Study of the Financial Sector and SME Development in Poland
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Study of the Financial Sector and SME Development in Poland Volume One: Main Report GEMINI Technical Report No. 68 GROWTHU=EmINI and EQUITY through MICROENTERPRISE INVESTMENTS and INSTITUTIONS 7250 Woodmont Avenue, Suite 200, Bethesda, Maryland 20814 DEVELOPMENT ALTERNATIVES, INC. * Michigan State University * ACCION International Management Systems International, Inc. * Opportunity International * Technoserve • World Education Study of The Financial Sector and SME Development in Poland Volume One: Main Report by Bruce Heatly Cynthia Lynn Chrzan-Lanigan The GEMINI Poland Small Business Project and Cathy Silverstein Management Systems International February 1994 This work was supported by the U.S. Agency for International Development Mission in Poland through abuy-in to the Growth and Equity through Microenterprise Investments and Institutions (GEMINI) Project, contract number DHR-5448-Q-34-9081-00. TABLE OF CONTENTS Pave VOLUME ONE- MAIN REPORT EXECUTIVE SUMMARY iii INTRODUCTION I PURPOSE OF THE STUDY 1 METHODOLOGY 1 THE FINANCIAL SYSTEM IN POLAND 3 THE BANKING SECTOR 3 National Bank of Poland 3 Treasury-Owned Commercialized Banks 4 Private Banks 5 Cooperative Banks 5 Credit Unions 7 Specialized Banks 7 THE CAPITAL MARKET 8 THE INTERNATIONAL ASSISTANCE SECTOR 9 International Monetary Fund 10 Stabilization Fund 10 World Bank II European Economic Community/European Investment Bank 12 European Bank for Reconstruction and Development 13 United Nations Development Programme 14 U.S. Agency for International Development 15 Overseas Development Administration (ODA) 16 Polish Swiss Regional Program 17 GTZ (Gesellschaft ffir technische Zusammenarbeit) 17 Other Donor-Supported Agencies 17 Guarantee Mechanisms 18 SMALL- AND MEDIUM-SIZED ENTERPRISES 21 INTERNAL CONSTRAINTS TO SME GROWTH 22 Traditional Business Practices 22 Lack of Management and Planning Experience 23 Cash Flow Problems 23 Individualism 23 Links Between SOEs and the Private Sector 24 Marketing Strategy 24 Financial/Accounting Strategy 24 Inventory Management 25 EXTERNAL CONSTRAINTS TO SME DEVELOPMENT 25 Financial Sector Constraints to SME Development 26 Public Sector Constraints to SME Development 32 Gray Market Activity 36 Privatization 36 CONCLUSIONS AND RECOMMENDATIONS 39 CONCLUSIONS 39 RECOMMENDATIONS 39 BIBLIOGRAPHY 41 VOLUME TWO: APPENDICES APPENDIX A: LIST OF PERSONS INTERVIEWED A-I APPENDIX B: BANK LOANS AN DEPOSITS RESEARCH - PRELIMINARY REPORT B-I APPENDIX C: VENTURE CAPITAL STUDY IN THE REPUBLIC OF POLAND, PHASE I C-I APPENDIX D: PROJECT FOR CREATION AND OPERATION OF A CAPITAL FUND FOR THE POMORSKI REGION (GDAINSK AREA) D-1 APPENDIX E: THE DEVELOPMENT OF THE CAPITAL MARKET IN THE PROCESS OF TRANSFORMATION OF POLAND'S ECONOMY INTO A MARKET SYSTEM E-1 APPENDIX F: INVESTING IN THE FUTURE: REPORT OF THE TASK FORCE FOR SMALL AND MEDIUM ENTERPRISES F-i APPENDIX G: BOTTLENECKS TO PRIVATE SME DEVELOPMENT IN POLAND G-1 iii ACRONYMS ACDI Agricultural Cooperative Development International BISE Bank for Socio Economic Initiatives BGZ The Food Economy Bank CDC Citizens Democracy Corps COM Council of Ministers CUP Central Planning Office EBRD European Bank for Reconstruction and Development EC European Economic Community ECU European Currency Unit EIB European Investment Bank EVCC Enterprise Venture Capital Corporation FDPA The Foundation for the Development of Polish Agricultui FISE Foundation for Socio Economic Initiatives GDP Gross Domestic Product GOP Government of Poland IESC International Executive Service Corps IMF International Monetary Fund L/C Letter of Credit MBAEC MBA Executive Corps MEI Market Economy Institutions Program MOF Ministry of Finaace NBP National Bank of Poland/Central Bank ODA Overseas Development Administration PAECC Polish American Enterprise Credit Corporation PAEF Polish American Enterprise Fund PBAS Polish Business Advisory Service PDB Polish Development Bank PIB Polish Investment Bank PPEF Polish Private Equity Fund SDR Special Drawing Rights SME Small- ana Medium-sized Enterprise SOE State-owned Enterprise TISE Society for Socio Economic Investments UNDP United Nations Development Programme USAID U.S. Agency for International Development VOCA Volunteers in Overseas Cooperative Assistance WBK Wielkopolski Bank Kreditowy V EXECUTIVE SUMMARY Over the past four years Poland has made significant progress in the transition from a centrally planned economy to a free market system. This progress has been accompished, in large part, by the rapid expansion of the small- and medium-sized enterprise (SME) sector. Government of Poland (GOP) policies, although not clearly defined, have nevertheless created an atmosphere for the development of private entrepreneurship unknown during the