SME Chamber

Basel II for SMEs

Conference Agenda

08.30 Registration of

09.00 Welcome address Prof. Joe Bannister, Chairman, Malta
Financial Services Authority

09.10 Conference Programme Mr. Charles J
Busuttil, President GRTU and moderator of the morning session

09.20 The
Maltese Government Policies in Enhancing the Access to Finance for SMEs

Prime Minister of Malta and Minister for Finance, Hon. Dr. Lawrence

09.35 What access to finance means to SME’s: The changes proposed
in Basil II

Mr. Gerhard Huemer, UEAPME

09.50 How Banks may reassess
SMEs following implementation of Basel II Mr. Christian Marlier, Fortis

10.50 Q & A

11.00 Coffee break

11.30 Local
implications of the implementation of Basil II on SME’s Mr. Karol Gabaretta and
Ms Catherine Galea, Malta Financial Services Authority

12.00 What SMEs
can do to improve their access to finance Mr. Ian Jakeways, International SME

12.45 Q & A

13.00 Lunch

14.00 Credit Rating and
Risk assessment to favour the access of finance for SMEs Mr. Joseph F.X. Zahra,
Chairman Bank of Valletta Group

Moderator of the afternoon session – Mr.
Vincent V Farrugia Director General GRTU

14.30 Presentation of the
toolkit Mr. Ian Jakeways, International SME speaker

15.30 Q &

15.45 Coffee Break

16.00 Access to Finance: A Maltese SME
perspective; result of survey conducted by GRTU among Maltese SME's Mr. Vincent
Farrugia, Director General GRTU

