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A new Mediobanca for small and medium-sized enterprises

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Mediobanca was established by Mattioli and Cuccia in 1946, immediately as a joint stock company, and its full name was Mediobanca Banca di Credito Finanziario. It operated from the beginning having, as founding partners, Banca Commerciale, of which Raffaele Mattioli was President at the time, and Credito Italiano.

Enrico  Cuccia  was  an  unsurpassed  analyser  of  balance  sheets  and accounts – in fact, one of his best known witty remarks was the one on Berlusconi’s Fininvest: “Indeed, how much is a TV antenna really worth?” He was General Manager of Mediobanca from its foundation until 1982, when the dual crisis of public and private companies and of the banks that supported them could already be perceived.

What was the logic behind the establishment of this particular financial structure?

Simply to guarantee and meet – in the medium and sometimes long and very long term –   the economic needs of the manufacturing companies, which had been devastated by World War II.

After the banking reform of 1936, of which Mattioli and Cuccia’s father- in-law, Alberto Beneduce, had  designed the  general guidelines –  later imitated in many financial laws following the 1929 crisis, also in the USA- there were many banks that had chosen to operate in the traditional market of savings collection and then in the short-term credit market.

There was, therefore, the lack of a specialized financial structure which worked only for companies, funded them in the medium-long term and finally led them – where possible – to be listed on the Stock Exchange.

At the time, legislation clearly separated credit and savings banks from those that operated for companies and led them to the listed on the Stock Exchange.

It was the most rational way to separate companies from banks, so as to avoid companies’ crisis leading to the death of public savings.

Enrico Cuccia, who certainly did not like the Italian ruling class, except for his friend and old banker Ugo La Malfa, kept Mediobanca clearly out of the many pressures coming from the whole political world.

However, particularly from 1982 onwards, Cuccia had to face very strong tension with the Institute for Industrial Reconstruction (IRI) – at the time led by Romano Prodi – that forced the three banks of national interest, namely Banca Commerciale, Banca di Roma and Credito Italiano – which were all within the IRI sphere – not to renew Enrico Cuccia’s term of office.

Nevertheless, there was another factor that led to the inevitable transformation of Mediobanca.

The 1993 Banking Law, in fact, abolished the obligation for banks to be specialised – hence the separation between savings banks and financial credit institutions for medium-long term companies – and a real crisis occurred between the banks participating in the shareholding structure of Mediobanca and the old medium-long term credit institution.

The central idea underlying the 1936 Law, however, was not entirely wrong, even though it was no longer comprehensible in the context of financial globalization.

Either the banks are separated from their clients or the likelihood of a parallel collapse increases disproportionately.

Moreover, the Consolidated Law of the then Prime Minister Giuliano Amato, i.e. the 1993 reform law, put an end to the structural division between banks and anticipated by six years the end of the U.S. Glass- Steagall Act which, in essence, resumed the principles of separation between banks and companies enshrined in the Fascist Banking Law of 1936.

Currently, in Italy alone, 200 billion euros are needed within the next 18 months in view of resuming the path of development and even of mere productive stability, apart from the E.U. governments’ initiatives – albeit necessary – to face the impact of the Covid-19 pandemic.

This is the extent of a complete post-war reconstruction. With a view to solving these specific problems, the States have always resorted to forms of extraordinary debt – as was the case with the traditional War Bonds – which are bearer financial instruments with a lower average income than the standard ones, but have a long duration ranging between 7 and 15 years.

Nowadays, however, the securities market is very complex and structured, but we could also envisage a monthly issue of 15-20 year Italy Bonds – a market that is already very large and currently appreciated by savers – with a  1.5-2%  constant  coupon,  the  same  as  the  current  BTPs,  obviously exempt from all present and future taxes, but with a tax credit – if anything – for corporate or retail customers equal to or even higher than the coupon (for example a 3-4% tax credit).

The SMEs’ crisis, however, has been worsened by the COVID-19 pandemic and the necessary lockdown of many companies and craft businesses.

