Opinion
By Yannos Stavrinidis
European countries generally do not create state-run mechanisms that directly provide loans to small and medium-sized enterprises. Governments across Europe tend to avoid such structures because they are costly, bureaucratic, and often overlap with the role already played by banks.
Instead, many European countries follow a “wholesale” financing model with risk-sharing. In simple terms, governments provide funds to banks so they can lend for specific purposes, while taking on part of the risk and helping reduce borrowing costs. No organization understands lending better than banks themselves.
The Cyprus Business Development Organisation (KOAE) is being established as a public law entity with the aim of improving access to financing for small and medium-sized enterprises, start-ups, and self-employed individuals in Cyprus, while addressing gaps in the market.
KOAE was created following government approval in June in order to meet a milestone under the Recovery and Resilience Plan, with an implementation deadline in August. Failure to meet the deadline would mean losing the disbursement of a €50 million tranche.
In other words, an organization of such importance, as we will see below, was approved, legislated, and established within just three months.
A wide range of powers
The answer to why this organization matters lies in the scope of its responsibilities.
According to government plans, the newly established body will be able to provide loans, offer guarantees, invest in companies, acquire shares, participate in business management, create investment funds, and manage public funds.
And while the economy needed a guarantee mechanism, the government created a “monster” with potentially enormous influence — one that will soon become a target for political intervention.
The wide range of powers creates a state investment structure with multiple roles that will be difficult to manage effectively.
The new initiative also carries the risk of discouraging the growth of Cyprus’ private investment market, as private investors and fund managers will find it difficult to compete with an organization backed by the state and supported by government guarantees.
At the same time, by choosing this approach to address the financing gap, business risk is effectively transferred to the taxpayer.
Of course, the finance minister has clarified that the government will not provide funding beyond the initial €60 million. This means KOAE will have to borrow or seek other sources of capital, and that alone increases the level of risk.
If the government promoted this solution solely to meet the milestone requirement, then valuable time and effort were wasted. From the beginning, it should have been made clear that the organization's only purpose was to secure the tranche and then decide what comes next.
I believe this would have received greater understanding from the parliamentary majority if they had known from the outset what objective the organization was actually intended to serve.
Cyprus’ recurring problem
The problem in Cyprus is that we are slow to implement solutions. Then, when we finally act, using the excuse that time has overtaken the original need, we create complicated bureaucratic structures under state control.
And at the end of the day, neither the original need is properly addressed, nor are we spared from problems, scandals, and unintended consequences.
Examples from abroad show a different approach.
Germany’s KfW, France’s Bpifrance, Italy’s CDP, Spain’s ICO, Poland’s BGK, and Ireland’s SBCI are organizations linked to the European Investment Fund, allowing them to absorb part of the risk and reduce the burden on the economy.
This is the model Cyprus should have considered: not replacing the private sector, but supporting it by sharing risk and improving access to finance where genuine gaps exist.
