ups

67 See:http://erawatch.jrc.ec.europa.eu/erawatch/opencms/information/country_pages/mt/

supportmeasure/support_0032. 68 At the international level, crowdfunding has been growing exponentially. Globally collected amounts increased

from EUR 380m in 2009 to EUR 2.1bn in 2012 (“Observatoire des entrepreneurs” French observatory of

entrepreneurs, “PME Finance” Finance SME, 2014). Out of these, the American market accounts for 60% as

compared to 35% in Europe (“Observatoire des entrepreneurs” French observatory of entrepreneurs, “PME

Finance” Finance SME, 2014).

74

which come up with a product or service would be able to pitch their ideas in a

simple yet effective manner. In Malta various fund-raising campaigns have been

held in the past for different reasons that could be considered as a form of crowd

funding, most of which were held to raise money for various non-profit making/

social initiatives. However, the number of experiences of equity funding through this

mechanism for private sector initiatives remains limited.

Overall, the equity financing market in Malta is weak. Consulted stakeholders in the

financing market clearly stated that without the assistance of public institutions and

Government intervention the equity market in Malta will not change. Increasing the

availability of financing options would help in addressing the financing needs of

local enterprises. So far, only loan guarantees have been adopted under JEREMIE in

Malta whereas JEREMIE instruments in other EU Member States also provide for seed

loans and equity guarantees.

b) Quantification of the expected supply of financial products in

2014

As described in Section 7.1, the quantification of the expected supply of financial

products takes into account:

• The current supply trend of each product under consideration;

• Available data for 2014. When data are available for the first months of 2014,

assumptions have been made to compute the total supply of financial

products for the whole year of 2014;

• The perception of the development of each market expressed by market

stakeholders during interviews. These perceptions are used to define high and

low scenarios for each financial product for the future; and

• Any new funds in place such as for micro-finance and equity.

Table 21 below provides a summary of the last years and for 2014.

75

Table 21: Supply of financial products to SMEs in the previous years and estimate of

the annual supply in 2014 in Malta

Financial product

EUR (million)

2011 2012 2013 Estimate of annual

supply for 2014

Microfinance - - n/a 1

Short-term loans, credit lines and overdrafts 257 301 280 335 - 370

Medium- and long-term loans 682 810 741 884 - 977

Leasing n/a n/a n/a n/a

Business Angels n/a n/a n/a n/a

Venture Capital n/a n/a n/a n/a

Private Equity n/a n/a n/a n/a


Based on these estimates, the supply of each financial product is further broken

down by size of company. This split has been based on the information provided by

stakeholders on their current supply to, micro, small and medium-sized companies.

Microfinance

To date, microfinance supply is non-existent in the country. Nevertheless, and as

explained above, the BoV Start Plus micro-loan scheme is considered as

microfinance supply in 2014. As at the end of June 2014, 33 microloans have been

granted to 32 micro-enterprises with a total value of over EUR 480,000. The BoV

anticipates disbursing approximately EUR1.3m of loans until the end of the year 2014.

However, there is a growing awareness of the need for this type of financing, and in

November 2013 the first microfinance organisation operating independently and

locally was set up. It plans to disburse an indicative amount of EUR 20,000 in business

loans during the next year. As these plans are indicative and as the total amount will

not have a relevant impact in the market even if realised, the amount will not be

considered for the calculation of microfinance supply in 2014.

Short-term loans, overdrafts and credit lines

Interviews with stakeholders indicated that commercial banks are becoming more

risk averse when considering project financing. This is consistent with banking views

across Europe.

This report considers only the loans to non-financial corporations.

Figures for the supply of new loans to micro, and small and medium-sized enterprises

over the short-term and long-term were determined for 2014. Since actual data for

76

new loans, provided by the Central Bank of Malta, was available for the first five

months of 2014, in order to establish the total supply of new loans for the whole year

the figures were pro-rated and a range was set at plus or minus 5%.

Based on the computation methodology, the supply of short-term loans for 2014 will

range between EUR 335m and EUR 370m. The computation has taken into account

the supply of short-term loans to SMEs for January to May 2014. Since the supply of

short-term loans to SMEs over the first five months of 2014 represented about 42% of

the overall supply during this year, the supply of short-term loans provided to

Maltese SMEs between January and May 2014 was pro-rated to estimate to total

supply of this financial product for the whole year 2014.

Interviews indicated a shared perception that there are no specific constraints

foreseen in the future that could limit loan supply (short, medium or long-term loans).

This perception has been translated in the calculation with a variation of the supply

between -5% and +5%.

This supply of short-term loans for SMEs has been broken down into supply for micro-

enterprises on the one hand and for small and medium-sized companies on the

other hand, using information provided by commercial banks. Since the Central

Bank of Malta does not provide a split between the three sizes of companies, it was

determined based on the feedback received from key players in the market. As a

result, 25% of short-term loans were assigned to micro-enterprises, 32% to small

companies and 43% to medium-sized companies. Table 22 below provides an

overview of the resulting supply of short-term loans to SMEs per company size in

Malta.

Table 22: Estimated annual supply of short-term loans to SMEs in 2014 in Malta69

Supply of short-term loans to SMEs (e) 2014 (mEUR)

Total supply to SMEs 335 - 370

Total supply to micro-enterprises 82 - 91

Total supply to small enterprises 108 - 120

Total supply to medium-sized enterprises 144 - 159


Medium and long-term loans

The estimate of the supply of medium and long-term loans in 2014 has been

calculated by applying the same approach as for short-term loans. The

computation is based on the supply of medium and long-term loans provided

69 Differences between the sums of supply provided to micro, small and medium-sized companies and the total

supply provided to SMEs result from rounding errors.

77

between January and May 2014. Also, to translate the lack of specific constraint to

supply of medium and long-term loans perceived by bank stakeholders, a variation

of the supply between -5% and +5% has been applied.

The range for medium and long-term loans supply for SMEs in Malta in 2014 is

estimated to range from EUR 884m to EUR 977m.

Similar to short-term loans, the supply of medium and long-term loans to SMEs has

been broken down into supply for micro, small and medium-sized enterprises, using

a similar split. Table 23 below provides an overview of this supply.

Table 23: Estimated annual supply of medium and long-term loans to SMEs in 2014 in

Malta70

Supply of medium and long-term loans to SMEs (e) 2014 (mEUR)

Total supply to SMEs 884 - 977

Total supply to micro-enterprises 218 - 240

Total supply to small enterprises 286 - 317

Total supply to medium-sized enterprises 380 - 420


Leasing

The estimate of supply of leasing in 2014 could not be calculated due to the lack of

publicly available information. However, analysis indicates that this source of supply

is very limited.

Equity

The estimate of the supply of equity in 2014 could not be calculated due to the lack

of publicly available information. The analysis indicates that this source of supply is

very limited in Malta.

Summary of expected supply of financial products

All the estimates made for the supply of finance in Malta for 2014 are summarised in

the table below and used in the next sections so as to analyse - and when feasible

quantify - the financing gaps of SMEs in the country.

70 Differences between the sums of supply provided to micro, small and medium-sized companies and the total

supply provided to SMEs result from rounding errors.

78

Table 24: Estimate of the annual supply of financial products in 2014 in Malta

Financial product

Estimates of annual supply in 2014 (mEUR)

Total SME Micro-enterprises Small enterprises Medium-sized

enterprises

Microfinance 1 1 Not relevant for small and medium-

sized enterprises

Short-term loans, overdrafts,

credit lines 335 - 370 82 - 91 108 - 120 144 - 159

Medium- and long-term loans 884 - 977 218 - 240 286 - 317 380 - 420

Leasing n/a n/a n/a n/a

Business Angels n/a Split by category size is not relevant

Venture Capital n/a Split by category size is not relevant

Private Equity n/a Split by category size is not relevant

Total - - -


The amount of the future supply for SMEs from financial institutions is estimated

between 23.1% and 25.0% of the GDP of Malta (roughly in line with an average of

20.2% in the last three years).

Methodology to quantify the demand for finance 7.3

The methodology developed to assess the demand for financing from Maltese SMEs

relies on the sampling strategy used for the online survey. A questionnaire was

provided to a sample of Maltese SMEs according to sector and with a breakdown

by size into micro, small and medium-sized companies 71 . The SMEs consulted

reported their financing experiences in the past and needs in the future (in euros)72.

They provided information for various financial products, including: short-term loans,

medium and long-term loans.

Given the random arrangement of the SMEs composing the sample and the

number of responses obtained, the demand figures provide a reasonable estimate

for each of the categories of SMEs sizes in Malta.

The quantification of the demand for funding has been performed for micro-

enterprises on the one hand and for small and medium-sized companies on the

71 See Annex 2 for a complete note on the methodology used for the sampling of the online survey. 72 For this computation, results provided in Question 19 have been used (see Annex 8 for the questionnaire used for

the online survey). Answers considered are from 75 micro-enterprises, 29 small companies and 28 medium-sized

companies. In total, 132 SMEs provided an answer to that specific question. As a reminder, 217 SMEs answered

the online survey. SMEs may have decided not to provide an answer because they have no vision of their future

needs and consequently the financing amounts they will need in the future, because they do not make a clear

distinction between the different financial products or because they do not want to provide this information.

79

other hand to increase reliability through a larger sample size. Moreover, interviews

with representatives of SMEs and commercial banks (see Annex 5 for list) have

highlighted that financing demand from small and medium-sized companies are

often similar in Malta. Various financial products have been considered for the

analysis. For the two categories of SMEs considered and for each type of financing,

the answers provided by companies with amounts they expect to require in the

future have been computed73. The computation has been conducted by using the

following approach:

1. The “outliers” from the sample are left aside, i.e. where some firms indicated

EUR 0 amounts or extremely high financing figures for a particular type of

financing. In order to avoid a situation where a few responses severely skew

the global estimate of the demand, these answers are taken out.

2. The average of the remaining amounts is calculated. This step is conducted

for each financial product and each category of SMEs considered (micro-

enterprises on the one hand and small/medium-sized companies on the

other hand).

3. The final calculation of the demand for the entire population of each

category of companies is conducted as follows:

– The total number of companies of the specific size category is

computed74.

– This computed number is multiplied by the average amount to be sought

in 2014.

– A variation of -5% and +5% around the result computed previously is

applied to generate a reasonable approximation of the potential

demand.

In order to illustrate the computation method described above, the following box

gives an example of estimating demand for short-term loans from micro-enterprises.

73 The amounts used for the computation are estimated needs from SMEs for 2014, but they might also be

requested in a later moment. 74 The micro-enterprise population has been computed differently, with a correction for those for whom financing

is deemed not applicable, as explained in Box 1. This correction has been applied for computing demand for

loans. For microfinance, only 0 employee companies were considered, as shown Section 7.4 b).

80

Box 1: Example of a calculation of demand estimate for short-term loans from

micro-enterprises

Step 1: Outliers.

The amounts above EUR 100,000 have been removed from the computation as these

amounts, for short-term loans, are likely to have resulted from an overestimation of the

funding needs by the respondents, or from their misunderstanding of the questionnaire

question. Observations of the EUR 0 funding amounts have also been removed, as they are

an indication that no funding is needed for the future. By doing so, the micro-enterprises

which indicated the EUR 0 amounts are considered the same as those that did not answer

the question.

Step 2: Calculating the weighted average amount of the sample.

The average amount of the whole sample is EUR 31,964 and corresponds to the demand for

short-term loans by a single micro-enterprise that is intending to seek finance.

Step 3: Computing the potential demand from the population of micro-enterprises.

The total population of micro-enterprises in Malta is 37,23275.

First, the 0 employee companies are removed. They correspond to 9,293 enterprises76.

Second, the micro-enterprises that do not intend to raise finance in 2014 are filtered out.

According to the SAFE survey, 78.1% of enterprises prefer loan finance as an external source

of financing to finance their growth ambitions 77 . Consequently, the remaining micro-

enterprise population considered is of 21,820.

Third, the obtained number is multiplied by the proportion of micro-enterprises which used

short-term loans in 2013 as a proxy for the type of finance that will be sought in the future.

This proportion is 31.0%78.

Following these adjustments to the calculation, the population of relevant micro-enterprises

is 6,772, computed with the following formula:

(37,232 – 9,293)*0.781*0.31 = 6,77279

The volume of the potential demand for short-term loans from micro-enterprises is then

computed as follows:

31,964*6,772 = 216,456,88680

75 For the purpose of the computation of demand for loan products for micro and small/medium-sized enterprises,

the sectors “Financial and insurance activities” (NACE K according to rev.2 classification) and “Activities of

households as employers; undifferentiated goods- and services-producing activities of households for own use”

(NACE T) have been excluded since the present study focus on non-financial corporations. 76 This is based on the assumption that 0 employee companies have different needs than companies with

employees. These 0 employee companies are considered for microfinance only and not for short-term loans.

This assumption is based on the fact that commercial banks preferably finance more structured companies,

which tend to have employees. The total number of 0 employee companies stood at 10,263 in 2012 in Malta

however 0 employee companies engaged in NACE K and NACE T sectors according to rev.2 classification have

been removed since the present study focus on non-financial corporations. Data according to the latest NSO

data (August 2014). 77 This result derives from SMEs’ answers to Question 20 of the SAFE survey: “If you need external financing to realise

your growth ambitions, what type of external financing would you prefer most?” 78 This result derives from micro-enterprises’ answers to Question 6. 79 The result of this calculation is EUR 6,764 but contains rounding errors and the actual result is EUR 6,772.

81

A variation of -5% and +5% around this volume is then calculated to take into consideration

the potential fluctuation. The lower end of the estimated range is calculated as follows:

216,456,886*(1 - 0.05) = 205,634,042

The higher end of the range is calculated as follows:

216,456,886*(1 + 0.05) = 227,279,731

As a conclusion, the demand for short-term loans from micro-enterprises represents EUR 206m

at the lower end of the estimated range, and EUR 227m at the higher end.

The same methodology is applied to long-term loans (with 24.1% instead of 31.0%).

The results obtained for each financial product thus correspond to potential total

demand for this specific product, within a reasonable margin of tolerance.

Consequently, the potential demand is an estimate of the amounts that companies

might want to obtain, but which they would get only if they (1) convert their

intention to seek finance to action (many may be discouraged) and (2) met the

conditions set by finance suppliers81.

To ensure that the sample of SMEs was as representative as possible, the online

survey conducted for the study canvassed SMEs from different sectors. It is important

to remember that their answers are largely based on their perception of their own

business needs and expectations for the economy (GDP growth) and the overall

business climate. These perceptions and expectations are formed in the current

climate where the market operates within a relatively low-growth environment. Both

these factors exert pressure on the SMEs and will be further discussed in the section

on the analysis of the estimates of demand, based on the “viable” companies’

unmet need methodology described in Section 8.1.

80 The result of this calculation is EUR 216,460,208 but contains rounding errors and the actual result is

EUR 216,456,886. 81 For instance, 12.4% of the SMEs which applied to bank overdraft and credit lines were rejected (compared to

10.4% at the EU-28 level), 0% of those which applied to bank loan were rejected (compared to 12.6% at the EU-

28 level) and 19.1% of those which applied to other external financing (including loans from other lenders,

equity, leasing, and factoring) were rejected (compared to 5.5% at the EU-28 level) (European Commission,

SME’s Access to Finance survey, 2013).

82

Demand for financing from micro-enterprises 7.4

a) Financing micro-enterprises in Malta

Micro-enterprises (companies having between 0 and 9 employees) represent more

than 95% of the SME population in Malta 82 . Assessing and improving micro-

enterprises’ access to finance would consequently affect the largest part of the SME

population including its economic performance and social impact, particularly in

the sense of employment creation.

Figure 6: SME population in Malta according to the size of companies

Source: National Statistics Office of Malta, PwC analysis 2014.

As shown in Table 25 the number of micro-enterprises decreased from 40,083 in 2009

to 38,592 in 2012. This represents a compound annual growth rate of -1.3%. The

largest decline in the number of micro-enterprises occurred between 2011 and 2012

(by 4%). However this decline is not necessarily linked to the closing of enterprises.

Recently, a new law was introduced whereby companies are no longer required to

register for VAT purposes if their turnover does not exceed EUR 7,000 in one year.

Therefore, between 2011 and 2012 the data on the number of companies

registered in Malta was revised to reflect this change in legislation.

Table 25: Number of micro-enterprises in Malta

Number of

companies

2009 2010 2011 2012

Number of

companies

% of total

SME

population

Number of

companies

% of total

SME

population

Change

over

2009-2010

Number of

companies

% of total

SME

population

Change

over

2010-2011

Number of

companies

% of total

SME

population

Change

over

2011-2012

Total SME

population 41,910 42,607 1.7% 42,131 -1.1% 40,573 -3.7%

Total micro-

enterprises 40,083 95.6% 40,686 95.5% 1.5% 40,183 95.4% -1.2% 38,592 95.1% -4.0%

Source: National Statistics Office Malta, PwC analysis, 2014.

82 The share of micro-enterprises among all SMEs in Malta is higher than the EU-27 average of 92.1% (European

Commission, 2013). Conversely, the share of small enterprises is smaller by 1.9 percentage points. It should be

noted that the SME sector is particularly important when comparing the number of employees. While on

average in EU-27 66.5% of the total workforce is active in the SME sector, the share is 80% in Malta (36% for micro-

enterprises In Malta and 28.7% in EU-27).

83

Results of the online survey indicate that only 8.8% of SME owners in Malta identify

their company to be in the initial stages of the development lifecycle (initiation and

creation). The results also indicate that about 17.5% of micro-enterprises consider

that their company is in a post-creation phase, as illustrated in Figure 7. Both of these

could have considerable potential to grow and create further job opportunities. A

third of all micro-enterprises believe that their business is still developing and 29.4%

believe they have reached a maturity stage, which could still produce growth but

likely at a lower level.

Figure 7: Development stage of micro-enterprises in Malta83

Source: PwC, SME online survey among Maltese SMEs, 2014.

Figure 8 below illustrates that most of the micro-enterprises interviewed used

retained earnings, short-term loans, bank overdrafts and credit lines (maturity < 1

year) and medium to long term loans (maturity >1 year) to fund their businesses over

the last 3 years (2011-2013).

Around 12% of all micro-enterprises seeking finance indicated that they used

microloans from microfinance institutions as a funding source. Since microfinance

institutions are not present in the country, it is assumed that these answers are

provided under a misperception of the definition of microfinance and most

probably these loans represent short or medium to long term loans provided by

banks up to EUR 25,000.

Capital contributions of shareholders and public grants are only used respectively

by 12% and 10% of micro-sized enterprises. No respondent used factoring, equity

from national or foreign institutions, buyout capital or corporate bonds.

In the survey, companies were asked to state which financial products were

relevant to them and to what degree these were sufficiently accessible. 44% of

83 The number of micro-enterprises having provided an answer: 126.

84

micro-enterprises stated to have sufficient access to short term loans (including bank

overdrafts and credit lines), followed by medium to long term loans with 41%84.

Micro-enterprises perceived loans provided with interest rates subsidies (32%) and

loans guaranteed by public or private entities (31%) as the most inaccessible

products but relevant to their business85. The accessibility of short-term loans and

medium and long-term loans remains difficult for approximately a quarter of

respondents but with these products remaining the most relevant to the micro-

enterprise segment. The least relevant sources for micro-enterprises are mezzanine

financing, factoring, buyout capital, corporate bonds and technology transfer funds

where between 79% and 80% of respondents indicated that these financial

products are not relevant to their financing needs86.

Financial sources to fund start-ups are considerably different than funding sources

used by established enterprises. In the case of start-ups, according to associations

interviewed, enterprise owners used their own savings as financial resources to start

their business. Other informal sources like savings and credits from friends and family

members are also a common source of financing when starting up a business. This

highlights the lack of institutions in the country that would be specialised in seed

financing, such as microfinance institutions and seed funds, and the dominance of

the banking sector that is not generally equipped to support such financing.

84 The number of micro-enterprises having provided an answer: 108. 85 The number of micro-enterprises that provided an answer: 99 in the case of loans provided with interest rate

subsidies and 100 in the case of loans guaranteed by a public or private entity. 86 The number of micro-enterprises that provided an answer: 94, 95, 96, 96 and 97 respectively for each type of

financial product.

85

Figure 8: Sources of funding used by micro-enterprises between 2011 and 201387


According to a large proportion of micro-enterprises, support from public or private

institutions is perceived as limited. According to the survey, even those companies

that are looking for finance do not seek such support. Moreover, when companies

did seek assistance, they frequently felt they lacked it. In particular, micro-

enterprises stated they were not supported by commercial banks (36% as opposed

to 24% not lacking support) and the State (26% and 12% respectively). Informal

support originating from friends and family proved to be among the most supportive

since 32% of the respondents felt supported by them. An even more important role is

played by other professional networks like accountants, tax or financial consultants

with 37% of the respondents being satisfied with their assistance as illustrated in the

Figure below.

87 The number of micro-enterprises that provided an answer: 116.

86

Figure 9: Feeling of lack of support among micro-companies when seeking finance88

Source: PwC, online survey among Maltese SMEs, 2014.

88 Number of micro-enterprises that answered this question: 126.

87

Simultaneously however, the majority of micro-enterprises in Malta feel discouraged

when looking for finance. According to the online survey conducted for this study,

62.7% of micro-enterprises in Malta felt always (10%), often (21%) or sometimes (31%)

discouraged in seeking finance89 over the last three years. Since this share includes

companies that sought finance in addition to those that did not, it reveals that

access to finance is a key concern for micro-enterprises. This may be attributed to

micro-entrepreneurs not having sufficient time to look for financing. Due to the

limited material and human resources of their companies, they perform several roles

(operating day-to-day business, tax and accounting, developing business strategy)

at the same time. For the same reason, i.e. an absence of financially-trained

employees and insufficient time to gather information, micro-entrepreneurs may

lack the knowledge to seek finance and complete related administrative

formalities. Moreover, once denied finance, micro-enterprises may feel reluctant to

apply again and also deter other micro-enterprises that have not applied yet.

15.1% of respondents attributed the difficulties to the financial situation of their

business and 11.9% indicated that difficulties arose as a result of high costs of

obtaining financing. In fact, according to stakeholders from business associations

interviewed, costs of financing, in particular bank charges incurred by micro-

enterprises for administrative purposes, create barriers for such enterprises when

applying for bank financing. Moreover, the charges are reported to have worsened

in 2011-2013 by over one quarter of the respondents (5.6% think they deteriorated

significantly and 19.8% observed just deterioration). On the other hand, 47.6% of

micro-enterprises indicated that they did not experience difficulties in obtaining

financing.


88

Figure 10: Reasons for the difficulties for micro-enterprises in accessing finance over

2011-201390


Indeed, when specifically asked about debt financing, 52.4% of micro-enterprises

stated that they faced difficulties. The main difficulties identified as barriers can be

linked to two factors; the willingness of banks to provide micro-enterprises with

financing and the effort required applying for financing. In the survey, 23.0% of

respondents identified the willingness of banks to provide them with financing as the

main barrier, while 16.7% implied that the effort made or burden experienced when

applying for financing is usually a cause for difficulties faced in obtaining financing.

In addition, a significant part of the respondents are of the opinion these difficulties

intensified in 2011-2013. It is of note that 30.2% of the respondents stated willingness

of banks to lend deteriorated during this period (9.5% noted strong deterioration

and 20.6% deterioration).


89

Figure 11: Perception of change in the conditions of debt financing in 2011-2013 by

micro-enterprises in Malta91


Overall, 36.5% of companies stated to have faced obstacles in accessing debt

finance92. Figure 12 below shows that lack of own capital was identified as the most

recurring obstacle for micro-enterprises (11.9% of micro-enterprises). Another major

difficulty identified by companies is the high interest rates with 7.1%.

Figure 12: Obstacles to loan financing reported by micro-enterprises93


91 The number of micro-enterprises that provided an answer: 126 92 The number of micro-enterprises that provided an answer: 46. 93 The number of micro-enterprises that provided an answer: 126.

90

Despite the abovementioned difficulties in getting loans, those of the respondents

that did receive them, received on average 83% of the amount sought (EUR 50,428

out of EUR 60,983). This rate is much higher than in the case of equity products (56%)

and even grants (78%). However, it is of note that successful loan applications

require collateral. As illustrated in the figure below, 50% of surveyed micro-

enterprises stated to have relied on their own assets for loan collateral or on family

and friends (11.1%). Only 17.5% relied on company assets and. The fact that such a

large number of enterprise owners had to rely on their own assets to guarantee their

loan is again an indication of the lack of other institutions that would support micro-

enterprises especially in their inception phase instead of the banking system that

normally requires collateral. As debt finance is the most important funding source in

the country, the findings indicate that, micro-enterprises lacking assets would most

probably be excluded from any formal financing.

Figure 13: Type of collateral provided for debt financing by micro-enterprises94


Regarding the purpose of financing, the survey highlighted that the financing

obtained by micro-enterprises was primarily used for working capital (32.2% of

reasons to seek financing). The launch of new products and services accounted for

only 14.6% of reasons given, which is less than acquisition of machinery and

equipment and the purchase or rental of land and buildings with over 17%. Only

3.9% of purposes for financing were to expand operations in new markets abroad

and only 2.4% was for export sales. It has been indicated that the local market is

limited and saturated, with limited opportunities for growth. Therefore the

unwillingness or inability of micro-enterprises to expand their business scope or

export their products and services is a crucial indication. The Maltese Government

and authorities such as Malta Enterprise have recently introduced new

programmes, such as the Gateway to Export Programme and the Go Global

Programme, to assist micro and small enterprises by providing them with an

assessment of export readiness to determine if they are ready to venture into new


91

markets through their exports95. Such initiatives should be further supported in order

to motivate micro-enterprises to seek new opportunities.

