2 AUTHORS: Dr. Aleksander BĄKOWSKI (editing) Marzena MAŻEWSKA (editing) Elwira KOPROWSKA-SKALSKA Jacek KOTRA Dr. Karol LITYŃSKI Marek MIKA Ewa POPIELCZAK Dr. Andrzej SIEMASZKO Małgorzata SNARSKA-ŚWIDERSKA Anna TÓRZ
3 REVIEWER: Professor Edward Stawasz The publication has been co-financed from the European Social Fund under the systemic project Development of human resources through promotion of knowledge, transfer and popularisation of innovation (the Operational Programme Human Capital, measure 2.1.3). The electronic version of this publication is available on the Innovation Portal The publication prepared by the experts of Polish Business and Innovation Centres Association. Opinions and arguments presented in the publication do not reflect the position of the Polish Agency for Enterprise Development, but only the position of the Authors. Copy available free of charge Copyright by Polska Agencja Rozwoju Przedsiębiorczości, Warsaw 2012 ISBN
4 Marek MIKA LOCAL LOAN FUNDS Loan funds, operating in Poland for twenty years, have become a permanent feature of Polish financial system. They are non-profit institutions that allocate all generated profit to the achievement of their statutory objectives. They are separate organizational and financial entities within the meaning of applicable law, and their core business is focused on providing financial services in the form of granting loans. The main objective of a loan fund is to provide financing sources and possibilities for entities from the sector of micro, small and medium-sized enterprises, and to facilitate this group s access to external sources of financing (outside capital). During the economic downturn, when the effects of the global financial crisis are felt and when access to other forms of external financing, including bank loans, is limited, loan funds are often the only source of financial support for companies seeking external funding sources. In addition to direct financing of current and investment needs of SMEs, loan funds support local development (by providing advisory and training services); their impact is particularly positive in terms of improving the activity of the local labor market. These actions contribute favorably to the competitiveness and innovativeness of the economy not only on the local or regional level, but also nationally. The acquired funds are used to finance current operations and investment needs, in particular in the early stages of development of enterprises. Loans can be applied for by entrepreneurs who cannot rely on financing from traditional banks nor have a limited access to it. Loan funds are based on well-designed and systematically implemented organizational standards and procedures for the provision of loan services. They operate on the basis of individual lending regulations and follow the rules of professional ethics. Characteristics of this group of financial institutions include the following aspects: - they are local institutions and conduct their business in a specific (territorially limited) area, - the range of products and services they offer is tailored to the needs of businesses and individuals operating in a particular area, - they focus on providing financial services to a specific group of clients - mostly to micro, small and medium-sized enterprises, - they apply simplified principles and rules for evaluating the creditworthiness of clients, making loan-granting procedures less complicated and more user-friendly for the potential clients. At the end of 2011, 86 institutions engaged in lending activities were in operation, 12 of which did not disclose the results of their operations or do it only occasionally, which may be due to the negligible value of these services in the context of their activities. Although only a slight alteration has been observed in the number of loan funds as compared to 2010, significant changes have taken place. In the present analysis, local branches and subsidiaries are not
5 regarded as separate funds1. The study was, however, based on data relating to funds that have appeared on the market or those that provided the results of their activities. The collected data and information gathered through telephone interviews indicate that nine funds stopped or temporarily suspended their lending activities, while one has been liquidated as an institution. An important change in the market is the transformation of the largest loan fund to date - Fundusz Mikro sp. z o.o. based in Warsaw into a bank. The exclusion of this organisation from the sector of loan funds resulted in substantial changes in values as regards a variety of information characterizing the loan fund industry in Poland. The majority of loan funds which presented the results of their activity (66) are members of the Polish Association of Loan Funds (40). Map 1. Loan funds in Poland in Their results are presented in summary data of the institutions running them, for example, data on Polish Entrepreneurs Foundation (PEF) outlines all the results of sub-regional loan funds established and managed by the PEF as branch offices, such as "Gryf", "Kujawiak", "Odra" "Pomeranus" etc., or the Canadian Loan Program.
