SMALL BUSINESS IN THE REPUBLIC OF BELARUS: EXPANDING OPPORTUNITIES FOR FINANCING (ЭКОНОМИКА БЕЛАРУСИ)

Liudmila Istomina, co-ordinator of the UNDP project on support of small and medium business in Belarus, candidate of economic sciences, Library.BY

The world?s experience convincingly proved that en trepreneur plays a key role in the market economy. In industrially developed countries around 50-70% of total volume of goods and services are produced by small business sector. At the same time, it determines economic growth rates, structure and quality of the GDP. As integral part of people?s way of life, the small business is considered to be the basis of the modern liberal economy in most countries.

The small-scale economy, emerging now in Belarus should be oriented to the so called ?tuning fork? system, which presents classical targets that are successfully performed by small and medium enterprises in the developed countries. Among those are to be named smoothing over economic fluctuations; competition development and creation of incentives for a full application of human knowledge and skills; increase in employment rates; formation of diversified and quality-driven system of industrial and services sectors; development of innovative potential of the economy.

As independent socio-economic formation, the small entrepreneurship has a short history. However, during 10 years of its development, it went through many ups and downs. Today, the entrepreneur sector of the economy has more than 21,000 small enterprises and 130,000 private entrepreneurs. May we consider these figures as big or not? It is possible to make such estimations if one compares countries on the basis of how many citizens come on an entrepreneur. Thus, in Europe this proportion is 10 to 1, and in Belarus, by the end of 1997, it was 52 to 1. The non-state sector of economy employs 232,000 Belarusians, they produce 9% of the GDP. Circulating rumours about miraculous enrichment of small entrepreneurs are clearly exaggerated, since the average level of profitability at small non-state enterprises amounts to 13.2%. Although the same indicator calculated for the whole economy in the first half of this year slightly exceeds the level of 7%.1 At the same time, one can easily discover considerable disproportion in the development of entrepreneurship. Thus, the biggest part-50.2% of small enterprises is concentrated in the trade sphere, 15.8% are engaged in industrial production, and 11.4% of small enterprises are operating on the construction market. Small scientific and innovation enterprises make 4.2%, and the share of private agricultural sector is even less-0.6%.

What Are the Obstacles In the Way of Entrepreneurship?

The problems of small entrepreneurship that do paralyse its dynamics have been widely discussed lately. Moreover, they are known and can be named: heavy tax burden; inconsistent and not stable legislation; dictate on the part of controlling authorities and bureaucrats; underdeveloped infrastructure for the support of entrepreneurs; lack of industrial and office buildings; hard access to technical, informational and investment resources. However, a ?major? obstacle for entrepreneurs seems to be the lack of their own financial resources and extremely complicated lending procedure. This was emphasised by 38% of starting businessmen and by 47% of ?mature? enterprises.2 Small and micro- enterprises, and those beginning their business activity face the most severe and tough conditions: they neither possess any significant start-up finances or property nor have guarantors like large-scale enterprises or financial organisations. Owing to insufficiency of technical and financial resources, the starting entrepreneurs are very limited in their search for potential investors. Under the existing conditions of insufficient finance, loan capital remains the main source of the small business development.

Sources of Loan Capital: Reflecting on Numbers

In the beginning of 1998, under the UNDP office project ?Creating infrastructure for support and development of small business in the Republic of Belarus? a research study with two goals was conducted. The first goal was to find out what is the situation in the sphere of credit services provided to small business by various financial and credit institutions; and the second-to study the needs of legal entities representing small business as well as of citizens in introduction of the new financial technology-micro-financing. 223 respondents-owners of small enterprises and private entrepreneurs- have been questioned on the subject.

The results of the mini-poll clearly demonstrate obstacles in the way of those engaged in entrepreneur activity. The major problem that starting businessmen has to deal with is the start-up capital. The major part of respondents (69%) started their business using their own financial resources, complementing them with loans from friends and relatives. Only owners of small enterprises could use bank loans and capital assets from state enterprises that became available at residual value. Only 10% of respondents were these ?lucky men?, that managed to buy written off capital goods at good discount.