16.30 Q & A

16.45 Closing
remarks and end of

Address by Charles J Busuttil

President of GRTUMalta Chamber of Small
and Medium Enterprises –

20th October 2004

It is my pleasure as President
of GRTU to welcome you to this conference and to wish you all a good day. GRTU
is particularly happy to have been given this great opportunity by UEAPME to
organise this special SME development session.GRTU has for the last 55
years striven to send one important message to the authorities: small businesses
matter; they are extremely important for any country most of all for small
economies striving to catch up with larger richer ones; small business are the
backbone of the modern market economy. Our message today is everyone’s
message; if only from words the authorities could move to deeds. Progress has
been registered in Malta as in the rest of Europe and UEAPME deserves great
praise for its consistent efforts to cause the European bureaucratic systems,
including the European Commission, to move in a strategic manner towards the
assistance of SME development. The Lisbon Agenda gives loads of importance to
SME's; but are we really there? Are we any close to achieve the targets so
ambitiously set? Romano Prodi ex-president of the commission is sceptical. We
are even more so. But the efforts are there. Many people and
institutions are working hard to ensure that more of the words in favour of SME
support are turned to deeds. In Malta we still have a long way to go even though
Malta is essentially an SME economy. Unfortunately we cannot report much
progress. We have worked hard together with the other organisations representing
business to establish Malta Enterprise as a focal point organisation in support
of SME’s. But even Malta Enterprise is facing difficult times. The
Budget cutting imposed by the economic realities Malta is facing today with a
stagnant GDP growth has also been imposed on Malta Enterprise. We all want to
move forward, we all want to grab the opportunities that the enlarged internal
EU Market is offering, and yet somehow we are failing.We will hear the
Prime Minister of Malta Dr Lawrence Gonzi, who I have great honour to welcome
among us today give us his government’s view as to what should and will be done
to give Maltese entrepreneurs the means to implement the projects and
investments they are ready to unleash. Our Director General, Vincent
Farrugia who was instrumental in getting this Conference organised as the first
of a serious of 60 Conferences on Future Access to Finance to SME's that will be
organised throughout the EU, will this afternoon give us the result of the
survey conducted among Maltese SME's. Rather than us, it will be they speaking
through us, Throughout the day we will be hearing expert presentations related
to the main theme Basil II the Future of Access to Finance for SME’s. From
Malta, besides Prof. Joe Bannister whom you have already heard, you will have
excellent presentations from Karol Gabaretta and Catherine Galea from MFSA.
The Chairman of Bank of Valletta, Mr Joe FX Zahra will talk to us on
Credit Rating and Risk Assessment in favour of access to finance for
SME’s.Our International guests Gerhard Huemer from UEAPME and Christian
Marlier from Fortis Bank will give us the basic turnouts of the reform inherent
in Basil II, while Ian Jakeways will present us with an excellent Toolkit that
should give us a splendid instrument for SME owners and managers in pursuit of
access to finance.The Conference should leave you all with positive gain
to you personally and to your firms. You will have ample time to ask and discuss
and we will be happy to receive your comments during the conference and later by
e mailing to us at GRTU.There are many organisations I wish to thank for
their support in organising this Conference. The EU Commission tops the list as
this is a project funded by the European Union; The organising consortium;
UEAPME and the European Savings Bank Group and Lloyds TSB.From Malta
Bank of Valletta and the Malta Financial Services Authority; The Prime Minister
for cordially accepting our invitation to address us this morning; our crew at
GRTU who have worked so hard to organise this event; to all of you for joining
us today.It is with great satisfaction that I now invite the Hon. Dr.
Lawrence Gonzi to address us. I thank you and wish you a successful Conference.
—————————–Charles J Busuttil –
President GRTU – Malta Chamber of Small and Medium EnterprisesStarted
his Business career in 1978 manufacturing soft toys and soon after branched into
hand screen-printing. This activity led him quite naturally to enter into the
souvenir trade and currently has business outlets in the Crafts Village, Ta’
Qali specialising in Malta lace and jewellery.He joined GRTU in 1990 and
held Office as a Treasurer, Vice President and for the last six years as
President.He represented GRTU in various Governmental Boards and
Committee notably amongst them Malta Council for Economic and Social
FINANCE FOR SMEs – ATTARD – 20 OCTOBER 2004 Ladies and Gentlemen,
First of all allow me to kick-start this contribution of mine, by
reiterating in the strongest terms possible my government’s commitment to
stimulate the economy through supporting Small and Medium Sized enterprises. I
am firm in the belief that SME’s are the major lubricant to the economic cycle
and a significant catalyst to growth. We are currently devoting a lot of
our time and effort on the formulation of the 2005 Budget. In doing so, we are
clearly and strategically ensuring that all measures which shall be announced
are underpinned by a horizontal thrust to stimulate economic growth. There is,
in my opinion, no other alternative path. You have heard me and other government
representatives, stressing repeatedly that addressing the budget deficit is a
priority. However, I must stress to you all that this national target can never
be achieved if it is limited only to cost-cutting and administrative reform.
More importantly it must be an exercise that is forward looking and that
includes policies for expansion, job creation and investment
opportunity.Basel II is yet another confirmation of the kind of
interdependent world we live in today. The “Revised Framework for International
Convergence of Capital Measurement and Capital Standards” – to give it its full
title – is another example of how our dependence on a sound and stable global
financial system is in turn changing not just the way we act in government, in
business and as individuals, but also the method of achieving that objective..
Suffice it to say that the Basel II process is underpinned by years of
consultation and negotiation between international and national regulatory
bodies, by scores of impact assessments at all levels and by a tried and tested
method of implementation. During the course of this Seminar, you will have the
opportunity to glimpse the global reach of this process.The first Basel
Accord started off as an agreement reached by the G-10 countries in 1988 and
addressed the need to place financial institutions on firmer ground by adopting
minimum capital requirements. The Accord came to be adopted by over 100
countries and was absorbed into our legal and regulatory framework in 1994.
Basel II may be generally described as an initiative that seeks to improve the
supervisory review of the capital adequacy of credit institutions. It defines a
set of disclosure obligations that encourages better market discipline. It is a
process that the Central Bank of Malta and the MFSA have been monitoring and
evaluating since inception. Six years down the line it is clear that
Basel II seeks to manage risks within the global banking system through a
balanced approach. The most obvious example of this is the adoption of a
multi-layered set of capital rules that are relatively simple at one end of the
scale but that gradually get more complex the more internationally-active a bank
opts to be. The EU’s approach to Basel II follows much along the same lines.
Keeping a delicate balance between regulatory accountability and organisational
flexibility, EU legislation adopting the Basle principles pays due attention to
the need for close supervision of banks’ internal systems while building on the
existing EU-wide regulatory structure. This approach allows supervisory
authorities to rely, to an extent, on the validation of such systems carried out
by the regulatory authority in the ‘host’ Member State.As you will no
doubt be hearing later on today, studies commissioned by the European Commission
have shown that the overall impact of the new capital requirements framework for
credit institutions should be positive for the EU. More significantly from the
local perspective, the findings are that there would not be any major
disadvantages for smaller credit institutions. Moreover, banks lending primarily
to SMEs and retail customers should not be adversely affected by the new capital
requirements.I shall leave the technical details for the experts. It is
worthwhile noting, however, that the implementation of Basel II could very well
serve as a litmus test for our restructured and revitalised economy and its
potential to compete in a dynamic and global environment. This correlation
between developments at the international level and the challenges we have been
taking on at the national level places our standards into sharp relief and tests
our determination to succeed in today’s unequivocally global village.Our
root and branch reform of the financial services sector in 1994 is perhaps the
best example of our ability to keep up with an international financial system
that becomes more sophisticated by the day. It is fair to say that this sector
has all along been able to respond very well to the exacting standards expected
of any internationally respected finance centre. It is to our credit that the
robustness of our supervisory framework and the health of our financial system
have been reaffirmed over and over again through successive evaluations carried
out by international bodies such as the OECD and IMF, and by our peers in the
EU. While we must continue to be vigilant at all times, it is comforting
to note that our Central Bank and the MFSA have teams that have been involved in
the Basel II debate all along and that local banks have also been involved in
the impact testing organised by the Basel Committee in conjunction with the
European Commission, ahead of implementation.With regard to our SMEs it
is important that our commitment to provide and maintain a level playing field
for this extremely vital component of our economic framework permeates all
levels of policy making and administration, on a continuing basis. It is
critically important therefore that, in line with the Lisbon Agreement, we
continue to ensure that the competitiveness of SMEs in our country is not
adversely affected by administrative measures and initiatives, even if these are
taken in the general interest of our economic well being. Indeed public sector
organisations, whatever their role, also have a brief to ensure that the
formulation and implementation of such measures adequately takes into account
the interests of SMEs in this regard. As a member of the international
community, Malta must comply with internationally accepted levels of regulation
in all areas. At the same time, regulatory authorities must unshackle the
business operators from unnecessary bureaucracy. A lot has been achieved in this
area in recent years, but the task is ongoing. There are numerous international
benchmarks against which to gauge our progress. How long does it take to
register a company, to obtain bank finance, to be granted planning permission or
to be awarded a court judgment? In an enlarged single market, foreign
investment, large or small, will flow to the jurisdiction that delivers best and