Just think that the Italian small and medium-sized enterprises account for over 90% of the total number of companies –  and I am referring to those with less than 20 employees – but receive only 13% of bank loans.

In 2019 there was the biggest drop in loans to SMEs as from 2015.

If we look at the Bank of Italy data processed in early 2020, it turns out that credit to riskier SMEs – calculated on the basis of CERVED criteria – has fallen by 8% for micro-enterprises, but the rating and the amount of bank loans available also for the “safest” SMEs have decreased.

In the meantime, bank loans have increased throughout the Eurozone by 3.7% in continental Europe – hence also in Italy, although only by 3% – with a rate of five percentage points lower in Italy than the trend currently recorded in the rest of the European Union.

A credit crunch for the Italian smaller companies, which makes them very weak, often unable of achieving good globalization, and also inevitably slow in renewing their cutting-edge technologies, but finally prone to the cycle of their short term and loan capital.

One of the reasons for this structural weakness of the Italian SMEs’ finance is, on the one hand, the fact that they have no access to the debt market, with the issuing of bonds or mini-bonds, but, on the other hand, the real European regulatory jungle, which is aimed at reaching one single goal, i.e. to severely lower the credit risk for banks.

All E.U. regulations in the banking sector tend not to grant credit at all to the weaker and smaller SMEs and to consider the usual non-performing loans of companies only as an immediate prelude to bankruptcy.

If we had behaved like this during the huge economic boom of the 1960s, we would still have the rubble of World War II in our major cities.

If a bank follows the completely risk-averse behaviour of a traditional insurance company, then it might as well change business.

Furthermore, the new E.U. regulations in the offing, regarding the regular provision of bank loans to companies and households, are even stricter and more stringent than the international ones – hence money is lent only to those who basically do not need it.

Not to mention the regulations known as Basel II, i.e. the International Convergence of Capital Measurements and Capital Standards developed by the “Basel Committee” established within the Bank for International Settlements (BIS), located in the big tower overlooking the centre of the Swiss city.

Ironically, the BIS was created in 1930 to manage the implementation of the Young Plan, the ingenious and very modern financial operation that cut the war debt of defeated Germany by 20%, dividing it into instalments to be paid every 58 years, with the last one paid in 1988, one year before German reunification.

Unlike this brilliant idea of debt repayment, which was developed in the 1920s, the Basel II regulations, which came into force in 2007, have only one obsessive goal, i.e. to make the banking system stable and radically reduce the companies’ credit risk vis-à-vis the system itself.

In some years after the Basel II regulations, the reduction in loans to companies, and in this case also to large companies, was even 3.5% on average.

It should also be recalled that the Basel III regulations have been in action since January 2013, becoming fully operational in January 2019.

According to the latest data from the Bank of Italy, the decrease in loans to SMEs ranges between 1.9 and 2%.

The estimate is made on the basis of already largely insufficient data.

Furthermore, the weight of bank loans on Italian corporate balance sheets, both of SMEs and large companies is, on average, over 60% of total debt.

In Germany, the United Kingdom and France the bank debt burden on total corporate debt is around 50%.

Hence, if the companies themselves do not take risks on their own and tend to be not only risk averse but also focused on unproductive income, also the banks tend to protect themselves more than usual and even more than it happens with the Basel III regulations.

Hence companies’ low capitalization, but also naive, excessive and bureaucratic formalism of banks, which often forget that their business is to  sell  money  and,  when  giving  information,  put  together  national, European and international standards that, in addition to Basel III regulations, also include the IRFS 9,  created in  2014 to improve and standardize financial information.

Finally, the Italian SMEs pay much more for loans than their competitors because the risk analysis procedure is much more formalized, legalized, bureaucratic and very strict, while the German and French banks serve their business clients in a much more flexible way.

The guarantees are almost always the applicant’s personal ones. This is not even provided for in the various Basel regulations. The rates of access to credit in other European countries are 2-3%, with Italy that, for a low rating company, even goes so far as to charge a 7-8% yearly interest rate.