The share of those, who for their start-up resorted to the services of private money lenders, is not significant. Firstly, because in this case monthly interest rates are 4-5%, and credit should be paid out in currency. The second reason is that required is a mortgage on liquid assets (like transport vehicle, privatised apartment, and so on), which must be formalised by notary. Besides, local businessmen are aware of what could be the result of so-called informal investigation to ensure full and timely back payment. However, as soon as their business starts growing, despite above mentioned negative points, about 17% of entrepreneurs do resort to the services of the ?shadow? financiers. This proves that considerable part of entrepreneurs is ready to borrow money at rates that almost double those at commercial banks. With this they avoid slow paper processing: it takes 3 days to apply and get credit from private money lenders. In fig.2 one can see what loans are ?most popular? with entrepreneurs seeking credits from private money lenders.

60% of respondents have resorted to loans, 12% of them-once, 13%-two times, and 35%-three and more times. Money have been spent in the following way: 76% of entrepreneurs directed them to floating capital replenishment and copital assets purchases; 20% of respondents purchased new equipment.

Since major part of loans came not from financial and credit institutes (banks? share is only 9.5%) but from private money lenders, entrepreneurs received them in currency. Terms of credits are up to 3 months (42%), or 3 months and longer (36%). Clearly, short terms are appropriate for businessmen whose major goal is to replenish circulating capital.

A surprisingly low share of banks in financing small business is directly connected to the opinion of respondents about complexity of getting credit from banks. Answers were estimated at seven-point scale. The majority of respondents find this procedure very complicated. And answers to the question about the reason of complexity are presented in fig. 3.

As one may see in fig. 3, the answer ?low interest of banks in co-operation with small business? prevails. The domestic bank sector does not meet the needs of small business due to a high risk of repayment default. However, banks? impartial statistics show that credits to individual businessmen turn to be a better investment than those extended to industrial giants. Apparently, the negative attitude to entrepreneurs might be explained by economic reasons. Banks prefer to provide their services to a major client rather than to hundreds of small enterprises since operational costs do not depend on arranged loans.

The next important problem in relations between small business and banks comes from the necessity of loan collateral, which, following corresponding legislative acts, is one of the major requirements. The starting asset value of most enterprises is hardly sufficient to meet this requirement. If the pledge is provided, banks initially seek guarantees of possible asset realisation, and thus underestimate pledge value of goods, fixed assets or equipment. What is a positive aspect of the credit security study is that banks often take into account the share of businessman?s own financial contribution to the starting project. Today?s requirements for this share are from 10% to 50% of the project?s value. The next underlying reason is a complicated procedure of obtaining a credit. On average, it takes 1-3 months from the moment of request for credit to receive effectively the requested credit. This results from multi-stage considering procedure in banks, large amount of corresponding documents to be processed and other formal routine. For entrepreneurs, whose main competitive advantage on the market is their quick response to customers? needs, such terms are hardly acceptab- le. This is why they apply for credits to other financial sources.

16% of respondents have also pointed to the so-called informal requirements, that is money reward for a bank employee for prompt consideration of the credit application and a guaranteed allocation of the credit.

Only 2% of respondents applied for credits that are provided by the Belarusian Fund for Financial Support of Entrepreneurs. Interpreting these data, it is necessary to emphasise that information about structures providing financial and consulting services for the small business is insufficient. However, it is possible to make a different conclusion. The Fund?s main requirement is to channel loans primarily to production projects and purchase of new equipment rather than to the other concrete needs of entrepreneurs, for instance, to form floating capital. The results of the first part of the research highlighted weak points in the existing mechanism of financial support of the small business. These results prove that micro-enterprises and private entrepreneurs are not provided with adequate number of bank services. This makes them resort to the ?shadow? lending market.

We have to admit that entrepreneurs in most countries encounter the same problems, especially at their start-up stage. Despite the fact that demand for micro-credits is really worth of paying attention to, almost everywhere small-scale enterprises do not have free access to finance resources circulating on the financial market.

This problem, together with the issue of self-employment as a major solution to the poverty problem, was under consideration at the 1997 Summit on micro-financing in Washington.

