Policy-Based Directed Credit for SMEs in the Transition Countries

Abstract

Fostering small and medium sized enterprises (SMEs) is indispensable to create workable economic system in the transition countries. By developing sufficient number of SMEs effective allocation of resources can be realized among regions and sectors, and also new employment opportunity can be created and thus the unemployment can be decreased. However, current situation is that the access to working capital and long-term loan for fixed capital investment is limited and the lack of management ability and technological information is impeding the development of SMEs.

The influx of foreign direct investments (FDI) is not enough at all for Balkan countries and CIS countries to recover the GDP level of 1989. Most of the FDI is related to the privatization and the green field investments are very little. In 1998, the financial crisis in Russia led to worsening economic conditions in these regions, principally in the countries of the former Soviet Union.

Currently the international financial institutions and bilateral donors are financing many infrastructure projects, however, in a mid-term period the demand will not follow.

The commercial banks should have a financial intermediary function such as collecting money from individuals and lending to productive industries. However, current commercial banks are not working as intermediary institutions.

If there is no functioning market system, it is necessary to utilize small and medium-sized enterprise financing as policy based directed credit to foster SMEs.

The EBRD and other donors extend assistance to strengthen the financial sector in the transition countries by investing directly in financial institutions and by providing loans to the enterprise sector via local intermediaries. However, due to its high interest rate, SMEs are faced with difficulties to acquire them in some countries.