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/ REX/264
EU-Turkey Joint
Consultative Committee

Brussels, 31/10/2008

25th meeting of the EU-Turkey Joint Consultative Committee

Paris, France

18-19 November, 2008

REPORT

Access to financing for SME's in the EU and Turkey

RAPPORTEUR

Doç. Dr. Ekrem KESKİN

Member of the EU-Turkey Joint Consultative Committee – Group I (Employers)

Secretary General, Turkish Bankers Union

SME Financing in the Turkish Economy

Contents:

I.  Introduction

II.  Definition of an SME

III.  General Characteristics and Problems of SMEs in Turkey

IV.  Main Supports Provided to SMEs in Turkey

V.  SME Financing in Turkey

VI.  Conclusion and Assessments

Source

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I. Introduction

In Turkey as in the rest of the world, small and medium-sized enterprises (SMEs) have a considerable share. In the social and economic structures of their countries, SMEs have been an indispensable element in terms of industrialization, urbanization, efficient and equitable distribution of resources, elimination of interregional gaps in development, creation of employment, and development of trade. For this reason, they play an effective role in the processes of policy-making and strategy formulation in their respective countries. Unlike large enterprises, since they do not depend on high-cost investments, SMEs can adapt more easily and rapidly to technological developments, administrative and process changes, and market preferences. This character of SMEs enables them to be more flexible in economic fluctuations, and offers the advantage of rapidly adapting to demand and controlling the costs.

99.5 percent of the enterprises in Turkey are considered within SMEs’ category. These enterprises provide 61.1 percent of total employment. They contribute about 36 percent of. GNP. The necessary financing for these enterprises to carry on their activities efficiently is a fundamental issue in Turkey. The problem is further deepened by the fact that except for banking sector facilities, alternative sources of financing including capital market instruments, have not been created for SMEs. Macroeconomic factors are also an important cause of the financing problems of SMEs. In an environment of increased financial vulnerability and instability, exchange rate and interest rate increases have an adverse effect on the financial condition and profitability of these firms.

In this paper, the issue of SME financing in Turkey is addressed. Within this framework, Section I is an introduction. Section II makes the definition of SME. In the following sections the general characteristics and problems of SMEs in Turkey, the main supports provided to them, and the issue of SME financing in Turkey are discussed. Section VI concludes.

II. Definition of SME

In the world literature, there is no common definition of SME. The criteria that determine SMEs vary according to the economic structures of countries. The criteria most commonly used in the definition of an SME is the number of workers employed. Although this criteria is not sufficient in the classification of enterprises from the viewpoint of size, it is the most commonly used criteria. The criteria of fixed capital, the amount of investment or the annual amount of sales are also used in addition to the number of workers employed.

The definition of SME includes the criteria of the number of workers, the balance-sheet size, and the degree of independence.

Table 1: Definition of an SME

Number of employees / Annual turnover / or / Balance-sheet size / Independence
Micro-sized enterprise / Less than 10 / Up to 2 million Euros / Up to 2 million Euros / Shareholding by another firm not to exceed 25%
Small-sized enterprise / Less than 50 / Up to 10 million Euros / Up to 10 million Euros
Medium-sized enterprise / Less than 250 / Up to 50 million Euros / Up to 43 million Euros

Conditions of Being SME According to the Basel II Standards:

Under the standard method used to determine capital adequacy in Basel II, the SME limits are determined according to the total annual sales turnover. An SME is defined as a firm with a total turnover of up to 50 million euros.

The "retail-corporate" distinction becomes very important with respect to the definition of an SME. Those SMEs which have less than 1 million euros in total credit (cash + non-Cash) with a bank are defined within the "retail portfolio" while those SMEs which have more than 1 million euros in total credit with the relevant bank are defined within the "corporate portfolio". Risk weights change according to the retail portfolio and corporate portfolio distinction.

The classifications of firms according to the standard method are summarized in the table below.

Table 2: Classifications of Firms According to the Standard Method

Amount of Credit (C) / Annual Sales Turnover (T) / Classification
C > 1000000.- Euro / T > 50000000.- Euro / Corporate
C > 1000000.- Euro / T < 50000000.- Euro / Corporate-(SME)
C < 1000000.- Euro / T > 50000000.- Euro / Corporate
C < 1000000.- Euro / T < 50000000.- Euro / Retail-(SME)

In the Basel II Capital Accord, those firms which have a total annual sales figure below 50 million euros and a total risk above 1 million euros are considered in the corporate SME portfolio.