Figure 14: Use of funding by micro-enterprises in 2011- 201396


The online survey also investigated future needs of micro-enterprises, which shared

their intentions for future funding sources for the year 2014. Results on the products

that micro-companies intend to seek are presented in Figure 15. Similar to the past,

traditional banking products such as loans, represent the main source of finance to

be used in the future. Particularly, short-term loans are to be sought by micro-

enterprises (42.7%) followed by medium and long-term loans (25.3%).

This is expected due to the lack of alternative finance providers in the country.

Equity funding from corporate bonds or rescue / turnaround and buyout, and even

mezzanine and hybrid finance is not mentioned as a future financing source by the

micro-enterprises who responded to the questionnaire.

While some Maltese micro-enterprises believe they lack support from commercial

banks, they still consider them as their main finance suppliers in the future. Moreover,

a large majority of micro-enterprises do not expect to have different needs or uses

of finance in 2014, therefore many of them expect to face the same challenges as

they currently have.

95 Malta enterprise website: Programme overview – Gateway to Export. 96 The number of micro-enterprises which provided an answer: 126.

92

Figure 15: Expected sources of funding in 2014 indicated by micro-enterprises97


Uses of funding are also likely to remain the same as in the past, as underlined in

Figure 16. Funding will be required for financing working capital (24.8% of reasons

given), for purchasing machinery and equipment (15.5%) and for launching new

products/services (12.4%). As indicated by respondents, 7.5% and 4% of the reasons

to seek finance is to develop international activities and finance export sales

respectively. These rates seem to slightly increase compared to the period 2011 and

2013. This is a positive indication that micro-enterprises’ appetite to expand their

operations in international markets is increasing.


93

Figure 16: Expected use of funding of micro-enterprises in 201498


b) Quantification of potential demand for financial products from

micro-enterprises in Malta in 2014

Demand from existing micro-enterprises has been considered for two categories of

companies:

• Micro-enterprises with no employees;

• Micro-enterprises with between 1 and 9 employees.

It is assumed, to facilitate analysis and quantification of demand, that the most

suitable financial product for micro-enterprises without employees is microfinance.

Similarly, micro-enterprises with employees are expected to require more

conventional loans (short-term or medium and long-term). The survey did not

provide information on other products at this level of detail. Equity products are

considered as a whole for the three main categories of SMEs in Section 7.8.

In the case of micro-enterprises with no employees, demand has been considered

for both existing and companies that do not yet exist in order to provide insights on

financing demand for financial inclusion.

The assumptions on the desirability of financial products depending on the type of

micro-enterprise are illustrated in Figure 17 below.


94

Figure 17: Categorisation assumptions for financial products for micro-enterprises

and financial inclusion

Source: PwC 2014.

Demand from micro-enterprises with employees is considered first.

Quantification of demand for loans

The methodology behind quantifying micro-enterprise demand for financing is

provided in Section 7.3. The information provided by SMEs in the online survey was

used in estimating demand for the following financial products:

• Short-term loans, bank overdrafts and credit lines; and

• Medium and long-term loans.

The average amount in short-term loans sought by micro-enterprises is EUR 31,964

and EUR 73,133 for medium and long-term loans.

To calculate micro-enterprises’ total demand for the selected financial product, the

total population of micro-enterprises has been identified on the basis of the

following considerations:

• First, the number of 0 employee companies is removed (9,293) as they tend

to have different needs than established companies.

• Second, the obtained number is multiplied99 by

– The rate of enterprises that prefer bank loans as a type of external

financing as a proxy for companies seeking finance in the future: 78.1%

for short-term loans and for medium and long-term loans as indicated in

the ECB’s SAFE survey of 2013100; and

99 The use of proxies in these calculations is intended to provide a more realistic size sample of population. These

proxies originate from different sources in order to reinforce the triangulation process, and reveal a behavioural

pattern of companies related to their choices of financing either in the past or the future. It has to be noted that

different approaches could have been used to obtain a similar result; however, the information provided by the

SAFE survey and the survey conducted for the present report, provide strong indications on the financing

choices of SMEs, thus allowing to reduce the population size based on these choices. As a result of the use of

proxies, the population is reduced to a number of companies that is more likely to seek a specific financial

product, thus allowing a more realistic computation of demand for this product. 100 This result derives from SMEs’ answers to Question 20 of the SAFE survey: “If you need external financing to realise

your growth ambitions, what type of external financing would you prefer most?”

95

– The rate of micro-enterprises that used the financial product in 2013 as a

proxy for their respective likely uptake among those seeking finance in

the future: 31.0% for short-term loans and 24.1% for medium and long-

term loans.

In order to estimate the total demand from micro-enterprises, the average amount

is multiplied by the total population (6,772 micro-enterprises for short-term loans and

5,267 micro-enterprises for medium and long-term loans). A variation of -5% and +5%

around this volume is then calculated so as to take into consideration the potential

fluctuation of demand.

This method is applied for 2014 for the two financial products. The results by product

are presented in Table 26 below.

Table 26: Annual demand for financial products among micro-enterprises in Malta in

2014

Average finance sought by a single

micro-enterprise (mEUR)

Finance sought by the total micro-

enterprise population (mEUR)

Short-term loans, bank

overdrafts and credit lines 0.032 206 - 227

Medium and long-term loans 0.073 366 - 404


The demand figures listed in the table above appear to be consistent with the

business environment in Malta and the projected real GDP growth of 2.3% in 2014

and 2015.

Micro-enterprises usually consider using long-term loans in order to update their

equipment and machinery. However, they are also willing to secure their financing

over the next few years, especially for working capital purposes. In fact, micro-

enterprises seem to not clearly distinguish the purpose of loans depending on

different maturity periods when looking for financing. For example, and as illustrated

in other surveys, SMEs in Malta use more bank overdraft and credit lines than

average in the EU-28101 (SAFE survey, 2013). They however use less bank loans than

the average in EU-28 (25.0% of SMEs as compared to 31.6%)102.

101 65.7% of the SMEs in Malta used bank overdraft and credit line over the last 6 months prior to the survey

conducted for the European Commission and the European Central Bank, when they were 38.8% for the EU-28

(European Commission, SME’s Access to Finance survey, 2013). The survey was conducted over the second half

of 2013. 102 25.0% of the SMEs in Malta used bank loan over the last 6 months prior to the survey conducted for the European

Commission and the European Central Bank, when they were 31.6% for the EU-28 (European Commission, SME’s

Access to Finance survey, 2013).

96

It seems that micro-enterprises in Malta intend to use short-term loans for medium-

term investments and may also use long-term loans to cover their working capital

needs and finance their day-to-day business or to cope with their existing debt.

The sense that Maltese micro-enterprises may not make a clear distinction between

the uses of loans with various maturities is also consistent with the observations on

microfinance that are highlighted later on in the present section and that illustrate

the extent to which microfinance products are not clearly defined neither by micro-

enterprises, nor by financial services providers in the country.

Quantification of demand for microfinance

Demand for microfinance has only been considered for 0 employee companies in

Malta. This is done since microfinance is mostly used for financial inclusion and social

entrepreneurship purposes. As already established in this report, most newly created

companies are micro-enterprises. Two calculations have been made:

• Demand for microfinance from existing micro-enterprises; and

• Demand for microfinance from potential micro-enterprises (financial

inclusion).

Demand for microfinance from existing micro-enterprises

The average amount of microfinance intended to be sought in 2014 by micro-

enterprises has been computed with the methodology described in Section 7.3,

except in this case, the average amount of microfinance being sought by micro-

enterprises was derived from the average amount expressed by respondents from

the online survey, who stated their intention to seek amounts of short-term and

medium to long-term loans of EUR 25,000 or less. The average amount is EUR 15,857.

As already mentioned, the perception of microfinance in Malta is different than

other countries, since it is mostly associated with bank loans below EUR 25,000. Thus,

if microfinance institutions did exist, these companies would most probably seek this

financing from these institutions.

For the survey, 21 micro-enterprises provided an appropriate answer (between

EUR 1 and EUR 25,000), with 17 micro-enterprises requesting short-term loans and 4

medium to long-term loans respectively. This average of EUR 15,857 is higher when

compared to a survey conducted by the European Microfinance Network103 (EMN),

where the EU average for business loans provided by MFIs is EUR 9,960.

However, according to the same survey, there seems to be wide differences from

country to country regarding the average loan amounts, ranging from very low

amounts of below EUR 1,000 to high amounts reaching EUR 20,000. No figure is

available on the demand side of microfinance in Malta specifically to conduct

103 EMN 2014, Overview of the microcredit sector in the European Union for the period 2012-2013.

97

triangulation. Finally, information provided by the supply side of microfinance is of

limited support since the first microfinance institution in Malta was set up less than

one year ago, which means that until very recently, no supply for this type of

financing was available.

For these reasons, the following quantitative analysis uses an average amount of

EUR 15,857 for microfinance to be sought by an existing micro-enterprise in 2014 in

Malta and the population considered for computation is 7,258 micro-enterprises with

0 employees104.

The computation of demand for microfinance has been made for 2014. The results

are presented in Table 27 below.

Table 27: Annual demand for microfinance in Malta in 2014

Average finance to be sought by a

single micro-enterprise (mEUR)

Finance to be sought by the total

micro-enterprise population (mEUR)

Microfinance 0.016 109 - 121


Micro-enterprises in Malta may not yet be familiar with the purposes of microfinance

and the actors of this market. Also, micro-enterprises in Malta may not clearly make

a difference between the sources of financing they require, but the amounts

indicated for short-term loans express a clear need for short-term financing.

Demand for microfinance from potential micro-enterprises (financial

inclusion)

Microfinance can be used for financial inclusion to help people at risk of poverty to

create their own company.

Since there is no available data on demand for microfinance in Malta and that

there is a no information on the supply of microfinance in the country, the average

amount to be sought by a micro-enterprise for financial inclusion in 2014 may be

considered at EUR 15,857, i.e. the same as the average amount to be sought by an

existing micro-enterprise.

The population at risk of poverty, who might be the population who might seek this

type of finance, consists of people with very different profiles, such as: (1) young

people with no qualification, who have never worked and have difficulties finding a

job, (2) people with disabilities, (3) people from unprivileged populations, (4) people

104 9,293 micro-enterprises with 0 employees exist in Malta. As for the computation of demand estimate for short-

term loans, enterprises which do not intend to raise loan finance in 2014 are filtered out. As 78.1% of enterprises

prefer loan finance as an external source of finance to finance their growth ambitions (SAFE survey, 2014), 7,258

enterprises are considered for the calculation.

98

living in difficult areas with high rates of unemployment or (5) experienced people

who are unemployed for a long period and have difficulty in adapting and finding

a new job.

This population may create their own business, if properly supported.

To determine the number of people aged 15-64 years old at risk of poverty that may

create their own business. With this approach, the following steps are conducted:

• Consider within the population of 15-64 years old in Malta in 2012 (184,500

people), the people at risk of poverty (15% according to 2012 figures). This

population represents 27,675 people.

• Among these people, consider the percentage of people that prefer to be

self-employed to exploit a business opportunity. This percentage among the

overall Maltese population is 8%105. The population obtained is 2,214.

• Among this population, consider the people who think that starting a business

is a desirable career choice but do not have enough capital/financial

resources to be self-employed. This represents 17% of the respondent to the

Eurobarometer survey conducted in 2012 106 . The population obtained

represents 376 people.

• Multiply this population of companies by the estimated average amount of

microfinance to be sought by a micro-enterprise for financial inclusion in

Malta in 2014: EUR 15,857.

The results are presented in Table 28 below and yield a need for microfinance of

EUR 6m may be expressed by new business creators who currently face social

exclusion and may be willing to initiative a business if better supported in their

access to finance.

Table 28: Annual demand for microfinance for financial inclusion in Malta in 2014


single micro-enterprise (mEUR)


micro-enterprise population (mEUR)

Microfinance 0.016 6


It has to be reminded that this demand is indicative as Malta has a strong tradition

of informal financing originating from the family and social environment rather than

specialised institutions.

105 Q6 in Flash Eurobarometer 354, 2012: Why would you prefer to be self-employed rather than an employee? 106 Q8 in Flash Eurobarometer 354, 2012: Why would it not be feasible for you to be self-employed within the next 5

years?

99

Demand for financing from small enterprises in Malta 7.5

Overall, small enterprises (companies with 10 to 49 employees) have easier access

to finance than micro-enterprises as evidenced by proportionately higher use of it.

Loans are the primary financial product used by small enterprises as their larger

asset base facilitates collateralisation. Unlike micro-companies, small enterprises

favour medium and long-term loans over short-term loans as their investment needs

are comparably higher. Demand for financing from small enterprises is further

detailed in the paragraphs below.

Small enterprises represented 3.9% of the total SME population in Malta in 2012. The

number of small enterprises increased between 2009 and 2010 by 6.3%, remained

stable in 2011 and increased by a further 2.0% in 2012. Therefore small enterprises

increased year on year by 2.7%. Small enterprises seem to grow in line with GDP

growth.

Table 29: Number of small enterprises in the Malta

Number of

companies

2009 2010 2011 2012

Number of

companies

% of total

SME

population

Number of

companies

% of total

SME

population

Change

over

2009-2010

Number of

companies

% of total

SME

population

Change

over

2010-2011

Number of

companies

% of total

SME

population

Change

over

2011-2012

Total SME

population 41,910 42,607 1.7% 42,131 -1.1% 40,573 -3.7%

Total small

enterprises 1,491 3.6% 1,585 3.7% 6.3% 1,583 3.8% -0.1% 1,615 3.9% 2.0%


Figure 18 shows that a significant share, namely nearly half of all respondents (48%),

believe that their business is in a development stage of its life cycle, indicating that

they expect further business growth and an increase in their employees. The survey

also revealed that around 38% of respondents see their business in the maturity

stage, meaning that they do not envisage significant growth within their company.

14% see their company to be in the reorganisation stage of its lifecycle.

100

Figure 18: Development stages of small enterprises in Malta107


When seeking finance, small companies most frequently look for support from

commercial banks (70% of respondents), accountants, tax experts and financial

advisors (48%) and the State (42%). The State is perceived by small companies as

the least supportive actor. With 30% of the respondents, the rate is similar to the one

declared by micro-enterprises (26%).

Commercial banks are second least supportive actor (18%). However, at the same

time, they are seen by small companies as the most supportive actor, which is in

sharp contrast with micro-enterprises (52% and 24% respectively). Comparably

closer and more trusting relationship between small companies and banks can be

linked to larger asset base, credit history and experience in dealing with financial

institutions of the former. It is explored in detail in the paragraphs below.

Finally, unlike micro-enterprises, relatively few small companies declared having

sought help from family and friends (22%). This can be explained by the fact that

small companies have higher financing needs which cannot be addressed by

informal financing sources.

107 The number of small enterprises that provided an answer: 50.

101

Figure 19: Feeling of lack of support among small enterprises when seeking finance108



102

Analysing the most-frequently used sources of finance, Figure 20 shows that small

companies depend heavily on short-term and medium and long-term financing

sought from banking institutions, with 62.5% and 56.3% of them having used medium

to long-term loans and short-term loans, bank overdraft facilities and other credit

lines respectively. Unlike micro-companies, small enterprises prefer medium and

long-term loans to short-term loans, which illustrates their greater investment needs.

Similar to micro-enterprises, about one third of small companies finance their

operations and investment needs through retained earnings; however, small

enterprises naturally rely much more on formal sources due to their higher needs in

financing than micro-companies. A quarter of respondents have had recent

experience in using bank guarantees, while 14.6% claimed to have used capital

contributions from shareholders. Since small enterprises have easier access to formal

funding sources than micro-enterprises, it allows them to diversify their financial

sources. A further 12.5% of respondents indicated they used loans provided with

interest rate subsidies and grants and fewer than 10% of respondents indicated they

used other financing products such as leasing, microloans, and factoring amongst

others. No respondent used forms of private equity financing such as Venture

Capital, Business Angels and technology transfer funds among others.

Figure 20: Sources of funding used by small enterprises between 2011 and 2013109



103

The survey further queried on the perception of sufficient access to finance for

different products. Approximately 81% of small enterprises seeking financing stated

to have sufficient access to medium to long-term loans, while 73.8% felt they had

sufficient access to short-term loans, bank overdrafts and credit facilities110. These

two financial products are also the most relevant forms of financing to small

companies, with 88.1% and 83.3% of respondents indicating their relevance. 44.4%

of respondents also felt there is sufficient access to bank guarantees including

export guarantees111. On the other hand, small companies feel that there is a lack of

access to loans provided with interest rate subsidies (36.1%)112. The least relevant

forms of financing to small enterprises included loans obtained from the parent

company, technology transfer funds, mezzanine financing and private grants and

donations among others.

Regarding obstacles in accessing financial resources, under two thirds of enterprises

(62.0%) stated that they did not experience any difficulties when seeking financing.

Small companies identified the cost of obtaining financing (16.0%) and other terms

and conditions of financing (14.0%) as the two major obstacles in accessing

financial measures. The views of the respondents are in line with the perception in

the market, where rather than access to finance being an issue, the problem lies

more with the affordability of the loan.

Indeed, between 20% and 25% small enterprises are of the opinion that willingness of

banks to lend (24%), cost of financing (24%) and administrative burden of loan

applications (20%) deteriorated in 2011-2013. While these proportions are lower than

among micro-enterprises, they are a visible signal that credit market in Malta

remains tight and is not becoming more accommodating to SMEs. This is further

confirmed by high percentage of respondents who did not perceive any change in

the above conditions: 36% with respect to financing cost, 50% for financing burden

and 42% for willingness of banks to lend. Simultaneously, as much as 56% of the

respondents declare that financial situation and turnover of their small companies

improved in the same period. While a positive signal, it poses a question of where

the seemingly flourishing companies will finance in the future if the financing market

remains very conservative.

Figure below illustrates how small enterprises perceive changes in loan financing.

110 The number of small enterprises that provided an answer: 42. 111 The number of small enterprises that provided an answer: 36. 112 Ibid.

104


small enterprises in Malta113


Figure 22: Reasons for the difficulties for small enterprises in accessing finance over

2011-2013114


The above evidences that small companies have fewer difficulties in accessing

finance than micro-companies. This translates into a lesser feeling of

discouragement of small enterprises. 40% of them felt discouraged from seeking

113 The number of small enterprises that provided an answer: 50. 114 The number of small enterprises that provided an answer: 50.

105

finance in 2011-2013 (8% always, 10% often and 22% occasionally) as opposed to

62.7% of micro-companies.

Figure 23: Feeling of discouragement from seeking finance among small enterprises

in Malta115


When focusing on debt financing, 72.0% of small companies did not encounter

problems or did not ask for loans. For the companies that faced problems, the most

serious problem raised was the cost of obtaining finance (12.0%), followed by lack of

own capital (8.0%) and insufficient collateral or guarantee (8.0%). When asked

about collateral provided for loan financing, 60% of respondents used business

assets (only 17.5% in the case of micro-enterprises).


106

Figure 24: Obstacles to loan financing reported by small enterprises116


Small companies were also asked to identify the reasons why they sought financing.

More than one third of their financing was used to finance working capital and

13.4% of financing was used to launch a new product or service. Over 11% of

financing used was allocated to investment needs, e.g. the acquisition of

machinery and equipment and the purchase or rental of land and buildings. Only a

small proportion of reasons referred to the financing of R&D, innovation and

developing and entering new markets; 5.2% between 2011 and 2013. This confirms

the reluctance of companies to invest in R&D as shown in Chapter 4. Moreover, only

4% of indicated purposes for seeking financing by small companies targeted export

sales. This percentage is rather low, especially when considering that expansion

within the local market is limited and growth largely depends on access to other

markets abroad. It is noticeable that the same figure for micro-enterprises is even

lower at 2.4% for the period between 2011 and 2013, confirming the insularity of the

Maltese economy and the reliance of SMEs on the domestic market, as mentioned

in Chapter 4.


107

Figure 25: Use of funding by small enterprises over 2011-2013117


Small enterprises plan to seek similar products in 2014 when compared to the past as

indicated in Figure 26, especially, medium and long-term loans (48.3%) and short-

term loans, bank overdrafts and credit lines (37.9%). Equity funding from Business

Angels, investment funds, technology transfer funds or rescue / turnaround and

buyout, mezzanine and hybrid finance, corporate bonds are not mentioned as a

potential financing source. Also other forms of financing such as loans guaranteed

by public or private entities, or loans provided with interest rate subsidies are not

selected.

Figure 26: Expected sources of funding in 2014 indicated by small enterprises118


117 The number of small enterprises that provided an answer: 50. 118 The number of small enterprises that provided an answer: 29.

108

Demand for financing from medium-sized enterprises in Malta 7.6

Medium-sized companies find access to finance even less restricted than small

enterprises. However, unlike the latter, they quote a lack of willingness of banks as

the main obstacle in obtaining finance. This would suggest that, despite larger asset

bases, medium-sized companies in Malta may already be significantly indebted.

Similarly to small enterprises, medium-sized companies have preference for medium-

and long-term loans. Interestingly, though, medium-sized enterprises use a significant

proportion of their financing on improvement of energy efficiency, which is not the

case for other SME sizes. These trends are further detailed in the following

paragraphs.

As illustrated in Table 30 below, medium-sized enterprises (companies with 50 to 249

employees) accounted for 366 entities, representing only 0.9% of the total SME

population in the country (2012). This proportion was stable over the last few years.

Table 30: Number of medium-sized enterprises in the Malta

Number of

companies

2009 2010 2011 2012

Number of

companies

% of total

SME

population

Number of

companies

% of total

SME

population

Change

over

2009-2010

Number of

companies

% of total

SME

population

Change

over

2010-2011

Number of

companies

% of total

SME

population

Change

over

2011-2012

Total SME

population 41,910 42,607 1.7% 42,131 -1.1% 40,573 -3.7%

Total

medium

enterprises

336 0.8% 336 0.8% 0.0% 365 0.9% 8.6% 366 0.9% 0.3%


Figure 27 shows that more than half of all respondents (56.1%) believe that their

business is in a mature stage of its life cycle. The survey also indicated that around

24.4% of respondents see their business in the development stage and another

17.1% in the reorganisation stage.

Figure 27: Development stages of medium-sized enterprises in Malta119


119 The number of medium-sized enterprises that provided an answer: 41.

109

Interestingly, medium-sized companies find access to finance slightly more

challenging than small enterprises. 49% of the respondents felt discouraged from

seeking finance, as compared for 40% in the case of small companies. One of the

reasons for this may be an already significant indebtedness of medium-sized

companies, which makes banks more reluctant to lend. It is however of note that

discouragement was most often only occasional (37%).

Figure 28: Discouragement of medium-sized companies in Malta from seeking

finance120


As is the case with other companies, medium-sized enterprises use mostly short-term

loans, overdrafts and credit lines (57.5%) and medium to long-term loans (47.5%) as

a means of obtaining external financing. No respondent indicated using mezzanine

Venture Capital funds or Business Angel financing. In comparison, the total SME

population used short term (30.5%) and medium and long term loans (24%) to a

much lesser extent than medium/sized companies, demonstrating that larger

companies have easier access to these products.

The survey also queried the perception that companies have regarding their access

to different products. 73% and 67.6% of medium-sized enterprises stated have

sufficient access to medium and long-term loans and short-term loans, bank

overdrafts and credit lines respectively121. Loans provided with interest rate subsidies

were relevant for 51.5% of the respondents. However, 30.3% stated not to having

sufficient access to them122. Bank guarantees also seem to be equally relevant to

medium companies (48%) as to small companies (44%), but less so for micro-

enterprises (34%).

120 The number of medium-sized enterprises that provided an answer: 41. 121 The number of medium-sized enterprises that provided an answer: 37. 122 The number of medium-sized enterprises that provided an answer: 33.

110

Figure 29: Sources of funding used by medium-sized enterprises over 2011-2013123


When analysing the obstacles in accessing finance, 29.3% of the medium-sized

enterprises answered that the willingness of banks to provide finance had been the

main difficulty during the period from 2011 to 2013. The second most widespread

difficulty was other terms or conditions of finance, indicated by 19.5% of the

respondents. While 12.2% of medium-sized respondents noted that the cost of

financing was an issue, this proportion amounted to 16% among small enterprises

that responded to the survey.

In fact, even though the majority of medium-sized enterprises are successful in

raising the (loan) finance sought, the obstacles identified suggest that their access

to finance is not all plain sailing.

123 The number of medium-sized enterprises that provided an answer: 40. Note: Other sources of funding are:

microloan from a microfinance institution, factoring, venture capital funds, business angels, technology transfer

funds, equity from national, regional or foreign institutions, rescue / turnaround and buyout capital, mezzanine or

hybrid financing, private grants or donations and external capital contributions.

111

Figure 30: Reasons for difficulties for medium-sized enterprises in accessing finance

over 2011-2013124


According to Figure 31 below, medium-sized enterprises had difficulties in receiving

loans as a result of their existing debt (9.8%), insufficient potential of the business or

project being financed (9.8%), and insufficient collateral or guarantee (9.8%). When

asked about collateral provided for loan financing, 58.5% of medium-sized

enterprises stated to have used their company’s assets and the owner’s assets

(41.5%)125.