socialist period. However, this development has not yet reached its potential because of remaining constraints. Many of these constraints can be removed through policy and legislative initiatives, technical assistance, and experience. Others, the result of policies adopted by GOP to address macroeconomic issues, will be resolved only through successful realization of the economic stabilization process. In spite of severe government restrictions on private economic activity prior to 1989, private entrepreneurship in Poland was not totally eliminated. As these restrictions were lifted, a relatively small private sector started to expand rapidly, and the number of SMEs increased from 300,000 to 1,700,000. When the privatized state-owned enterprises, small in number but significant in terms of employment, are included, the private sector accounts for an estimated one-third of nonagricultural employment. When the employment figures for the agi;culture sector, which is 80 percent privately owned, are added, it becomes evident that private sector emp!oyment in the economy has passed the 50 percent mark. Private sector contribution to gross domestic pro.41ct, reported to be 28 percent in 1989, has officially been estimated to have grown to more than 50 percent by the end of 1993. Although expansion of the private sector has been dramatic, the rate of further development is likely to be slowed by remaining constraints. Some of these constraints reflect the inexperience of both private sector entrepreneurs and financial sector institutions and can be corrected over time by training and experience. Others require legislative and regulatoiy action. However, an important GOP constraint to SME sector development is the lack of a comprehensive national policy in support of SMEs. When adopted, an effective SME policy will express GOP recognition that a well-developed SME sector is critical to building a strong national economy, declare the government's commitment to promote and support development of the sector, and mandate coordinated action to remove barriers to SME development. Without this policy, no framework exists within which to structure the corrective initiatives GOP must take. As advisors to the Council of Ministers, the Poland Small Business Project of the Growth and Equity through Microenterprise Investments and Institutions (GEMINI) Project has assisted in the development of an umbrella policy identifying those issues that must be addressed to ensure maximum development of the SME sector. In addition, GEMINI and the Council of Ministers staff are finalizing a draft SME Act that identifies the actions to be taken and the implementing agencies responsible fnr setting the policy in motion. The umbrella policy will provide guidelines for initiatives to be undertaken by the government. A Financial Sector Action Plan will also be developed by GEMINI to assist in implementing programs to address the financial sector constraints to SME development. Foremost among these constraints are the shortages of short-term credit, investment capital, asset-based financial mechanisms, and capital market facilities. The primary concern of the SME sector is the limited access to bank credit. Entrepreneurs maintain that the banks' collateral requirements are excessive, interest rates are too high, and the financial information requested is intrusive and overly complicated. Bankers contend collateral coverage of 150 200 percent is essential to high-risk SME lending. They also maintain that the transaction cost of small vi loans requires higher interest rates. The banks prefer to limit their lending activities to the larger companies with established credit experience, accurate financial statements, and professional business plans. The banks also prefer to invest in GOP bonds and treasury bills that provide high returns and have neither risk nor significant transaction costs. Under current circumstances the comments of the bankers and entrepreneurs have some validity. Nevertheless, training and experience will improve entrepreneurs' ability to prepare accurate and realistic business plans, and banks, by improving the efficiency of their lending procedures, can reduce both the cost and the risk of SME lending. Proposed amendments to collateral law will reduce the amount of collateral required by reducing the attachment costs and improving the collection procedures for mortgaged assets in the event of loan default. In recognition of limited SME access to credit and investment capital in the domestic financial system, international assistance agencies offer significant financial aid in the form of loans and grants for private sector development. Multinational support is provided by the World Bank, tile European Economic Community, and the European Bank for Reconstruction and Development. Assistance