It should be recalled that currently 92% of Italian companies are micro- enterprises and SMEs, with five and a half million VAT numbers. The average turnover of all these micro-enterprises and SMEs does not exceed two million euros per year.

In France, Germany and Great Britain, the number of entrepreneurs is half of the Italian ones. In France, however, 75% of companies –  which are not SMEs, but medium-sized and large enterprises – are concentrated around Paris, while in Germany – despite the E.U. regulations do not accept it – the banking network is still in the hands of the Länder and of KfW – the equivalent of the Italian investment bank “Cassa Depositi e Prestiti” – which supports all banks in crisis, again in defiance of E.U. regulations.

The bank rating is primarily public, i.e. that of the companies specialised in the sector – which, in Italy, are controlled by CONSOB – and the SMEs often cannot afford to pay large sums of money to the rating companies and also wait for a long time before the rating is made official.

The non-official rating that, instead, Italian banks often adopt is – so to speak – “private”. It is above all the software that the Bank of Italy makes available to banks to evaluate the companies’ balance sheets and accounts, always based on the principle explained by a great and well-known Italian entrepreneur: “the first balance sheet is for everyone and is submitted to the banks; the second one is seen only by company managers and is not made public; the third is very confidential and is seen only by the CEO and the main shareholder, who never speak about it”.

The Bank of Italy’ software studies companies according to a geo-sectoral criterion and following the past trends only of the sector to which they belong.

If the rating turns out to be negative – as is often the case in a phase of crisis and in “mature” sectors, where many SMEs still operate – the bank offers them an 8% interest rate, which is completely off-market, or – as often happens –  does  not grant them any  loan, thus  making them go bankrupt.

Therefore, also the SMEs must be equipped with a “language” suitable for banking procedures, good accounting tools, such as business plans and management budgets, as well as fintech tools, such as business analysis and professional creditworthiness assessments.

At least initially, this could break the wall of incommunicability that separates the business banking clients from the banks’ way of thinking or not thinking at all.

What could be a possible alternative? The private capital market. In Italy there are 1,375 billion euros of private savings which could be invested productively.

In France and Great Britain, the investment in start-ups is on average, year after year, 2.5 billion euros. In Italy it is worth 160 million euros.

The Prime Minister’s Decree known as “Curaitalia” has established the Guarantee Fund for SMEs, which also provides for long-term operations (over 36 months).

However, will the Guarantee Funds and the Credit Consortia be enough to ensure credit flows to SMEs? I do not think so.

According to the latest data, the Credit Consortia have a very low risk profile. They are currently 34 and are subject to the supervision of the Bank of Italy.

In 2019 they issued guarantees to the tune of 7.3 billion euros. Hence, once again, they are not sufficient.

Therefore, we officially propose the establishment of a Medium-Long

Term Credit Bank dedicated to small and medium-sized enterprises.

You can have access to it with the same criteria as an ordinary industrial credit bank, which can lead the most promising SMEs to be listed on the

Stock Exchange or can possibly organize an effective market for the mini- bonds issued by any small and medium-sized enterprise.

Ordinary credit banks or, even better, industrial credit banks and companies can be shareholders of our Mediobanca for SMEs. It can also have its own research unit developing analysis and risk profiles for its clients. It can issue debt and credit securities on the market and can also take part in merger, acquisition and expansion operations in foreign markets.

Hence a Mediobanca model specifically adapted to suit Italian SMEs.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France. “

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Digital Futures: Driving Systemic Change for Women

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Authors: Erin Watson-Lynn and Tengfei Wang*

As digital technology continues to unlock new financial opportunities for people across Asia and the Pacific, it is critical that women are central to strategies aimed at harnessing the digital financial future. Women are generally poorer than men – their work is less formal, they receive lower pay, and their money is less likely to be banked. Even when controlling for class, rural residency, age, income, and education level, women are overrepresented among the world’s poorest people in developing countries. Successfully harnessing digital technology can play a key role in creating new opportunities for women to utilise formal financial products and services in ways that empower them. 