124 The number of medium-sized enterprises that provided an answer: 41. 125 Ibid.

112

Figure 31: Reasons referred to as difficulties by medium-sized enterprises in receiving

loan financing126


Overall, the majority of the respondents had the opinion that the financing

conditions remained mostly unchanged and financial situation of their companies

improved in 2011-2013. This is illustrated in the Figure below.


medium-sized enterprises in Malta127


Medium-sized enterprises indicated that financing working capital (27.6%) was the

main purpose for the funds raised, while improving energy efficiency represented

the second largest reason of using finance by medium-sized enterprises (18.4%).

126 The number of medium-sized enterprises that provided an answer: 41. 127 The number of medium-sized enterprises that provided an answer: 41.

113

Since medium enterprises are larger they incur higher administrative costs, especially

utility costs, which are especially high in Malta. On this basis, more effort is made to

invest in energy efficient equipment. In the case of micro and small enterprises only

6.3% used the funding sought for improving energy efficiency. The third most

common purpose with 17.1% of responses was to fund other needs such as

acquiring machinery and equipment or acquiring or renting land and buildings.

Figure 33: Use of funding by medium-sized enterprises over 2011-2013128


When asked about the financial products to be sought in the future, medium-sized

enterprises identified virtually the same products used to date. According to the

survey, medium and long-term loans will be sought by just over 46% of respondents,

followed by short-term loans (39.3%), which presumably reflect the medium-sized

companies’ greater relative interest in investing in the business.

Equity funding from existing shareholders or family and friends or national / foreign

institutions, Business Angels, Venture Capital funds, or rescue / turnaround and

buyout, technology transfer funds, and even mezzanine and hybrid finance

attracted no responses. This lack of responses indicates also in the case of medium-

sized companies a very low awareness of such financing sources and the relative

sufficiency of the banking infrastructure for their needs. Also, other forms of financing

such as loans guaranteed by a public or private entity and corporate bonds did not

attract any responses from medium sized companies.

128 The number of medium-sized enterprises that provided an answer: 41. Note: no respondent answered: transfer

ownership.

114

Figure 34 Expected sources of funding in 2014 indicated by medium-sized

enterprises129


According to the online survey, as shown in Figure 35, most of the medium-sized

enterprises anticipate using funding for acquiring machinery and equipment (24.6%

of total funding being sought) and for financing their working capital (21.7%). It is

interesting to note that 10.1% of respondents indicated that funding sources would

be used to develop international activities. This response indicates that medium

enterprises may be more optimistic about growth prospects in the near future than

their smaller counterparts.

Figure 35: Expected use of funding of medium-sized enterprises in 2014130


129 Number of medium-sized enterprises that provided an answer: 28. 130 Number of medium-sized enterprises that provided an answer: 41.

115

Quantification of potential demand for financial products from 7.7

small and medium-sized enterprises in Malta in 2014

The quantification of demand for financing for small and medium-sized enterprises

has been calculated for the two size categories together. Interviews with

representatives of SMEs and commercial banks have also confirmed that financing

demand from small and medium-sized companies are often similar in Malta. The

following quantification of demand from these companies uses the methodology

described in Section 7.3 for the following financial products:

• Short-term loans, bank overdrafts and credit lines; and

• Medium and long-term loans.

Similar to micro-enterprises, small and medium-sized companies have not indicated

amounts that can be appropriately used for the quantification of the potential

demand for other financial products, such as leasing and factoring.

After implementing all the steps of the methodology for 2014, the average potential

demand from a single small or medium-sized company for each product is

provided. For short-term loans, the average demand amounts to EUR 170,833.

Despite the fact that average amounts of short-term loans are not available, this

amount seems consistent with the business reality of Malta also based on

international experience and the size of these companies. A respective amount was

also computed for medium and long-term loans (EUR 282,667), as presented in Table

31 below.

Table 31: Annual demand for financial products by small and medium-sized

enterprises in Malta in 2014

Average finance to be sought

by a single small or medium-

sized enterprise (mEUR)


population of small and medium-

sized enterprises (mEUR)


overdrafts and credit lines 0.171 175 -193

Medium and long-term loans 0.283 284 - 314


In order to estimate the demand in the total population of small and medium-sized

enterprises, the average amounts were multiplied by the number of companies and

a variation of -5% and +5% was applied.

It was described in the previous sections that the banking sector is dominant in

Malta and nearly the only formal source of financing for companies. As a result,

small and medium-sized companies are the natural clients of banks and therefore

access to finance is easier for these companies. The later seem to have experience

with banks and they seem to be more aware of the different financing products

116

associated to different uses. According to the findings, these companies will seek

funding through medium and long-term loans, in order to support their businesses.

Potential demand for equity financing from the SME population in 7.8

Malta

The Maltese equity market portrays an unusual paradox. As presented in the supply

side analysis, the country seems to attract equity funds due to a friendly legislative

framework. However, these equity funds have no interest in the local market as its

small size does not seem to match portfolio requirements of private investment

funds. On the other hand and as described in the demand side analysis, SMEs have

limited experience or even awareness of equity funding and how this funding could

benefit their businesses. As explained below, factors like moderate innovativeness

and insularity of the market, very small size and family character of many businesses

leave few Maltese companies interested in financing innovation or significant

growth. Hence, new equity would not automatically trigger high-quality demand as

shown by several similar attempts in the past.

The estimate of demand for equity financing in Malta will mainly remain qualitative

since it is recognised that quantifying demand for equity may depend on many

contextual factors, such as: capacity of the SME to present its project and attract

investors, ability of the SME to be well supported by a network and interest of

investors in the sector. However, an indicative quantification will also be provided

for consistency reasons and in order to provide an indicative financing gap.

In contrast to debt products that can support a very wide range of potential

companies in terms of size and sectors with their working capital and investment

needs, equity financing is only appropriate for a small subset of companies. Despite

the fact that demand for equity financing could originate from different sectors,

sizes and company profiles, a realistic approach in describing demand is actually to

define the profile of companies where the type of demand would materialise that

would be of interest to investors.

In the AFMA survey conducted for this study, a few companies expressed the

willingness to use equity financing in the future. These investments could be

attractive for equity investors but only if other conditions are met first. For this reason

it is important to define the prerequisites sought by investors. For early stage

financing the profile of the entrepreneur and his or her educational or professional

background are important, as well as the viability and scalability of the business. As

Malta is a small market and rather saturated, a targeted company would have to

consider developing its operations in international markets. The level of innovation

deriving from the business is also a priority along with defining growth perspectives

before considering the size of the company or even the sector. It was shown that

the percentage of companies willing to expand their business to new markets is

117

slightly increasing compared to the past, thus equity financing could be relevant to

those companies.

SMEs were asked to provide the amounts of equity financing they sought and

obtained over 2011-2013, but as only a very limited number of enterprises clearly

stated their needs, estimating the financing need is not representative. The survey

showed that the ratio of equity financing obtained over equity financing sought

increases with the size of the SME. Micro-enterprises have indicated that they only

obtain 56% of the amount sought while small and medium-sized enterprises

specified that they managed to obtain 95% and 65% of equity financing sought

respectively131 . It has to be noted that this equity financing received does not

necessarily originate from the local market.

As mentioned in Chapter 7.2, Business Angels in Malta are not coordinated, or rather

there have been attempts to coordinate them that have failed, and only few

individual investors are active in the country. Moreover, VC funds would need to be

incentivised to focus their attention on Maltese companies, and particularly if they

are to develop local operations, given the risk of limited high quality propositions.

In parallel, interviews with financial stakeholders and SME representatives are

confirming the findings of the survey as they stated that investment from private

sector has declined in recent years and few SMEs are being funded by equity

financing. In fact, between 1% and 5% of SMEs intending to seek funding in 2014 are

looking for equity financing from various external equity sources132, which is in line

with other regions in Europe.

A large proportion of SMEs are owned by a single person (20.6%) or are family

businesses (60.7%) (SAFE survey, 2013). Reluctance in seeking and obtaining equity

financing may consequently be linked to the existing mentality of SMEs’ owners who

are not willing to share its management.

As illustrated in the online survey133:

• For Venture Capital: 70% consider they do not need it, 27% consider the

access is not adequate and only 2% consider their access as adequate;

• For mezzanine financing: 82% consider they do not need it, 18% consider the

access is not adequate and only 1% considers their access as adequate; and

131 These figures should however be taken with precaution since the amounts provided by the companies for

equity financing sought may vary from EUR 3,000 to EUR 2m, illustrating very different financing needs and/or a

poor estimation of the actual needs of the company. That is why focusing on ratio provides more insights than

only considering the amounts given by the SMEs in the survey. 132 This is confirmed by the SAFE survey: When asked “If you need external financing to realise your growth

ambitions, what type of external financing would you prefer most?” 5.1% of enterprises state equity investment

(including Venture Capital or Business Angels). 133 The number of SMEs that provided an answer: 135.

118

• For Business Angels: 73% consider they do not need it, 23% consider the

access is not adequate and 3% consider their access as adequate.

Overall, only between 1% and 7% of SMEs in Malta considers their access to equity

and quasi-equity financing as adequate. However, the fact that circa 25% of

companies feel that there is an inadequate supply of early stage finance suggests

that there may be a sufficient latent demand.

Even though information on Venture Capital in Malta is limited, an example of an

SME having received equity financing in the last few years is illustrated below.

As mentioned in Annex 4 of the report, the University of Malta (UOM) has recently

launched a business incubator called TAKEOFF, which has been operational for the

last year, offering facilities (office and communication facilities and mentorship) for

start-ups. Through financing received from the Government of Malta, UOM

launched the Seed fund award as part of the TAKEOFF programme where funds

were awarded to nine applicants. The total request by the participants to this Seed

Fund was EUR 400,000 meaning that there was a strong interest in the programme.

Eventually, one of the start-ups, DiscountIF has managed to raise EUR 190,000

through angel investors in the United Kingdom.

This initiative raised some awareness on the opportunities for young entrepreneurs in

launching an innovative start-up. Although there have been some initiatives in the

past year to further raise awareness on equity financing, the overall demand for

equity financing is limited. This demand is also often not well formulated by the

entrepreneurs who lack financial knowledge and experience with VC funds. This

lack of knowledge and experience is faced by all sizes and all maturity stages of

SMEs. It is likely to be one of the main barriers for seeking equity financing in Malta.

The challenges for the future will be to assist SMEs in the commercialisation process

and helping them to attract more customers during the early stages of the

development of their business. Due to its small market size, Malta does probably not

produce enough start-ups to support the portfolio requirements of a privately

managed venture capital investment fund. Hence, the challenge would be to

incentivise investors, through public funding and assistance, to focus on the Maltese

market. For this to be done successfully, government needs also to be the catalyst

to drive the demand for equity financing.

Several stakeholders have voiced their opinion on the need to introduce tax

incentives if investment funds were to invest in local projects. Interviewees specified

that some forms of tax exemptions such as investment tax credits, tax exemptions on

dividend payments and exemptions from tax on the sale of underlying companies

could be introduced to attract foreign or local high net worth individuals, as is done

in other EU Member States.

119

Stakeholders recognise the importance of encouraging high-technology and

knowledge-intensive industries. As highlighted in the analysis of innovation in Malta,

a considerable lack of funding instruments for innovative companies to finance

growth exists particularly in the critical development stages. Equity finance is

potentially the most appropriate form of financing to promote innovation in the

country as anticipated by national strategies. Nevertheless, increasing innovation

does not only depend on adequate financial sources, but a stimulating

environment supported by stronger links and interactions between universities,

research institutes and innovative SMEs. The AFMA survey conducted for this study

revealed that most SMEs did not request support from the innovation framework

(approximately 78%) and infrastructure in the country such as incubators, innovation

centres, technology parks and clusters, further confirming that there might be lack

of awareness of the presence of such institutions, but also reflecting the limited

appetite for innovation among companies. Strengthening this environment in

combination with the involvement of BAs and VC funds in such interactions would

benefit young innovative SMEs.

Quantification of demand for equity financing

The average amount of equity financing to be sought by SMEs in Malta in 2014 is

estimated to be EUR 116,485134; however, this sits in a range of between EUR 5,000

and EUR 500,000 reflecting the wide scope of potential types of businesses and their

development stages.

For the calculation of the total demand of SMEs, the total population has been

identified on the basis of the following considerations:

• First, only micro-enterprises with employees are taken into consideration as

even start-ups will need to have a team in order to be able to raise seed

finance. They are 27,939 micro-enterprises.

• Second, all small and medium-sized companies are taken into consideration:

1,897 enterprises.

• Third, the obtained number is multiplied by the proportion of SMEs that are

interested in seeking equity financing in 2014. As already mentioned, the

lower end of the range may be estimated at 1% and the higher end of the

range may be considered at 5%.

The number of SMEs that may seek equity financing in Malta in 2014 is between 298

and 1,492 (Table 32).

134 Amounts used for the computation of the average includes: “capital contribution of shareholders”, “external

capital contributions (family or friends)”, “Business Angels”, “investment funds”, “Venture Capital funds”,

“technology transfer funds”, “rescue/turnaround funds and buyout capital”, “other private investors”,

“mezzanine or hybrid capital”, and “equity from national, regional and foreign institutions”. The average amount

is computed by adding all the amounts given by SMEs for the above-mentioned financial products. Amounts

that are above EUR 500,000 have been considered as outliers since they may be only relevant to a limited

number of companies.

120

Table 32: Annual demand for equity financing in Malta in 2014


single SME (mEUR)


SME population (mEUR)

Equity financing 0.121 35 - 174


This range of demand for equity financing should be considered with caution,

particularly as equity investment can be applied to different needs. There is a wide

range of amounts sought: small amounts could illustrate a capitalisation need in

order for SMEs to stabilise and/or solidify their capital structure as well as to have

better access to debt financing and large amounts could illustrate SMEs’ willingness

to secure future investments for the launch of new activities and the implementation

of their growth strategies.

The equity market mainly depends on the capacity of matching supply and

demand and the ability of stakeholders to coordinate. Such coordination needs

considerable improvement in Malta to be more effective and to be able to raise

relevant investment projects for BAs, VC and PE funds. This coordination implies

investment funds, Chambers of Commerce, business clusters and incubators, for

instance. Coordination efforts have improved considerably in the past year or two

with the University of Malta teaming up with other incubators such as the Microsoft

Innovation Centre. However, these efforts need to be strengthened, especially

among the Government and its agencies, and other initiatives that may be

launched in the future by other institutions.

Notwithstanding the above, supply-side representatives are at times not willing to

meet the demand, even if they are able to. For instance, SMEs looking for equity

finance may be in an inappropriate stage of development, e.g. seeking VC

financing while PE would be more appropriate. Another example is SMEs looking for

PE financing when they should seek equity for turnaround investment. This highlights

lack of SMEs’ ability to define their equity financing needs and their timing as well as

non-recognition of the need to build contact with appropriate providers. Targeted

technical assistance and awareness-raising could tackle these issues, resulting in

more robust demand for equity. Nevertheless, the number of companies as

preferred investment targets by VC funds will be limited, as mainly high growth

potential companies with global aspirations are targeted.

It is worth noting that by indicating an amount for equity financing, Maltese SMEs

also express their need for support from business clusters and investors to help them

structure and implement their growth strategies. This support does not only cover the

provision of financing, but also the skills support and mentoring that SMEs may need

to develop.

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8 Financing gaps, conclusions and recommendations

This chapter provides the calculations of the financing gaps per company size and

per financial product in order to draw conclusions and present recommendations to

be used for the development of a future investment strategy for the use of Financial

Instruments. The chapter is set out as follows.

Section 8.1 outlines the methodology used to calculate the financing gaps. The first

part of the analysis provides estimates of the financing gaps based on the

estimated existing supply and the potential demand per company category and

per financial product. The financing gaps are then calculated based on a recent

approach elaborated by the European Commission135 which takes into account the

unmet demand for financial products from viable SMEs in Malta.

In Section 8.2 the financing gaps based on both potential and “viable SMEs”

demand are presented and analysed. The analysis is carried out by segment of

company size and by financial product.

Section 8.3 provides an overview of the supply, demand and financing needs of

large companies in Malta.

Section 8.4 provides conclusions and main findings of the AFMA study, including

lessons learned from previous initiatives.

Section 8.5 presents the recommendations for the future investment strategy in

Malta.

Rationale behind financing gaps and methodology to compute 8.1

them

In order to provide a greater perspective of the SMEs’ needs in Malta, two different

methodologies have been used to define the financing gaps: one that provides the

total amount that SMEs would ideally like to seek compared to the total supply, and

the other that takes into account the pressing issue of viable, growing companies

that have failed to obtain finance. In the following paragraphs, the rationale behind

the use of financing gaps is provided to define the context and understanding of

the gaps. The two methodologies are subsequently elaborated upon. Furthermore, it

has to be reminded (as mentioned in Chapter 7) that the computation provide

gaps for 2014, but these gaps are average annual gaps that expand in a period of

the next one to two years (2015 and 2016). For reasons of simplification the gaps are

referred as gaps for 2014.

135 European Commission (2013). Ex-ante assessment of the EU SME Initiative. Staff Working Document, November

2013.

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a) Rationale behind financing gaps

The estimated supply of financial products presented in Chapter 7 was based on

market trends, information provided by the Central Bank of Malta and estimates of

market stakeholders. As a result, such supply figures can be considered as robust

and objective due to the fact that information is collected by the Central Bank of

Malta from financial institutions, and market stakeholders have the expertise to

provide such insights based on the liquidity and overall conditions of the institutions

they represent.

The estimated demand is based on the online survey answers provided by SME

owners or managers and is related to their knowledge of their respective markets

and the perspective of their company. Unlike figures provided for the last years

which represent disbursed amounts, the expressed figures shown by the survey show

the SMEs’ real demand preferences independent from real market constrains. In the

present report, financing gaps are first calculated by subtracting existing supply

from potential demand. Nevertheless, the following points have to be taken into

account when assessing the financing gaps based on potential demand.

• Potential demand may not actually translate into action. SMEs express their

expectations and intentions when answering the online survey. These

intentions may however not translate into action in the coming months or

years for several reasons. SMEs may be discouraged to ask for finance,

because of requirements (collateral, interest rates) or because of their

difficult financial situation. They may also change their growth strategy and

decide to postpone their investments.

• Specific nature of the economy in Malta. Malta is a relatively small country

compared to the EU with some specificities that have to be taken into

account when reading the gaps. Although this island economy is dominated

by the banking sector, the banks are very cautious when lending, which is

reflected by one of the highest interest rates in Eurozone. At the same time

these banks are only willing to lend to enterprises with sufficient assets, and

strong credit history. As a result, a considerable part of enterprises, particularly

among micro-enterprises has to rely on informal sources of financing or on

the personal assets of the business owner to be used as collateral. Especially

for micro-enterprises, this environment nurtures a conservative mentality

toward financing needs and some figures may be understated because of

this mentality. Regarding small and medium sized enterprises, these aspects

also have to be taken into account. The fact that these companies are

dependent solely on the banking sector for financing implies that most

companies that are growing in size depend on assets of the owners or

shareholders. In that sense, even if these companies have access to finance,

the dependence on the banking sector has to be perceived as a market

failure and taken into account, even in the absence of financing gaps.

123

• Total lack of supply for certain financing products. In the case of Malta, there

are cases of financing products such as microfinance and equity where the

supply is non-existent. Despite this, gaps are provided in order to support

policy makers in case these products are introduced in the future. It has to be

taken into account however that the total absence of supply also implies a

very low awareness of these specific markets from the demand side. As such

the demand expressed for these specific products should not necessarily be

considered realistic since the respondents have no relevant experience

seeking these products.

• Limited knowledge of financing sources and products. SMEs may not be

aware of all the financing sources available on the Maltese market. SMEs

may consequently keep seeking debt financing without envisaging other

funding sources, such as for example factoring. Demand for debt products

provided by the banking system may consequently remain high, while more

sophisticated products could be more appropriate to SMEs’ actual needs.

• The absence of financing gaps does not mean that companies have an easy

access to financing.

Small and medium-sized companies in Malta are often asset-based and may

not experience difficulties to provide collateral to commercial banks. On the

other hand, the omnipresence of banks in the country and the lack of other

financing sources may prevent smaller enterprises to access bank financing

because of a lack of collateral. For that reason, it may also indicate a

difficulty for smaller companies to grow and develop since they do not have

the assets and collateral required by banks.

• Larger companies often have a clearer vision of their future financing needs.

Small and medium-sized enterprises often have more time and skills to define

their growth strategies and clarify their financing needs. They also request

higher amounts to finance providers, in comparison with micro-enterprises.

The larger companies may consequently have a clearer perception of their

financing needs when answering the online survey and provide higher

amounts. This does not mean that micro-enterprises do not have financing

needs but that they may encounter difficulties or lack time to clearly define

these needs and/or answer the online survey. One consequence may then

be that a higher proportion of small and medium-sized companies answer

the specific question related to future needs in the online survey and provide

higher amounts. This may influence the average amount calculated when

the total SME population is considered, such as for equity financing.

These market conditions create a tendency for SMEs to underestimate or

overestimate their financing needs or to request financing which is needed for more

than one year. As a result, the financing gaps calculated with potential supply and

potential demand should not be perceived by policy makers as amounts that

124

should be covered in a single year or as gaps that have to be bridged by Financial

Instruments in order to facilitate private financing for SMEs. On the other hand, the

lack of gaps also should not be perceived as an indication that FIs are not needed,

since market failures can still exist in qualitative aspects. Overall, gaps are an

indication of financing needs in the overall economy of Malta, according to the

methodologies described in the report and market constraints experienced by SMEs

in the country136.

In order to give the analysis of financing gaps a more operational focus for the

design of Financial Instruments, the report also provides viable financing gaps

(VFGs). These gaps express a more targeted approach for identifying needs of SMEs

which experience growth but do not have access to finance. Nevertheless, it has to

be taken into account that these needs do not necessarily reflect a realistic view of

the market, but only a minimum existing gap for the following reasons:

• The definition of a viable company (as described later on in Section 8.1.c)) is

a limiting factor. SMEs which have deteriorating financial standings due to

external reasons are not taken into account, nor are newly created SMEs

which should be a target of Financial Instruments.

• SMEs which are viable but do have access to finance could be in a process

of experiencing financing constraints which do not allow for the further

development of their activities or for their expansion to international markets.

These SMEs create important added value and should be taken into account

when analysing financing gaps.

• Especially in Malta, companies may be experiencing growth but not seeking

finance from the formal banking sector due to their inexperience or lack of

awareness and thus would not recognise their lack of access to finance.

• SMEs which have difficulties restructuring their existing debts are also not

included. These companies could become viable if supported in their

process to renegotiate their terms on existing loans, and consequently if their

access to finance is supported by Financial Instruments. However, the impact

of these companies on financing demand is difficult to estimate.

• Potential financing demand of SMEs that do not yet exist is not taken into

account (due to lack of data availability); however, most companies start

out as micro-enterprises and many of them do not seek finance over the first

years of existence or have very limited needs.

• Some companies not included in this group may have received funding, but

less than they sought out to obtain.

136 Financial Instruments are one of the solutions to reduce the identified financing gaps and need to be

considered in a complementary manner with other financing tools, such as grants. The latter may be of

particular interest for instance in the case of R&D financing or financing support to financial intermediaries or

final beneficiaries for capacity building and training.

125

Both of the above-mentioned methodological approaches to calculating financing

gaps provide useful information to policy makers. They define maximum needs from

the potential demand and minimum needs from the viable financing gaps.

The methodologies used to compute the financing gaps are detailed in the

following paragraphs.

b) Methodology to compute financing gaps with estimated

supply and potential demand

The first methodology to calculate the financing gaps uses the estimated supply

and the range of potential demand calculated in the previous sections of the report

for each category of SME and each financial product.

For each financial product considered per category of SMEs, two steps have been

followed: first, the minimum estimated supply is subtracted from the lower figure of

the potential demand (as calculated in Chapter 7). Second, the maximum

estimated supply is subtracted from the higher figure of the potential demand.

For each of the subtractions, when a positive number is obtained, a financing gap is

identified. If a subtraction provides a negative number, it means that, under certain

circumstances, the supply in 2014 may cover the potential demand for the

considered financial product.

This computation methodology is followed for two categories of SMEs (micro-

enterprises on the one hand and small together with medium-sized companies on

the other hand) and two financial products: short-term loans and medium and long-

term loans.

c) The viable SMEs methodology to compute financing gaps

A second methodology is used to estimate financing gaps for loans. It follows the

approach based on “viable SMEs” that was suggested by the European

Commission in a recent report137, and the gaps estimated by using this method will

be henceforth referred to as Viable Financing Gaps or VFGs. The methodology used

by the EC estimates financing gaps by using two elements:

• The identification of the percentage rate of financially viable SMEs that were

unsuccessful in obtaining loan finance in Malta; and

• The calculation of a loan financing gap by using an average loan amount

that would have been requested by these companies.


2013.

126

In the EC report, viable SMEs are defined as SMEs that have registered positive

growth in terms of turnover in the last six months. The proportion of viable SMEs that

were unsuccessful in obtaining loan finance is considered in the EC report as the

share of SMEs that (1) applied for a bank loan but were rejected by the bank (bank

rejection); (2) refused the bank’s proposed loan because of high interest rates (SME

refusal); and (3) did not apply for a loan for fear of rejection (SME discouragement).

For Malta, the EC report estimates the proportion of viable SMEs that were

unsuccessful in obtaining loan finance at 6.3%.

In order to compute a viable loan financing gap for SMEs in Malta which is in line

with the EC report’s assumptions, the following methodology has been used in the

present report.

