dilka
Jan 14, 2012
Graduate / essay on financial problems of SMEs [2]
In 1858 British Prime Minister William Gladstone articulated the importance of finance in his famous quotes: "Finance is, as it were, the stomach of the country, from which all the other organs take their tone." A well-functioning financial system is considered as a prerequisite of sustained economic development. Healthy and effectively functioning small and medium sized enterprises (SMEs) are also most evident indicators of a strong economy.
SMEs play a very important role in the Turkish economy due to their large share in the total number of enterprises (%98) and workforce. The business environment, in which SMEs operate, has been difficult for many years especially after the financial crisis of 2001. Then, the traces of the economic crisis have almost disappeared. Nowadays, as a result of stability and confidence, macroeconomic indicators of Turkey are in good health and Turkey has become the fastest growing economy among the OECD countries.
Challenging business environment for SMEs is still a reality of Turkish economy. Lack of efficient production, limited use of management and control systems, lack of technological capacity, scarcity of information and need for training are major difficulties that Turkish SMEs are suffering from.
Yet, as in most of developing countries, fundraising has been the most bothersome problem of SMEs in Turkey. Since per capita income is low in Turkey, there are difficulties in collection of savings and steer them towards investment to encourage development of loans to the economy and to SMEs in particular. On the other hand, banks prefer to make loans to larger companies and don't make loans to small firms due to challenging business environment. Since SMEs are regarded as too risky, banks generally ask for collateral before lending. Therefore SMEs get a very small proportion of the aggregate loans. Accordingly the cost of financing has been increasing and low profitable SMEs cannot cope with those difficulties.
Playing key role in development of economics and employment, SMEs need urgent and programmed support to foster the availability of funds and in terms of access to financial markets. Transparent and efficient capital markets are required to obtain the funds they necessitate. In this framework, different models should be generated to overcome the problem of fundraising. Microfinance and microcredit approaches of Muhammad Yunus (the owner of Nobel Peace Prize from Bangladesh) would be good model for Turkey. In those models he has translated visions into practical action for the benefit of millions of people, not only in Bangladesh, but also in many other countries. Those successful instruments should also be customized to Turkish enterprises in accordance with their needs.
Having 7 years working experience Capital Markets Board, I believe that it will be practical to finance SMEs through capital markets. In this regard I have two significant proposals. First would be to set Small Business Investment Companies that will gather several SMEs in order to make public offerings at the stock exchanges. In addition, trading of SMEs' common stocks at the over the counter markets would be an alternative solution. In USA, the shares of SMEs are traded at the Small Cap Market. Similarly, in UK, financial instruments of SMEs are traded at the Alternative Investment Market. Those practices would serve as a good model for Turkey.
In conclusion, it should be recognized that a stronger SMEs is vital for sustainable development. As a developing country, Turkey should follow up the best practices in the world and should generate instruments for SMEs to obtain more funds from the capital markets. Furthermore, country's economy will be strengthened and deepened through healthy and effective functioning capital markets.
In 1858 British Prime Minister William Gladstone articulated the importance of finance in his famous quotes: "Finance is, as it were, the stomach of the country, from which all the other organs take their tone." A well-functioning financial system is considered as a prerequisite of sustained economic development. Healthy and effectively functioning small and medium sized enterprises (SMEs) are also most evident indicators of a strong economy.
SMEs play a very important role in the Turkish economy due to their large share in the total number of enterprises (%98) and workforce. The business environment, in which SMEs operate, has been difficult for many years especially after the financial crisis of 2001. Then, the traces of the economic crisis have almost disappeared. Nowadays, as a result of stability and confidence, macroeconomic indicators of Turkey are in good health and Turkey has become the fastest growing economy among the OECD countries.
Challenging business environment for SMEs is still a reality of Turkish economy. Lack of efficient production, limited use of management and control systems, lack of technological capacity, scarcity of information and need for training are major difficulties that Turkish SMEs are suffering from.
Yet, as in most of developing countries, fundraising has been the most bothersome problem of SMEs in Turkey. Since per capita income is low in Turkey, there are difficulties in collection of savings and steer them towards investment to encourage development of loans to the economy and to SMEs in particular. On the other hand, banks prefer to make loans to larger companies and don't make loans to small firms due to challenging business environment. Since SMEs are regarded as too risky, banks generally ask for collateral before lending. Therefore SMEs get a very small proportion of the aggregate loans. Accordingly the cost of financing has been increasing and low profitable SMEs cannot cope with those difficulties.
Playing key role in development of economics and employment, SMEs need urgent and programmed support to foster the availability of funds and in terms of access to financial markets. Transparent and efficient capital markets are required to obtain the funds they necessitate. In this framework, different models should be generated to overcome the problem of fundraising. Microfinance and microcredit approaches of Muhammad Yunus (the owner of Nobel Peace Prize from Bangladesh) would be good model for Turkey. In those models he has translated visions into practical action for the benefit of millions of people, not only in Bangladesh, but also in many other countries. Those successful instruments should also be customized to Turkish enterprises in accordance with their needs.
Having 7 years working experience Capital Markets Board, I believe that it will be practical to finance SMEs through capital markets. In this regard I have two significant proposals. First would be to set Small Business Investment Companies that will gather several SMEs in order to make public offerings at the stock exchanges. In addition, trading of SMEs' common stocks at the over the counter markets would be an alternative solution. In USA, the shares of SMEs are traded at the Small Cap Market. Similarly, in UK, financial instruments of SMEs are traded at the Alternative Investment Market. Those practices would serve as a good model for Turkey.
In conclusion, it should be recognized that a stronger SMEs is vital for sustainable development. As a developing country, Turkey should follow up the best practices in the world and should generate instruments for SMEs to obtain more funds from the capital markets. Furthermore, country's economy will be strengthened and deepened through healthy and effective functioning capital markets.