Accelerating women’s access to the formal economy through digital innovations in finance increases their opportunity to generate an income and builds resilience to economic shocks. The recently issued ESCAP guidebook titled, Harnessing Digital Technology for Financial Inclusion in the Asia Pacific, highlights the fact that mechanisms to bring women into the digital economy are different from those for other groups, and that tailored policy responses are important for women to fully realise their potential in the Asia-Pacific region.

Overwhelmingly, the evidence tells us that how women utilise their finances can have a beneficial impact on the broader community. When women have bank accounts, they are more likely to save money, buy healthier foods for their family, and invest in education. For women who receive Government-to-Person (G2P) payments, there is significant improvement in their lives across a range of social and economic outcomes. Access to safe, secure, and affordable digital financial services thus has the potential to significantly improve the lives of women.

Despite the enormous opportunity, there are numerous constraints which affect women’s access to financial services. This includes the gender gap in mobile phone ownership across Asia and the Pacific, lower levels of education (including lower levels of basic numeracy and literacy), and lower levels of financial literacy. This complex web of constraints means that country and provincial level diagnostics are required and demands agile and flexible policy responses that meet the unique needs of women across the region.

Already, across Asia and the Pacific, governments are implementing innovative policy solutions to capture the opportunities that come with digital finance, while trying to manage the constraints women often face. The policy guidebook provides a framework to examine the role of governments as market facilitators, market participants and market regulators. Through this framework, specific policy innovations drawn from examples across the region are identified which other governments can adapt and implement in their local markets.  

A good example of how strategies can be implemented at either the central government or local government levels can be found in Pakistan. While central government leadership is important, embedding tailored interventions into locally appropriate strategies plays a crucial role for implementation and effectiveness. The localisation of broader strategies needs to include women in their development and ongoing evaluation. In the Khyber Pakhtunkhwa province, 50,000 beneficiary committees comprising local women at the district level regularly provide feedback into the government’s G2P payment system. The feedback from these committees led to a biometric system linked to the national ID card that has enabled the government to identify women who weren’t receiving their payments, or if payments were fraudulently obtained by others.

In Cambodia and the Philippines, governments have implemented new and innovative solutions to support remittance payments through public-private-partnerships and policies that enable access to non-traditional banks. In Cambodia, Wing Money has specialised programs for women, who are overwhelmingly the beneficiaries of remittance payments. Creating an enabling environment for a business such as Wing Money to develop and thrive with these low-cost solutions is an example of a positive market intervention. In the Philippines, adjusting banking policies to enable access to non-traditional banking enables women, especially those with micro-enterprises in rural areas, to access digital products.

While facilitating participation in the market can yield benefits for women, so can regulating in a way that drives systemic change. For example, in Lao People’s Democratic Republic and India, different mechanisms for targets are used to improve access to digital financial products. In Lao People’s Democratic Republic, the central government through its national strategy, introduced a target of a 9 per cent increase in women’s access to financial services by 2025. In India, their targets are set within the bureaucracy to incentivise policy makers to implement the Digital India strategy and promotions and job security are rewarded based on performance.

These examples of innovative policy solutions are only foundational. The options for governments and policy makers at the nexus of market facilitation, participation and regulation demands creativity and agility. Underpinning this is the need for a baseline of country and regional level diagnostics to capture the diverse needs of women – those who are set to benefit the most of from harnessing the future of digital financial inclusion.

*Tengfei Wang, Economic Affairs Officer

This article is the second of a two-part series based on the findings of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) Policy Guidebook: Harnessing Digital Technology for Financial Inclusion in Asia and the Pacific, and is jointly prepared by ESCAP and the Griffith Asia Institute.source: UNESCAP

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Empowering women-led small businesses in Nepal to go digital

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People walk down a street of shops in Kathmandu, Nepal. (file) photo World Bank/Peter Kapuscinski

Authors: Louise Anne Sophie Lavaud and Mitch Hsieh*
Throughout the years, Laxmi Shrestha and her husband saw the opportunities that opening an online shop could bring to her family business.

