ACCOUNTANTS FOR BUSINESS Financing SMEs in Cyprus: no stone left unturned? About ACCA This report presents the findings of ACCA (the Association of Chartered Certified an independent study by RTD Accountants) is the global body for professional Talos into ways of improving accountants. We aim to offer business-relevant, first- choice qualifications to people of application, ability and SMEs’ access to finance in Cyprus, ambition around the world who seek a rewarding career as well as ACCA’s response and in accountancy, finance and management. policy recommendations. It is Founded in 1904, ACCA has consistently held unique core values: opportunity, diversity, innovation, integrity based on a series of stakeholder and accountability. We believe that accountants bring interviews and member input value to economies in all stages of development. We aim to develop capacity in the profession and encourage the following a global call for evidence adoption of consistent global standards. Our values are by ACCA. aligned to the needs of employers in all sectors and we ensure that, through our qualifications, we prepare accountants for business. We work to open up the profession to people of all backgrounds and remove artificial barriers to entry, ensuring that our qualifications and their delivery meet the diverse needs of trainee professionals and their employers. We support our 162,000 members and 428,000 students in 173 countries, helping them to develop successful careers in accounting and business, with the skills needed by employers. We work through a network of over 91 offices and centres and more than 8,500 Approved Employers worldwide, who provide high standards of employee learning and development. ABOUT ACCOUNTANTS FOR BUSINESS ACCA’s global programme, Accountants for Business, champions the role of finance professionals in all sectors AUTHORS as true value creators in organisations. Through people, process and professionalism, accountants are central to This report has been prepared for great performance. They shape business strategy through ACCA by RTD Talos. The research a deep understanding of financial drivers and seek team consisted of: opportunities for long-term success. By focusing on the critical role professional accountants play in economies at Dr Alexandros Michaelides, CEO all stages of development around the world, and in diverse organisations, ACCA seeks to highlight and Panagiotis Savvides, Lead Researcher enhance the role the accountancy profession plays in supporting a healthy global economy. Diamantina Beza, Researcher. www.accaglobal.com/ri FOR MORE INFORMATION CONTACT Emmanouil Schizas Senior Economic Analyst, ACCA [email protected] © The Association of Chartered Certified Accountants, 2May 2014 Contents Foreword 5 1. Introduction 6 2. Stakeholder interviews 10 3. Overview of recommendations 11 4. Bank-initiated solutions 13 5. Government-initiated solutions 16 6. Solutions initiated by alternative finance providers 23 7. Restoring access to finance for Cyprus’s SMEs: ACCA’s response 25 Appendix: An overview of EU Funded Liquidity Instruments 30 References 33 FINANCING SMES IN CYPRUS: NO STONE LEFT UNTURNED? 3 4 Foreword While visiting Cyprus in late 2013, I had a chance to hear at first hand from ACCA’s members and stakeholders how the current financial and economic crisis was affecting the country’s small and medium-sized enterprises (SMEs.) As a sign of ACCA’s commitment to our membership in Cyprus, to the SME sector and to the public interest, I promised at the time that ACCA would commission independent research into the subject of SME financing, and return with recommendations for government, businesses and professional accountants. It is now my pleasure to fulfil this promise, by publishing the independent report prepared for ACCA by RTD Talos, as well as our own response and recommendations. I am delighted to see the range and calibre of stakeholders from Europe and beyond who have responded to ACCA’s international call for evidence, and I am grateful to all contributors. Talos’s findings underscore the value of financial information and good financial management as the most reliable building blocks of SMEs’ access to finance. They point to a role for government, not merely as a lender or carrier of risk, but as a builder of financial infrastructure around which the private sector can first heal, and then innovate. What happened in Cyprus in 2013 is almost without precedent: the overnight shutting-down of a developed country’s banking system. Nonetheless, this does not mean that policymakers cannot benefit from international experience – only that they must draw from a wider pool of good practices, and often from Helen Brand unexpected places. ACCA chief executive I believe that the scope of ACCA’s global Access to Finance programme and the breadth of skills among our membership make us a natural partner of both government and industry in Cyprus. From frontier capital markets in south east Asia, to microfinance intermediaries in east Africa, to the Fintech champions in the City of London or the public-funding juggernauts of Brussels and Luxembourg, the reach of our professional network is unparalleled. Most important of all, however, will be the contribution of our members on the ground. As SMEs’ most trusted advisers, finance professionals in practice and in business will undoubtedly be the ones to lead the sector on the long road to recovery. They can count on our unwavering support. FINANCING SMES IN CYPRUS: NO STONE LEFT UNTURNED? 