The interest rates chargeable by Maltese banks on SME loans : an analysis

Abstract

Purpose: This study analyses financing needs for SMEs, Vis a Vis bank loans, focusing on the interest rate charged on loans. The study will seek to determine how local banks establish such rates and to determine whether there are imperfections in the market. The study also aims to make comparisons of such rates with those offered for similar loans in other Eurozone countries. Design: An online questionnaire was distributed to local SMEs. Semi-structured interviews were conducted with a number of bank representatives, with a representative from the Central Bank of Malta and with Malta Enterprise. Furthermore, data regarding the level of interest rates and non-performing loans in Malta and in the Euro Area was obtained to support and corroborate the findings. This also enabled cross country comparisons to be drawn. Findings: The study clearly shows that local SMEs highly depend on bank financing, preferring overdrafts to loans. The high level of interest rates and the collateral required are the two main obstacles faced by SMEs when they apply for a loan. Certain SME preferences when getting a loan such as opting for loans with longer maturity and providing immovable property as security may push up the interest rate charged. The two main factors underpinning interest rate pricing are the banks’ cost of funding and the risk element. Local banks make limited use of cheap ECB funding, due to the high deposit base. Schemes offered by Malta Enterprise are effective for SMEs as they canhelp them benefit from lower interest rates. Conclusion: The study shows that the interest rates on SME loans are higher than the euro area average. However rises were more pronounced in past whereas there has been downward pressure on the rates. This can be partly due to the higher cost of funding and an ever-increasing rate of non-performing loans. Banks must be more innovative and make use of EU funds available at low interest rates. Moreover, SMEs must opt for other forms of financing available. Planned government initiatives are poised to help reduce the financing costs of SMEs. Value: Hopefully this study sheds further light on the financing habits of SMEs with regards to bank loans and the interest rates charged on the loans. The study can contribute by shedding light on the current situation of SME bank financing, by providing recommendations that can help reduce the cost burden faced by SMEs when obtaining such loans. Given the high importance of SMEs to the local economy, it is of utmost importance that they have access to affordable financing.