The proportion of financially viable SMEs that were unsuccessful in obtaining loan

finance has been estimated for the two categories of SMEs. The number of SMEs

defining their turnover as better or much better between 2011 and 2013 has been

taken from the online survey data. Among the viable SMEs, the share of companies

that were unsuccessful in obtaining loan finance has been calculated. On this basis,

10.2%138 of viable micro-enterprises were unsuccessful in obtaining loan financing. In

considering small and medium-sized companies, one notes that all companies were

successful in obtaining loan financing. These percentages are applied to the

population figure used to calculate the potential demand previously 139 . These

percentages also indicate the difference between micro-enterprises, who have

difficulties despite an increasing turnover on the one hand, and small/medium-sized

companies on the other hand which do not seem to face difficulties to access loan

financing.

For micro-enterprises, the calculation of the financing demand from a single

company is multiplied by the share of viable unsuccessful SMEs in the micro-

enterprise population. A variation of -5% and +5% is then applied so as to take into

consideration the potential fluctuation.

In order to illustrate the methodology presented above, the following box provides

the calculation used to estimate the financing gap of viable micro-enterprises that

were unsuccessful in obtaining short-term loans.

138 As per the online survey 6 micro-enterprises out of 59 were unsuccessful in obtaining financing despite

experiencing an improvement in turnover. In opposite to the ratio of 6.3% (SAFE survey) which captures the last 6

month, this figure covers the period of the whole last year and is, hence, higher. 139 Specifically, 6,772 micro-enterprises for short-term loans, 5,267 micro-enterprises for medium and long-term loans

and 1,078 small and medium-sized companies taken together for short-term loans and 1,056 for medium and

long-term loans.

127

Box 2: Example of calculation of a viable financing gap (VFG) for short-term loans

for viable micro-enterprises

Step 1: Calculating the share of viable micro-enterprises that were unsuccessful in

obtaining loan finance

The percentage of micro-enterprises that define their turnover as better or much

better between 2011 and 2013, but are unsuccessful in obtaining short, medium and

long-term loans, represent 10.2%140 of all micro-enterprises in Malta. This percentage

corresponds to the micro-enterprises who sought finance and were unsuccessful in obtaining

short, medium or long-term loans between 2011 and 2013 (using Question 5 on turnover and

Question 7 on the satisfaction on financing sources; these two questions are present in the

questionnaire in Annex 8). The percentage is computed based on the micro-enterprise

population which perceive their turnover as better or much better between 2011 and 2013.

Among this population, only those which were unsuccessful in receiving short, medium or

long-term loans were taken into consideration. Following the same approach, there is no

small or medium-sized enterprise in this situation. As already mentioned, the difference

between these percentages illustrates the difference in access to finance between micro-

enterprises on the one hand and small/medium-sized companies on the other hand. The

absolute number of micro-enterprises is 689 for short-term loans.

Step 2: Computing the average short-term loan sought by a single micro-enterprise

This computation provides the average demand of short-term loans for micro-

enterprises. The average amount is EUR 31,964.

Step 3: Multiplying the average amount by the number of viable micro-enterprises

that were unsuccessful in obtaining loan finance

The formula is the following: 689*31,964 = 22,012,565141.

Step 4: Estimate of a reasonable range for the viable financing gap

Based on the calculation in step 3, a viable financing gap is obtained. In order to

take into account of the variation of the demand around this viable financing gap,

a variation of -5% and +5% is applied, giving a viable financing gap between

EUR 21m and EUR 23m.

The same approach is applied to the other category of SMEs and to medium and

long-term loans.

140 This percentage corresponds to the micro-enterprises that perceive their turnover as better or much better

between 2011 and 2013, who sought finance and were unsuccessful in obtaining short, medium or long-term

loans. The respective percentage for small and medium-sized enterprises is 0%. This illustrates again the

difference in access to finance for micro-enterprises and small/medium-sized companies. 141 The result of this calculation is EUR 22,023,196 but contains rounding errors and the actual result is EUR 22,012,565.

128

Financing gaps 8.2

The analysis in this section, based on the two methodologies described above,

presents the financing gaps computed according to the potential demand for

financial products as well as the viable financing gaps (VFGs) based on viable

demand.

a) Financing gaps for micro-enterprises

Micro-enterprises in Malta represent the vast majority of companies in the country.

On the one hand, commercial banks do not consider these companies as potential

clients unless their collateral requirements are met, on the other hand many micro-

enterprises can provide private collateral (owner’s assets and family and friends) to

access formal loan financing. The dominance of the banking sector excludes in this

sense micro-enterprises which are not able to provide sufficient collateral, which is

consolidated by the lack of specialised institutions such as microfinance providers

that could support these companies. The analysis also highlighted two important

points. One is that micro-enterprises could be discouraged from seeking bank

financing due to their lack of collateral but also due to their inexperience in dealing

with banks and their limited technical skills in applying for loans and presenting

business plans. The second point is that a third of micro-enterprises consider that

guarantees which are provided in Malta by JEREMIE and Malta Enterprise are

inaccessible to them. This has to be taken into account when designing FIs in the

future and especially guarantee instruments.

Financing gaps for microfinance

As mentioned previously, the microfinance market in Malta is practically non-

existent except for some initiatives more directed toward charity and support of

sensitive social groups and less toward business microfinance. The quantitative

estimate of the financing gap for microfinance presented in the table below is

based on potential demand from existing micro-enterprises in Malta.

Table 33: Potential financing gap for microfinance for micro-enterprises in 2014

Range of potential

demand (mEUR) Estimated supply (mEUR) Financing gap (mEUR)

Microfinance 109 - 121 1 108 - 120


This financing gap for 2014 based on potential demand from existing micro-

enterprises is estimated to range between EUR 109m and EUR 120m. This financing

gap arises mainly from:

• The difficulties that micro-enterprises (especially 0 employee companies)

experience when seeking financing from financial institutions, and especially

commercial banks;

129

• The fact that the microfinance market is very limited in Malta. This financing

product, if available, is implemented by commercial banks (BoV), but not by

specialist MFIs; and

• Microfinance products are not well identified by their potential beneficiaries

in the country.

Given the current estimated gap for microfinance, one can envisage that as supply

for microfinance is expected to increase over the coming years, awareness of these

financial products will also increase. In addition, the number of 0 employee

companies in Malta also tends to increase implying a potential increasing demand

of microfinance in the coming years.

Moreover, a need for microfinance for financial inclusion has been computed in the

previous section. This need is estimated at EUR 6m. It corresponds to the financing

amount of microfinance that would be needed by new business entrepreneurs who

currently face social exclusion and may be willing to launch a business if they were

better supported in their access to finance.

Table 34 below indicates the total financing gap for microfinance, including

microfinance needed for financial inclusion. It ranges between EUR 114m and

EUR 126m.


including financial inclusion



Financing gap for financial

inclusion (mEUR)


microfinance (mEUR)

Microfinance 108 - 120 6 114 - 126


Financing gaps for loans

Many micro-enterprises in Malta, especially start-ups, are experiencing problems in

accessing the banking system, which is nearly the only source of corporate funding

in the country. Access to mainstream banking products tends to be limited to those

micro-enterprises with a good credit history of the owner, larger turnovers and lower

levels of debt financing and sufficient equity invested according to banks’

standards. Micro-enterprises which cannot fulfil the bank’s requirements seek

financing from informal sources (family and friends) because they lack credit history,

lack collateral while not being aware of the existing Financial Instruments providing

guarantees and lack knowledge of banking procedures.

The quantitative estimate of the financing gaps based on potential demand for

micro-enterprises in Malta is summarised in the tables below.

130

Table 35: Potential financing gaps per financial product for micro-enterprises in 2014

Range of potential



overdrafts and credit lines 206 - 227 82 - 91 123 - 136

Medium and long-term loans 366 - 404 218 - 240 148 - 164

Total 572 - 632 300 - 331 272 - 300


These gaps are subject to the limitations described in the previous paragraphs but

they provide an indicative view of the total potential financing needs of micro-

enterprises in the country.

For 2014, the financing gap for short-term loans is between EUR 123m and EUR 136m

and is an indication of a need for working capital finance for micro-companies. The

quantification of these gaps seems consistent with the interviews carried out, since

stakeholders underlined the need for working capital financing for micro-enterprises.

Financing needs for investment are also highlighted by the financing gaps for long-

term loans for 2014 (where the financing gap ranges between EUR 148m to

EUR 164m). One should note that the financing gap for medium to long-term loans is

very similar to the financing gap for short-term loans indicating that the demand for

short-term loans is much higher than the supply when compared with the ratio of

demand and supply of medium to long-term loans. This further confirms the

importance of short-term financing for micro-enterprises, since this provides the

means to finance the day-to-day running of their business.

The demand analysis in Chapter 7 demonstrated that micro-enterprises may not be

trying to access the right kind of finance for their desired use. This should be an

indication that micro-enterprises would benefit from customised products in terms of

amount, maturity, and collateral requirements. The absence of specialised MFIs

enhances the shortcomings in loan products for micro-enterprises. With regard to

the heterogeneous nature of micro-enterprises, mainly with 0 employees, and start-

up micro-enterprises, a better supply of targeted products, such as microfinance

products, is a crucial success factor in closing the financial gaps since such micro-

enterprises currently rely heavily on informal sources and need support to cover their

funding needs.

Overall, micro-enterprises’ problems in accessing finance may also be explained by

their difficulties in defining their needs and formulating a clear business plan for the

future. This factor highlighted during interviews with financial institutions is probably

due to the lack of managerial skills that entrepreneurs have when launching their

activity. In order to cope with these challenges, business owners may need support

131

to define the most appropriate financing sources and products for their

development.

In order to provide a more targeted view of these gaps, the present report has also

calculated a gap range for the loan products (short-term loans, overdrafts and

credit lines, and medium and long-term loans) based on the viable demand as

described in Section 8.1. These gaps (VFGs) are presented in Table 36.

Table 36: Viable financing gaps for micro-enterprises concerning loan products in

2014

Range for viable financing gap (mEUR)

Short-term loans, bank overdrafts and credit line 21 - 23

Medium and long-term loans 37 - 41

Total 58 - 64


For 2014, the calculation has identified a VFG for short-term loans ranging between

EUR 21m and EUR 23m. For long-term loans, the VFG ranges between EUR 37m and

EUR 41m. The VFGs refer to financing needs of micro-enterprises, which are viable

but still have no access to finance. These companies should become a policy

priority for future public assistance, since by improving their access to finance this

would create a stronger business environment in the market and will also help

companies expand and develop in other markets locally or abroad.

For 2014, the total viable gap for loan products ranging between EUR 58m and

EUR 64m is an indication that the obstacles for the financing of micro-enterprises are

not only linked to the viability of the business plans but also to other constraints, such

as the lack of funding at the launch of the business, the lack of financial knowledge,

the lack of experience with and relation to financial institutions (often leading to

discouragement to seek finance) and the lack of collateral. The range of the viable

financing gap for total loan products (EUR 58m - EUR 64m) also seems to be

consistent with the gap identified for SMEs in Malta in the ex-ante assessment of the

EU SME Initiative142, which is between EUR 18m and EUR 61m. The VFG computed in

the present AFMA study is in line with the gap identified in the ex-ante assessment of

the EU SME Initiative since there is no viable financing gap for small and medium

sized enterprises, as detailed in the following section. Therefore, the total viable

financing gap is essentially the viable financing gap for micro-enterprises.

The total viable financing gap computation also illustrates a prudent and

conservative banking sector resulting from an overall attitude of the banking system


2013.

132

toward micro-enterprises and new regulations on banking risk management (mainly

resulting from the implementation of Basel II and III regulations).

In this context, the further development of guarantee products in the country

and/or funding products that would better incentivise the existing commercial

banking sector to support micro-enterprises would improve their access to bank

financing. It would also help to avoid the difficult period that micro-enterprises

experience when they need to invest and grow if they have no credit history and

lack relations with banks and experience with the banking sector in general.

Both potential financing gap and viable financing gap for micro-enterprises are

illustrated in the following figure for 2014 to show their relative size.

Figure 36: Potential financing gaps and viable financing gaps for micro-enterprises

for 2014


b) Financing gaps for small and medium-sized companies

Small enterprises represent a much smaller segment of the SME population than

micro-enterprises in Malta. The number of small companies has been slightly

increasing since 2009 signifying that companies are growing within the local market

pushed by the growth in GDP. According to the findings presented in previous

chapters, small companies have access to bank financing. They are perceived by

banks as clients of interest and have the experience and knowledge to apply for

loans. The majority of small enterprises indicated that they did not face obstacles

when seeking finance; however, some indicated that costs of financing and other

terms and conditions imposed by financial institutions are a growing cause of

concern to them. Moreover, as the majority of these companies are in a

development stage, their financing needs will be increasing in the coming years.

This has to be taken into account by policy makers, since the banking system will

always request collateral and it is not evident that existing assets will be sufficient for

small companies to implement their growth strategies.

133

Medium-sized enterprises represent an even smaller segment of the SME population.

Like other sizes of SMEs, medium-sized enterprises have favoured short-term loans to

medium and long-term loans over the past few years. However, they have faced

even fewer difficulties than small companies.

The quantitative estimate of the financing gap for small and medium-sized

companies based on potential demand in Malta is summarised in the table below

for 2014.

Table 37: Potential financing gaps per financial product for small and medium-sized

enterprises in 2014

Range of potential



overdrafts and credit lines 175 - 193 252 - 279 -

Medium and long-term loans 284 - 314 667 - 737 -

Total 459 - 507 919 - 1,016 -


According to the table above, financial institutions seem to be addressing the

demand for loan products from small and medium-sized enterprises since the supply

for both medium and long-term loans and short-term loans exceeds the demand in

2014.

This result is confirmed by the opinions expressed by the stakeholders interviewed

who believe that financial institutions appear to be meeting the demand for loan

products from small and medium sized enterprises. This observation is also reflected

through the literature review carried out143, which indicated that:

• Consolidated debt from non-financial corporations in Malta is estimated at

nearly 82% of GDP, which is higher than the EU-28 average (69.4%);

• Maltese enterprises tend to have large proportions of debt in their balance

sheets compared with equity (high levels of gearing);

• Eurostat states that persons in Malta own more immovable property (82%) as

in other Member States (70% EU-27 average), which is the most used form of

collateral according to the survey conducted for this study; and

• The SBA Fact sheet states that the percentage of rejected loan applications

and unacceptable loan offers in 2011 was 0% in Malta as compared to the

EU average of 15%.

These points confirm that financial institutions generally meet the demand for loan

products and as many stakeholder confirmed, banks in Malta have excess liquidity

143 See Annex 4 for a detailed presentation of the market environment en Malta.

134

making it easy to finance enterprises, especially when it comes to companies

having previous credit history and a good relationship with the banks.

For 2014, the calculation reveals that there are no viable gaps for short-term and

medium to long-term loans. This is because no small or medium sized company,

which experienced an improvement in turnover, indicated that they were

unsuccessful in obtaining loan financing for either short-term or medium to long-term

loans (as indicated by the SAFE survey).

However, the lack of gaps can be misleading. Indeed, the banking system focuses

on small and medium-size enterprises, because they have assets and are more

suitable clients than micro-enterprises; however, the dominance of the banking

system that appears as the only financing source for SMEs has to be considered as

an important market failure. As already mentioned, the limited choice of financing

products, and the complete lack of equity financing or mezzanine financing, causes

SMEs to collateralise their assets and damage their balance sheets. Moreover, the

complete dependency on banking financing makes the market sensitive to external

shocks related to the banking environment, as was experienced in other EU

countries.

This dependency on the banking system may also prevent micro-enterprises in areas

of activities were tangible assets are not required, from growing. Micro-enterprises

that are not asset-based and cannot provide collateral are consequently excluded

from banking finance. This situation is even more emphasised by the lack of

alternative financing sources for the developing micro-enterprises. The

characteristics of this market failure may not be quantified in a financing gap. The

smaller percentage of small enterprises among all SMEs in Malta in comparison with

the EU average is however a strong indication for it.

In addition to these weaknesses of the Maltese banking sector, small and medium-

sized enterprises have also limited knowledge and awareness of existing FIs which

could support them in reducing costs and probably allow them to secure funds

without tying up their assets. This is despite the experience with banks that small and

medium-sized enterprises may have acquired over the years.

It also has to be noted that, those companies that have assets and are perceived

as attractive clients by commercial banks, are often encouraged by banks to

receive higher amounts than the ones initially applied for. Although qualitative

information is not provided by the survey to support this argument, the market

experience in Malta reveals this reality. Overall, the reliance of business owners and

entrepreneurs on assets that can be collateralised is an important market failure

since it limits business activity to specific social groups or redirects business activities

toward asset based types of companies with the danger of excluding non-asset

based enterprises from the financial market.

135

c) Financing gap for equity financing

The analysis conducted in Chapter 7 revealed that the investment funds present in

Malta do not invest locally and that the overall equity financing market in the

country is weak. This is despite a perception of the banks that Maltese SMEs are

under-capitalised. In the meantime, most of SMEs in Malta do not know the

functioning of an equity market and do not tend to seek equity financing and/or do

not perceive a need to strengthen the equity structure of their company. The need

for equity financing expressed by SMEs in the online survey result from the most

structured companies and those having the stronger history with finance providers.

That is why the potential gaps for equity financing illustrated in the table below

needs to be considered with caution. When a financing gap exists for equity

financing in Malta, it results from a lack of investors willing to invest in the country

and a lack of knowledge and habit from SMEs of all sizes to seek equity financing.

This financing gap is consequently mainly indicative and illustrates the extent to

which the equity market in Malta requires better structuring. It also indicates the

SMEs’ expectations for stronger support from business clusters and investors to help

them define and implement their growth strategies for the future.

Table 38 below provides the quantitative estimate of the financing gap for equity

financing in Malta. Following the analysis conducted in the present AFMA study, this

gap may be considered as the potential demand for equity financing expressed by

SMEs in the country.


Range of potential


Equity financing 35 - 174 - 35 - 174


The potential financing gap for equity financing illustrated in the table above is

mostly an indication that the equity market needs to be more developed in Malta.

The development needs to be twofold: of the volume supplied and of the products

offered as the demand figure above comprises many different individually

demanded amounts which cannot be all addressed by the same equity product.

This would require a public intervention that would increase investor confidence

and trust in the local market.

Access to finance from large companies in Malta 8.3

Large companies represent only 0.15% of all companies in the market. These

companies have an easier access to banking finance and an alternative financing

136

source namely the stock market 144 . Following a request from the MA, large

companies were included in the analysis which is presented in the section below.

a) Supply of financing for large companies

As highlighted in Section 7.2 and in Table 39 below, new loans to all companies in

Malta amounted to EUR 1.2bn in 2011, increasing to EUR 1.3bn in 2013. In 2014, the

estimated amount of total new loans is expected to amount to EUR 1.7bn, based on

actual figures until May 2014.

Table 39: New loans to all non-financial corporate entities with the year-on-year

change

Loan Type 2011 (mEUR) 2012 (mEUR) 2013 (mEUR) 2014 (e)145

(mEUR)

Short-term (up to 1 year) 331 388 361 454

y-o-y % - 17% -7% 26%

Medium/Long-term (more than 1 year) 879 1,044 955 1,199

y-o-y % - 19% -9% 26%

Total 1,210 I,432 1,316 1,653


No data is available for new loans provided exclusively to large companies in Malta.

In order to consider the amount of new loans issued to large companies,

assumptions on the percentage of new loans to large companies of total loans

were made based on information available on outstanding loans. CBM data

revealed that even though large companies in Malta represent only 0.1% of total

active companies, approximately 22% of the total value of outstanding loans of

non-financial corporations resident in Malta arises from short-term and medium to

long-term loans to large companies.

Once the supply of bank loans to large companies was defined, data for the supply

of loans was categorised into short-term loans (maturity < 1 year) and medium/long-

term loans (maturity > 1 year) using the ratio of 27 / 73, as defined previously in

Section 7.1. This split was determined based on public available information issued

by the Central Bank of Malta on outstanding loans to non-financial corporations.

Table 40 below provides the estimates of the supply of short-term and medium to

long-term loans to large companies based on the abovementioned data and

assumptions.

144 As of 2014, there were approximately 10 large companies listed on the Malta Stock Exchange. 145 Estimates for 2014 are based on actual data until May 2014 and were pro-rated to project figures until year end.

137

Table 40: Estimate of loan disbursements to large companies

Financial product 2011 (mEUR) 2012 (mEUR) 2013 (mEUR) 2014 (e) (mEUR)

Total 295 321 271 352 - 389

Short-term loans 81 88 75 97 - 107

Medium and long-term loans 214 233 197 255 - 282


Stakeholders in the banking sector indicated that the supply of short and long-term

financing to large enterprises is not perceived to be an issue as for smaller

enterprises since large enterprises would typically have stronger and more enduring

business relationships with commercial banks.

Apart from bank financing, large companies also have easier access to alternative

financing avenues, such as the issue of corporate bonds on the local stock market.

Larger enterprises would typically attract stronger investment from the market, given

their size and reputation. In fact over the years, bond issues have become more

popular among large companies as a means of financing large real estate projects.

Large companies are also eligible to apply for funding under a number of grant

schemes and Financial Instruments available through both EU and national funding.

Clearly large companies are well positioned to use their resources, knowledge and

expertise to tap such funding.

b) Demand for financing from large enterprises

Since the business environment in Malta is restricted and the size of most local

enterprises and the scale of their operations is much smaller than that of enterprises

in other EU Member States, the views of large companies (companies employing

250 persons or more) on access to finance were also obtained via the online survey.

10 companies provided their views, which means that numerical results need to be

treated with caution, but it does represent ca. 18% of the population of large

enterprises.

Large enterprises represented 0.15% of the total companies in Malta in 2012. The

number of large enterprises increased between 2009 and 2010 by 3.6% and

remained stable in 2011, increasing by a further 5.2% in 2012. Therefore large

enterprises increased year on year by 2.9%.

138

Table 41: Number of large enterprises in Malta

Number of

companies

2009 2010 2011 2012

Number of

companies

% of total

companies

in Malta

Number of

companies

% of total

companies

in Malta

Change

over

2009-2010

Number of

companies

% of total

companies

in Malta

Change

over

2010-2011

Number of

companies

% of total

companies

in Malta

Change

over

2011-2012

Total

companies

in Malta

41,966 42,665 1.7% 42,189 -1.1% 40,634 -3.7%

Total large

enterprises 56 0.13% 58 0.14% 3.6% 58 0.14% 0.0% 61 0.15% 5.2%

Source: National Statistics Office Malta, PwC analysis.

In order to identify if there were any problems among large enterprises regarding

the accessibility of financing in Malta, a survey was distributed to 25 large

companies. Ten respondents completed the survey thus representing 16.7% of the

total large enterprise population in Malta.

Figure 37 shows that 60% of all respondents, believe that their business is in a maturity

stage. The survey also revealed that around 20% of respondents see their business in

the development stage, indicating that they expect growth within their company

while another 20% see their company to be in the reorganisation stage of its

lifecycle.

Figure 37: Development stages of large enterprises in Malta146

Source: PwC, online survey among Maltese large enterprises, 2014.

Analysing the most-used sources of finance, Figure 38 highlights the extent to which

large companies depend on short-term and long-term financing sought from

banking institutions (60% for each type of financing), as well as loans obtained from

their parent company and financing through retained earnings.

The survey further queried on the perception of sufficient access to finance for

different products. 78% of large enterprises stated to have sufficient access to short-

146 The number of large enterprises that provided an answer: 10.

139

term loans, bank overdrafts and credit facilities and medium to long-term loans147.

Two third of respondents also felt there is sufficient access to loans obtained from

their parent company148. On the other hand, one third of large companies feel that

there is a lack of access to public grants and external capital contributions149. The

least relevant forms of financing to large enterprises included several forms of equity

financing such as, technology transfer funds, investment funds, Venture Capital,

Business Angels, equity from national or foreign institutions and buyout capital.

Figure 38: Sources of funding used by large enterprises between 2011 and 2013150


Half of the large enterprises stated that they did not experience any difficulties when

seeking financing. Large companies identified the financial situation of their business

(40% of respondents) as the major obstacle in accessing finance. One fifth of the

respondents also feel that there is a lack of willingness from banks to provide them

with financing and believe that their debt / turnover ratio is another reason why they

find difficulty when seeking financing. This observation is line with higher debt ratios

in comparison to the EU average.

147 The number of large enterprises that provided an answer: 9. 148 Ibid. 149 Ibid. 150 The number of large enterprises that provided an answer: 10.

140

Figure 39: Reasons explaining difficulties of large enterprises in accessing finance151


When focusing on debt financing, 58% of large enterprises did not experience any

difficulties in obtaining loans or did not request any. For those companies facing

problems, the most serious barrier related to their existing debts (17% of respondents

faced such a difficulty) meaning that these companies are typically highly geared.

When asked about collateral provided for loan financing, 67% of respondents used

company assets indicating that these companies have much more security to offer

compared with SMEs. However, it is interesting to note that 17% of respondents

stated they used the owners’ assets as collateral, indicating that even large

companies might not have enough collateral from business assets to satisfy the

bank’s requirements for providing security.

Figure 40: Obstacles to loan financing reported by large enterprises152


151 Ibid. 152 The number of large enterprises that provided an answer: 10.

141

Large companies were also asked to identify for what reason they sought financing.