5 1. Introduction Cyprus is facing a credit and liquidity banking system and government following the banking crisis prohibited crunch unprecedented among powerless to assist businesses has the opening of new accounts at any developed countries, following the exacerbated what was already a very bank for local residents, other than collapse of the country’s difficult situation. making a deposit above €5,000. The disproportionately large, international combination of falling wages and job financial system in early 2013. The The scale of capital flight, caused by the insecurity literally stopped consumers bail-in of March 2013 was originally decision of the Eurogroup to force from making any major purchase aimed at recapitalising Cypriot banks in depositors to recapitalise the banks in decisions beyond essential ones. order to return them to health, while which they held their deposits and by strict capital controls (previously the decision to sell Cypriot banks’ The charts below highlight the scale of considered impossible in the Eurozone) subsidiaries in Greece, has been capital flight. On March 2012, the were aimed at preserving their deposit phenomenal, changing the financial Central Bank of Cyprus reported total base. Neither worked quite as landscape in many ways. Companies deposits of €70.7bn. By June 2013, that envisaged, with evidence of sharply that depended on their cash flow to pay figure was at €50.7bn and by March reduced lending, rising delinquencies salaries and suppliers no longer had the 2014, total deposits were at €46.2bn, a and continued deposit flight funds or had limited or no access to 35% reduction in two years. Loss of throughout the country. Meanwhile, the them. Access to any type of bank business deposits has been even more country’s international bailout is itself financing was all but eliminated for rapid than that of household deposits. subject to a great deal of criticism, more than a year. Wary depositors no especially with regard to debt longer trusted the banks with their The reduction in deposits by local sustainability. The combination of a money and capital controls introduced residents was 31%, with €32.5bn deposited in banks as of March 2014 compared with €42.6bn in February 2013 and an estimated €1bn currently held outside banks. The situation will Figure 1.1: Deposits at banking institutions in Cyprus (in €millions) only get worse as the Bank of Cyprus, Cyprus’s largest bank, is partly financed through €9.55bn-worth of Emergency Liquidity Assistance (ELA) provided by 75,000 the Central Bank of Cyprus, liquidity 70,000 that will be gone from the local market 65,000 as the Emergency Liquidity Assistance is partly repaid. 60,000 55,000 50,000 45,000 40,000 2 2 2 2 2 3 3 3 3 3 3 4 4 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 March May July mber mber nuary March May July mber mber nuary March e e a e e a pt ov J pt ov J e N e N S S 6 Figure 1.2: Company deposits in Cyprus Figure 1.3: Household deposits in Cyprus (in €millions) (in €millions) 40,000 40,000 Total 35,000 35,000 Local 30,000 30,000 Other Euro area 25,000 25,000 20,000 20,000 Rest of the world 15,000 15,000 10,000 10,000 5,000 5,000 0 0 2 2 2 3 3 3 4 2 2 2 3 3 3 4 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 March July mber March July mber March March July mber March July mber March e e e e v v v v o o o o N N N N Figure 1.4: Insurance and pension funds Figure 1.5: Other financial deposits in deposits in Cyprus (in €millions) Cyprus (in €millions) 9,000 9,000 Total 8,000 8,000 Local 7,000 7,000 Other Euro area 6,000 6,000 5,000 5,000 Rest of the world 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 0 0 2 2 2 3 3 3 4 2 2 2 3 3 3 4 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 March July mber March July mber March March July mber March July mber March e e e e v v v v o o o o N N N N Source: Central Bank of Cyprus (2014) FINANCING SMES IN CYPRUS: NO STONE LEFT UNTURNED? 