In recent years the international community seriously revised basic theoretical and practical aspects of granting socio-economic and financial aid. Instead of providing minimal resources sufficient for survival only, something that discourages initiative of those who receive the aid, the decision was taken to put emphasis on the development of entrepreneurship and self-employment. As a result, a number of pilot projects were launched in many countries of the world. Micro-crediting (micro-financing in a wider sense) is not a simple allocation of small credits but rather a whole range of measures directed at making simpler the access to financial resources and services for citizens and entities of the small business. Financial independence of small business is intended to be ensured through micro-credits. The main aspect of micro-crediting is that, instead of traditional forms of the loan collateral like pledged property, it is possible to apply for credit under collective responsibility of borrowers. In other words, allocation of credits is carried out under guarantees of a particular social group formed on the basis of industrial, territorial, religious, national, relative or other relations. Now, in micro-crediting programmes in the transitional economies this form of the loan collateral is used. With this, credit recovery indicator has reached the level of 95-98%. The other positive aspects of the successful micro-crediting programmes include:

?simplified application procedure;

?allocation of small credits to meet most basic needs (like in programmes of micro-crediting in Nizhniy Novgorod, Voronezh, Rostov-on-Don, where first credit, as a rule, did not exceed $300-500);

?opportunity to receive further credits after a successful return of previous ones (the average sum of micro-credits allocated by the respective funds in Poland is $1,500-3,000);

?short terms of crediting which do not exceed 12 months, although the most popular terms are of 3- 6 months;

?encouragement of the growth of savings as far as the programme is in progress;

?democratic principles of the clients? participation in decision-making process, organisation of respective teaching courses;

?effective systems of management.

More than 8 million people have already become clients of the micro-financing institutions. This proves that these programmes are effective under different socio-economic conditions on all continents.

The second group of questions of the survey, conducted by the UNDP project, was centred around the issue if it is an attainable target for the newly emerging institution of micro-crediting to change the existing situation on the market of financial services for small business in Belarus. Having no real knowledge about the world?s practice in the sphere of micro-financing, Belarusian entrepreneurs expressed their own opinions on micro-crediting.

95% of respondents were in favour of the establishment of such a system, and 93% of them would probably resort to its services. The entrepreneurs would work with credits from $1,000 to $5,000. And only 11% of the respondents would like to apply for credits exceeding $10,000. Among them prevailing are legal entities-85%. And practically no interest in micro-credits less than $500 was shown. The respondents would use credits in the following way: $1,000-5,000 credits-primarily for the replenishment of floating capital, and those of $5,000-10,000-for the establishment of a new additional business. Through specific questions in the questionnaire an attempt was made to define what would be reasonable limits of interest rates. On the basis of the methodology of micro-financing, to the respondents were suggested several types of interest rates exceeding those in the banks. It was pointed out that about 84% of entrepreneurs would apply for micro-credits at interest rate exceeding by 5-10% the banks? interest rates under the conditions of a simpler procedure of allocation.

The integral part of the process of micro-crediting is its fixed-term character. Analysing entrepreneurs? wishes on different issues, it became clear that the major part of the respondents (44%) would prefer to apply for 6-12 months credits.

One may find the results of the survey on problems of micro-financing, conducted for the first time in Belarus, rather optimistic. These results prove that local entrepreneurs would welcome the establishment of national system of micro-crediting. Consultants of the UNDP project, together with specialists from the ministry of entrepreneurship and investment, are working on the introduction of the new financial technology in Belarus. An analysis of international models and methodologies of micro- financing is close to its end. At the same time, the research on successful introduction of the like programmes in other countries is conducted now. But it is time to move from words and plans to concrete deeds. We express our hope for the success of the pilot project that is expected to make some further steps in the development of the financial mechanism of support of the small business in Belarus. The project is conducted together with the Belarusian Fund of the Financial Support of Entrepreneurs.

The real economic growth can be attained only after millions of citizens with entrepreneurial initiatives are given economic freedom; and this is not declared only, but appropriate mechanism of realisation and resource support are provided for.

1. Vsemirnyi Bank o Belarusi: bez kupiur, Belorusskaya Delovaya Gazeta, 27 July 1998.

2. Special survey 1997-98 under the TACIS project ?Revelation of needs of the small enterprises of Ukraine, Belarus and Moldova for developing of the supporting programs on the national and regional levels?, Natsionalnaya Economicheskaya Gazeta, No. 28, June 1998.

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SMALL BUSINESS IN THE REPUBLIC OF BELARUS: EXPANDING OPPORTUNITIES FOR FINANCING

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