Micro, small and medium-sized enterprises (MSMEs) employ up to three-quarters of the population in many developing countries, and often account for almost one-third of their national gross domestic product (GDP), according to the World Bank. And with 55% of wages and salaries in Turkey being paid by small and medium-sized enterprises (SMEs), and 59% of exports coming from the segment in 2013 – according to data from the Turkish statistical office Turkstat – the picture is not much different in the country.
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Yet the major obstacle that SMEs across the world are facing is access to finance. In Turkey, SMEs have only recently become a larger area of focus among banks, after additional macro-prudential policies to curb highly profitable consumer lending were implemented by the Turkish Banks Association in late 2013, which diverted lending to SMEs.
But how well served are Turkish SMEs now? And what characterises them?
Export champions
The general distinction between micro, small, medium-sized, commercial and corporate clients is an important one, especially for banks in allowing themselves to better serve their customers. Yet the term SME or MSME still includes a wide variety of different businesses.
“SMEs in Turkey form 63% of business turnover, and employ 76% of the workforce,” says Ӧmer Aras, chairman and group chief executive at Finansbank, the eighth largest bank in the country by Tier 1 capital. “But within SMEs there are different types: small businesses that want to stay small with a certain quality, such as the corner pastry shop. There are also SMEs that are very fast growing, but there are differences within this group as well: some SMEs grow fast thanks to competitive advantages they gain through value-added products or services; then again, some SMEs are able to grow fast and compete because they avoid paying taxes. The key challenge for us is to identify SMEs with value-added production or services, and finance those.”
Even when disregarding the grey, informal economy, the range of SMEs in Turkey is vast – from a single employee to a workforce of 250, from a corner shop to budding export champion – requiring bespoke financial services throughout the businesses’ different stages of development.
“We think of SMEs [as businesses] with some production, some network but not our biggest commercial customers, [while] what we call micro customers would be a pharmacy, a store – really small businesses,” says Hüseyin Özkaya, chief executive at Bank Audi subsidiary Odeabank. “We do lending for SMEs more traditionally: we are offering good solutions – one-on-one, just like with a commercial customer.”
Banks are in the business of providing credit card services, card machines and collection services at one end of the spectrum, and trade finance, hedging solutions and foreign exchange (FX) denominated loans at the other.
The larger SMEs
An example of a growing Turkish SME is tile maker Graniser. The Izmir-based business, established in 1997, was mostly selling in the domestic market in the 1990s, but has seen its export sales gradually increase in the past few years, according to Erol Hacıoğlu, the company's general manager.
“[International sales] currently account for 54% of our total sales,” he says. “This high ratio generates our company more than enough liquidity in foreign currency both to finance our imports with lower foreign exchange risk and to utilise loans in foreign currency with lower interest rates.”
In the early years, Graniser used to collect advance cheques from its customers in order to induce and increase sales, according to Mr Hacıoğlu, while the company now utilises them as a means of funding.
Today, Graniser exports to more than 60 countries. Mr Hacıoğlu says that his business needs more investments in technology, and as receivables collection periods have slowed since the 2000s, Graniser now needs higher levels of working capital.
“Turkey is somewhat similar to Germany,” says Jean-Patrick Marquet, country director for Turkey at the European Bank for Reconstruction and Development (EBRD). “You have the kind of ‘mittelstand’ of large SMEs, which represent a big potential for the country. Those SMEs are typically family owned, quite dynamic – and also typically already quite leveraged.”
Larger clients such as Graniser have significantly more funding opportunities than their small or even micro-sized compatriots: from bank finance to some Turkish lira bond issuance and options to increase the capital base through equity investments – through public and private markets. Institutions such as the EBRD itself are actively seeking medium-sized targets for direct investments, as increasingly are private equity firms specialised on Turkey.
Regional private equity firm Bancroft is one such example. The fund – which has a focus on central and eastern Europe, as well as Greece and Turkey – invested in Graniser in 2012, taking a majority equity stake for $75m. The EBRD followed suit in 2013, when it became a shareholder in the tile manufacturer after a €10m equity investment. For Graniser, the investments were strategic, to help the firm increase profits and enhance production technology and capacity.
The right finance
For micro and small businesses, however, financing is meanwhile constrained to bank borrowing. “SMEs have access to finance, but the key issue is that they don’t necessarily have access to the right finance,” says the EBRD’s Mr Marquet. “What is lacking is local currency funding at affordable rates, and especially in the right maturity.”
Loans to SMEs typically come in maturities as short as one or two years for the smallest businesses, he adds – terms the EBRD is aiming to encourage banks to extend to three to five years, depending on the business. “It is critical to give the companies the room to manoeuvre in terms of having enough medium- to long-term debt that doesn't expose them to a refinancing risk and to the market environment,” he says.