7 In response to this situation, ACCA In particular, the Call for Evidence, and STATE OF SMES IN CYPRUS launched an international Call for the research behind Talos’s study, Evidence in March 2014 (ACCA 2014), focused on existing and underused The majority of SMEs in Cyprus are inviting local and international options for: businesses employing up to nine stakeholders as well as its members and employees, with an average of 2.1 students to share their views on the • accessing official funding from employees per business in that situation in the country and what can be Europe or further afield category. Specifically, 92.5% of done to make access to finance easier businesses (about 40,000) in Cyprus fall for Cypriot SMEs. This study discusses • exploring options provided by State within this category, with 6.3% (about the results of this Call for Evidence. Aid rules in order to allow the 2,600) falling in the 10–49-employees government to support Cyprus’s category, 1.1% (about 500) in the The Call for Evidence focused on the SMEs directly 50–249-employees category and 0.2% options available to bankers, other (about 78) in the >250-employees finance providers, entrepreneurs and • unlocking credit and liquidity in the category (Eurostat et al. 2013). policymakers for financing Cyprus’s supply chains of major corporates Small and Medium Enterprises (SMEs), and the government starting from existing Access to Finance policies and schemes that are either • overcoming restrictions placed on underperforming under current liquidity the banks by liquidity and capital and demand conditions or could be requirements adjusted in order to perform better. It also aimed to identify the unexplored • assessing the creditworthiness of opportunities for financing SMEs, and informationally opaque businesses the institutions and organisations that may be able to help.   • sidestepping the banks and appealing directly to investors to finance SMEs, on a scalable basis • accessing funding for SMEs through the capital markets, either directly or through customers with uninterrupted access to them • financing SMEs in Cyprus by offering SME credit and equity to savers and investors as alternatives to bank deposits. 8 Each size band produces about the Almost 38% of all employees in Cyprus The data shows that SMEs, especially same amount of revenue, about €2bn a work for businesses with 0–9 micro companies, are important in year, making 250+ employee businesses employees; almost 23% work for Cyprus because of the large number of the most productive per employee, with businesses with 10–49 employees; 20% people they employ. close to €50,000 revenue per employee work for a company that employs compared with about €41,000 revenue 50–249 people; and the remaining 20% per employee for 10–49 and 50–249 work for companies that employ at least employee size bands. In the 0–9-size 250 people. band, each employee generates about €27,000 in revenue. Figure 1.6: Cypriot companies Figure 1.7: Output for the different size Figure 1.8: Distribution of employment categorised by size, 2013 categories of Cypriot companies according to company size 50,000 5,000 100,000 40,000 4,000 80,000 30,000 3,000 60,000 20,000 2,000 40,000 10,000 1,000 20,000 0 0 0 8 9 0 1 2 3 4 8 9 0 1 2 3 4 8 9 0 1 2 3 4 200 200 201 201 201 201 201 200 200 201 201 201 201 201 200 200 201 201 201 201 201 Source: Eurostat et al.2013 Source: Eurostat et al.2013 Source: Eurostat et al. 2013 0–9 10–49 50–249 250+ Figure 1.9: SME share, 2013 Figure 1.10: SME output share, 2013 Figure 1.11: SME employee share, 2013 50–249 1% 10–49 19% 6% 26% 27% 250+ 38% 0–9 93% 250+ 0–9 0–9 50–249 50–249 20% 10–49 22% 10–49 25% 23% Source: Eurostat et al.2013 Source: Eurostat et al.2013 Source: Eurostat et al.2013 FINANCING SMES IN CYPRUS: NO STONE LEFT UNTURNED? 9 2. Stakeholder interviews A number of interviews were held with local stakeholders as well as European BOX 2.1: INSTITUTIONS THAT PROVIDED THE PERSPECTIVES FOR THE and International organisations to STUDY identify common themes and different opinions among interviewees, as well as • Bank of Cyprus to solicit proposals to address the issue • Bartercard Cyprus of financing SMEs in Cyprus. • CNBI Each interviewee was asked a sub-set of • Cooperative Central Bank of Cyprus the structured interview questions developed by Talos and ACCA that • Cyprus Business Angels Network matched their personal background and • Cyprus Chamber of Commerce and Industry institutional agenda. Areas of inquiry included what initiatives and new laws • Cyprus Commissioner for State Aid Control the government needs to make, what • Cyprus Federation of Industrialists and Employers funding options and new programmes the international community needs to • Cyprus Institute of Certified Management Consultants. offer to help SMEs access funds, what • Cyprus Securities and Exchange Commission the banks need to do in order to provide the liquidity and what SMEs • Directorate General for European Programmes, Coordination and themselves need to start doing to gain Development of the Republic of Cyprus access to liquidity. • EY The institutions that provided the • EU Commission’s Directorate General for Enterprise and Industry perspectives for the study are shown in Box 2.1: • European Association of Craft, Small and Medium-sized Enterprises • European Banking Federation • European Investment Bank • European Investment Fund • Fast Moving Consumer Goods Association Cyprus • Hellenic Bank • Infocredit • Institute of Certified Public Accountants of Cyprus • Institute of International Finance • Ministry of Agriculture • Ministry of Energy, Commerce, Industry and Tourism • Ministry of Finance. 10