“Looking at the trend of TikTok and other sites, we thought selling online could help us but we weren’t technically sound,” said Laxmi, the owner ofLaxmi Hastakala Store, in Banepa, Nepal, and part of a family of artisans.

As she learned about selling online, she picked up on how to market her shop digitally and, according to Laxmi: “It has surely given our business a push we always wanted. Recently we started selling our products online and we also receive payments online.”

Laxmi Hastakala Store is among the 1,800 women-led micro, small and medium enterprises (MSMEs) in Nepal being trained on digital and financial literacy by Sparrow Pay – one of the winners of the Women Fintech MSME Innovation Fund launched in 2019 by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) and the United Nations Capital Development Fund (UNCDF).

Sparrow Pay has created a local digital marketplace where women-led MSMEs can offer products and services to its existing 800,000+ digital payment service users. Additionally, Sparrow Pay is supporting these women entrepreneurs in adopting digital payments and creating a payment history to support access to additional financial services.

MSMEs are a vital source of employment and a significant contributor to a country’s GDP. However, more than 45 per cent of MSMEs in Asia and the Pacific are constrained from accessing finance and other support for their businesses. Socio-cultural norms mean women-led enterprises have to overcome gender-specific barriers to access institutional credit and other financial services.

ESCAP and UNCDF aim to encourage easy access to digital finance for MSMEs in Asia and the Pacific, break the financial barriers surrounding women-led enterprises and support entrepreneur-centric growth and inclusiveness throughout the region. Initiatives by the 10 winning fintech companies are currently supporting more than 9,000 women-led MSMEs in Bangladesh, Cambodia, Fiji, Myanmar, Nepal, Samoa and Viet Nam.

Just like Laxmi, these women business owners plan on successfully growing their companies in the digital area.

The Women Fintech MSME Innovation Fund is part of a regional programme “Catalyzing Women’s Entrepreneurship: Creating a Gender-Responsive Entrepreneurial Ecosystem,” which seeks to support the growth of women entrepreneurs in Asia and the Pacific by enabling a policy environment for such business owners, providing them with access to finance and expanding the use of ICT for entrepreneurship.

*Mitch Hsieh Chief, Communications and Knowledge Management Section

UNESCAP

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Is It Possible to Lift Sanctions Against Russia? — No

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Every conflict sooner or later ends in peace. Such is the conventional wisdom that can often be heard from those who, amid the current situation of the sanctions tsunami and confrontation with the West, are trying to find hope for a return to “normality”. The logic of such wisdom is simple. At some point, the parties will cease fire and sit down at the negotiating table. The end of hostilities will lead to a gradual reduction in sanctions pressure on Russia, and our businesses will be able to return to work with Western partners.

We have to disappoint those who believe in such a prospect. Sanctions against Russia, for the most part, will not be lifted even in the event of a ceasefire in Ukraine and a peace agreement. There will be no return to “pre-February normality”. Instead of remembering a lost past, we will have to focus on creating a new future in which Western sanctions remain a constant variable.

Why is the lifting of Western sanctions on Russia extremely unlikely? There are several reasons.

The first reason is the complexity of the conflict between Ukraine and Russia. It has every chance of being prolonged for a long time. There may be pauses in active hostilities. The parties may conclude temporary truces. However, such truces are unlikely to remove the political contradictions that gave rise to the conflict. Currently, there are no parameters for a political compromise that would suit all parties. Even if an agreement between Moscow and Kiev is reached, its sustainability and feasibility are not guaranteed. The experience of Minsk-2 shows that the mere appearance of agreements does not automatically resolve political problems and does not lead to the lifting or easing of sanctions. The Ukrainian problem can smoulder and flare up again for decades, partly because both sides are limited in the possibilities of a decisive military victory and complete surrender of the enemy. Relations between Russia and Ukraine are at risk of entering the ranks of long-term conflicts, similar to relations between India and Pakistan, or North and South Korea. The complexity and longevity of the conflict guarantee Western sanctions for the long term.