While offering funding for all types of clients, Turkish banks have only recently focused on competing in the area of SME financing. In October 2013, the Turkish government introduced macroprudential measures in an effort to reduce consumption – among others by reducing credit card limits – as well as imports and the state’s large current account deficit of 7.9% as of 2013.
Concurrently, the government has added incentives to banks to lend to businesses – measures that have been effective. The current account deficit in Turkey has fallen to 5.7% of GDP as of 2014, while consumer and credit card lending has slowed. And lending to MSMEs has grown the fastest of all sectors from 2006 to 2014, boosting SME lending from 8% of GDP in 2006 to 19% in 2014, according to Mr Aras.
A growing appetite
Atıl Ozus, the chief financial officer at Turkey’s third largest bank by capital, Akbank, calls the SME sector “the most vibrant part of the Turkish economy” and agrees that there is a “growing appetite from Turkish banks in this area” in the past three to five years. “There is big competition in this segment, and competition puts pressure on pricing and the competitive dynamic,” he says. “At Akbank [SMEs are] a strategic growth area in the medium and longer term.”
According to Mr Ozus, Akbank differentiates itself from the competition through its product range, its reach – on top of its branches, it offers mobile banking, internet banking, dedicated SME relationship managers in its call centre – and partnership with SMEs, for whom the bank also provides consultation and other services.
Turkey’s 10th largest bank by capital, BNP Paribas-owned Türk Ekonomi Bankası (TEB), has made SME banking one of its clear areas of focus, as it realised that the Turkish financial sector was not equipped to analyse in depth the behaviours and businesses of SMEs, according to Ümit Leblebici, the general manager of TEB.
“[TEB] launched a new banking approach, where it positioned itself as the ‘consultant bank of Turkish SMEs’ by providing comprehensive products and services for them,” he says. “This was a game changer in the market, based not only on providing financial support to SMEs, but also helping them to grow their business and markets.”
According to Mr Leblebici, TEB’s analysis showed that Turkish SMEs face three key challenges in growing their businesses: limited access to information, lack of technological know-how and limited capacity for research and development. For this reason, TEB decided that a cornerstone of its SME strategy would be to provide non-financial services such as consultancy, capacity development, information dissemination and networking to support SMEs in strategically planning their future and growing their business.
The IFI effect
Many Turkish banks, including TEB, are working with international financial organisations (IFIs) such as the EBRD, the International Finance Corporation (IFC) or the European Fund for South-east Europe (EFSE), which provide targeted intermediary finance. In turn, the banks are required to use the funds to lend to specified sectors or areas of focus, such as energy-efficiency products or businesses run by women.
Odeabank, the Turkish subsidiary of Lebanon’s Bank Audi, is one of the banks that have received targeted funding from the EBRD – a €60m loan for on-lending to MSMEs. One of Turkey’s latest additions to the banking sector, Odeabank only started operating in 2012, but it was already the country’s 16th largest by Tier 1 capital and the 15th largest by assets as of the end of 2014.
“We are already quite advanced – we have about Tl2.5bn [$863m] in lending to SMEs,” says Mr Özkaya. “What we especially want to develop further is retail-like [banking for] micro clients. They require some working capital finance, some cheque-processing capability, some point of sales and [need all these services] online as well. In this area we are really prepared to invest more, and we are making [sure] the customer needs are met much more efficiently, more cheaply and faster.”
Catering for those smallest of the small micro-businesses, on paper, is the most profitable part of the banking business, according to Akbank’s Mr Ozus. This is because banks can charge higher net interest margins based on risk pricing models. Yet, micro customers are also those clients with comparably higher asset quality issues, he adds.
Under a separate scheme, the ‘Finance and Advice for Women in Business’ programme, Turkey’s Finansbank and TEB have each received €50m in loans from a consortium of the EBRD, the EU and the Turkish government to lend to women-led SMEs.
The scheme has not only earmarked a total of €300m for dedicated credit lines to participating banks, but also includes a risk-sharing mechanism and advice to help banks better address the financial needs and growth plans of their clients. It also offers direct advice to SMEs to improve their competitiveness, and a range of training, networking and mentoring opportunities.
Willing participants
IFIs such as the EBRD are open to working with all banks that adhere to its corporate governance criteria, and are willing to join its initiatives.
“The product we offer to the banks is the same for all the banks that join the programme, but the pricing will differ bank by bank,” says Mr Marquet. He adds that the banks will then apply their own credit policies and interest rates when on-lending.
“SME lending is quite attractive but is very expensive to serve, so the challenge is to make sure that you have an efficient way to cater for them,” says Finansbank’s Mr Aras. “We cannot keep hiring people to serve zillions of SMEs, but have to make sure that we use effective and advanced technology to give them the best services we can provide – that is what we are trying to do.”
Unless the government is changing its constraints on Turkey’s consumer lending, MSMEs are the banks’ clients of the future. And as SMEs generally work with no more than one or two banks, compared with the corporates’ larger groups of syndication banks, SME banking competition is only going to increase.
