Nonfinancial Obstacles to SME Financing in Serbia

Abstract

Owners and directors of small and medium-sized enterprises (SMEs), sole traders, representatives of SME associations and entrepreneurs all report that the basic obstacle to achieving more rapid development in Serbia is the lack of finance and modern mechanisms for its deployment. The financial infrastructure that supports SMEs in Serbia is undeveloped. Up to now, SMEs and entrepreneurs have financed their operations out of their own resources because financial markets in Serbia were isolated and lacked the support of international financial institutions. The local financial sector in the former Yugoslavia was designed to support large scale, socially owned enterprises – otherwise known as the “Pillars of Development.” Banks, especially large-scale socially owned banks, had a redistributive function imposed on them by the state, and they dealt solely with large-scale, socially owned enterprises. In addition, the Fund for Development of the Republic of Serbia disbursed its funds to the same target group. Capacity to repay the banks or the Fund was not a criterion for credit approval. The former economic and political system did not support the development of financial instruments for SMEs. Cooperation with SMEs focused on a few selected companies, while sole traders were almost completely excluded from credit transactions with the banking sector. SME owners and citizens completely lost their trust in the banks and channelled their savings into the grey economy, to banks abroad, or kept their savings at home. Only payments effected through the National Payment Bureau functioned properly for SMEs. Since 2001, the National Bank has been implementing reforms in the banking sector. The objectives are to establish market-based banking practices that boost the development of the real sector, stabilise the currency and gain the trust of citizens and SMEs. Bank balance sheets have been cleaned up, some banks have been closed, and strict control of loan use has been instigated to avoid the recurrence of