Effects of Basel II Standards on Small Medium Size Enterprises: Evidence from the Istanbul Stock Exchange
24 Pages Posted: 1 Sep 2011
Date Written: 2006
Abstract
Rapid development and recent financial crisis in international financial markets lead regulatory bodies to establish some common supervisory standards for both financial institutions, providing credits to the firms, and non-financial companies, operating in a highly competitive environment, to accomplish the market discipline and effective global risk management all over the world. On this respect, Basel-II capital adequacy standards, developed by the Basel Banking Committee on June 2004 and will be applied by the G-10 and European countries starting from 2007, bring some obligations to the banks for the effective supervision and management of risks. At the same time, they also force Small-Medium size Enterprises (SME) to establish a sound corporate structure for financing their operations, reporting the financial results and managing their risks so as to install a healthy relations with their creditors.
This study discusses the foreseen effects of Basel-II standards on SMEs in Turkey, focusing mainly on non-financial companies traded in the Istanbul Stock Exchange (ISE). It covers the strengths and weaknesses of the SMEs and offers ways to fill the existing gaps and improve the potential advantages for the proper risk management and application of the standards. The subsections analyze the capital and partnership structure, the asset-liability management and collateral usage, management of FX position, credit relationship with banks, receivables collection policy, profitability and inter-group relationship issues in the ISE companies.
The results reveal that the banks should vary their evaluation standards in conformity with the Basel-II for the credits extended to the companies for the effective measurement of risk. By the end-of-year 2005, about 50 % of the non-financial companies traded in the ISE is within the scale of SMEs, as defined by the Basel-II, New Capital Accord. Furthermore, the findings show that many of the SMEs have difficulties in using credits from banks and in employing the corporate governance principles effectively. Many of them use high-level real estate as collateral in getting credits from the banks. Thus, they are expected to experience problems in receiving an appropriate credit rating and in obtaining low-cost credits from the banks during the 3-year transition period 2006-2008, unless they take the necessary steps to improve their corporate structure and culture, use effective risk management techniques and employ international financial reporting standards transparently.
Keywords: Basel-II, SME finance, Istanbul Stock Exchange
JEL Classification: G21, G28
Suggested Citation: Suggested Citation