You will agree with me that the banking sector in Malta has
improved efficiency in many areas, without sacrificing the stability of the
sector. I am sure that Basel II will offer new opportunities for financial
institutions, and these opportunities cannot but translate into efficiencies for
the consumer, including the small businesses. As has been done all along, the
MFSA will continue to consult with other regulatory agencies within the EU as
well as with local financial institutions and consumers in order to ensure a
smooth transition to the revised capital framework, mindful that continued
access to finance is of vital importance to our SMEs. On the other hand one
cannot but stress the role that good governance plays in minimising all kinds of
risk in our financial system in order that we can continue to enjoy the benefit
of greater competition and wider choice, as consumers of credit and other
financial services.

My Government welcomes the joint initiative taken by
the GRTU and UAPME and appreciates the support given by other organisations to
the widening of the debate about the relevance of Basel II to our SME sector. I
thank you for giving me the opportunity to address this gathering and wish you
all a successful


V Farrugia

Director General – GRTU
Malta Chamber of Small and Medium
Enterprises – 20th October 2004

A Maltese Perspective

So now we’ve
heard it all. We know what Basil II is all about. We have in hand an excellent
toolkit that will help SME owners and managers to access better to finance for
their projects. But is this what SME’s have been looking for? It is part of my
task to reply to this question. I do this in two parts. In the first instance by
reporting to you what our SME’s are saying. Then I would rather hear you and
perhaps our experts in answer to the points raised by our members.

way I see things as an economist and as a person who have happily taken upon
myself the hard task of speaking on behalf of small business, the crucial point
is investment. Whatever else we do we need to encourage investment. Investment
comes from the entrepreneur. It is not created by politicians, commissioners or
bureaucrats. Investment relies on the initiative of entrepreneurs, small, medium
or large. Finance is essential for investment. In Malta the financial
institutions are loaded with money. We have a situation where on one side we
have institutions that are awash with money and on the other side entrepreneurs
full of investment ideas. Yet unemployment grows and new investment per capita
of employment created falls. In 2000 new investment in Malta accounted on
average for Lm3, 460 per capita for additional employment created. By 2001 this
per capita average fell to Lm1,713. In 2002 new investment accounted for Lm2026
per capita and in 2003 for Lm 2064 per capita. These figures reflect also the
economic value added performance of the economy, better known as GDP. The simple
truth is that you cannot generate employment without new investment and you
cannot have economic growth without new employment. In Malta the main resource
is human capital, the GDP is in effect the sum total of all enterprise and
employment income utilised in generating growth. And growth begets

