In order to expand and fulfill market demands, a private enterprise must possess sufficient financial sources to fund its activity in order to accomplish the necessary investments, which would then lead to an increase in the volume of business always in accordance with the market requirements.
There are two main methods in funding a business activity such as: borrowing and/or capital increase. As seen in the chart below, both these methods are used in their most traditional way: the capital (re-investing the profits, additional fresh capital from the stockholders) and the borrowing (banking loans).
On the other hand, using capital market through the issuance of ownership securities (such as company shares) and/or private debt securities (commercial papers and corporate bonds) is still in its early stage of development.
During the 25 year transition period (1990-2015) the two most popular methods in funding a business activity were via re-investment of profits or through fresh capital added from the stockholders. Likewise, another element of great importance used to raise capital is borrowing from commercial banks. During the past few years, some private entities have started issuing private debt securities as well.
Nevertheless, the absence of a well-developed capital market and a securities exchange has prevented businesses from using these options efficiently to fund their activity. Based on the best international practices, it results that the using these financial instruments (corporate shares and bonds) to fund business activities is much more cost efficient than bank borrowing or fresh capital from the stockholders.
However, it should be noted that Albania does possess the right institutional and legal tools needed to make possible using these financial instruments by the domestic businesses as a way of raising funds. What is missing, it is the limited knowledge the business community over these instruments as well as their will to use them.
For more information about Listing Criteria on Albanian Securities Exchange click here