Alternative financial institutions propping up SME lending in Turkey

Turkey went through an especially difficult 2009 as the global financial crisis led many domestic and foreign investors, frightened by uncertainty over whether Turkey had left behind its history of massive collapses during crises, to pull out. Banks soon followed suit by restricting their lending operations, preferring to play it safe by running to risk-free government bonds and low risk investments. Their action worked in their favor in 2009, with many banks posting record profits and with some even surpassing the TL 3 billion profit mark.

According to data from the Banking Regulation and Supervision Agency (BDDK), the amount of credit available for SMEs decreased by 1 percent to reach TL 83.1 billion -- though it had fallen to as low as 78.6 billion in July 2009, or a decrease of 8 percent over a year before. Compared to the 10.6 percent increase in 2008 and the 28 percent increase in 2007, this was a worrying reversal. The number of bank customers classified as SMEs decreased from 1.3 million to 1.2 million, along with a 72.2 percent increase in the number of SMEs defaulting on their payments, or more than 203,000 businesses. The monetary value of these non-performing loans increased by a similar 62 percent, to reach TL 6.9 million in 2009.

Süleyman Yılmaz, general manager of KOBİ Venture Capital Investment Trust (KOBİ AŞ), speaking to Sunday’s Zaman, stated that a 1 percent fall may not seem like a big deal but emphasized that it could have been much greater. “The government used up all of the funds it could, and that decrease could have doubled,” said Yılmaz. In fact, domestic private banks took an especially hard step back, decreasing the amount of SME loans by 9.1 percent, or TL 4.6 billion in 2009 over 2008, while public government-owned banks tried their best to catch up, increasing their SME loan portfolio by 8.7 percent, or TL 1.5 billion. This along with the increase in non-performing loans meant that SMEs not only had blemished credit records but faced even stricter lending conditions.

While private banks held a firm grip on their finances, certain non-bank financial institutions are coming to aid Turkey and, as Yılmaz stated, possibly stop an even further decline in the amount of credit available to SMEs.

Venture capital for the rest of us

KOBİ AŞ provides venture capital to SMEs that are past the development stage and are looking to grow through new products in order to alleviate capital constraints and gives financing for promising SMEs. Yılmaz stated that the organization is currently financing seven SMEs, ranging from machine manufacturers to a firm producing dentures.

Yılmaz, however, stated that because the concept of venture capital is new in Turkey, SME owners still had misconceptions about what exactly KOBİ AŞ does. “We try to introduce ourselves and what venture capital is in every province that we visit. The first question we get is, ‘How can we get a loan from you?’ We aren’t a source of loans; we’re an alternative source of capital.”

Despite this approach, however, Yılmaz said there is much interest and many applications for funding from all corners of Turkey. He added, however, that the number of applicants dropped significantly during the difficult days of 2009 -- a time when applications and therefore interest should have been rising. “We used to get at least an application a day, but now we started getting one every few days. People chose to shrink and keep their costs under control rather than turning the crisis into an opportunity. … It was definitely strange to see them choosing to be introverted rather than coming to us for help.”

The firms funded by KOBİ AŞ have been successful with the funding received, Yılmaz stated, adding that not only are their profits growing but the number of employees are increasing upwards of 25 percent for some of the firms that KOBİ AŞ funds. He continued by saying that an involvement with KOBİ AŞ also strengthened firms in other aspects, giving them an upper hand in negotiations with banks, providing them with consulting services and connecting them to a large network of SMEs.

Regarding the development of venture capital in Turkey, Yılmaz stated that in terms of the funds that KOBİ AŞ has, they weren’t that large of a venture capital fund but had a larger vision they were pursuing: “By making ourselves known, we are trying to help the venture capital sector in Turkey grow. … This isn’t a one-way street; our sector also needs investors.”

Indirect lending

Pushing banks to loan to SMEs through incentives and financial backing has also been proven to funnel credit to SMEs. The European Investment Bank (EIB), the EU’s long-term lending institution, opened up a 1.5 billion euro credit line in 2009 for Turkey’s banks to draw on and lend to Turkish SMEs. Although the EIB is scaling back its SME lending operations and instead shifting focus toward renewable energy investments in 2010, the sheer volume of the credit line they opened in 2009 has helped slow the shrinking of SME loans available in the market.

An alternative approach to propping up bank lending is guarantees, which cover for some of the losses that banks may incur. This instrument, therefore, makes banks more willing to lend during uncertain times. Jose Romano, the head of the Turkish operations of the European Investment Fund (EIF), an EU agency specifically focused on financing SMEs through indirect means, speaking to Sunday’s Zaman, stated that the EIF is picking up operations in Turkey through the Competitiveness and Innovation Program (CIP) -- a half billion euro program for credit guarantees through the EU and the accession countries -- by providing such guarantees to private banks.

“The guarantees we provide help support lending to SMEs as financial intermediaries suddenly get some of the portfolio risk guaranteed by the EIB,” Romano stated. He said the EIF will be officially announcing a counter guarantee to the Credit Guarantee Fund (KGF) on March 17 at the SME Finance Days in Ankara. This would indirectly result in 90 million euros of lending to SMEs through guarantees to banks. He also added that the past year has been busy, with many financial intermediaries applying to the EIF to take advantage of the guarantees available.

“One of the big problems that SMEs have is collateral. They have to promise [to banks] the provision, the price and secondary collateral source. The guarantees we provide to financial intermediaries allow them to reduce the collateral requirements or to pass on some pricing advantages to SMEs. So these guarantee instruments are very powerful in increasing the volume of lending in the economy,” stated Romano.