Definition of SME in Turkey:

The "Definition of SME" decided by the European Union in 1996 was changed following the new definition which was made in 2003 entered into force on 1 January 2005, and all member countries and candidate member countries were required to align their definitions of an SME with the EU definition.

Alignment with the EU definition of an SME is emphasized in the Progress Reports prepared by the European Commission in Turkey’s process of accession to the EU and presented to our country and among the short-term measures of the Accession Partnership Document prepared in 2003 for Turkey. The activities to implement the necessary legal arrangements for the purpose of using a definition aligned with the EU in all practices concerning SMEs were conducted by the Ministry of Industry and Trade, and the legal infrastructure for determining the definition was created by Law 5331 for the Addition of One Additional Article to the Law on the Organization and Duties of the Ministry of Industry and Trade, which entered into force upon its publication in the Official Gazette on 16 April 2005. The "Regulation Concerning the Definition, Characteristics and Classification of Small and Medium-Sized Enterprises" prepared in the framework of the activities for alignment with the "SME Definition" conducted under the said Law was published in the Official Gazette No 25997 of 18November 2005 as the annex to Council of Ministers Decision 2005/9617 and entered into force on 18 May 2006. In the framework of the activities for alignment, it was decided by the Council of Ministers on 19/10/2005 upon letter 5674 of 28/7/2005 from the Ministry of Industry and Trade, in accordance with Additional Article 1 of Law 3143 on the Organization and Duties of the Ministry of Industry and Trade, that the "Regulation Concerning the Definition, Characteristics and Classification of Small and Medium-Sized Enterprises" should be brought into force.

Classification of small and medium-sized enterprises

Article 5 – SMEs are classified as follows.

a) Micro enterprise is defined as a business employing less than 10 persons and having annual net sales revenue or a financial balance-sheet of up to 1 million YTL;

b) Small enterprise is defined as a business employing less than 50 persons and having annual net sales revenue or a financial balance-sheet of up to 5 million YTL; and

c) Medium-sized enterprise is defined as a business employing less than 250 persons and having annual net sales revenue or a financial balance-sheet of up to 25 million YTL."

The purpose of the Regulation is to determine the definition of small and medium-sized enterprises and to ensure that this definition is taken as a basis in the implementations of all institutions and organizations. Together with the Regulation, the model statements and application forms to be filled out by SMEs in their applications for funds have also been prepared in line with the EU practices. The obligation to align the definition of an SME with the EU definition, included among the priorities of the area of SMEs in the process of accession to the EU, has thus been fulfilled.

Enterprises covered by the "Regulation Concerning the Definition, Characteristics and Classification of Small and Medium-Sized Enterprises" are classified according to their sizes, financial balance-sheets and types. Also, there are different definitions of an SME used by the Small and Medium Industry Development Organization (SMIDO), the Treasury Undersecretariat, Halk Bankası A.Ş. and Türk Eximbank (Table 3).

Table 3: SME Definitions Used in Turkey and in the EU

Institution / Sectoral Definition / Micro-Sized Enterprise / Small-Sized Enterprise / Medium-Sized Enterprise
SMIDO* / Manufacturing Industry / ---- / 1 to 50 employees / 51 to 150 employees
Halk Bankası A.Ş / Manufacturing Industry / Fixed investment
550000 euros / Fixed investment
550000 Euros / 1 to 250 employees Fixed investment 550,000 euros
Treasury Undersecretariat / Manufacturing, agriculture, mining, education, health care, software industry / 1 to 9 employees Fixed investment
550000 euros / 10 to 49 employees Fixed investment 550,000 Euros / 50 to 250 employees Fixed investment 550,000 euros
Türk Eximbank / Manufacturing Industry / ---- / ---- / 1 to 200 employees Fixed investment 1830000 euros

Source: Istanbul Chamber of Trade, 2008

III. General Characteristics and Problems of SMEs in Turkey

In Turkey, SMEs have an important place in terms of the number of businesses, the number of employees, and the value-added they create. As in developed economies, SMEs constitute a great majority of all enterprises in Turkey. They constitute 99.5 percent of all enterprises and provide 61.1percent of total employment while their shares in total investments and exports are limited to 56.5percent and 16.6 percent, respectively.