Figure 41 below illustrates that, similarly to SMEs, large companies tend to use the

financing for diverse purposes. Of all the purposes stated for using finance, more

than one third was working capital and nearly 16% was launching a new product or

service. Approximately 11% of times, the financing was used to develop activities in

new markets, including international markets. R&D, innovation and improvement of

energy efficiency accounted for only a small proportion of destinations of financing:

5.3% between 2011 and 2013. 21.1% of needs financed were other needs such as

the acquisition of machinery and equipment, rent or purchase land and buildings.

Figure 41: Use of funding by large enterprises over 2011-2013153


Large enterprises plan to seek similar financial products in 2014 as indicated in Figure

42, especially short-term loans, bank overdrafts and credit lines (43%) and medium

and long-term loans (43%). 29% of respondents indicated they will be seeking

leasing products, which may be used to finance the hire of machinery and other

equipment or vehicles used by the company. No large company intends to finance

its operations through equity financing other than one respondent who indicated

that the company will be seeking financing from private investors.

153 The number of large enterprises that provided an answer: 10.

142

Figure 42: Expected sources of funding in 2014 indicated by large enterprises154


c) Conclusions for large companies

Overall, large companies in Malta do not face any difficulty with access to finance.

Results from the online survey indicated that only 11% of the respondents stated to

have insufficient access to short-term loans, bank overdrafts and credit facilities and

medium to long-term loans155.

Large companies in Malta can be categorised into three broad groups. The first

category of large companies includes export-oriented manufacturing companies.

These mainly consist of subsidiaries of foreign-owned companies, which set up

subsidies in Malta in the 1970s to benefit from certain advantages such as low

labour and operational costs and an English-speaking skilled workforce. These

companies do not experience many difficulties in accessing funding since such

decisions are made at group level and financing is usually obtained from the parent

company. In fact, it transpired that 50% of large companies in the online survey

sought funding in the form of loans from the parent company156.

Another category of large companies could be classified as that including family-

owned businesses, which, at holding level are considered large and are three to

four generations old. Such companies generally have very strong relationships with

local commercial banks therefore are more likely to obtain financing. In addition,

these companies have easier access to equity markets because of their size. Some

154 The number of large enterprises that provided an answer: 7. 155 The number of large enterprises that provided an answer: 9. 156 The number of large enterprises that provided an answer: 10.

143

are listed on the Malta Stock Exchange and many trade corporate bonds on the

same Stock Exchange. On the other hand, regulatory capital requirements for credit

and financial institutions, currently being implemented across the EU, may end up

also restricting access to finance for large companies.

Over the last two years it has become increasingly difficult to fund large projects,

especially those related to real estate activities. The third category of large

companies in Malta includes construction companies, which currently have

problems with funding as a result of the stagnation of the construction and real

estate market in Malta. In fact, the 11% of respondents who stated they do not have

access to short, medium and long-term loans were engaged in the construction

industry. As identified in Chapter 4, the construction and real estate sectors

contributed to almost 50% of the rise in non-performing loans as a result of

overvalued properties, low levels of sales and the oversupply of real estate.

Conclusions and main findings 8.4

The objective of the analysis conducted in the present study was to identify the

main characteristics of SMEs’ access to finance in Malta, to draw a picture of the

current situation, identify the major constraints and analyse any existing financing

gaps. In this framework, the overall objective has been to consider market failures,

suboptimal investment situations and financing needs in the SME sector. The goal of

this analysis is to contribute to the formulation of an investment strategy for Financial

Instruments for SME financing that would use the European Structural and

Investment Funds, and more specifically ERDF resources157. This analysis also draws

from the experience of the current use of the Financial Instruments already in place

in Malta.

The analysis conducted in the present study revealed that the Maltese economy

remained resilient during the crisis and that SMEs have largely contributed to this

resilience. This resilience is also mainly attributable to the strength of the domestic

banking system, the intervention of Government, which provided temporary

assistance to companies engaged in the manufacturing and tourism sectors (these

industries were mostly impacted by the financial crisis in Malta). It has to be noted

however that this resilience also derives from the fact that the Maltese economy

and especially SMEs do not have a tradition of exporting activities and thus are

more protected from shocks in the external environment.

In the current environment, characterised by reduced availability of credit and

tighter lending standards, the financing needs of SMEs, especially micro-enterprises,

157 Financial Instruments are one of the solutions to reduce the identified financing gaps and need to be

considered in a complementary manner with other financing tools, such as grants. The latter may be of

particular interest for instance in the case of R&D financing or financing support to financial intermediaries or

final beneficiaries for capacity building.

144

have to be given specific attention. The tightening of credit standards across the EU

has impacted SMEs in all Member States; however, Maltese SMEs were impacted to

a lesser extent. This is mostly related to the fact that banking financing is only

available to those SMEs with sufficient assets while other companies have learned to

rely on informal sources of financing. It is important to mention that while lending to

SMEs decreased in 2013158 during the first 6 month lending increased substantially

and is expected to continue during the next month.

SMEs represent almost the entire population of enterprises in Malta (99.8%). They also

account for 78.6% of the total national employment. Among the total population of

SMEs, 95.1% are micro-enterprises. These micro-enterprises represent 32.3% of the

overall employment which is above the EU average. Meanwhile, the numbers of

SMEs tend to remain stable while the number of 0 employee companies is in

constant increase since 2009. According to these trends, SMEs in Malta seem to be

adapting to their environment irrespective of whether they have access to the

banking system or not. Micro-enterprises are the companies that face the main

difficulties accessing finance due to their lack of collateral, credit history and

technical expertise in seeking and negotiating with financial institutions. Many

micro-enterprise owners consequently have to rely on informal sources for collateral

or also financing. Larger companies do not encounter particular difficulties to

receive financing.

The analysis also highlighted the public Financial Instruments that have contributed,

and keep contributing, to the improvement of SMEs’ access to finance in Malta.

These Financial Instruments only partially cover the scope of current SMEs’ needs

and allow room for improvement. There seems to be a focus on guarantees which

are very relevant to the needs of SMEs but the awareness of their existence is still

limited and their visibility needs to be enhanced. The analysis also highlighted that

networks and relationships between actors in the country need to be set up and/or

strengthened so as to propose a more efficient and comprehensive support grid to

SMEs. These networks are meant to communicate and inform existing and newly

created SMEs about the existing financing products available and the Financial

Instruments at their disposal in Malta. However, the information is not always clearly

diffused among SMEs.

Overall, the existing Financial Instruments supported by public interventions have

positively impacted the financing conditions and environment of the national

market thanks to the development and promotion of guarantee products and

loans.

The present study concludes that the positive impact of existing Financial

Instruments could be increased with the use of ESI Funds into existing or new

158 CBM Annual Report, 2013.

145

Financial Instruments. This use would enable the development of financing products

currently not available to SMEs, such as microfinance products, and support the

structuring of an equity market that would invest in local SMEs in view of supporting

their development and favouring innovation.

The following paragraphs summarise the findings and conclusions per financial

product, lessons learned from prior use of Financial Instruments and present

recommendations for the formulation of a future investment strategy.

a) Microfinance

Demand for microfinance covers both existing SMEs and people currently

unemployed and/or at risk of poverty who see themselves as potential business

creators if their access to finance was facilitated (financial inclusion).

In the case of Malta, the potential financing gap for microfinance for existing micro-

enterprises in 2014 ranges between EUR 108m and EUR 120m. Concerning

microfinance for financial inclusion, a gap has been estimated of EUR 6m.

On this basis, a total financing gap for microfinance may be considered between

EUR 114m and EUR 126m. As already mentioned, the microfinance financing gap

may be explained by the lack of a supply market and the unclear definition of

microfinance for micro-enterprises, despite there being a clear need for short-term

financing for these companies and financing support for business creation.


including financial inclusion



Financing gap for

financial inclusion (mEUR)


microfinance (mEUR)

Microfinance 108 - 120 6 114 - 126


b) Short-term loans, overdrafts and credit lines

SMEs of all sizes have needs for working capital financing in Malta. On the supply

side, the analysis has highlighted that commercial banks do not face liquidity issues

but still apply higher than average interest rates on SME loans. These higher interest

rates illustrate a conservative approach toward financing SMEs of commercial

banks. According to the stakeholders interviewed most of Maltese SMEs are under-

capitalised when compared to their EU counter-parts.

On the demand side, the analysis indicates that SMEs give particular prominence to

the availability of working capital to manage their day-to-day business activities.

146

The study reveals viable financing gaps for short-term loans for micro-enterprises, but

not for small and medium-sized companies, as illustrated in the table below.

Table 43: Viable financing gaps for short-term loans, overdrafts and credit lines in

2014


for micro-enterprises

(mEUR)



enterprises (mEUR)


for SMEs (mEUR)


overdrafts and credit lines 21 - 23 - 21 - 23


VFGs indicated in the table above indicate that the financing market falls short

when it comes to assisting micro-enterprises. This is mainly because micro-enterprises

pose higher risks. Stakeholder interviews indicated that over the past few years very

few business start-ups were approaching banks for financing and preferred seeking

financing from more informal sources and often start their activities under-

capitalised. It appears that commercial banks are catering for larger SMEs and

many of their clients are well-established, have credit history and can provide

collateral.

c) Medium and long-term loans

All sizes of SMEs use medium and long-term debt financing in Malta. These loans are

sought to finance investment and business expansion and are crucial for the

enterprises’ future development and sustainability. In the short run, micro, small and

medium-sized companies intend to continue investing in their equipment and

machinery as well as launch new activities.

Viable financing gaps were calculated and are presented in the table below.

Table 44: Viable financing gaps for medium and long-term loans in 2014





enterprises (mEUR)


for SMEs (mEUR)

Medium and long-

term loans 37 - 41 - 37 - 41


Table 44 presents a viable financing gap for medium and long-term debt. As is the

case for short-term loans, one notes that the VFG arises mainly from the reluctance

of the banking sector to support micro-enterprises. Likewise, demand side

constraints primarily concern micro-enterprises, which have difficulties to meet the

collateral requirements and also find it complicated to apply for loan financing.

Bridging this gap would foster investment and job creation in Malta.

147

d) Equity

The financing gap for equity financing in Malta results from the lack of local

investment from investment funds located in the country and from the lack of

knowledge of the smaller SMEs of the functioning and purposes of equity financing.

A potential financing gap was calculated for equity financing for all SMEs in Malta,

and needs to be taken indicative only for reasons explained previously. The table

below presents the financing gap for 2014.


Financing gap for equity financing (mEUR)

Equity financing 35 - 174


The analysis conducted in the present AFMA study highlighted that equity financing

should be considered as key for the support of SMEs in their future access to finance

in view of supporting their growth strategies. However, in the design of any FI,

consideration needs to be given to the presence of a sufficient critical mass in

demand from specific targets for equity investment, their attractiveness to private

investors and the ability of the financial intermediary to leverage existing networks

and stakeholders (incubators, Chamber of Commerce) to facilitate matchmaking

and provide mentoring and support to SMEs in the country. Especially the last point

has to be highlighted as a growing equity market does not solely depend on

sufficient supply, but on an adequate equity environment – particularly given

previous attempts which have created only limited impact in the market.

e) Lessons learned from the use of FIs in Malta

Malta has a limited experience in the use of FIs and as a result also SMEs have a low

awareness of the benefits of FIs. Even though legislation regulating the provision of

FIs by the State has been in place since the 1990s FIs have only been used in in

recent years. The EU-funded JEREMIE guarantee Financial Instrument became

available in Malta in 2011 and in 2013 another guarantee instrument, the Guarantee

Facility under the CIP (supporting the BoV Start Plus loan product) was also

introduced. The JEREMIE initiative has proven to be successful as it was well

marketed and appropriately targeted at different sectors. Also it is important to note

that despite the limited experience of micro-enterprises with the banking system,

they received the majority of guarantees, thus generating genuine additionality.

Throughout the AFMA report, the existing FIs are analysed and lessons learnt are

being highlighted through information provided by interviews and desk research. A

summary of lessons learnt from the use of FIs is provided below:

148

• The JEREMIE initiative in Malta provided funding assistance to a number of

SMEs in various sectors. Sectors dominating Malta’s economy such as

wholesale and retail, accommodation and food service activities and the

manufacturing industry accounted for 67% of the total sanctioned amount of

loans159.

• The financial intermediary BoV allocated substantial resources to ensure the

successful implementation of the guarantee scheme and the achievement

of the agreed targets. The financial intermediary also brought in a good

knowledge of the SME lending market and targeted industries and was

equipped with a good understanding of EU rules. In fact, BoV making use of

JASMINE and using Technical Assistance to maximise its success, can be seen

as a good practice example of how technical assistance supports

intermediaries in branching out into new Financial Instruments/markets.

• In addition, with the help of the EU Research department, the financial

intermediary made various efforts to implement its communication strategy.

This involved the organisation of over 40 information sessions with SMEs and

stakeholders, the printing of brochures, several one-to-one meetings, phone

enquiries, billboards and television adverts which enabled them to reach

many SMEs160.

• A number of EU funded Financial Instruments (JEREMIE, JASMINE and CIP)

were implemented through a single financial intermediary, which has its

disadvantages. Since Maltese entrepreneurs like to retain the relationship with

a particular bank or bank manager, the need to switch banks may have

been an obstacle to being able to benefit from the JEREMIE initiative. With

more than one financial intermediary offering funds to SMEs there could have

been a greater outreach to SMEs across Malta and Gozo. Given experience

in the JEREMIE Call for Expression of Interest, other good quality institutions

may be willing to engage with FIs.

• The use of many intermediaries, especially concerning guarantee schemes

has proved elsewhere to increase awareness for the use of FIs and the

competition between the intermediaries often improves the overall lending

conditions for SMEs. Nevertheless, the unsuccessful cooperation of Malta

Enterprise and the European Commission's Multiannual Programme for

Enterprise has to be taken into account when designing new schemes.

159 Bank of Valletta presentation – The JEREMIE Initiative in Malta. 160 Research paper – JEREMIE – Joint European Resources for Micro to Medium Enterprises.

149

• The current JEREMIE initiative focuses mainly on capital investment and does

not provide for working capital loans. The most popular financing product

among SMEs in Malta is the use of short-term loans and overdrafts to finance

their working capital needs. In fact the BOV Start Plus loan product, which

benefits from a more recent guarantee programme undertaken by BOV and

financed through the CIP, supports capital investment and working capital

directly related to a capital investment project. This initiative is however only

available to start-up micro-enterprises and is not available to established

SMEs.

• Equity financing in Malta is almost non-existent. Despite the substantial inflow

of FDI in the country and despite the fact that a number of initiatives were

introduced to try boost the equity funding culture, these have not been able

to motivate private investors to support SMEs in Malta.

• The concept of microfinance in Malta is non-existent. This is due to the lack of

microfinance institutions. As a result, there is a perception in the market that

microfinance is similar to microcredit provided by banks, which tend to be

standard bank loans and not necessarily capped at EUR 25,000. Any new

microfinance initiative should ensure that the distinction is clearly articulated.

• A lack of training and technical skills of entrepreneurs and employees in

general has also been identified, causing concerns about the level of

technical knowledge that these new business owners will have. While some

FIs in access to finance are being implemented, none to date have been

used for training and mentoring purposes in order to support more technical

aspects of running a business like creating a business plan, or applying and

negotiating with financial institutions.

Below, a non-exhaustive SWOT analysis (Strengths, Weaknesses, Opportunities and

Threats) is provided regarding access to finance for SMEs as a general overview

leading to the recommendations provided in the next section.

150

Table 46: SWOT analysis regarding access to financing for SMEs in Malta

Strengths Weaknesses Opportunities Threats

Commercial

banks

Strong presence of

commercial banks

in the country

Liquidity and

solvency are well

above current

regulatory

requirements

Well diversified asset

holding

Reliance on

domestic financing

avoiding exposure

to external shocks

on financial markets

Conservative approach toward

SMEs and especially micro-

enterprises.

Relatively high interest rates

Stable economic

outlook for the

future161

Increasing use of

FIs

New programming

period providing

new opportunities

for the use of FIs

through banks

Instability of the financial system

in Europe

Rising levels of NPLs mainly in the

construction and real estate

sectors

Overreliance on real estate

market

The implementation of the new

CRD IV/CRR Framework (Basel

III) (limitations to support SMEs)

Even for banks with large

market share, the total scope of

SME finance needs may not

provide sufficient critical mass

for some instruments.

Poor credit history among SMEs

and especially micro-enterprises

High indebtedness of those

SMEs that have access to

finance

Lack of technical skills of

business owners to apply for

banking products and present

business plans

Saturated economy. Further

economic development highly

dependent on SMEs’ ability to

engage in export activities

161 Eurostat European Economic Forecast Spring 2014.

151


Equity

investors

Strong regulatory

framework within

the financial

services sector

Strong presence of

investment fund

managers,

administrators and

other professional

services firms,

although they are

not focused on VC

Negligible presence of venture

capital and Business Angel

networks in Malta

Size and nature of the local

market is not conducive to

attracting an adequate deal

flow for VC

No interest from investment

funds domiciled in Malta in

investing locally

Illiquid stock market

The Alternative List

market where

companies can

have limited

trading history

The new

programming

period and

opportunities for

introducing FIs

related to equity

investors

Momentum

associated with

the creation of

TAKEOFF +

Microsoft

Innovation

Centre+ BioMalta

Life Sciences Park

Limited technical skills of SME

owners to interact with equity

funds

Many SMEs are family owned

and by nature averse to

external equity investors

Low level of innovation in the

country

Limited technical skills of

investors for dealing with

Maltese SMEs.

Financial

Instruments

Success of JEREMIE

Malta Enterprise has

a track record in

designing recycling

forms of financing

Low awareness of FIs among

SMEs

Negligible FIs for non-bankable

SMEs

Publicly funded FIs limited to a

single financial intermediary

Poor diversity of FIs. Existing FIs

adapted to the banking sector

New EU regulation

promoting the use

of FIs

Willingness of the

country to

promote the use of

FIs

Continued

exploitation of BOV

Start Plus for micro-

enterprises

Strong banking

sector


owners and knowledge to apply

for such instruments

No interest by equity investors to

invest locally

Non-existence of microfinance

institutions

Confusing perception of

microfinance in the market

Lack of technical skills of

business owners to apply for

financing products and present

business plans

152


SMEs Resilience of SMEs

during the crisis

SME sector

expanded over the

past five years in

number of firms and

employees162

Relatively high

success rates in

obtaining finance


owners

Weak credit history

Weak export tradition in the

country

Lack of customised FIs (to

different SME sizes, different

development stages and

various needs)

High indebtedness of

companies those companies

that have access to finance

New EU regulation

promoting the use

of FIs

New programming

period

Scarcity of skilled labour force in

certain sectors

Decline in SME investment

appetite over the last couple of

years

Lack of interest from equity

investors in the local market

162 SBA Fact Sheet Malta, 2013.

153

Recommendations 8.5

The use of Financial Instruments is relatively recent in Malta. In recent years some

initiatives to implement FIs and support business enterprises through loan guarantees

and direct loans have been introduced, primarily though Malta Enterprise and

JEREMIE.

However, the specific nature of the Maltese economy and more specifically the

dominance of the banking sector have created some limitations to the use of FIs

that need to be overcome.

As an EU member state, Malta has for a number of years been benefiting from

various EU funding programmes, particularly grants. The launch of the JEREMIE

guarantee instrument in 2011 provided another dimension towards how EU funds

could be used to support SMEs in Malta. Given the take-up to date, JEREMIE has

been a relative success in Malta and is considered to be a best practice example

amongst other member state regions. In going forward, the challenge for Malta will

be to understand how EU and national funds can be combined to foster further

support for SMEs through the use of FIs. The diversification of FIs beyond guarantees,

the involvement of more intermediaries, and the launch of instruments in fields that

are still non-existent in the country such as microfinance and equity have to be

investigated.

The key recommendations from the analysis conducted in the present AFMA report

are detailed below:

a. Support and expand the implementation of JEREMIE or similar instruments.

The implementation of the JEREMIE guarantee instrument during the 2007-2013

programming period was successful and demand for the product will continue. It

stands to reason that this instrument should be further supported during the

upcoming EU programming period.

The Managing Authority should consider expanding, the allocation of EU funds

for the next programming period towards this instrument, given that the new

instrument would span the full duration of the programming period. The JEREMIE

initiative could also implement other instruments in the forms of risk sharing

facilities and equity instruments, subject to further investigation and the

prerequisites mentioned in Recommendation e). Especially the latter could

motivate investors, help generate demand and help build an equity ecosystem

over time, although the small size Maltese business base will continue to be a

limiting factor. Within JEREMIE, there could be more need specific instruments

rather than the generic guarantee instrument offered today. Such instruments

would cater for specific needs of specific companies like start-up or micro-

enterprises and would increase awareness of the use of FIs but increase the

154

perception that FIs are relevant to all SMES and not only those that already have

access to finance.

In implementing JEREMIE instruments going forward, it is also important to

consider appointing more than one financial intermediary, recognising that a

certain critical mass will be required for each, particularly for low-leverage

instruments such as risk sharing loans or equity. This approach is likely to allow a

much deeper penetration amongst SMEs who may have been reluctant in the

previous period to consider JEREMIE, given their existing banking customer

relationship.

b. Consider developing specific guarantee instruments or complementing the

existing instruments to facilitate access to short-term debt for working capital

purposes and long-term debt for investment purposes.

The analysis conducted for the present report has revealed that financing gaps

exist for short-term and medium and long-term loans for micro-enterprises.

Moreover it was established that an increasing need for working capital

financing is appearing in the market. The main barrier for the access to debt

financing for SMEs, especially micro-enterprises, is related to the collateral

requirements imposed by commercial banks locally. The analysis for this study

has identified that micro-companies have a greater need to seek funding

especially for financing working capital. Taking into account the lack of

microfinance institutions in the country, Financial Instruments in the form of

guarantees and other risk-mitigation products to support micro-enterprises

without collateral could be developed or could complement existing guarantee

products.

c. Consider the introduction of a risk sharing loan facility.

Besides the need for guarantee schemes and collateral support, Maltese SMEs

could also benefit from a Financial Instrument which would target a reduction in

the cost of lending. It was highlighted in the analysis that interest rates, including

bank charges and fees in Malta are high thus affecting the overall cost of

financing. With the introduction of a risk sharing loan facility, for example, SMEs

and especially small and medium-sized companies willing to expand, could

benefit from reduced interest rates.

However, when designing and implementing FIs, several factors have to be

taken into account, such as, the leverage effect and the capacity of the market

to benefit from these FIs. In the case of Malta, the priority should be put on

guarantees which are mostly needed by SMEs and have a higher leverage

effect.

d. Support the provision of microfinance for existing and potential entrepreneurs.

As underlined in the analysis, micro-enterprises are exposed to excessive interest

rates and bank charges and often rely on personal assets, such as their personal

155

properties, as collateral. The promotion of a microfinance facility provided by a

non-banking institution, to support existing and potential entrepreneurs should be

considered. In lack of such a specialised institution, the provision of (collateral-

free) microfinance through a risk sharing scheme with commercial banks could

also be considered.

e. Create the conditions for the development of an environment that will support

equity financing and an active Business Angel community.

The equity market and business angel environment in Malta have a very weak

presence. Early-stage investments in the technology and knowledge-based

sectors in Malta are scarcely financed. The investment gap is particularly

apparent for companies in their start-up phase, where risk and uncertainty are at

their highest.

A Financial Instrument could be used to cultivate a new business mentality and

raise awareness among SMEs on the benefits of equity financing. Experience in

other countries has shown that equity investments in SMEs through public

assistance schemes tend to attract private investors and Business Angels. With

the creation of a co-investment fund acting as a lead investor, for example,

private investors could be encouraged to invest in companies, especially

technology and knowledge-based start-up companies, and such a fund could

ultimately encourage the creation of an organised private investment

community in Malta. This type of funding structure will also become more

relevant in the near future once the BioMalta Life Sciences Park (which is co-

funded by ERDF funds) is completed and research and development activities

commence.

However, in the design of any FI, priority should be given to develop an

adequate business environment as an efficient equity market does not solely

depend on sufficient supply – particularly given previous attempts in Malta which

have created only limited impact in the market. An experienced approach

combing knowledge and reputation of JEREMIE might create the necessary

synergies and confidence among stakeholders to develop the equity market.

f. Consider an appropriate combination of grants and FIs for investment purposes

or mentoring and training support to SMEs.

Malta has implemented several grant programmes in recent years that have

proved successful. A combination of grants and FIs for investment purposes

could help SMEs complement their financing with banking loans and facilitate

the implementation of their business plans. A combination of grants and FIs could

also be envisaged in initiatives to mentor SME owners. It has been mentioned in

the analysis that SMEs do not have experience in negotiating with financial

institutions and in preparing business plans. Mentoring initiatives would support

SMEs in applying to banks but also to grant programmes. When setting up such

initiatives it is vital to keep the balance between tailoring them to the needs of

156

SMEs and maintaining a scope sufficiently broad to ensure a reasonable take-

up. As illustrated by several unsuccessful grant schemes in the programming

period 2007-2013 (e.g. on vocational training of farmers or development of new

farming products), too specific a programme, however well-meaning, may be

inefficient, with only a handful (if any) SMEs using it.

157

Annexes

158

Annex 1 – Article 37 (2 and 3) of the Common Provisions

Regulation n°1303/2013 adopted on 17 December 2013163

2.

