The Local Financial System and Sustainable SME Development in South-East Europe

One of the most important pre-conditions for the sustained expansion of the SME sector in South-East Europe is to have in place a set of cost-effective, accountable and transparent local financial institutions, instruments and credit markets, which together constitute a healthy local financial system (EBRD, 1999; World Bank, 1999; 2000). This is certainly not an easy task. The difficult conditions prevailing in the region — economic collapse, lack of resources, persistent inter-ethnic antipathy, isolation, rising inequality and poverty, endemic criminality — continue to frustrate financial sector reform. Moreover, the inheritance of past financial sector malpractice continues to weigh heavily on the latest generation of policy-makers, who are attempting to upgrade the efficiency of a range of financial institutions long used to an environment of “soft budget constraints”. Also proving to be a barrier to progress are the many elite groups that emerged and benefited handsomely from political connections and financial sector irregularities under communism and during the first post-communist governments. These groups are quite determined, and sometimes very violently inclined (for example, in Albania), to hold on to the power and wealth that they have unjustly accumulated.