Table: 4. Shares of SMEs in the Selected Countries, 2003 (%)

USA / Germany / Japan / France / Britain / S. Korea / Italy / Turkey
SME’s Share in All Enterprises / 97.2 / 99.8 / 99.4 / 99.9 / 96.0 / 97.8 / 97 / 99.5
SME’s Share in Total Employment / 50.4 / 64.0 / 81.4 / 49.4 / 36.0 / 61.9 / 56 / 61.1
SME’s Share in Total Investment / 38.0 / 44.0 / 40.0 / 45.0 / 29.5 / 34.5 / 36.9 / 56.5
SME’s Share in Value-Added / 36.2 / 49.0 / 52.0 / 54.0 / 25.1 / 34.5 / 53 / 37.7
SME’s Share in Total Exports / 32.0 / 31.1 / 38.0 / 23.0 / 22.2 / 20.2 / - / 16.6
SME’s Share in Total Loan / 42.7 / 35.0 / 50.0 / 48.0 / 27.2 / 46.8 / - / 5-10*

*This ratio was 27.3 percent as of June 2008.

Source: SMIDO.

According to the 2003 data of the Turkstat (Turkish Statistical Institute), the total number of enterprises in Turkey is 1720598 and, in the sectoral distribution of the enterprises (Table 5), the commercial sector has the largest share at 46.19 percent. In the manufacturing sector, there are 246899 firms, constituting 14.35 percent of all enterprises (SPO, 2008).

Most SMEs in Turkey operate as family enterprises. The enterprise owner and the person in charge of management are usually the same individual. The powers thus concentrate in a single person and, since the others have no power, efficiency and effectiveness cannot be achieved in risk-taking and decision-making. In many of the enterprises, there is no certain human resource policy nor any strategy for technical training and development. In addition, there are considerable problems concerning small and medium sized enterprises in the Turkish legal system. It is not possible for these enterprises to benefit from the same services as other enterprises.

Table 5: Sectoral Distribution of SMEs*

Number of Enterprises / Percentage / Number of Employees / Percentage
Commerce / 794715 / 46.19 / 2048644 / 32.38
Manufacturing / 246899 / 14.35 / 2043815 / 32.31
Transport, Storage, Communications / 244490 / 14.21 / 500104 / 7.91
Hotels and Restaurants / 163112 / 9.48 / 526845 / 8.33
Other Social, Public and Private Service Activities / 90919 / 5.28 / 213400 / 3.37
Property, Leasing and Business Activities / 90473 / 5.26 / 325697 / 5.15
Construction / 35702 / 2.07 / 229400 / 3.63
Health Care and Social Services / 31546 / 1.83 / 99966 / 1.58
Activities of Financial Intermediary Organizations / 13538 / 0.79 / 123178 / 1.95
Education Services / 5692 / 0.33 / 76435 / 1.21
Mining and Quarrying / 1809 / 0.11 / 80341 / 1.27
Electricity, Gas and Water Distribution / 1703 / 0.10 / 57591 / 0.91
Total / 1720598 / 100.00 / 6325036 / 100.00

*Turkstat 2002 data.

Source: SPO, 2008

A survey covering 40000 SMEs in Turkey was conducted by the SMIDO (2005). According to the results of this survey, 56 percent of SMEs do not or can not make any exports. 46 percent of SMEs suffer from a lack of funds while 63 percent of them need additional financing but 70 percent do not use any loan. 56 percent of these enterprises have no registered trademark, utility model or patent while 60 percent do not benefit from statistical quality control, 72 percent from performance management, and 76 percent from computer-supported production and sales planning.

In Turkey, SMEs also face certain problems as a result of their capital structures. These problems reduces their financial strength and hinder their growth. Due to their capital structures, SMEs have also certain disadvantages in terms of self-financing. Since they have a low capital intensity and operate mainly in labour-intensive sectors, the amount of depreciation set aside on fixed assets is at low levels in SMEs. As a result, they are able to set aside less funds in this way and can not benefit from such an important possibility as the capacity extension effect of depreciations (Alkin and Okay, 2008, pp.68, 74).

IV. Main Supports Provided to SMEs in Turkey

Support mechanisms developed for competitive undertakings to emerge and for existing SMEs to develop and to take place in an environment of global competition in almost every country. The organizations providing support to SMEs in our country for this purpose are classified as follows: