GAPSME : cause for concern from a bank lending perspective?

Abstract

PURPOSE: Malta has recently adopted General Accounting Principles for Small and Medium-sized Entities (GAPSME) through the transposition of the Single Accounting Directive (SAD), becoming the default accounting framework for qualifying small and medium-sized entities (SMEs). SMEs have a significant impact on the Maltese economy whilst banks are the primary external source of financing sought by businesses. This research aims to study banks' attitudes towards SME lending, how such attitudes are likely to change following the introduction of GAPSME, whether GAPSME adequately addresses banks' concerns, and how financial reporting can better suit banks' requirements. DESIGN: Semi-structured interviews were conducted with six of the leading local financial institutions. Replies were analysed by identifying similarities and differences of the main features and through the use of statistical tests. FINDINGS: Local banks adopt divergent business models with SMEs - servicing clients through different units or centralising commercial credit. Whilst close client communication is key to all banks, the majority prefer hard rather than soft information as financial statements (FS) provide tangible evidence of business progression. Collateral is a weak contender to FS as a resource to secure lending - statement of cash flows being the most valuable among the five FS elements. Banks collate financial and non-financial information from various sources - preference for projections outweighs historical information, both for new and existing clients. A positive outlook to continue serving SMEs is evident - some banks launching products targeting such clients. CONCLUSION: Banks have reservations about GAPSME as it does not fully address their requirements. FS still lack disclosures and future-oriented information. Recommendations include reduction in timeframes for presenting FS to banks, introduction of the concept of materiality for the extent of disclosures required, and projected cash flows. Banks are willing to accept GAPSME if clients present additional information and entrepreneurs act professionally.