Support of Financial Instruments shall be based on an ex-ante assessment which has

established evidence of market failures or sub-optimal investment situations, and the

estimated level and scope of public investment needs, including types of Financial

Instruments to be supported. Such ex ante assessment shall include:

(a) An analysis of market failures, suboptimal investment situations, and investment

needs for policy areas and thematic objectives or investment priorities to be

addressed with a view to contribute to the achievement of specific objectives

set out under a priority and to be supported through Financial Instruments. This

analysis shall be based on available good practice methodology;

(b) An assessment of the value added of the Financial Instruments considered to be

supported by the European Structural and Investment Funds, consistency with

other forms of public assistance addressing the same market, possible State Aid

implications, the proportionality of the envisaged assistance and measures to

minimise market distortion;

(c) An estimate of additional public and private resources to be potentially raised

by the Financial Instrument down to the level of the final recipient (expected

leverage effect), including as appropriate an assessment of the need for, and

level of, preferential remuneration to attract counterpart resources from private

investors and/or a description of the mechanisms which will be used to establish

the need for, and extent of, such preferential remuneration, such as a

competitive or appropriately independent assessment process;

(d) An assessment of lessons learnt from similar instruments and ex-ante assessments

carried out by the Member State in the past, and how these lessons will be

applied in the future;

(e) The proposed investment strategy, including an examination of options for

implementation arrangements within the meaning of Article 38, financial

products to be offered, final recipients targeted, envisaged combination with

grant support as appropriate;

163 The present AFMA study is addressing point (a) and an assessment of lessons learned from similar instruments in

the country as per (d).

159

f) A specification of the expected results and how the Financial Instrument

concerned is expected to contribute to the achievement of the specific

objectives set out under the relevant priority including indicators for that

contribution;

(g) Provisions allowing for the ex-ante assessment to be reviewed and updated as

required during the implementation of any Financial Instrument which has been

implemented based upon such assessment, where during the implementation

phase, the managing authority considers that the ex-ante assessment may no

longer accurately represent the market conditions existing at the time of

implementation.

3

The ex-ante assessment may be performed in stages. It shall, in any event, be

completed before the managing authority decides to make programme

contributions to a Financial Instrument.

The summary findings and conclusions of ex-ante assessments in relation to Financial

Instruments shall be published within three months from their date of finalisation.

The ex-ante assessment shall be submitted to the monitoring committee for

information purposes in accordance with Fund-specific rules.

160

Annex 2 – Note on the sampling methodology of the online survey

The online survey was been conducted in Malta, where 40,573 SMEs are operating

(National Statistical Office, as per requested information in August 2014).

The SME population in Malta was defined and stratified on the basis of three

dimensions:

• Sectors, using the NACE rev.2 classification;

• Location, using the 2 macro-regions in Malta (NUTS level 3);

• Size of companies (micro, small, medium-sized), using NSO figures as per

requested information due to unavailability of public data. The most updated

NSO figures of the SME population for 2012 were obtained in August 2014.

Starting from this stratification, a suitable sample of the SMEs in Malta was by using

the member databases of the Malta Chamber of Commerce, the Enterprise and

Industry and of the General Retailers and Traders Union (GRTU) and beneficiaries of

grant schemes (funded by the EU) that were administered by Malta Enterprise (ME),

the Tourism and Sustainable Development Unit (TSDU) and the Department for

Social Welfare Standards (DSWS). A total of 11,000 invitations to participate in the

survey were sent and 271 companies provided valid responses, in line with

expectations for an online B2B survey.

The questionnaire used for the online survey included 22 questions and is presented

in Annex 8. The survey was sent out on 22nd May 2014 and closed on 09th July 2014.

Responses were monitored and the survey was closed when the respondent

population had achieved a representation of each stratum, based on the three

dimensions, with a sufficient degree of freedom to implement a relevant statistical

analysis.

Table 47 below provides a detailed description of the stratification with:

• The number of SMEs per size of enterprise, per region and per sector at the

national level; along with the related percentage compared to the total SME

population in Malta.

• The number of SMEs that answered the online survey (respondents) per size of

enterprise, per region and per sector. The related percentages are also

provided.

161

Table 47: Stratification of respondents to the online survey for AFMA in Malta

compared to the population of SMEs in the country

SME population in Malta Respondents

Number Percentage Number Percentage

Size of enterprise

Micro-enterprises 38,592 95.1% 126 58.1%

Small enterprises 1,615 4.0% 50 23.0%

Medium-sized enterprises 366 0.9% 41 18.9%

Region

Malta 37,684 92.9% 198 91.2%

Gozo 2,889 7.1% 19 8.8%

Sector

A AGRICULTURE, FORESTRY AND FISHING 2,889 7.1% 3 1.4%

B MINING AND QUARRYING 54 0.1% 0 0.0%

C MANUFACTURING 2,526 6.2% 40 18.4%

D ELECTRICITY,GAS,STEAM AND AIR CONDITIONING SUPPLY 171 0.0% 4 1.8%

E WATER SUPPLY; SEWERAGE, WASTE MANAGEMENT AND REMEDIATION

ACTIVITIES 4,416 0.4% 1 0.5%

F CONSTRUCTION 10,550 10.9% 10 4.6%

G WHOLESALE AND RETAIL TRADE;REPAIR OF MOTOR VEHICLES AND

MOTORCYCLES 1,645 26.0% 34 15.7%

H TRANSPORTATION AND STORAGE 2,508 4.1% 6 2.8%

I ACCOMMODATION AND FOOD SERVICE ACTIVITIES 1,253 6.2% 20 9.2%

J INFORMATION AND COMMUNICATION 1,448 3.1% 8 3.7%

K: FINANCIAL SERVICES AND INSURANCE COMAPNIES 1,773 3.6% 13 6.0%

L REAL ESTATE ACTIVITIES 3,964 4.4% 5 2.3%

M PROFESSIONAL, SCIENTIFIC AND TECHNICAL ACTIVITIES 1,831 9.8% 12 5.5%

N ADMINISTRATIVE AND SUPPORT SERVICE ACTIVITIES 2,889 4.5% 5 2.3%

P EDUCATION 985 2.4% 13 6.0%

Q HUMAN HEALTH AND SOCIAL WORK ACTIVITIES 934 2.3% 6 2.8%

R ARTS, ENTERTAINMENT AND RECREATION 1,321 3.3% 9 4.1%

S OTHER SERVICE ACTIVITIES 2,303 5.7% 26 12.0%

T ACTIVITIES OF HOUSEHOLDS AS EMPLOYERS; UNDIFFERENTIATED GOODS

AND SERVICES PRODUCING ACTIVITIES OF HOUSEHOLDS FOR OWN USE 2 0.0% - 0.0%

U ACTIVITIES OF EXTRATERRITORIAL ORGANISATIONS AND BODIES 0 0.0% 2 0.9%

Source: National Statistics Office, PwC analysis, 2014.

The distribution of respondents by sector and location is closely aligned with the

total population. For the size categories, it was more important to obtain sufficient

responses by category size than to match the population, because these

categories are examined separately in the analysis.

162

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Annex 4 – Detailed analysis of the market environment of Malta

This section presents the market environment for Maltese SMEs. Insights provided by

the online survey complement the existing data. Over the last few years, despite the

turbulence experienced in the global and European economic environment, Malta

has consistently maintained a degree of stability and avoided many of the

difficulties experienced by some other EU Member States. The continuous efforts of

government and policy makers to keep up this performance have resulted in the

maintenance of positive conditions within the economic market. Nonetheless, SMEs

are still exposed to several challenging factors, including demographics - such as an

ageing population and low participation rate of women in the labour force - and

market conditions – such as GDP growth, volatility of interest rates and inflation - that

impact their growth perspectives. These elements are analysed in the sections

below.

Characteristics of the economy and demographics

Important indicators such as Gross Domestic Product (GDP), GDP growth rate,

inflation rate, and political and regulatory matters (e.g. fiscal conditions and tax

policies), which for the most part define existing market conditions (e.g. investments,

consumption and export growth) ultimately affect the overall profitability of SMEs.

Furthermore, social indicators and conditions (e.g. the quality and cost of human

resources) and the overall outlook of the demographics also remain crucial

components of Maltese SMEs’ competitiveness. Malta’s map and key figures are

shown in Table 48 below.

Table 48: Malta – Map and key figures

Indicator Value Date

Population 421,364 2012

GDP EUR 6.8bn 2012

Real GDP

growth 0.9% / 2.4% 2012 / 2013

Inflation 2.8% / 1.0% 2012 / 2013

Employed

population 172,701 2012

Source: NSO Malta in Figures 2013, CBM 2013 annual report.

168

a) Economic and political overview of Malta

Since the country joined the European Union in 2004, and despite the still fragile

external environment, the Maltese economy has outperformed the Eurozone

average in recent years. Real GDP growth accelerated to 2.4% during 2013, from

0.9% in the previous year (Eurostat, 2014). One of the critical success factors of Malta

is its ability to attract Foreign Direct Investment (FDI) in specific sectors. Recent

regulatory frameworks implemented in the country continue to improve the local

business environment, especially within the gaming, financial services and ICT

sectors. However, the Eurozone’s unstable economic situation, and the political

situation in neighbouring North African countries continues to create uncertainty on

the ability of Malta to thrive. Special attention is therefore made to monitor external

market conditions.

Political Context

As a republic and full Member State of the EU, Malta enjoys political stability at both

a national and international level. The Maltese government is democratically

elected for a 5-year mandate whereby last elections were held in 2013 and the

coming elections to be held in 2018. There are two principal political movements on

the island, the Centre Right Nationalist Party and the Centre Left, the New Labour

movement. Malta enjoys well-established relations with European countries and,

due to its geographical location, also has good relations with countries in the

Middle-East and North Africa.

Macroeconomic overview

Over the period 2005-2008, before the peak of the global crisis, the Maltese

economy reported considerable progress and sustained positive real GDP growth

rates, ranging from 2.6% to a record 4.1% in 2007, below those observed in Cyprus

and Luxembourg, but above the EU-28 average since 2007 (Figure 43). In 2009,

Malta’s real GDP contracted as a result of a substantial decrease in the

manufacturing industry, and to a lesser extent in the construction, wholesale and

retail, tourism and transport sectors. This is illustrated in the figure below.

169

Figure 43: GDP growth rates in Malta according to Eurostat forecasts

Source: Eurostat, European Economic Forecast, Spring 2014.

Since the decline observed in 2009, the country’s economic performance

experienced a sharp recovery in 2010, 2% above the EU-28 average, followed by

modest growth in 2011 and 2012. 2013 has seen economic recovery, bringing

growth rates to levels prior to those of the recession. This growth can be explained

by household consumption coupled with a decline in import activities (Eurostat,

2014).

Real GDP growth is projected to remain largely unchanged, averaging 2.3% in 2015,

converging with Luxembourg and the EU-28 average (Eurostat, 2014). Labour

market participation is set to remain on an upward path, largely reflecting higher

activity by women and older workers. The job market is expected to be able to fully

absorb this inflow and the unemployment rate is set to decline slightly. Favourable

labour market conditions and the positive impact of the announced reduction of

electricity tariffs are projected to support a further improvement in household

consumption.

The recovery is however to be considered rather cautiously, in an environment of

higher interest rates, as compared with the Eurozone (see paragraph below on

interest rates and bank lending). Improving domestic demand is expected to boost

imports, but overall net exports are projected to continue to contribute positively to

real GDP growth and the current account is forecast to remain in surplus over the

forecast horizon.

From 3% of GDP in 2013, the budget deficit is expected to decrease to 2.7% of GDP

in 2014. The 2014 budget includes mostly revenue-increasing measures, including

higher indirect taxation (mainly excise duties), a new programme to grant Maltese

citizenship to foreign individuals and families (against the payment of a fee and

170

investments in the country) and the introduction of a new tax regime for rental

income.

On the expenditure side, the budget envisages some restrictions on recruitment.

Overall, the current revenue ratio is projected to increase by 0.2 percentage point

of GDP, while primary current expenditure is forecast to stabilise.

Foreign Direct Investments

Interviews with stakeholders revealed that throughout the past few decades, Malta

has upheld a very good record in attracting foreign investors to Malta, who re-invest

in their production and service facilities on the island. This has been achieved by

moving from a labour-based industry towards knowledge-based, which resulted in

attracting Foreign Direct Investment from countries like the UK, Germany, Italy,

France, Spain and the United States. Malta’s favourable industrial climate and pro-

business policies have been the basis on which foreign companies have built their

success.

As at June 2013, FDI in Malta was estimated at EUR 11.4bn, with 79.1% originating

from financial and insurance activities. Geographically, EU Member States were the

largest contributors to Malta’s inward Foreign Direct Investment, with EUR 8.4bn, or

73.2% of total FDI (NSO, 2014).

Inflation

In 2009, the Harmonized Index of Consumer Prices (HICP) plummeted from around

4.75% to less than 2%, but showed a relative resilience to the crisis, as compared with

the EU-28 average (1%) and the near-to-zero inflation observed in Cyprus and

Luxembourg. In 2013, inflation for Malta came in slightly below expectations at 1%

for the year as a whole, slowing down from 3.2% in 2012, 0.5 percent below the EU-

28 average, but twice as high as in Cyprus. Deceleration resulted from lower prices

for services being offered by restaurants and hotels. Energy prices also declined

slightly, in line with developments in international markets. This trend is illustrated in

the figure below.

171

Figure 44: HICP inflation for Malta including Eurostat forecasts

Source: Eurostat European Economic Forecast, Spring 2014.

In 2014, the reduction in electricity tariffs is projected to offset a rebound in services

inflation and keep overall price inflation at a relatively moderate rate (by Malta's

historical standards) of 1.2%. With the output gap estimated to have closed in 2014,

the HICP is forecast to accelerate further to 1.9% in 2015, above the Eurozone

average of 1.5% (Eurostat, 2014).

Financial sector and interest rates

The legal framework of Malta’s financial sector requires official licences from the

Malta Financial Services Authority (MFSA) for any type of credit and financial

activities. As a result, only legally registered institutions can provide financial services.

The MFSA is the authority responsible for the licensing, regulation and supervision of

credit institutions, electronic money institutions and financial institutions. It carries out

its functions as the competent authority through its Banking Unit.

Credit institution licenses

The banking sector in Malta consists of 26 credit institutions. Three of these institutions

are owned by Maltese shareholders exclusively, while 23 institutions are foreign-

owned. The number of banks setting up in Malta over the last 6 years increased from

22 to 26, representing a growth of approximately 3% (MFSA, 2013).

Credit institutions in Malta are classified as “core domestic banks”, “non-core

domestic banks”, or other banks. Core domestic banks are those institutions, which

have strong links with the domestic economy. These banks have a widespread

branch network, provide a vast range of banking services and are core providers of

credit and deposit services in Malta. These banks mainly include HSBC Bank and

Bank of Valletta. The “non-core domestic banks” are institutions which have a more

restricted role in the domestic economy, since the volume of operations and the

172

banking services they offer to residents are limited, while other banks are those

which cater for the international market.

Most credit institutions in Malta possess broad licences allowing them to engage in

consumer lending, leasing, factoring and other financial services. Loans remain the

most popular form of financing by SMEs in Malta, and cover the whole scope of

available loan products including standard loans (short-, medium, long-term and

revolving loans), bank overdrafts, credit line and conditional loans.

Most often, loan products are provided against collateral and, as a result, banks

tend to design and offer asset based products such as mortgage business loans,

quick loans for micro-enterprises and mortgage loans for hotel and restaurants. Bank

guarantees and letters of credit are offered by most commercial banks in the

country and usually take the form of payment guarantees, bid bonds, performance

bonds and advance payment guarantees. These products are however rarely used

by SMEs.

Factoring products are mostly provided by commercial banks. Types of factoring

products include factoring with recourse, which is the financing of current

operational needs of a company, based on the credit sales of the company

without the need of any collateral and factoring without recourse - protection of

credit sales along with the collection and management of the underlying

receivables. Also, in this case no collateral is required. Export and import factoring

are two other financial products offered by commercial banks where collection is

carried out by a correspondent factoring company in the country of the importer /

exporter. Import factoring is rarely provided by financial intermediaries in Malta164.

Legislation allows leasing facilities to be provided by commercial banks through their

branches or specialised subsidiaries. Alternatively, legislation also allows financial

intermediaries in Malta to offer leasing products, including financial leasing

products, operational leasing and fleet management (a leasing product used for

transportation and logistics companies that have large fleets of motor vehicles).

According to stakeholders interviewed, leasing and hire purchase facilities have

become more popular among SMEs over the past few years, but the leasing is

predominantly provided within the supply chain. No data is however available to

estimate this trend165.

164 Presently the Central Bank of Malta does not collect data on the supply of factoring products in Malta from

commercial banks. 165 Presently the Central Bank of Malta does not collect data on the supply of leasing products in Malta from

commercial banks.

173

Financial institution licenses

In Malta, 28 institutions are licensed as financial institutions under the Financial

Institution Act (FIA) 1994. The FIA is a law which emerged from the Banking Act. The

key difference between credit and financial institutions is that a financial institution

licence covers institutions that undertake certain activities but are not funded

through deposits of the public. Therefore, the FIA regulates companies carrying on

activities such as lending (including personal credits, mortgage credits, factoring

and financing of commercial transactions), leasing, Venture Capital, money

transmission services, issuing and administering means of payment (e.g. credit cards,

travellers’ cheques), providing guarantees, trading for own account or for account

of customers in money market instruments, underwriting and participation of share

issues and money broking.

Bank lending and interest rates

Despite the economic downturn, which is still being felt in many Member States of

the European Union and is still having repercussions on the lending market across

Europe, the Maltese banking sector remains resilient thanks to its strong capital base

and bank liquidity. The World Economic Forum rated Malta’s banking sector as the

12th soundest in the world out of 144 countries, and placed Malta at number 15 for

financial market development (Malta Financial Services Authority, 2012).

However, bank lending to private Non-Financial Corporations (NFCs) declined at a

fast pace during 2013, falling by 4.9%, after a drop of 0.7% in 2012. The reduction in

loans to private sector NFCs was broad-based, but stemmed mainly from reduced

borrowings by firms in the construction and wholesale and retail trade sectors. For

the first time since the onset of the global financial crisis, loans to private NFCs in

Malta during the second half of 2013 contracted at a faster annual pace than in

the Eurozone as a whole. Despite this development, disbursed loans in the first half of

2014 increased strongly in comparison to the same timeframe in 2013, indicating an

overall increase for the year 2014.

Lending to SMEs declined by 3.1%, following an increase of 5.6% in 2012. Loans to

SMEs, which have been facilitated by targeted EU loan guarantee programmes,

comprised more than three-fourths of those granted to all private NFCs resident in

Malta during 2013 166 . Contributions to growth in loans to private non-financial

corporations are presented in Table 49 below.

166 Central Bank of Malta, Annual Report 2013.

174

Table 49: Contributions to growth in loans to private non-financial corporations

All private NFCs SMEs

Dec 2012 Dec 2013 Dec 2012 Dec 2013

Accommodation and food service activities 0.2% -0.2% 0.1% 0.3%

Construction -1.8% -3.4% -0.1% -4.5%

Manufacturing 0.7% -0.3% 0.5% 1.1%

Real estate activities 0.1% 0.6% 3.1% -0.6%

Transportation and storage -0.4% -0.4% 0.0% -0.9%

Wholesale and retail trade -0.5% -1.2% 0.3% -1.5%

Other 0.9% 0.1% 1.7% 3.0%

Total -0.7% -4.9% 5.6% -3.1%

Source: CBM, Annual Report 2013.

In the future, Maltese banks, similar to banks in other Member States, may face

tougher regulation, higher capital requirements and, perhaps, also scarcer funding.

The small size of the domestic market, moreover, will require them to be more

innovative, exploiting the opportunities of the Single Market and of Malta’s strategic

location on the EU’s southernmost frontier. The future challenge for the banking

sector is to remain competitive.

According to a presentation published by the Central Bank of Malta (CBM) in

January 2014, Malta has the fifth highest rate of bank lending interests after Cyprus,

Greece, Portugal and Slovenia. These interest rates may be considered as high for

SMEs to get credit and expand operations. In parallel, banks have higher interest

margins than the Eurozone average.

Credit growth in Malta has slowed down since the financial crisis in 2008, almost

approaching the zero level in 2013 - such is the caution exercised by banks in the

face of Non-Performing Loans (NPLs) and other defaulters, especially in the

construction industry. In fact, according to the CBM, the construction industry suffers

from the highest weighted average interest rates, followed by the real estate

activities sector and the wholesale and retail sectors. In 2009, the difference in the

interest rates set by the European Central Bank (ECB) and those offered by Maltese

banks was 2.8%, and in 2013 this climbed to 4.8% while for countries like Luxembourg

this difference has remained stable (Times of Malta, 2014)167.

The associations that provide support to SMEs and have been interviewed believe

that local banks impose excessive charges and interest rates and believe that

lending rates and bank charges in Malta are among the highest in the Eurozone.

167 Article in Malta Today (21 January 2014): Maltese Banks Charging High Interest Rates on Lending.

175

They also commented on the high level of bank fees charged since these may

discourage SMEs from seek financing (Times of Malta, 2014) 168.

Interest rates for loans up to EUR 250,000 and between EUR 0.25m and EUR 1m in the

Eurozone for 2012 are shown in Figure 45. Interest rates for overdrafts in the Eurozone

for 2013 are shown in Figure 46.

Figure 45: Interest rates for loans up to and including EUR 0.25m and between

EUR 0.25m and EUR 1m (January to July 2013)

Source: European Commission, 2013.

168 Article in Times of Malta (24 April 2014): GRTU in defense of cheaper financing for small businesses.

176

Figure 46: Interest rates for overdrafts in the Eurozone in 2012 (January to September)

Source: European Commission, 2013.

Corporate indebtedness

According to Eurostat, consolidated loans of non-financial corporations as a

percentage of GDP were estimated at nearly 81.5% in Malta in 2012. Malta’s level of

corporate debt was as high as in Slovenia and close to the levels of corporate debt

in the Netherlands and Belgium. Even though Cyprus, Ireland and Luxembourg have

higher corporate debt levels than Malta, Malta’s corporate debt level is higher than

the EU-28 average of 69.4% of GDP169.

The high level of debt of non-financial corporations may have a negative impact on

the capacity of the companies to further access finance. They may be restricted

from further investment and instead concentrate on paying off loans170.

The Financial Stability Report Update issued by the Central Bank of Malta reported

that during 2013 the total Non-Performing Loans (NPLs) ratio, as a percentage of

total outstanding loans disbursed by core domestic banks, increased from 8.2% to

9%, mainly because of a deterioration in the quality of resident corporate loans

(Figure 47). The ratio of NPLs from resident non-financial corporations increased from

nearly 9% in 2009 to almost 16% in the first half of 2013. The construction and real

estate sectors contributed to almost 50% of the rise in NPLs as a result of overvalued

properties, low levels of sales and the oversupply of real estate, while the

169 Eurostat: Private debt as a percentage of GDP - consolidated - annual data. 170 Article from Times of Malta, December 2013: Malta’s private debt: a cause for concern?

7.74

7.076.78

5.38 5.3 5.28 5.13 4.964.51

3.97 3.863.41

3.19 3.14

2.56 2.53 2.412.04

0

1

2

3

4

5

6

7

8

9

177

accommodation and food services sector contributed to around 25%. Despite this

increasing trend, the level of NPLs compared to the total outstanding loans

disbursed does not constitute an alarming factor for the Maltese economy and

SMEs’ access to finance since it concerns SMEs which have access to finance and

the NPL level remains at an acceptable level.

Figure 47: Non-Performing Loans as a percentage of total gross loans issued by core

domestic banks

Source: Central Bank of Malta, 2013.

b) Characteristics of the demographics

Malta’s changing demographics have an extensive influence over most domestic

social indicators, and may have an important impact on the local business

environment, and the development of SMEs. The wide availability of a well-

educated labour force represents a competitive advantage for the country, serving

as a lever to attract investment. On the other hand, the aging population is a major

cause of concern for the long-term prospects of SME development in the country.

As of 2012, Malta’s population amounted to 421,364 people (0.1% of the total EU

population). Malta ranked 1st as the most densely populated country in the EU with

approximately 1,333 inhabitants per square kilometre (NSO, 2012). Compared to

2011, total population in the country has increased by 0.9% (NSO, 2012). However,

substantial falls in the population size are forecast by 2060 (Figure 48). According to

estimations by the NSO, the population of Malta is expected to reach 429,000

persons by 2025 and down to just over 350,000 by 2060. According to such

estimates, by 2060, children and youths under 20 will decrease from 90,705 to

around 59,300 – a drop of 35% as a result of less births. Therefore overall it is

178

envisaged that the rate of births will decrease and will not be enough to offset the

number of deaths.

Figure 48: Projection of the total population of Malta in the long-term171

Source: NSO Demographic Review 2010, Census 2011.

Aging and working population

According to Eurostat data, the number of people above the age of 65 years old

represented 15% of Malta’s population in 2009. In 2012, the number of people in this

age group had increased from 2.2%, to 17.2% of the total population, when

compared with the results for 2009. The average age of the Maltese population

stood at 40.4 years, whilst in Gozo this was slightly higher at 41.7 years (NSO Census

2011, 2014).

At EU level, Malta ranks at the 17th place in terms of aging population. In 2012, the

EU-27 average level of population above 65 years old was 18.2%. Furthermore,

children aged 15 years old and below represented 14.6% of the total population in

Malta in 2012.

