Expert views

Creating the right business environment for SMEs

25 September 2019
Ruslan Spivak, Raiffeisen Bank Aval, Ukraine

Bringing SMEs and the banking system closer to each other by fine-tuning rules and approaches

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

During the decade that was framed as one of the longest world economy growth periods, developing countries including Ukraine suffered several deep crises and recession periods. Negative impact undermines the appetite for risk in financing SMEs because of their low survival rate (less than 50%), crisis-prone nature, fragility and lack of resilience.
Thus, despite their importance to the economy, SMEs are constantly experiencing constraints in access to finance compared to larger segments. Official statistics usually hardly edge the 35% share of SMEs using loans, which is simply insufficient to cover demand and to maintain proper development and scalability.

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

  • Macroeconomic and internal market dynamics
  • Regulatory environment
  • Institutional capability
  • Customer readiness and corporate culture

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


Currently more than 52,000 regulations all over the world are stipulating banking sector activity with a one-size-fits-all approach. Rarely do developed national regulations favor banking policy for SMEs. In the vast majority, special programmes aimed at SME sector support the remain in name only and do not come to fruition. This forces financial institutions to apply standard, restrictive approaches on collateral, financial ratios, reserves and so on.

Although bank lending remains the prevalent form of external SME financing, unfavourable regulations has brought about the rise of challenger banks and fintechs. Both demonstrated a record of 30% asset growth in 2018 and continue to carve out new ground in business banking finance. They thereby disrupt the industry in terms of both products and services that have only been available to corporate customers in the past.

Here we can observe tangible progress in the last decade. Usually with substantial assistance from United Nations bodies, World Bank Group, the European Bank for Reconstruction and Development, the European Investment Bank and so forth, local authorities develop national strategies to improve SME development, with a separate clause dedicated to better access to finance and preferential interest rates.

However, such programmes are limited in their resources and cannot meet the demand while still providing real value to beneficiaries desperately seeking capital. Still despite all efforts the regulation complexity legacy is extremely high in developing countries, especially touching start-ups, license and permit systems and tax regime. Thus, the Regulatory Impact Analysis (RIA) should to be implemented as an effective regulatory environment or health-check tool.

In those countries where the share of black economy is extremely high (close to 50%), national dialogue and special policy elaboration on re-adaptation of this part of the business community is needed. This is the true glimpse of hope for the second chance which, along with further simplification of regulations and administrative procedures and digitalization, should reduce burdens and have a tremendously positive impact on SMEs across developing economies.


Following several crisis events and struggling from a huge non-performing loan burden, banks have implemented tough lending requirements reflected in the strictest-ever risk policy. Unfortunately, such a policy was common, especially in developing countries, forcing more than 70% of SMEs to seek alternative financing or switch the business model to no-loan mode. As a result, less than 20% of entities grew at a rate higher than inflation and the percentage of SMEs using loans shrunk to a marginal 6%-7%. Only in the last few years has some progress been observed.

Efficient industry-based solutions with friendly instruments are being offered, boosting access to finance to as much as 35% of entities, securing healthy portfolios with the average probability of default at less than 4%. Still, that is not enough and the banking sector should find effective solutions by targeting not only immediate cost-impact ratio and return on risk weighted assets but also social functions on growing and scaling the SMEs.

At the same time loan marginality of business banking is still high in developing countries, sometimes reaching as much as 6%, almost twice as much as in corporate banking, securing positions of target capital allocation segment. However, banks are still struggling to build efficient, easy and fast processes to ensure best customer experience, thus lowering the cost of service for SMEs.

Finally, we should acknowledge that banks are less and less able to accompany SMEs in riskier projects such as high-tech, innovations and intangible assets. A separate topic of extreme importance is providing financing for the Sustainable Development Goals implementation. Here, blended finance instruments and mezzanine products are very effective at providing both technical and funding support for SME transformation, hence impacting the overall economic and business landscape in developing countries.


Despite efforts at narrowing the gap, financial literacy and institutional maturity are among the top factors limiting SME access to finance. This is the true uphill battle for the vast majority. About 40% of entities are struggling to build proper accounting and cash flows to ensure transparency, managerial control and predictability, which are critical to obtaining financing. Late payments with counter agents or past bankruptcies, seen as a result of poor management and crisis vulnerability, create a bad track record for financial institutions, closing doors on cooperation for the huge number of businesses that have already died and been reincarnated.

The main post-crisis lesson learned has definitely been a stronger imperative to increase the financial literacy and managerial capacity of entrepreneurs to avoid the deadlock mistakes in view of an expected world financial crisis.

Many challenges lie ahead. However, the road starts from the first step and is paved with close cooperation between international organizations, state authorities and the banking system. It is extremely important to create an integrated synergetic effect to boost the SMEs development.