Our survey shows that our entrepreneurs are willing to invest
(show Chart 1). 45.3% of the firms we visited told us that they have plans to
invest more in their line of business in the next 12 months. 54.7% said they do
not have any plans for expansion. When however one reads the comments the
majority of these 54.7% gave us for not investing, only 9% gave as a reason
something which is not corrigible: age, they are growing too old: no Basil II
can change that! The rest, as we see later, gave us reasons that can be
corrected given the right policies and the right incentives. Those willing to
invest will create anything from three additional employees to 40 with an
average of 20 employees per project. (Chart 2) When the positive replies are
assessed it is interesting to note that 29% will invest between Lm10,000 to
Lm100,000. 21.5 will invest between Lm150,000 and Lm1,000,000 while fewer than
10% are ready to invest but they still have not come up with a properly costed
business plan. The smaller the firms are the less likely that you will find good
business plans backing the business intentions of owners. Indeed our survey
showed a remarkable absence of proper business analysis. I would say that for
about 40% of the firms surveyed the toolkit we are handling out today should
become very useful. Indeed we will be promoting this Toolkit much further in the
coming months so that more of our SME’s learn how to use it.

I stressed
before the average per capita investment as seen from a macro level basing on
National Statistics Office (NSO) figures for the years 2000 – 2003. The surveyed
sample which represent firms from all sectors but predominantly (80%) from the
services sector resulted in a remarkable Lm5, 558 per capita in terms of new
investment that entrepreneurs are willing to create. This is above the average
nationally and above the average over the last four years. It shows in my view
that the economy is ready to go if only someone removes the holds that are
barring enterprise. Our sample shows that 18 firms out of 64 (chart3) visited
are willing to invest between Lm10,00 to Lm100, 000 a total of Lm860,000 among
them. 5 of the 65 firms have advanced plans for investment ranging from Lm150,
000 to Lm1, 000,000 to a sum total of Lm2.09 million. These five firms would
create an investment of Lm15,569 per capita of jobs created. This is almost 4
times the national average of the best of the last five years. 23 firms in all
are planning to invest Lm2,950,000 with an average Lm7,734 per capita of new

These are firms that fall within the category of small. Those
that we considered to represent a larger category we assessed separately. Indeed
these represented a new approach to investment in Malta: firms either from the
same group or complete outsiders yet complementary coming together to invest as
a consortium. Two of these groups together (chart 4) will invest Lm24, 455 per
person employed generating a total new investment of Lm16.5 million. This is
indeed remarkable were it to be translated all over the economy. And projects
vary from IT projects to pharmaceutical, to transport and haulage, repair and
maintenance, entertainment and hospitality beverages and food and retailing.
Only 10% come from the retail sector. Entrepreneurs are gearing themselves to
meet the challenges ahead.

We asked of course, (chart5) about financing.
Those investing up to Lm100, 000 state that they will be financing up to 26.4%
from their own funds, the remainder 73.6% will come from the Banks. Those who
intend to invest more, from Lm150,000 up to Lm1,000,000 intend to utilise 22.5%
from their own funds and 77.5% from the Banks. On average entrepreneurs are
hoping to use 25.6% from their own funds and 74.4% from the financial
institutions. The entrepreneurs who are joining forces in consortia are looking
also at the financial market and they are confident that they can also finance
through a Bond issue.

We also asked our firms what keeps them from
investing and what are the problems they meet when seeking Bank Finance. We see
first the reasons for lack of Investment: (chart 6).

We see next the
obstacles (chart 7) entrepreneurs met when seeking bank Financing (chart 9).