The decreasing population of working age is a major cause for concern for the

Maltese business environment. As at the end of 2012, the population of working age

according to NSO figures included 358,785 people, or 85.2% of the total population

(Labour Force survey Q4/2013, 2014). Aligned with the increasing retirement age,

the working population has increased by 2.2%, in comparison with 2009 (Labour

Force survey Q4/2013, 2014).

Also, Malta is still experiencing very low rates of female participation in the

workforce, when compared to the rest of the EU. NSO figures show that the majority

of inactive persons forming part of the working age population are females with a

rate of 61.6% inactive relative to 34.7% for males. This situation also results in the fact

171 Basis: end 2010 estimates of the total population.

421 427 429 416

378352

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100

150

200

250

300

350

400

450

500

2012 2015 2025 2035 2050 2060

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179

that Malta lags behind the other EU Member States when it comes to women

pursuing careers.

Therefore, an aging population and the result of low female participation in the

workforce are tangible causes of concern for the future development of SMEs in

terms of human resources availability and the potential loss of entrepreneurial

talents.

Regional population distribution

Malta is composed of two islands. The main island is also called Malta while the

second one is Gozo, also comprising another very small island, Comino. In 2012,

approximately 7.4% of the total Maltese population resided in Gozo. Covering a

land area of 67 km2, Gozo is one of the smallest NUTS III regions in Europe in terms of

population size. The island is rural in character, and compared to Malta, less

developed. Around one in five persons in Gozo live in Victoria. The population of

Gozo has remained stable over the years. When considering land use and land

cover, residential areas account for approximately 12% whilst agriculture and

natural areas account for about 78% (European Commission, 2012)172. This reflects

the predominance of agriculture in the Gozitan economy.

The number of inhabitants per region as at 2012 is provided in Table 50 below.

Table 50: Number of inhabitants per region as of 2012

Regions Population Share (%)

Malta 389,906 92.5%

Gozo and Comino 31,458 7.5%

Source: National Statistics Office, StatDB 2012.

Labour Force

The labour force is one of Malta’s main competitive advantages. Malta is known for

having a highly skilled labour force, together with lower average salaries when

compared to many other EU Member States. Malta’s highly skilled labour pool is one

of the main reasons why many foreign companies engaged in the financial services

sector and other professional service lines set up their operations in Malta, thus

encouraging foreign capital investment in the country. The estimated labour hourly

cost for 2012 is shown in Figure 49 below.

172 European Commission report on the economic and social situation of Gozo (Malta) 19/10/2012.

180

Figure 49: Estimated hourly labour cost for 2012

Source: Eurostat, 2013.

In Malta and Gozo approximately 40% of the population aged 15 and over has

completed its education up to lower secondary level, while 13% have completed

their education up to tertiary level. This is shown in Figure 50 below.

Figure 50: Population aged 15 and over by highest level of education successfully

completed, 2011

Source: NSO, Census 2011.

Following this, the Maltese workforce can be viewed as highly skilled and

competent in areas such as social science, business and law, followed by health

and welfare. The percentage of graduates completing their studies in these two last

areas is higher than that of the EU-27 area. The percentage of tertiary education

graduates by type of subjects studied is indicated in Figure 51 below.

181

Figure 51: Tertiary education graduates by type of subjects studied

Source: Eurostat, 2012.

A series of policy initiatives have been introduced by the Ministry of Education to

ensure high levels of education attainments of the Malta student population. These

include improving literacy, providing better community access in deprived areas

and providing incentives for students to stay in school longer. Furthermore, the

government is introducing and widening childcare facilities to allow working

mothers to enter the labour market. There are also initiatives to open schools earlier

and provide support for longer hours to help working parents with childcare. There

are also programmes being launched aimed at continuing to retain the existing

workforce, updating their skills and increasing labour force participation. To

complete these initiatives, reforms are currently under way with respect to the

National Curriculum Framework, Early School Leaving Strategy and the National

Literacy Strategy.

In addition, the government remains committed towards raising the number of

persons in tertiary education through the development of new scholarship schemes

that complement ongoing programmes. The government will also be launching a

Lifelong Learning Strategy, which coupled with the ongoing and new training

programmes, shall contribute towards raising the skills and competences of the

labour market.

The government is also introducing changes in the tax-benefit system intended to

make work pay, alongside labour activation programmes, through the launch of the

Active Ageing Strategy (Economic Partnership Programme, 2013).

Overall, Malta is facing demographic challenges similar to those faced by other

European Member States with an aging population. However, these challenges do

not directly concern the development of local SMEs which have access to a well-

educated population. In addition, Malta is a competitive and friendly destination for

182

foreign businesses with its well-educated labour force and advantageous climate

conditions.

Unemployment

The latest Labour Force Survey estimates indicate that in 2013, total unemployed

persons in Malta stood at 6.4% (12,131persons) relative to 6.5% in the fourth quarter

of 2012. In 2013, out of the total unemployed of 6.4%, 27% (3,274) were between the

ages of 15 and 24 and 73% (8,857) were over the age of 25. This is relative to 29.9%

for those between the ages of 15 and 24 and 70.1% for those over the age of 25

years old in 2012 (Labour Force Survey, 2014).

In addition, according to NSO statistics, the total number of registered unemployed

stood at 7,401 persons in 2013, compared to 6,811persons in 2012. The majority of

persons registering for unemployment in 2013 were in the service workers and shop

and market sales workers occupation category, which includes travel attendants,

housekeep and restaurant service workers, personal care service workers, other

personal services and protective services workers (21.5%), followed by clerks (17.2%),

technicians and associate professionals (12%) and craft and related trade workers

(12%) (NSO, Registered Unemployed, December 2013). This indicates that

occupations of service workers that are of lower paying salaries are the main

people suffering from unemployment in Malta.

SME characteristics and environment

a) Characteristics of Maltese SMEs

According to NSO statistics there were 70,538 SMEs registered in Malta in 2012

(Business Demographics 2008-2013, 2013). However, results from stakeholder

interviews and data obtained from NSO show that a large percentage of the

registered SMEs remain actually inactive. Therefore, of the 70,538 SMEs, 40,573 were

active companies and a further 61 were classified as large implying that 99.8% of

the total active companies were SMEs, of which 97.2% were micro-enterprises.

Further analysis of the SME distribution by regions shows that 93% of the SMEs in the

Maltese islands are concentrated in Malta, while the remaining 7% operate from

Gozo (Table 51).

The business structure in Malta has remained largely unchanged until 2010. On the

other hand, in 2011 the number of active SMEs declined by 1.1% and 2012 this figure

further declined by 3.7%. In the meantime, new regulations173 came into force in

2011 which excludes SMEs reporting less than annual turnover of EUR 7,000 from

173 Value Added Tax Regulations, 2010 (Exemption from Registration), coming into force on 1 January 2011, as

notified in the Legal Notice 524 of 2010.

183

collecting VAT. Thus, this apparent decline in the number of active SMEs is not an

actual decline but is the result of the abovementioned amendment174.

Table 51: Absolute number of active SMEs per region across 2009 to 2012 and

percentage change year-on-year

Number of

companies

2009 2010 2011 2012

Number of

companies

Number of

companies

Change

over 2009-

2010

Number of

companies

Change over

2010-2011

Number of

companies

As % of

total SME

population

Change

over 2011-

2012

Total SME

population 41,910 42,609 1.6% 42,131 -1.1% 40,573 -3.7%

Malta 38,678 39,373 1.8% 38,953 -0.1% 37,684 92.9% -3.3%

Gozo and

Comino 3,232 3,236 0.1% 3,178 -1.8% 2,889 7.0% -9.1%

Source: NSO Malta, 2014.

The Table 52 compares the stratification of SMEs in Malta, by size, with that of the EU-

28 countries, and also compares the percentage of persons employed in each

category, depending on the size of the company, with the share of EU employment.

In Malta, the percentage of micro-enterprises is higher than the EU-28 average

(95.1% compared with 92.2%) and this is offset by the number of small companies

(4% of total companies in Malta), which is 2.5 percentage point lower than the EU-28

average. The largest share of persons within the working population in Malta is

employed by micro-enterprises (32.2%), as opposed to the EU-28 share, where the

majority of people are employed by companies employing 250 persons and over

(32.8%). Each other company size in Malta (small, medium-sized and large

enterprises) employ approximately 22% of the total workforce. As a whole, Maltese

SMEs employ 79% of the total workforce in Malta. This is higher than the EU average

of 67.2%, showing that SMEs in Malta employ a significant proportion of workers. It

highlights the importance of this company size in terms of their contribution to

economic activity and economic growth.

Table 52: SME distribution by size of class of employment and number of

employees175

Number of Enterprises Employed

Malta and Gozo EU-28 Malta and Gozo EU-28

Number Share Share Number Share Share

Micro-enterprises 38,592 95.0% 92.2% 48,102 32.3% 29.5%

Small enterprises 1,615 4.0% 6.5% 32,919 22.1% 20.5%

Medium-sized enterprises 366 0.9% 1.1% 36,050 24.2% 17.1%

SMEs 40,573 99.8% 99.8% 117,089 78.6% 67.2%

174 Business Demographics: 2007-2012. 175 Data from NSO was provided for 2012.

184

Number of Enterprises Employed

Malta and Gozo EU-28 Malta and Gozo EU-28

Number Share Share Number Share Share

Large enterprises 61 0.2% 0.2% 31,812 21.4% 32.8%

Total 40,634 100% 100% 148,901 100% 100%

Source: NSO Malta, Eurostat, 2014.

When considering SME employment for each company size (NSO, 2013):

• Micro-enterprises faced an overall decline in employment of 2.4% between

2009 and 2012, with the largest decline being observed in the period

between 2011 and 2012; and

• Small enterprises registered an increase in overall employment of 2.9%

between the period 2009 till 2012, with the largest year on year increase

being between 2009 and 2010; and

• Medium-sized enterprises registered the highest increase in employment of

the three company sizes between 2009 to 2012 with a 3.1% increase, the

largest increase being between 2010 and 2011.

Table 53 presents the number of active enterprises by sector in Malta. Close to 70%

of the enterprises can be classified in six sectors. The three activities with the highest

number of SMEs are “Wholesale and retail trade, repair of motor vehicles and

motorcycles” (26.0% of SMEs), “Construction” (10.9% of SMEs) and “Professional,

scientific and technical activities” (9.8% of SMEs).

Moreover, figures presented in Table 53 show that despite having the majority of

SMEs operating in the three above-mentioned sectors, this does not necessarily

reflect SMEs contribution to employment. The largest numbers of employed persons

by SMEs, apart from mostly being within the “wholesale and retail trade, repair of

motor vehicles and motorcycles” sector, are then in the manufacturing sector and

in the accommodation and food services industry. Hence, this implies that the SMEs

operating in the largest sectors do not necessarily contribute towards high level of

employment in these sectors.

185

Table 53: Enterprise distribution by sector and number of employees

Economic activity

(Industry sector) Number of Enterprises Employed

Value added

(mEUR)

up to 9 10-49 50 - 249 Total

SMEs % 250+

Total

SMEs % Total Total176 %

A AGRICULTURE,

FORESTRY AND FISHING 2,877 11 1 2,889 7.1% 0 3,301 2.8% 3,301 96 2.0%

B MINING AND

QUARRYING 44 10 0 54 0.1% 0 278 0.2% 278

782177 16.2%

C MANUFACTURING 2,262 215 50 2,527 6.2% 14 13,627 11.6% 21,695

D ELECTRICITY,GAS,STEAM

AND AIR CONDITIONING

SUPPLY

0 0 0 - 0.0% 1 - 0.0% 1,583

E WATER

SUPPLY;SEWERAGE, WASTE

MANAGEMENT AND

REMEDIATION ACTIVITIES

162 9 0 171 0.4% 1 458 0.4% 1,520

F CONSTRUCTION 4,286 111 19 4,416 10.9% 2 9,053 7.7% 9,825 262 5.4%

G WHOLESALE AND RETAIL

TRADE;REPAIR OF MOTOR

VEHICLES AND

MOTORCYCLES

10,037 448 65 10,550 26.0% 3 28,799 24.6% 29,643

1,268 26.2% H TRANSPORTATION AND

STORAGE 1,540 90 15 1,645 4.1% 6 5,455 4.7% 9,861

I ACCOMMODATION AND

FOOD SERVICE ACTIVITIES 2,288 158 63 2,509 6.2% 7 13,946 11.9% 16,256

J INFORMATION AND

COMMUNICATION 1,164 70 19 1,253 3.1% 4 4,870 4.2% 6,485 382 7.9%

K FINANCIAL AND

INSURANCE ACTIVITIES 1,358 65 19 1,442 3.6% 3 4,286 3.7% 7,447 493 10.2%

L REAL ESTATE ACTIVITIES 1,757 16 1 1,774 4.4% 0 1,612 1.4% 1,612 354 7.3%

M PROFESSIONAL,

SCIENTIFIC AND

TECHNICAL ACTIVITIES

3,799 151 17 3,967 9.8% 2 9,086 7.8% 10,047

613 12.7% N ADMINISTRATIVE AND

SUPPORT SERVICE

ACTIVITIES

1,695 103 33 1,831 4.5% 11 7,548 6.4% 11,712

P EDUCATION 893 60 32 985 2.4% 2 5,219 4.5% 5,745 n/a n/a

Q HUMAN HEALTH AND

SOCIAL WORK ACTIVITIES 889 31 14 934 2.3% 3 3,301 2.8% 5,043 n/a n/a

R ARTS, ENTERTAINMENT

AND RECREATION 1,263 43 15 1,321 3.3% 1 3,566 3.0% 3,854

589 12.2%

S OTHER SERVICE

ACTIVITIES 2,276 24 3 2,303 5.7% 1 2,682 2.3% 2,995

T Activities of households

as employers;

undifferentiated goods-

and services-producing

activities of households for

own use

2 0 0 2 0.0% 0 2 0.0% 2

U Activities of

extraterritorial

organisations and bodies

0 0 0 - 0.0% 0 0 0/0% 0

TOTAL 38,592 1,615 366 40,573 100% 61 117,089 100% 148,904 4,838 100%

Source: NSO Malta.

176 Figures for value-added are total figures for the industry and do not distinguish between SMEs and large firms;

however it is assumed that since 99.8% of enterprises are SMEs this could be used as a proxy for value added

generated by SMEs. Also, total value added for sectors O to Q (EUR 1,163m) is not included in this analysis.

Therefore, total value added generated by the Maltese economy amounted to EUR 6,001m. 177 Total figure for sectors B to E, of which EUR 753m relates to sector C (Manufacturing).

186

b) Innovation in Malta

According to the stakeholders interviewed, Malta’s innovation performance over

the last decade has been poor, mainly because of insufficient Research and

Development (R&D) spending, along with the almost non-existing linkages between

research, usually performed at the University of Malta, and the needs of the

productive sector.

A major concern in Malta is the commercialisation gap during the process of

launching a product onto the market. In Malta, there are a large number of SMEs,

which have come up with an innovative product/service but have experienced

difficulty in taking the product to market, mainly due to lack of adequate support.

In the past, there have been several attempts by the government and other public

and private institutions to set up Venture Capital funds, Business Angel networks and

other platforms, which were created to promote research, innovation and

development of enterprises, in particular, SMEs in Malta. These networks and funds,

were not successful, since they generated little interest from the industry (see

Section 7.2).

Table 54 shows the innovation performance of Maltese firms relative to the EU-28

average. In terms of “Business R&D expenditure,” Malta stands at 0.5% of GDP

compared to the EU-28 average at 1.3%178, illustrating the room for improvement of

spending for innovation in the country.

Table 54: R&D expenditure in 2012 as a percentage of GDP relative to EU-28

Type of expenditure Malta EU-28

Business R&D expenditures 0.50% 1.31%

Public R&D expenditures 0.33% 0.75%

Source: EC Innovation Union Scoreboard 2014.

Table 55 presents the level of expenditure on Research and Development stemming

from the private sector, the government and higher education institutions such as

the University of Malta and other institutions of post-secondary education such as

the Malta College of Arts, Science and Technology (MCAST). In 2011, the business

community invested EUR 31.5m in R&D, while higher education institutions spent

about EUR 14.2m and the Maltese government spent EUR 1.7m. In total R&D

expenditure in Malta, in 2011 accounted for 0.72% of GDP, which is much lower

when compared with the average of the EU-28 countries.

178 Gross Domestic Product as published in NSO News Release No. 110/2013.

187

Table 55: Total R&D expenditure in Malta as a percentage of GDP

Type of expenditure 2009 (mEUR) 2010 (mEUR) 2011 (mEUR)

Business R&D expenditures 20.12 26.16 31.52

Public R&D expenditures 1.50 1.55 1.69

Higher Education R&D expenditures 10.13 14.29 14.24

Total R&D expenditure 31.76 41.99 47.44

As a % of GDP 0.53% 0.66% 0.72%

Source: NSO – Research and Development in Malta: 2009-2011.

As illustrated in Figure 52 below, Malta falls within the “moderate innovators group”

among EU Member States. This is the group where Member States perform below

the EU average in areas related to innovation and R&D.

According to the EC Innovation Union Scoreboard, innovation performance in

Malta improved until 2010 after which it strongly declined. It improved once again in

2013 to a level comparable with that in 2008. Malta displays a clear weakness in

certain indicators of innovation performance, for example recent Ph.D. graduates,

but also has relative strengths such as its performance in Community trademarks,

non-R&D innovation expenditures and employment in knowledge-intensive

activities. Declines in growth are observed for Malta’s performance in sales share of

new innovations and licenses and patent revenues from abroad.

Figure 52: Malta’s innovation performance compared with other EU Member States

Source: EC Innovation Union Scoreboard, 2014.

0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

0.800

BG LV RO PL LT HR MT SK HU EL PT ES CZ IT CY EE SI EU FR AT IE UK BE NL LU FI DE DK SE

Modest innovators Moderate innovators Innovation followers Innovation leaders

188

In terms of the number of patent applications filed in Malta under the Patent

Cooperation Treaty, Malta lags behind most of its counterparts within the EU, with

0.82 applications filed per billion GDP, compared with 1.98 in the EU.

Table 56: Number of patent applications filed under the Patent Cooperation Treaty

(PCT), in 2010 per billion GDP in comparison with the EU-27

Type of expenditure Malta EU-27

PCT patent applications 0.82 1.98

Source: EC Innovation Union Scoreboard 2014.

A key concern in Malta is the lack of an effective Intellectual Property (IP) legal

framework, which has been identified by the market as a necessity for incentivising

investment in R&D. Such a framework would include regulations removing the risk of

rapid imitation, and ensuring ownership over the knowledge to the entity that

created it. It would also organise the dissemination of new technological

knowledge in the society (World Bank, 2013).

Recent initiatives and policies were introduced in Malta to create linkages between

research, market needs and the country’s innovation system. The main focus is set

on providing financial incentives for stimulating research and creating new research

organisations and institutions more aligned with market needs. In 2014, the MCST

launched “Fusion: The R&I Programme”. This programme aims to support local

enterprises to develop and commercialise new technologies. Fusion offers two

programmes. The first is a voucher programme covering IP checks and

commercialisation viability and the second programme supports the actual

technology development, thanks to funds ranging from EUR 50,000 to EUR 200,000.

The voucher programme enables SMEs to obtain vouchers that can be redeemed

for consulting and advisory services, as well as other non-financial support measures.

The programme is open to SMEs and researchers from academic institutions179 .

Fusion is supported through Malta’s government funds managed by the MCST and

will run from 2014 to 2020.

The University of Malta (UOM) has also recently launched “TAKEOFF”, which is a

Business Incubator that offers facilities (office and communication facilities as well as

mentorship) to startups who pay a subscription fee for the use of TAKEOFF and the

UOM reserves the right to take a small stake in the equity of the start-ups should the

company be successful and go to market. The UOM has also launched the “Seed

Fund award”, which is financed by the government, whereby EUR 100,000 are

shared between participants who are successful in securing funds for an innovative

start-up idea. There were 30 applicants for this Seed Fund and eventually 9

applicants were awarded funds which ranged between EUR 5,000 and EUR 18,000.

179 Article from Times of Malta – MCST launches R&I programme, 15 June 2014.

189

The demand for this Seed Fund programme was very high, with approximately

EUR 400,000 requested by applicants. Therefore, the programme was able to satisfy

only 25% of the demand.

Apart from the TAKEOFF programme, the UOM has also set up the “Centre for

Entrepreneurship and Business Incubation” (CEBI), which was established to educate

and support graduates in the creation of successful knowledge-based and

knowledge-intensive business ventures. It started delivering its first post-graduate

programmes in July 2014. This initiative mainly aims to stimulate and support the

growth and development of entrepreneurship in, inter alia, science, technology,

engineering, media and creative industries in Malta at practical, strategic,

educational, and research levels.

The Malta Information Technology Agency (MITA), acting as the central driver of

Government’s ICT policy, programmes and initiatives in Malta is also supporting a

number of initiatives that promote ICT. One such initiative is the “MITA Innovation

Hub”, which provides a support platform and collaborative environment for the

digital community. The “Digital Outreach” initiative is committed to sustaining a

digital-economic mindset, which is essential to retaining a strong national

competitive position. Amongst others, MITA also supports e-Government through

which public information is made available electronically to households and

businesses mitigating the information gap.

The “PwC EUR 1m Start up Fund: Promoting Entrepreneurship and Innovation” is a

further initiative whereby PwC Malta is dedicating up to EUR 1m per annum worth of

pro bono services to assist entrepreneurs in nurturing their business during the critical

stage of starting-up and growing a new business. The purpose of this fund is to ease

the financial burden of new entrepreneurs, as well as to contribute to new

businesses being set up with proper financial and management structures, which will

be of particular relevance to SMEs. Services provided through the PwC EUR 1m Start

up Fund are in-line with the needs of entrepreneurs, comprising of assistance in: the

preparation of business plans; the raising of bank finance; the set-up and registration

of companies; compliance with tax matters; the design and implementation of

accounting and IT systems; the set-up of employee share option schemes and staff

training in financial management related areas. For this initiative, PwC Malta is

collaborating with two key local institutions, the University of Malta and Times of

Malta.

In addition, Malta Enterprise is also supporting the “Business Advisory Services

Scheme” aimed at providing business undertakings operating in Malta with advisory

services that suit their respective circumstances and aim to support undertakings

with identifying their strengths and overcoming their weaknesses in specific areas. In

offering this scheme, Malta Enterprise established a team of business consultants

that have the capabilities to address the needs of undertakings at different stages

of business development. A range of business advisors services are available and

190

every effort is made to match the right advisor to the specific needs of the

applicant. Aid under this incentive may be granted to all enterprises that wish to

benefit from the scheme.

The Microsoft Innovation Centre (MIC) of Malta was launched in 2013 and is a million

dollar investment (EUR 758,922) by Microsoft and its partners to support the local IT

industry, with a focus on innovation, entrepreneurship and technology learning. The

start-up programme is offered to all entrepreneurs however with specific focus at

the early stages of development. These incentives are targeted at relieving initial

costs such as office space, hardware, and technology skills. Furthermore, a core

aspect of the programme is an in-depth business course from accounting to

marketing. The MIC is also the home of the largest IT community in Malta where

technology experts, most from within Microsoft, provide workshops and learning

sessions on the latest technologies.

The government of Malta is funding a life sciences centre which will be completed

in 2014, named the BioMalta campus. It is being developed to foster the growth of

the country's life sciences industry. The life sciences centre will provide laboratory

space to new and existing companies and will also extend business advisory

services, financial incentives and tangible support to companies intending to set up

operations. The BioMalta campus will initially consist of four buildings comprising of

10,000m² of laboratory space (representing 61 lab units) and 3,500m² of business

incubation facilities (representing 11 incubation units)180.

c) Legal framework and fiscal policy

The Maltese government has introduced series of legislative initiatives to improve

competitiveness, cut red tape and reduce the costs of regulation on enterprise.

Reforms in the judicial system also aimed at increasing transparency and reducing

the invisible costs of bureaucracy.

In the short-term, the government of Malta is planning to introduce a number of

economic and fiscal initiatives to improve the sustainability of public finances, which

will in turn support local enterprises, in particular SMEs, by improving administrative

competitiveness in the market and reducing administrative burden, experienced by

many companies in Malta and highlighted during interviews with the stakeholders.

The Maltese government is also committed towards enhancing efficiency in

revenue collection through the consolidation of the various government revenue

departments into one single authority.

180 BioMalta Life Sciences Park: http://www.pharmaceutical-technology.com/projects/biomalta-life-sciences-park.

191

The Maltese government is also dedicated to reducing bureaucracy in an effective

manner. In this regard, the government has a set objective to reduce 25% of existing

bureaucratic procedures. Initiatives are at present underway to reduce the length

of public procurement procedures. The holistic justice reform is also expected to

contribute to the competitiveness of Malta by enhancing the quality of the business

environment by containing administrative burdens and hence reducing

administrative costs.

In addition, the government is working on specific policy initiatives, including the

diversification of energy sources in Malta and the restructuring of Enemalta

Corporation, the main provider and distributor of energy in Malta, incorporating the

importation and distribution of petroleum products as well as the generation and

distribution of electricity in the country181. These initiatives are expected to result in

lower energy costs for SMEs, which are one of the highest among the EU, and

increased cost savings, enhancing competitiveness182.

