Lifelines: Addressing impediments to financing for small businesses

Access to finance for Tunisian firms is broadly good by regional standards. While 23.9% of firms surveyed by the World Bank’s 2013 Enterprise Survey identified access to finance as a major constraint, this was substantially below the MENA region’s average of 35.7%, and 53.6% had a bank loan or line of credit, more than double the regional average of 25.6%. However, as is common in many emerging markets, the situation remains more difficult for the country’s small and medium-sized enterprises (SMEs).

Obstacles To Leading

The World Bank attributes low SME credit levels in part to the cap imposed on lending interest rates, set at 1.2 times the average rate charged the previous half-year, which it says prevents banks from adequately pricing risks and “exclude[s] otherwise viable companies, mostly small and medium-sized enterprises that do not have adequate collateral”. Demands for collateral are high, which is due in part to the existence of the cap – 87% of loans require collateral according to the Enterprise Survey, versus 79% regionally, and the value of collateral required stood at 251.5% of loan values, compared to a regional average of 202.6%.

Industry figures say that the government appears opposed to the idea of removing the cap, which is aimed at protecting customers from predatory lending. However, other impediments to financing are being addressed. For example, the authorities are working on modernising the rules on bankruptcy. The World Bank argues that a weak bankruptcy system that allows firms to survive without paying their debts further pushes banks to adopt an “ultraconservative” lending strategy. Problems also exist on the SME side. “Banks are willing to finance SMEs if a good project is put in front of them, but are often faced with companies that are often not very transparent,” Souhir Taktak, CEO of the Banque de Financement des Petits et Moyens Entreprises (BFPME), told OBG. Small firms also appear reluctant to apply for a loan.

With banks disinclined to finance SMEs, leasing companies have stepped in. “SMEs these days rarely consider bank financing but rather go straight to leasing companies even if they are more expensive, for reasons of speed and reactivity,” Lilia Kamoun, senior analyst at stock market brokerage Tunisie Valeurs, told OBG. However, due to the nature of the leasing industry such financing is largely reserved for equipment, leaving SMEs struggling to obtain funding for other forms of investment.

Government Support

The government has created several institutions to boost lending to the segment. Prominent among these are the BFPME, which was established in 2005 and focuses in particular on industrial companies. Taktak told OBG that the bank had introduced products to help the segment, such as help for firms going through restructuring, and that it was working on a product to support start-ups in their initial years. “The main challenge for most SMEs is surviving their earlier years,” she said, arguing that the product would help SME clients eventually access finance from commercial banks.

The BFPME’s loans are guaranteed by another state-backed organisation, Société Tunisienne de Garantie (SOTUGAR), meaning that unlike most private sector banks, the institution does not ask clients for guarantees such as collateral which few SMEs have. SOTUGAR also provides other banks with loan guarantees for SMES. However, some industry figures say banks are reluctant to work with it because the judicial procedures banks are required to undertake to be reimbursed for bad loans are slow. The authorities are also planning to open a new public finance institution in 2016, to be known as the Bank of the Regions, which will provide financing for projects in the under-developed interior regions, including for SMEs. The bank will also provide technical assistance and coaching to young entrepreneurs aimed at improving the survival rate of start-ups.