6 The largest number of funds are located in Śląskie Voivodeship (10), while the smallest number (2) operate in Opolskie Voivodeship. Between five and seven loan funds function in the remaining voivodeships. Figure 1. Number of loan funds in Table 1. Number of loan funds per voivodeship in Territorial distribution of loan funds Voivodeship: Dolnośląskie Kujawsko-Pomorskie Lubelskie Lubuskie Łódzkie Małopolskie Mazowieckie Opolskie Podkarpackie Podlaskie Pomorskie Śląskie Świętokrzyskie Warmińsko-Mazurskie Wielkopolskie Zachodniopomorskie Total:
7 Organizational and legal forms The change in the number of funds in 2012 had no impact on the structure of their organisational and legal forms. The majority are association and foundations, although the number of commercial companies is steadily growing. Figure 2. The structure of loan funds, broken down by their organisational and legal form, in (in %) The period between the previous and the current study was one of relative stability in relation to organizational change and the number of entities whose main focus of activity is the provision of loans. Loan funds have started the process of creating and developing a network of regional branches, subsidiaries or local offices providing services to clients. According to the available data, more than 50% of the funds do not have branch offices. The majority of them started their lending activities relatively late, or their accumulated equity value qualifies them as small and very small (and, consequently, they do not need to set up local branches). Entities holding a large loan capital and with broader experience in the market have been developing a network of regional branches. More than 49% (49.2%) of loan funds have at least one regional office. 31% of the total number of loan funds have one regional office, while 7.4% have more than five offices. This confirms the tendency of the disappearance of a clear division between local and regional loan funds (in terms of their reach and significance), which to a large extent was an artificial division, in a way dictated by political considerations, for instance by the "Capital for the entrepreneurial" governmental project. The latter provided for the construction of a loan fund system which consisted of 16 regional/ provincial funds (by definition, voivodeship authorities were to hold equity in the latter) and 100 local funds. According to the rules of the program, this division naturally entailed variety
8 in the value of fund recapitalization. The need of finding new sources of capital and of implementing projects on schedule, and also ensuring a timely distribution of available financing meant that the funds focused on activities that were far removed from their original area of operation. This expansion was typical of funds with large and very large loan capital. Such local funds (operating within the area a poviat(s) or one voivodeship) were transformed into regional funds (operating on the level of a voivodeship(s)) or nationally (the entire country). Notwithstanding the above, loan funds have retained their characteristic features outlined at the beginning of this paper. Table 2. Percentage structure of loan funds according to the number of local branch offices Number of local branch offices Percentage structure No branch office 50.8% One branch office 31.5% Two branch offices 2.9% Three branch offices 7.4% Over five branch offices 7.4% Total 100% Size and structure of capital At the end of 2010, total capital held by loan funds amounted to PLN 1,565,958,869.27, whereas on , total capital of loan funds amounted to PLN 1,656,943, This very large increase in capital, totalling over PLN 978 million, was the result of acquiring capital from Regional Operational Programmes (in 11 voivodeships, funds were recapitalized as part of ROP and in 5 voivodeship the JEREMIE initiative was introduced) 2. The analysis provided for the following classification of funds operating in the market: up to PLN 3 million (very small), PLN 3-10 million (small), PLN million (medium), PLN million (large) and over PLN 40 million (very large). Although at the end of 2011, the funds with less than PLN 3 million of capital accounted for more than 14% of the total number of entities, their share in the total amount of capital was just over 1%. 2 The JEREMIE program is a joint initiative of the European Commission and the European Investment Bank. The abbreviation comes from "Joint European Resources for Micro to Medium Enterprises". The idea behind this initiative is to increase the competitiveness of the European economy in the global market. The JEREMIE Investment Fund offers assistance in creating or improving the system of financing and development of SMEs through the use of financial instruments, such as loans or guarantees. These instruments may be used continuously and on a revolving basis, as opposed to aid in the form of a grant, which can be used only once.
9 Figure 3. Number of loan funds in the market according to the value of capital held by them at the end of The distribution of the number of institutions running loan funds according to value of capital held by the funds is relatively uniform. However, the structure of the value of their capital has changed considerably. Table 3. Structure of the number of funds according to the value of their capital Value of the capital up to 3 million 14.3% 3-10 million 22.7% million 22.5% million 20.2% over 40 million 20.3% Total 100% Percentage structure of the number of funds Table 4. Structure of loan funds broken down by the value of the loan capital held by them Percentage share of groups of loan fund broken down by the value of loan capital Very small (<PLN 3 million) 38.60% 30.80% 17.10% 1.11% Small ( PLN 3 million <10 million) 34.30% 27.70% 20.00% 5.58 % Medium ( PLN 10 million<20 million) 18.60% 20.00% 22.90% 12.64% Large ( PLN 20 million<40 million) 2.90% 15.40% 24.29% 22.23% Very large ( PLN 40 million) 5.70% 6.20% 15.71% 58.44% Total % % % %
10 Over the last four years, significant changes have taken place in terms of the amount of capital held by each fund category. At the end of 2011, the share of very large funds, holding more than PLN 40 million of capital, amounted to nearly 60% (58.4%) and, in comparison with the data from the end of 2010, it had increased more than threefold. Target groups of funding services The main target group (beneficiaries) of loan funds are micro, small and mediumsized enterprises from the region (voivodeship) in which a given fund s seat is located. The target group of loan funds has not changed recently: it consists of micro, small and mediumsized enterprises. Given the change in the maximum amount of the loan (up to PLN 500,000), small and medium entrepreneurs are a growing group of service beneficiaries. In 2011, there was a decline in the share of micro enterprises (from 93% to 77.3%) to the benefit of small businesses (from 6% to 17.8%), as well as in the share of medium-sized enterprises (nearly 3.8%) in the total number of clients of loan funds. Some of the funds implementing the Jeremie initiative can provide loans of up to PLN 1 million. Data collected through the questionnaires submitted by the participating funds shows that 22.2% of the total number of loans goes to start-up companies, but only 15.7% of loan capital is used to finance these loans. The remaining 84.3% is granted to companies operating in the market for more than 12 months. Figure 4. Structure of the number of loans broken down by the types of enterprises If for the sake of comparison of loan funds with other financial institutions, we assume that start-up companies (for example, as defined by banks) are companies operating for no more than two or even three years, then nearly 40% of all clients of loan funds are start-up companies. This would confirm the belief that loan funds remain the closest business partners for start-ups.