The Maltese economy, including the financial and gaming sectors, have greatly

benefitted from a business-friendly tax regime. Greater fiscal integration of EU

Member States and potential harmonisation of tax rates could erode some of these

benefits, with consequences on employment, output, and fiscal revenues. On the

other hand, with Malta’s growth model increasingly dependent on financial and

niche services such as remote gaming, measures to broaden competitiveness

would help diversify the economy. In 2013, the International Monetary Fund (IMF)

reported that Malta should ensure better alignment of wages and productivity at

the enterprise level, promote foreign investment, improve the judicial system, and

promptly implement structural reforms. This is particularly important at a time when

many of Malta’s trading partners - notably EU Member States - are undergoing fiscal

consolidation and structural reforms to restore their competitiveness. More generally,

these reforms would make the economy less vulnerable to specific sectors and

more resilient to a potential harmonisation of tax rates at the EU level183.

In Malta, the corporate tax rate is a 35% flat rate, which is the highest among other

European Member States (Figure 53). In addition, the World Bank ranks Malta

among the lowest countries within the EU and lower than many non EU countries in

the overall business environment (Malta being at the 103th place) and also much

lower when it comes to ease of starting up a business (161st place) (World Bank,

Doing Business report, 2014).

181 http://www.enemalta.com.mt. 182 Ibid. 183 Malta – 2013 Article IV Consultation Concluding Statement:

http://www.imf.org/external/np/ms/2013/051313b.htm.

192

Figure 53: Corporate tax rate across countries in 2014

Source: PwC Worldwide Tax Summaries – Corporate Taxes 2013-2014.

However and as mentioned earlier, Malta is known for being an attractive location

for Foreign Direct Investment which motivates new business in sectors such as

financial and insurance activities, remote gaming and ICT due to highly favourable

tax incentives for foreign companies setting up subsidies in Malta. Thus, Malta’s

accession into the European Union in 2004, followed by a number of tax incentives

introduced, have improved the country’s attractiveness for tax planning and

corporate relocation.

Malta’s attractive corporate tax systems and specialised incentives targeted at the

gaming sector have made it a popular destination for companies working in this

sector. Malta’s gaming tax is one of the lowest and most flexible and its corporate

tax is unique within the EU as it provides an effective corporate tax rate of only 5%

on the distribution of dividends to shareholders. In addition, with a view to attracting

even more gaming companies, Malta has enacted a flat income tax rate of 15% for

certain highly qualified persons employed within the gaming industry. This allows

such gaming companies to retain any additional revenue from their operations184.

Similarly, to encourage further economic activity, enterprises that set up in the

financial services sector also benefit from specific tax incentives. In particular,

investment funds that are resident in Malta are, as a general rule, exempt from

Maltese income tax subject to the satisfaction of certain conditions. The legal

framework of investment funds in Malta and the particularities of the equity

financing market in Malta are further developed in Section 7.2.

184 Remote Gaming, Update 2013, LGA.

35%34% 33.30%

31.40%30% 29.60%

26%25% 25%

19.70%

0%

5%

10%

15%

20%

25%

30%

35%

40%

193

Annex 5 – List of interviews

Stakeholders interviewed for the present AFMA study in Malta are indicated in the

table below.

Table 57: Interviews conducted with the different stakeholder groups for the AFMA

study in Malta

Stakeholder group Institution interviewed

Banks and financial institutions

Bank of Valletta

HSBC Malta plc

Lombard Bank Malta plc

APS Bank plc

Banif Bank

Middlesea Valletta

Associations

Malta Chamber of Commerce, Enterprise and Industry

Malta Chamber of Small and Medium Enterprises (GRTU)

Gozo Business Chamber

Malta Business Bureau

Public Administration and State

Managing Authorities

Malta Enterprise

Planning and Programmes Coordination Division (PPCD)

Funds and Programmes Division (FPD)

National Statistics Office

Accelerators / incubators

The Malta Council for Science and Technology (MCST)

SmartCity Malta

University of Malta (Center for Business Entrepreneurship and

Business Incubation)

Equity investment providers Valletta Fund Management

Source: PwC, 2014.

194

Annex 6 – Glossary

Common Strategic

Framework (CSF)

Common Strategic Framework translates the objectives and

targets of the EU strategy for smart, sustainable and inclusive

growth (Europe 2020 Strategy) into key actions for the CSF

Funds (also called ESI Funds).

CSF Funds Common Strategic Framework Funds for the next

programming period. This includes: European Regional

Development Fund (ERDF), the European Social Fund (ESF),

the Cohesion Fund (CF), the European Agricultural Fund for

Rural Development (EAFRD) and the future European

Maritime and Fisheries Fund (EMFF). They are also called

European Structural and Investment (ESI) Funds.

Ex-ante assessment Identifies “market failures or suboptimal investment situations,

and investment needs” as established under Article 32 of

regulation n°1303/2013 (Common Provisions Regulation).

Member States / Managing Authorities are required to

conduct ex-ante assessments prior to supporting Financial

Instruments, including: rationale / additionality against existing

market gaps and demand / supply, potential private sector

involvement, target final recipients, products and indicators.

FEI Financial Engineering Instruments in programming period

2007-2013 as established under Article 44 of Council

Regulation (EC) 1083/2006 and as amended.

FI Financial Instruments in programming period 2014-2020 as

established under Article 32 of regulation n°1303/2013

(Common Provisions Regulation).

GAFMA Guidelines for SME Access to Finance Market Assessments. This

is a methodology developed by the European Investment

Fund to be used to prepare market assessments to identify

market failures, suboptimal investment situations and

investment needs for SMEs.

Guarantee A guarantee offers commitment by a third party called the

“guarantor” to pay the debt of a borrower when the latter

cannot pay it himself. The guarantor is liable to cover any

shortfall or default on the borrower's debt under the terms

and conditions as stipulated in the agreement between the

guarantor, the lender and / or the borrower.

Holding Fund Holding Fund is as defined in Article 44 of Council regulation

(EC) 1083/2006 and as amended.

It is a fund set up to invest in several equity funds, guarantee

funds, loan funds, or other incentive schemes providing

equity, loans, guarantees for repayable investments or

equivalent instruments for SMEs.

195

JEREMIE Joint European Resources for Micro to Medium Enterprises, is

an initiative of the European Commission developed together

with the European Investment Fund. It promotes the use of

Financial Instruments to improve access to finance for SMEs

via Structural Funds.

Managing Authority

(MA)

Managing Authority, as defined in the Community regulations

regarding Structural Funds.

Operational

Programme (OP)

As referred to in Part Three of the Common Provisions

Regulation and in the EMFF Regulation, and “Rural

Development Programme” referred to in the EAFRD

Regulation.

Document approved by the European Commission

comprising a set of priorities which may be implemented by

Structural Funds or other Financial Instruments.

Specific Fund In the context of JEREMIE, refers to loan, guarantee or

equity / Venture Capital funds investing in enterprises.

Thematic

Objectives

Objectives supported by each ESI Fund in accordance with its

mission in order to contribute to the Union strategy for smart,

sustainable and inclusive growth (See Article 9 of the

Common Provisions Regulation).

196

Annex 7 – List of indicators used for the AFMA study

Table 58: Indicators used to perform the AFMA study in Malta

Indicator Definition Source Analysis

Macroeconomic indicators

GDP Gross Domestic product NS0 2012/13 Historical analysis

GDP per capita Gross Domestic Product divided by

the total population Eurostat 2012 Comparison analysis

Real GDP Growth Year-on-year change in GDP

adjusted for price changes Eurostat 2012/13 Historical analysis

Inflation (RPI)

Retail Price Index – Change in the

price level of a market basket of

goods and services purchased

NSO 2012/13 Historical analysis

Inflation (HICP) Harmonized Index of Consumer Prices Eurostat 2014 Forecast analysis

Corporate tax rate Level of corporate tax rate as set by

the law World Bank 2013

Historical analysis

Comparison analysis

Market indicators

R&D expenditures as

% of GDP

Research and Development

expenditures divided by GDP NSO 2009-2011 Comparison analysis

Malta’s innovation

performance

Malta’s innovation performance

compared with other EU Member

States

EC Innovation Union

Scoreboard 2014 Comparison analysis

Patents applications Number of patents applications filed

under PCT

EC Innovation Union

Scoreboard 2014 Comparison analysis

Growth in loans to

NFCs and SMEs

Growth in loans to non-financial

corporations and SMEs

Central Bank of

Malta 2013 Historical analysis

Outstanding loans to

NFCs

Outstanding loans to non-financial

corporations resident in Malta

Central Bank of

Malta 2014

Comparison analysis

Gap Analysis

Outstanding loans to

SMEs

Outstanding loans to SMEs resident in

Malta

Central Bank of

Malta 2014

Comparison analysis

Gap Analysis

Loans to NFCs as a %

of GDP

Loans to non-financial corporations as

a percentage of GDP Eurostat 2012 Comparison analysis

AAR for overdrafts

and long-term loans

Annualised agreed (interest) rates for

revolving loans and overdrafts and

short and long-term loans

Central Bank of


Interest rates on

Loans

Interest rate on loan products up to

EUR 1m in the Eurozone

European

Commission 2013 Comparison analysis

Interest rates on

Overdrafts

Interest rate on overdrafts in the

Eurozone

European

Commission 2013 Comparison analysis

NPLs as a % of total

gross loans

Non-performing loans as a

percentage of gross loans issued by

core domestic banks

Central Bank of


Volume of

guarantees provided

Volume of guarantees provided by

product and by SMEs

Financial

statements of credit

institutions 2013

Historical analysis

Comparison analysis

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Indicator Definition Source Analysis

Social indicators

Population Population NSO 2012/13 Historical analysis

Comparison analysis

Projected population Projection of the Maltese population

in the long term NSO Census 2011 Forecast analysis

Average age of

Maltese population

Average age of population in Malta

and Gozo NSO Census 2011

Historical analysis

Comparison analysis

Employment &

Unemployment rates

Working population (non-working

population) divided by the

population in working age

NSO 2012/13 Historical analysis

Comparison analysis

Labour force in SMEs Share of labour force employed in

SMEs NSO 2012/13 Comparison analysis

Population attaining

highest level of

education

Population aged 15 and over by

highest level of education successfully

completed

NSO Census 2011 Comparison analysis

Students in higher

education institutions

Number of students attending higher

education institutions by different

areas of specialisation

Eurostat 2012 Historical analysis

Comparison analysis

People at risk of

poverty or social

exclusion by age

and sex

Share of population at risk of poverty Eurostat 2013 Historical analysis

Population on 1

January by five years

age groups and sex

Number of people divided in age

groups Eurostat 2014 Historical analysis

Comparison analysis

Source: PwC, 2014.

198

Annex 8 – Questionnaire for the online survey

The questionnaire used for the online survey, conducted for the AFMA study in

Malta, is presented below.

1. In which territorial area is the main business activity of your company based? (Please select from

the list below)

o Malta

o Gozo

2. In which sector does your business primarily operate? (Please select from the list below)

o Agriculture, forestry and fishing

o Mining and quarrying

o Manufacturing

o Electricity, gas, steam and air conditioning supply

o Water supply; sewerage, waste management and remediation activities

o Construction

o Wholesale and retail trade; repair of motor vehicles and motorcycles

o Transportation and storage

o Accommodation and food service activities

o Information and communication

o Financial and insurance activities

o Real estate activities

o Professional, scientific and technical activities

o Administrative and support service activities

o Public administration and defence; compulsory social security

o Education

o Human health and social work activities

o Arts, entertainment and recreation

o Other service activities

o Activities of households as employers; undifferentiated goods- and services-producing activities of

households for own use

o Activities of extraterritorial organisations and bodies

3. Over the last three years (2011, 2012, 2013), on average how many full-time staff or full-time staff

equivalent (“FTE”) were working in your company? (Please select from the list and answer for each

year)

1 - 9 employees 10 - 49 employees 50 - 249

employees

250+ employees

2013 o o o o

2012 o o o o

2011 o o o o

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4. At which growth phase would you currently position your company / activity?

o Initiation [business model is created, no commercial activity]

o Creation [commercial activity initiated, product not marketed]

o Post-creation [activity has begun, no profit]

o Development [profitable growth phase]

o Maturity [stable activity with frail or stagnant growth]

o Reorganisation [implementing or planning future restructuring processes in order to become

profitable]

o Takeover / transfer to new ownership/ buy-out

5. How did the following factors change between 2011 and 2013, in your opinion? (Please indicate

your answers in the fields provided below)

Much

Worse

Worse Unchanged Better Much

Better

No

Opinion

The financial situation of your

business o o o o o

o

Turnover o o o o o

o

The cost (interest and other) of

obtaining finance for your business o o o o o

o

The debt/turnover ratio of your

business o o o o o

o

Other terms or conditions of finance

(e.g. loan maturity, collateral levels,

etc.)

o o o o o o

The burden or effort to obtain

finance for your business o o o o o

o

The willingness of banks to provide

finance o o o o o

o

200

6. Over the last three years (2011, 2012, 2013), which source(s) of funding has your company used?

(Please indicate all the sources of finance you have used)

o Micro-loan from a micro-finance institution (< 25.000 euros)

o Short-term loans, bank overdrafts and credit lines (< 1 year)

o Medium and long-term loans (> 1 year)

o Loans guaranteed by a public or private entity

o Loan provided with interest rate subsidy

o Loan obtained from parent company

o Leasing

o Bank guarantees (including export guarantees)

o Factoring

o Investment funds

o Venture capital funds, i.e. capital provided by investors acting together in a fund set up for the

purpose of providing finance to start-up and small businesses

o Business Angels i.e. individuals investing in start-ups and entrepreneurs and often providing

mentoring

o Technology transfer funds

o Equity from national, regional or foreign institutions

o Rescue / turnaround and buyout capital

o Mezzanine or hybrid financing i.e. combining loans and equity

o Public grants

o Corporate bonds

o Other private investors

o Private grants or donations

o Retained earnings

o Capital contributions of shareholders

o External capital contributions (family or friends)

o Other financing sources

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7. How successful were you in obtaining each type of the products listed below over the last three

years (2011, 2012, 2013)?

Please indicate the level of success for each of the following sources, where “partially successful”

refers to not getting the requested amount or receiving it with unsatisfactory terms.

Whatever was not ticked in Q6 should be ticked as ''N/a'' in this question

Successful Partially

Successful

Unsuccessful N/a

Micro-loan from a micro-finance institution (< 25.000 euros) o o o o

Short-term loans, bank overdrafts and credit lines (< 1 year) o o o o

Medium and long-term loans (> 1 year) o o o o

Loans guaranteed by a public or private entity o o o o

Loan provided with interest rate subsidy o o o o

Loan obtained from parent company o o o o

Leasing o o o o

Bank guarantees (including export guarantees) o o o o

Factoring o o o o

Investment funds o o o o

Venture capital funds, i.e. capital provided by investors

acting together in a fund set up for the purpose of providing

finance to start-up and small businesses

o o o o

Business Angels i.e. individuals investing in start-ups and

entrepreneurs and often providing mentoring

o o o o

Technology transfer funds o o o o

Equity from national, regional or foreign institutions o o o o

Rescue / turnaround and buyout capital o o o o

Mezzanine or hybrid financing i.e. combining loans and

equity

o o o o

Public grants o o o o

Corporate bonds o o o o

Other private investors o o o o

Private grants or donations o o o o

Retained earnings o o o o

Capital contributions of shareholders o o o o

External capital contributions (family or friends) o o o o

Other financing sources o o o o

202

8. For what purpose did you seek finance in the last three years (2011, 2012, and 2013)? (Please select

one or more options from the list below)

o Finance working capital

o Ensure debt consolidation

o Acquire another company

o Rent machinery / equipment

o Launch a new product / service

o Develop international activities / enter a new market (geographic expansion)

o Finance export sales

o Finance R&D and innovation

o Transfer ownership

o Acquisition of an intangible asset

o Improve energy efficiency of your company

o Other needs

9. During the last three years (2011, 2012, 2013), in your opinion, what were the reasons for any

difficulties in obtaining finance that you experienced? (Please indicate one or more options from

the list below).

o The financial situation of your business

o The cost (interest and other) of obtaining finance for your business

o The debt / turnover ratio of your business

o Other terms or conditions of finance (e.g. loan maturity, collateral levels, covenants,

guarantee, conditions, duration, etc.)

o The burden or effort to obtain finance for your business

o The lack of expertise of your team to find or negotiate the best option

o The limited availability of equity investors

o The difficulties related to file the application

o The willingness of banks to provide finance

o Corruption

o Not applicable: Our company did not experience any difficulties

203

10. Over the last three years (2011, 2012, 2013), have you ever felt discouraged from seeking finance?

(Please indicate one or more of the options listed below)

o Never

o Rarely

o Occasionally

o Often

o Always

11. Over the last three years (2011, 2012, 2013), what type of guarantee did you provide for your

loan(s)?

(Please indicate one or more of the options listed below.)

o Owner’s assets

o Family and friends

o Company assets

o Business partners

o Mutual guarantee schemes such as cooperatives

o Other guarantee schemes (Private, public, national or regional)

o Other institution

o Not applicable: Our company did not use loan financing or did not need to provide collateral

12. Over the last three years (2011, 2012, 2013), which do you believe were the reasons for being

unsuccessful - or partially unsuccessful - in receiving loan financing? (Please indicate one or more

of the options listed below)

o Poor credit rating

o Lack of own capital

o Insufficient collateral or guarantee

o Insufficient potential or too high a risk (of the business or project)

o Already too much debt

o No credit history

o Poor credit history

o No reason given

o Interest rates were too high

o Other conditions of the loan were unacceptable (e.g. maturity, covenants)

204

o Not applicable: Our company did not request loan financing or was successful in receiving

loan financing over these years

13. Did you experience changes in bank financing terms and conditions over the last three years

(2011, 2012, 2013)? (Please indicate any changes per option provided)

Increased Decreased Unchanged

Interest rates o o o

Other costs related to the loan (other than interest rate) o o o

Amount of the loan / credit line available o o o

Maturity of the loan o o o

Collateral requirements o o o

Contractual issues related to the loan / Information

requirements, etc.

o o o

14. Over the last three years (2011, 2012, 2013), what sources of equity finance did you use? (Please

indicate all the equity sources you have used for the time period 2011 - 2013)

o Existing shareholders

o Directors in your company who were not previously shareholders

o Other employees of your business

o Family, friends or other individuals

o Venture capital funds i.e. capital provided by investors acting together in a fund set up for the

purpose of providing finance to start-up and small businesses

o Business angels i.e. individuals investing in start-ups and entrepreneurs and often providing

mentoring

o Mezzanine or hybrid financing i.e. combining loans and equity

o Initial Public Offering (IPO) or other stock market offerings i.e. the first issue of shares by a

private company to the public in order to generate capital

o Banks

o Other financial institutions e.g. subsidiaries of banks

o Other companies

o Public equity funds

o Other equity finance source

o Not Applicable: Our company did not seek for equity finance in these years

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15. What amount of loan and equity funding did you SEEK during the last three years? (Please provide

an estimate in thousands of Euros of the financing amount sought for loan and equity)

2011-2013

(thousands EUR)

Debt (all types of loan or credit)

Equity finance (all types of equity and quasi-

equity financing)

Grants or subsidies

16. What amount of loan and equity funding did you OBTAIN during the last three years? (Please

provide an estimate in thousands of Euros of the financing amount obtained for loan and equity)

2011-2013

(thousands EUR)

Debt (all types of loan or credit)

Equity finance (all types of equity and quasi-

equity financing)

Grants or subsidies

17. Do you feel you have sufficient access to the following financing sources in Malta?

Yes No Type of

financing not

relevant for

me

Micro-loan from a micro-finance institution (< 25.000 euros)

Short-term loans, bank overdrafts and credit lines (< 1 year)

Medium and long-term loans (> 1 year)

Loans guaranteed by a public or private entity

Loan provided with interest rate subsidy

Loan obtained from parent company

Leasing

Bank guarantees (including export guarantees)

Factoring

Investment funds

Venture capital funds

Business Angels

Technology transfer funds

Equity from national, regional or foreign institutions

Rescue / turnaround and buyout capital

Mezzanine or hybrid financing

Public grants

Corporate bonds

Other private investors

Private grants or donations

Retained earnings

Capital contributions of shareholders

External capital contributions (family or friends)

Other financing sources

206

18. Please select the FIVE forms of financing you prefer.

o Short-term loans, bank overdrafts and credit lines (<1 year)

o Medium and long-term loans (> 1 year)

o Loans guaranteed by a public or private entity

o Loan provided with interest rate subsidy

o Loan obtained from parent company

o Leasing

o Bank guarantees (including export guarantees)

o Factoring

o Investment funds

o Venture capital funds

o Business Angels

o Technology transfer funds

o Equity from national, regional or foreign institutions

o Rescue / turnaround and buyout capital

o Mezzanine or hybrid financing

o Public grants

o Corporate bonds

o Other private investors

o Private grants or donations

o Retained earnings

o Capital contributions of shareholders

o External capital contributions (family or friends)

o Other financing sources

207

19. What amount of each of the following financing sources have you already requested or do you

intend to request in 2014 (Amount in thousands of Euros)? (If not applicable leave blank)

(thousands EUR)

2014

Short-term loans, bank overdrafts and credit lines (< 1 year)

Medium and long-term loans (> 1 year)

Loans guaranteed by a public or private entity

Loan provided with interest rate subsidy

Loan obtained from parent company

Leasing

Bank guarantees (including export guarantees)

Factoring

Investment funds


Business Angels

Technology transfer funds

Equity from national, regional or foreign institutions

Rescue / turnaround and buyout capital

Mezzanine or hybrid financing

Public grants

Corporate bonds

Other private investors

Private grants or donations

Retained earnings

Capital contributions of shareholders

External capital contributions (family or friends)

Other financing sources

20. For what purpose is this funding being sought? (Please indicate one or more options)

o Finance working capital

o Ensure debt consolidation

o Acquire another company

o Acquire land / building

o Rent land / building

o Acquire machinery / equipment

o Rent machinery / equipment

o Launch a new product / service

o Develop international activities / enter a new market (geographic expansion)

o Finance export sales

o Finance R&D and innovation

o Transfer ownership

o Acquisition of an intangible asset

o Other needs

208

21. When looking for finance, do you feel you lacked support from:

Yes No Did not ask for

support from

this organisation

Your city

State authorities

Guarantee funds

Public Investment funds


Business angels

Commercial banks

Chamber of Commerce and Industry

Social Media (Facebook / Twitter…)

Support networks

Your accountant or an accounting, tax or finance consultant

Innovation infrastructure such as incubators, innovation centers,

technology parks, cluster

Your social environment such as friends, family

209

22. Please RANK the following factors limiting business growth in Malta by importance:

Please rank the FIVE most important factors in the short-term, medium-term and long-term (up to 1

year, from 1 to 3 years, from 3 to 5 years)

1 = least important factor; 5 = most important factor

o Limited demand in foreign markets

o Limited availability of suitable new personnel

o Loss of existing personnel

o Business transfer problems e.g. inheritance

o Cost of labour increasing

o Inability to finance necessary investment into equipment

o Products getting outdated (R&D necessary, product lead time)

o Difficulty keeping up with technological change

o Change in the competition (as new entrants in the market)

o Price competition / small margins

o Unfair competition, e.g. dumping

o Regulatory framework (related to issues such as labour code, public procurement

procedures, tax regulation)

o Lack of fiscal incentives

o Not enough supply of financing

o Available financing not appropriate to your need

o Corruption

o Do not see constraints (nothing ticked above)

210

Annex 9 – Interview guide

Below is presented the interview guide that was used to interview stakeholders.

When each interview was conducted this guide was fine-tuned and adapted

according to the interviewee’s experience and knowledge related to SMEs’ access

to finance in Malta.

A - Your investments in Small and Medium-sized Enterprises

1. Could you briefly describe the three key solutions that you are currently

offering to SMEs?

a) What is the volume invested for each solution and your capacity for the

next three years?

b) What are the eligibility criteria for each solution?

c) Are you adopting a single or multi-player approach? If Yes, which actors

do you involve in the process (co-investment)?

Please, find below options for answers:

Description Volume Eligibility criteria Key challenges and obstacles Approach

Equity, debt,

hybrid,

guarantee, other

Present | Future

e.g. size of investment

and company, sector,

location, type of

investment (target

activities / objectives)

e.g. cost, market acceptance,

legal complexity, expectations

for guarantees, risk profile

Single or

multi-player

2. What are the key Strengths, Weaknesses, Opportunities and Threats of your

current funding offer to SMEs?

3. What are some of the reasons why you declined to make investments from

your side (e.g. related to management, product, commercial considerations,

etc)?

4. What specific obstacles do you face as a Venture

Capitalist / bank / promotional bank / agency investing in Malta (e.g. cost,

market acceptance, legal complexity, expectations for guarantees, risk

profile, better conditions outside Malta)?

B - Market trends and challenges

5. How would you assess the market demand for financing SMEs in your

country? How many companies in your territory fit into your potential

pipeline?

211

6. Which sectors would you say are most likely to experience a growth in

demand in Malta? What would be the most likely objectives or target areas

for investment?

7. What are the key challenges for funding SMEs?

8. What are the emerging trends in SME financing Malta in terms of:

a) Instruments from the private sector

b) Instruments and mechanisms from the public sector

c) Policy framework

9. Have you ever considered using the securitisation of loan portfolios / lease

portfolios to SMEs?

10. Is market demand higher than the current supply? Is there a funding gap in

Malta?

C - Prospective solutions

11. Which are the most effective models to fund SMEs?

12. How do you see the role of public sector funding for supporting SME funding?

13. Is there a market need in Malta for SMEs?

212

Annex 10 – Minutes of the interviews

The minutes of the interviews are attached in a separate document.