Somebody has described me as the “Angry Voice of private Initiative”. I
don’t mind this title. They gave me many others and not all complimentary. But
yes I am angry. I have a long track record in investment promotion. Today I am a
member of the Board of Malta Enterprise, but for five years, in the past I was
also directly responsible for Investment Promotion in the old MDC. And I was
there in very difficult times. I believe I was a success then and I am confident
Malta Enterprise can be a success today. The secret is that we must be able to
provide entrepreneurs with solutions to their needs. That is why I am angry. We
know the needs but we don’t have the solutions even though we have the means.
And please this is not merely sales jargon. It is a reality. People with
initiative can also be disheartened. The comments received from entrepreneurs
should be taken as a list of needs. We need to find the solutions. The most
obvious solution, availability of money, is not enough. It is not true that only
money matters. We have the entrepreneurs, we have the projects we have the money
but our surveyed firms listed 31 problems, no the wrong word, needs. We must
find solutions to these needs.

Is Basil II sufficient?” Does Basil II
reach out to provide the solutions? I’d like to hear the guest experts with us
today to reply. Definitely Basil II does not meet all the needs. Many other
needs require other solutions and they require these from others besides the
Banks. From many of us present here today. We as business representatives need
to do more. The European Commission definitely needs to move. UEAPME and the
European Savings Bank Group need to do more. Bank of Valletta, the other
Commercial Banks in Malta and MFSA, need to do more. Definitely Malta Enterprise
needs to do more.

Government needs however to take the lead. The Prime
Minister this morning expressed his commitment to help SME’s. I know it is not a
frivolous commitment. Many of the policies we seek are after all already there.
I know that Dr Gonzi is determined to get investment moving.

regretfully there is an absence of commitment from many others. Certain
Ministers have a poor understanding of what enterprise is. They find it hard to
walk with the skin of an entrepreneur. Some people in the bureaucratic structure
of government are completely unaware of what causes entrepreneurs to

Many of our members believe that some bureaucrats actually even hate
businessmen. They are jealous of them and sometimes downright prejudicial
towards them.

An enterprise policy is the one that puts enterprise first.
Putting enterprise first is putting jobs first. It’s putting wealth first. It’s
putting health, the environment, a better living, first. We cannot have these
socially desirable goals unless we have the means. The means come from earnings.
Earnings come from investments. The greatest amounts of investment come from
SME’s. Access to finance is essential, but not enough. We must satisfy the needs
of entrepreneurs in a better more practical and more coherent way. I am sure we
can do it. Indeed we must do it.

In conclusion I quote from a draft
report drawn up by a high level committee of experts appointed by EU leaders and
Chaired by Win Kok, former Dutch Prime Minister. This 13 member group of experts
was appointed last April with the aim of injecting renewed stimulus into the
Lisbon strategy.

The Report says that the Lisbon Agenda adopted by the EU
Leaders four years ago to make the European Economy more flexible and
entrepreneurial, is failing. Many of its targets intended to be achieved by 2010
will be “seriously missed” “In some targets Europe has lost ground to both the
US and Asia, European societies are under strain. The Report warns that the
implications of this failure could be devastating for Europe.

The Report
warns against further red tape and regulation. “There is now a growing feeling
among Europe’s business community that a tipping point has been reached in which
any gains from incremental regulations are out weighted by the

The message is clear. We are already overburdened more than we
should. If the EU is now being pushed to move away from excessive regulations
why should we accept to follow where angels fear to thread.

I believe
that there is no reason why come 2010 we cannot be the exception. Not of
failure. But of success. But we must dare. Dare to reject what others now know
that is ruining their economy and stagnating their growth. Malta must
steadfastly adopt instead what is healthy. That is why I say we need an
enterprise policy that believes in innovation, supports investment, encourages

It is from this perspective that Maltese SME’s want to see the

I’d like now to have your views on all this.


Vincent Farrugia B.A
(Hons) Econ, D. Econ (D’Haag). F.I.T.D., Director General GRTU

Vincent V
Farrugia is an economist with specialisation in Labour Economics and Business
Development. After a career in senior management in the Public Sector, Vincent
Farrugia moved to the private sector occupying senior positions in industry and
finance. Since 1994 he has occupied the post of Director General of GRTU – Malta
Chamber of Small and Medium Enterprises which is Malta’s private sector
organisation with the largest number of entrepreneurs as members.

represents the widest cross- section of small business in Malta and Gozo.
Vincent Farrugia is a member of the most important public sector/private sector
consultation committees including Malta Council for Economic and Social
Development and the European Social Fund Committee. He is also a member of the
Board of Malta Enterprise.


Basel II for

The future of SME finance

Mr. Gerhard Huemer
October 2004

SMEs are concerned:

ï‚· Will there be credit
rationing or crunch?

ï‚· Will banks stop lending to SMEs?

Register for event

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