11 Figure 5.Structure of loans broken down by categories of enterprises A very important element in the development of loan funds consists in building solid relationships with clients. It turns out that more than 35% of borrowers are returning clients. This is a proof of client's satisfaction with the service, of the fact that their expectations are met, and that the services provided meet their needs. Returning clients are the best evidence confirming that the funds perform their task well. Loans granted Since their beginning until the end of 2011, loan funds granted more than 71 thousand loans with a total value of nearly PLN 2,881,000,000. The average value of a loan amounted to PLN 65,500, and it increased significantly as compared to the average value of a loan in 2010, which was PLN 38,900. A significant decrease in the number of loans serviced was observed - from 900 to 332, and the average number of newly granted loans dropped to 132. This is a result of changes in the strategy of operation of the funds and of their offer. Acquiring considerable funding from ROP and from the Jeremie initiative, increasing the maximum loan amount, and extending the period for which it is awarded (up to 96 months), allowed loan funds to grant fewer loans, but with much higher amounts and for significantly longer periods of time. Securities Loan securities remain the same as compared to previous years: the most popular forms are bills of exchange or civil law guarantee (considered sufficient in case of small loan amounts, along with mortgages). Cooperation between loan funds and guarantee funds has not improved; the main reason is that guaranteeing a loan provided by a loan fund by a guarantee fund from the same region is regarded as unacceptable double financing. Cooperation between loan funds and guarantee funds from different regions, if they use ROP funds, is prevented by the impossibility of transferring funds outside of a given voivodeship.
12 However, cooperation can and does take place when funds finance their operations with their own capital. The lowest interest rate amounted to 5.93%, even though, for example, funds implementing the Jeremie initiative provided loans with much lower interest rates (with the use of public aid). Own contribution amounted to 20% of the value of a project. Purpose and value of loans The majority of loans were granted for investment purposes (62%), investment and current operations (15.7%), as well as current operations (22.3%), with respective values of 63.7%, 15.7% and 20.6% (in the percentage structure). It is worth to mark that 65% of the funds have innovative companies in their loan portfolios. Figure 6. Structure of the number of loans broken down by their purpose Figure 7. Structure of the value loans granted broken down by their purpose
13 Loans with a value of over PLN 50,000 were the most popular group and accounted for over 78% of all loans disbursed in The value of 60% of loans range between PLN 50,000 and PLN 300,000; the value of the greatest number of loans granted ranged between PLN 120,000 and PLN 300,000. The smallest number of loans had a value of up to PLN 10,000 - they accounted only for 1% of all loans. Figure 8. Structure of loans broken down by their value Servicing the funds A statistical loan fund employs an average of 6 staff in charge of direct servicing of the borrowing process. Some of the staff employed in the fund is also involved in other services provided by the institution running the fund, such as: advisory services (45% of institutions operating loan funds), educational services (50%) and consulting services (38%). Additional proceeds from the provision of these services supplement the budget of loan funds. The average operating budget of a fund amounts to PLN 1,168, Figure 9. Structure of financing the operating budget of funds in 2011
14 As demonstrated above, loan funds rely on grants and project subsidies in the financing of their budgets to a relatively small extent, as compared to other types of institutions. Barriers to development Data analysis allowed to identify three main barriers which, in the opinion of management team members, remain the essential elements hindering the activities of loan funds. Table 5. Barriers to the development of loan funds Type of barrier Weight disadvantageous economic situation in the region, apathy and stagnation 3.1 insufficient capital 2.9 imprecise legal regulations 2.7 seekers of "easy money" 2.3 shortage of persons willing to start their own businesses 1.9 limited interest in services provided by loan funds 1.7 problems in co-operation with local and regional institutions, lack of support 1.6 difficulties in appointing a team in charge of evaluating business ventures 1.1 adverse attitude to loan funds 0.9 Disadvantageous economic situation is considered to be the main barrier, which is a significant indication of the slowing down of the future development of companies; finding new sources of capital remains an important problem for loan funds, considered by them to be an important barrier to their development. Legal regulations ranked third, as they are still not adjusted to the specific type of activity typical of loan funds.