Long term vs. Short term financing in AlbaniaALTax
The lack of developed markets for long term finance has become an important and challenging issue in Albania, but also in other neighbor’s countries. Since the global financial crisis of 2008 – 2009, this issue has become even more prominent in policy discussions.
Having access to long-term funds allows government and businesses to finance large investments as well as to reduce rollover risks and the potential for runs that could lead to costly crises.
In this context, a number of policy proposals have been put on the table to help economy lengthen debt maturity; these include the introduction of explicit seniority or sovereign debt instruments linked to gross domestic product. Businesses need long-term financing for acquiring new equipment, R&D, cash flow enhancement and company expansion.
Although it is not optimal in all situations, short-term debt has its uses. Among other things, it allows creditors to monitor debtors and to cope with moral hazard, agency problems, risk, and inadequate regulations and institutions. In particular, because debtors generally need to roll over theirÂ financing when the debt is short term, creditors are able to cut financing if debtors are not behaving as expected to guarantee the repayment of the financing obtained.
As a consequence, shorter-term debt tends to be more prevalent in economies with less-friendly investor policies. Short-term debt shifts risk to debtors because it forces them to roll over debt continually.
On the other side, the issue of long-term debt can be better understood as a trade-off between creditors and debtors in the allocation of risk.
Long-term debt shifts risk to the creditors because they have to bear the fluctuations in the probability of default and in other changing conditions in financial markets. Naturally, creditors require a premium as part of the compensation for the higher risk this type of debt implies, and the size of this premium depends on the degree of their risk appetite.
But, should be careful!
Because of this trade-off, long-term debt is not necessarily optimal in all situations. Ideally, creditors and debtors will eventually decide how they share the risk involved in lending at different maturities.
In Albania, however, creditors and debtors do not have ready access to long-term financing. This lack of long-term debt instruments can signal underlying problems such as market failures and policy distortions.
Lack of long-term financing also has adverse implications for economic growth and development. In particular, companies would be reluctant to finance long-term projects because of their exposure to the rollover risk associated with short-term financing.
Within debt markets, some studies highlight the importance of syndicated loans as a source of companies financing. Recent studies estimate that syndicated loans account for roughly one-third of total outstanding loans, and their relative importance has increased over time.
In Albania the first big incentive to enhance the syndicate loan it was in 2014, when the EBRD provided a loan to BESA foundation. But since then, only the government has used this instrument twice, as a tool to refinance the budget debt.
What is needed more than everything in the financial market of Albania right now is about the diversification of financial infrastructure and market.
To be more sensitive regarding to this diversification challenge we have to mention that elements like equity financing, corporate bonds, syndicate loan lack to market.
But, why not yet is enhanced the market of long term loans in Albania?
In the first view, long term and short-term financing both offer businesses some sort of temporary or long-term support in times of financial distress.
Short term financing is relatively easier to obtain and is frequently used by smaller and larger firms alike.
On the other hand, long term financing, is much more difficult and riskier to obtain, therefore, only larger businesses or companies with strong collateral can obtain long term loans.
If we can survey the segmentation of businesses in Albania, roughly 80% of them are micro or small businesses. Only 1% of businesses operating in Albania could be suggested as big businesses or big companies. But, even these companies do not compare with the parameters that should has a company to be considered as a case for long term financing criteria.
Longer term financing is used for larger investments or projects for which larger sums of funds are required for an extended period of time. Long term financing refers to financing that could go up to about 5 to 30 years or more. Long term loans are riskier and banks or financial institutions providing the loan have more to lose since the amount borrowed is larger and period of repayment is longer. Right now, the Albania financing market suffer the bad performance of loans, or non-performing loans concern.
The companies that have invested or plan to invest in Albania are operating for a short time period in large investments, i.e. like infrastructure. And the resident large investors that are investing in energy or mining sector are not so large, but are branches of medium companies in their residence countries, or have not access to this market.
In this market and economy context, it’s obvious that the long-term loan market in Albania is waiting for better periods, concentration of capital and economy enhancement leaded by big companies.