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United Nations Economic and Social Commission for Western Asia Dubai International Conference on Innovative Sources to Finance SMEs Dubai InterContinental Hotel – February 16-17, 2010 INNOVATIVE FINANCING OF SMEs: THE ITALIAN EXPERIENCE. SALVATORE ZECCHINI Institute for Industrial Promotion

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Salvatore zecchini institute for industrial promotion rome italy

United Nations Economic and Social Commission for Western AsiaDubai International Conference on Innovative Sources to Finance SMEsDubai InterContinental Hotel – February 16-17, 2010INNOVATIVE FINANCING OF SMEs: THE ITALIAN EXPERIENCE

SALVATORE ZECCHINI

Institute for Industrial Promotion

Rome Italy


SMEs are a diverse group of firms. Asia

Micro firms’ financial problems differ from those of small firms, that are in turn at variance with those of medium-sized firms.

Need to look at the country’s enterprise structure to see where most financial woes lie and what action should be taken first.




SMEs and MICRO ENTERPRISES IN ITALY AND OTHER MAJOR EU COUNTRIES(Number of firms, employment and value added in % and average %)


In the EU and in Italy in particular, SMEs have been the most dynamic component of the economic system, especially in terms of employment creation, in the current decade.


Enterprise demography in Italy most dynamic component of the economic system, especially in terms of employment creation, in the current decade.

Source: Unioncamere-InfoCamere, Movimprese


Balance sheets of italian manufacturing firms bach
BALANCE SHEETS OF ITALIAN MANUFACTURING FIRMS (BACH) most dynamic component of the economic system, especially in terms of employment creation, in the current decade.


Smes bank debt as a ratio to sales turnover year 2009 percentages
SMEs’ bank debt as a ratio to sales turnover most dynamic component of the economic system, especially in terms of employment creation, in the current decade.(Year 2009 - Percentages)


The italian smes financial pattern before the global financial crisis
The Italian SMEs financial pattern before the global financial crisis

  • Thin capitalization

  • Heavy reliance on bank debt, trade credit and self-financing

  • Dependency on short-term bank debt

  • Little recourse to financial markets

    Result:

    Severe difficulty to fund investment and innovation projects


It is not clear whether such financing pattern is the consequence of SMEs’ attitude (demand side), more than financiers’ risk aversion or the characteristics of financial system (supply side).

Contributing factors:

  • Information opacity

  • Bank-centered financial system

  • Minor role of institutional investors, such as pension funds

  • Family-based capitalism


Financing need of italian enterprises
Financing need of Italian Enterprises consequence of SMEs’ attitude (demand side), more than financiers’ risk aversion or the characteristics of financial system (supply side).

----------- Self-financing

-- ---- -- - EBIT

________ Investment expenditure

------------ Net financial charges

Source: Bank of Italy, Annual report, May 2009.


Self financing ability of italian enterprises
Self-financing ability of Italian Enterprises consequence of SMEs’ attitude (demand side), more than financiers’ risk aversion or the characteristics of financial system (supply side).

Cash flow / Investments (%)

Source: Bank of Italy, Annual report, May 2009.


Bank loans to italian enterprises percentage change on yearly basis
Bank Loans to Italian Enterprises consequence of SMEs’ attitude (demand side), more than financiers’ risk aversion or the characteristics of financial system (supply side).(percentage change on yearly basis)

------------ all enterprises, ---------- medium and large firms ----------- small firms

Source: Bank of Italy, Annual report, May 2009.


Firms under Financial Stress consequence of SMEs’ attitude (demand side), more than financiers’ risk aversion or the characteristics of financial system (supply side).

(March 2009 – by turnover size in thousand euros)

Source: Unicredit Data

Dark gray: Firms under stress

Light Gray: Firms with no stress


Aims of new financing pattern
Aims of new financing pattern consequence of SMEs’ attitude (demand side), more than financiers’ risk aversion or the characteristics of financial system (supply side).

