The use and misuse of overdrafts by SMEs : a Maltese perspective

Abstract

Purpose: The majority of the Maltese economy is made up of SMEs and overdrafts are a crucial source of finance for them. This study aims to scrutinise the use and misuse of overdrafts by SMEs. This research study identifies financial, business and other factors which banks consider, and assesses whether such factors help ensure better utilisation of overdrafts. Furthermore, it will also identify ways that help reduce the misuse of overdrafts. Design: This study was achieved through a qualitative approach. The semi- structured interviews were carried out with sixteen SMEs making use of overdrafts, operating in four different industries in Malta, as well as with three local banks. Findings: The findings of this research show that overdrafts are an important source of finance to SMEs. When granting or extending overdrafts, banks mostly consider the full set of financial statements, highlighting the important role of accountants. Banks believe that the information ensures better use of overdrafts while SMEs counter-argue that it is a risk assessment process. Although SMEs use the overdraft facility for working capital purposes, it is sometimes misused. Furthermore, the importance of having a good banking relationship was emphasized. SMEs trust that there are a lot of regulations in place but suggest that education and guidance, together with better communication will help reduce the misuse of overdrafts. Conclusion: There are no major discrepancies in the use and misuse of overdrafts by SMEs across the industries chosen. SMEs tend to heavily rely on overdrafts, maybe due to lack of access to other sources of finance. The bank’s processes for obtaining other types of financing are time-consuming and often complicated, which may consequently result in SMEs misusing their currently available overdraft facility. Misuse of overdrafts may also be a result of lack of financial knowledge or lack of financial planning. Value: This study seeks to increase awareness on the utilisation and the misuse of overdrafts. Furthermore, the views of local SMEs and local banks are compared and contrasted. SMEs are vital for the well-functioning of the Maltese economy and thus, providing them with guidance on the utilisation of overdrafts is of utmost importance.