The second reason is the stable nature of the contradictions between Russia and the West. The conflict in Ukraine is part of a larger Euro-Atlantic security palette. An unstable system of asymmetric bipolarity has formed in Europe, in which the security of Russia and NATO can hardly be indivisible. Russia has no way to crush the West without doing unacceptable damage to itself. However, the West, despite its colossal superiority, cannot crush Russia without incurring unacceptable losses. Containing Russia is the best strategy for the West. Ukraine is doomed to remain one of the areas of containment. For Russia, the strategy of asymmetric balancing of Western superiority remains optimal. It is possible that part of such a strategy will be a course towards a radical territorial redistribution of Ukraine, tearing away from it the eastern and southern parts. But in itself, such a redistribution will not remove the problems of Western sanctions.

The third reason is the institutional features of the sanctions policy of the initiating countries. Experience shows that sanctions are relatively easy to impose but very difficult to lift. Thus, with regard to Iran, a whole “web of laws” has formed in the United States, which significantly limits the administration’s ability to lift sanctions. Even if the sanctions are not enshrined in law, their cancellation or mitigation still requires political capital, which not every politician is ready to spend. In the US, such steps will cause criticism or even opposition in Congress, and in the EU – disagreements among member states. Of course, individual restrictions are lifted or relaxed in the interests of the initiating countries themselves. The experience of sanctions pressure on the Republic of Belarus shows the existence of the “sanction remissions” when restrictions are eased. However, the legal mechanisms of sanctions themselves remain and can be used at any time.

The fourth reason is the quick reversibility of the sanctions. Often, their abolition is accompanied by political demands, the implementation of which is a complicated process. For example, the Iranian nuclear deal required several years of complex negotiations and significant technological decisions. However, the return of sanctions can be carried out overnight. There is an asymmetry in the fulfilment of obligations. Fulfilling the requirements of the initiators requires significant changes, while the return of sanctions requires only a political decision. Rapid reversibility breeds distrust among target countries. It is easier for them to continue to live under sanctions than to make extensive concessions and risk receiving new sanctions. Historical experience shows that the initiators of sanctions tend to play the game of “finishing” the opponent. After the concessions come new, more radical political demands and the threat of new sanctions. The “Pompeo 13 Points” – a list of US demands on Iran beyond the limits of fulfilling the terms of the nuclear deal – have already become a textbook example. The Iranian lesson, apparently, was well learned in Moscow. Iran itself is actively working to achieve its goals in the field of nuclear arms. Ultimately, this shows the ineffectiveness of sanctions in terms of influencing the political course of the target country. But questionable effectiveness does not negate the fact that sanctions continue to be applied and enforced.

The fifth reason is the ability to adapt. Without a doubt, Russia will suffer enormous damage from the restrictive measures which have been introduced. However, the possibility of it adapting to the sanctions regime remains high. Russia has the chance, first, to partially make up for the shortfall in supplies from abroad with the help of its own industry, although this will require political will and the concentration of resources. Second, it has access to non-Western markets, as well as alternative sources of goods, services and technology. The key conditions for solving this problem will be the creation of reliable channels for financial transactions that are not related to the US dollar, the Euro, or Western financial institutions. Such a task is feasible both technically and politically, although it will also require time and political will. Iran’s experience shows that sanctions have seriously hit the country’s development opportunities. However, they did not interfere with the development of agriculture, industry and technology. The modernisation of the Soviet Union also proceeded under severe Western sanctions. The ability to adapt reduces the motivation for concessions to the demands of the initiating countries, especially given the risk of playing for “finishing”.

These reasons make the prospect of lifting or significantly reducing sanctions pressure on Russia extremely unlikely. The US, EU and other initiators have already introduced the most severe restrictions on Moscow. But the upward wave of sanctions escalation has not yet been exhausted. In addition, the achievement of the ceiling of the applied measures is unlikely to mean the abolition of those already introduced. However, the sanctions also do not mean the “end of history” of the Russian economy. It found itself in new conditions that will require adaptation and the search for new opportunities for development and growth.

From our partner RIAC

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