  • Reopen the bank lending channel

  • Ease the liquidity squeeze

  • Build up equity base

  • Promote investment in R&D and new technologies

  • Boost Mutual Credit Guarantee Schemes

  • Spur SME aggregation


Mutual credit guarantee schemes
MUTUAL CREDIT GUARANTEE SCHEMES consequence of SMEs’ attitude (demand side), more than financiers’ risk aversion or the characteristics of financial system (supply side).

Source: Federconfidi, Statistiche AECM, EU Finance Day for SMEs, Roma, 2008


Mutual credit guarantee schemes1
Mutual Credit Guarantee Schemes consequence of SMEs’ attitude (demand side), more than financiers’ risk aversion or the characteristics of financial system (supply side).

Source: Fedart Fidi


Most effective financial tools after the crisis
Most effective financial tools after the crisis consequence of SMEs’ attitude (demand side), more than financiers’ risk aversion or the characteristics of financial system (supply side).

  • Public guarantees to Mutual Credit Guarantee Schemes

  • On-lending of public funds to SMEs through banks

  • Extraordinary public support to bank recapitalization


Comparison of financial impact credit multipliers of various gvt tools
Comparison of Financial Impact consequence of SMEs’ attitude (demand side), more than financiers’ risk aversion or the characteristics of financial system (supply side).Credit multipliers of various Gvt tools

  • Guarantee by State Fund to MCGS with State endorsement : 45.3 times x 1 euro

  • Public purchased of participatory bonds issued by MCGS : 44.4 times

  • Guarantee by Regional government

    29.3 times

  • Tranched cover : 14.9 times

  • Capped guarantee by State Fund to MCGS :

    Source: L. Gai and F. Rossi, in Bancaria 2009


The most innovative financial instruments are less used by SMEs because of SMEs’ relatively low financial skills and limited offer by financial industry


Mezzanine debt
Mezzanine debt SMEs because of SMEs’ relatively low financial skills and limited offer by financial industry

Firms with less than 50 million euros turnover were 17 and received 129.6 million euros of mezzanine debt.


Mezzanine debt values in million euros
Mezzanine debt SMEs because of SMEs’ relatively low financial skills and limited offer by financial industry(values in million euros)


Venture capital and private equity
Venture capital and private equity SMEs because of SMEs’ relatively low financial skills and limited offer by financial industry


Venture capital and private equity1
Venture capital and private equity SMEs because of SMEs’ relatively low financial skills and limited offer by financial industry


Venture capital and private equity2
Venture capital and private equity SMEs because of SMEs’ relatively low financial skills and limited offer by financial industry


Venture capital and private equity3
Venture capital and private equity SMEs because of SMEs’ relatively low financial skills and limited offer by financial industry


Critical issues
Critical issues SMEs because of SMEs’ relatively low financial skills and limited offer by financial industry

  • Too many Gvt incentives lead small firms to remain small

  • Excessive transfer of financial risk to the public sector may lead to moral hazard

  • Undercapitalization of SMEs is benefiting from Gvt support

  • Basel 2 goes against SMEs’ excessive reliance on short-term debt

  • Lack of SME access to financial markets


Conclusions
Conclusions SMEs because of SMEs’ relatively low financial skills and limited offer by financial industry

  • Thin equity base and high dependency on bank lending are the weakest points in EU and Italy’s SME financing.

  • Innovative financial instruments have fuelled a significant expansion of SMEs in the EU before 2008, but are unable to shield them in current economic crisis.

  • Financial innovation has been of little help in overcoming SME undercapitalization.

  • Convergence needed between Gvt support and private capital to channel more funds to SMEs.

  • Gvt intervention is essential as performer of financial risk transformation, provider of guarantees, rule maker

  • Most finance needed for equity base, R&D, innovation, SME aggregation


  • Need to develop equity markets for small firms: it requires development of institutional investors, like pension funds.

  • Most effective financing tools are public credit guarantees, mutual credit guarantee schemes, on-lending of public funds.

  • Relationship banking is more suitable for financing small firms, as compared to parametric banking.

  • SMES have to show more transparency on their conditions, a commitment to raise equity base, and operate in a network fashion.

  • Overall, need for a better risk sharing between SMEs, lenders and public sector in advancing in innovative financing.


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