Access to SME Finance in Latin America: What to do

1
Access to SME Finance in Latin America What to
do?
Antonio Vives Deputy Manager Inter-American
Development Bank Private Enterprise, Financial
Markets and the Environment
2
Outline of the presentation

• Why is access to finance limited
• What needs to be done
• What do we, at the IDB, do
• Closing remarks

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Lack of financing is obstacle 1 to Latin
American business development
Major Obstacles to Business Development in Latin
America
(Percentage of those who think that it is the
principal obstacle)
Financing
Taxes and regulations
Policy instability
Inflation
Exchange rate
Street crime
Infrastructure
Practices against competition
Corruption
Organized crime
Judiciary system
0
5
10
15
20
25
30
35
Source World Business Environment Survey (WBES)
and IDB calculations.
4
Main obstacles
Source WBES, World Bank
5
Financial Markets Underdeveloped
Source The Latin American Competitiveness
Report 2001-2002, World Economic Forum and
Harvard Center for International Development
6
Credit Crunches Frequency ( months with crunch)
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Entrepreneurship Finance

• Main financial resources
• Personal savings
• Suppliers credit
• Used equipment
• Social networks
• Access to commercial loans 1 out of 5
• Venture capital marginal
• Prefer not to use external funds mistrust,
  control
• Start smaller and with lower level of technology

8
Financing of Entrepreneurship

• Two thirds indicated that they did not use credit
  because availability did not meet needs
  (collateral, tenor, interest rate, etc)
• Half do not want to do it in order not to loose
  control, to avoid debt (risky) and because they
  do not trust institutions
• Large part of reality is that firms do not have
  bankable projects, projects are ill defined,
  perspectives are low, more of the same

9
Why there is no Bank finance Ten villains

• Bad projects
• Better alternatives (crowding-out, little
  competition)
• High transactions costs
• Poor collateral, and if good, then
• Cumbersome (impossible?) recovery of assets
• Unreliable information at the firm level

10
Why there is no Bank finance Ten villains

• Shallow and incomplete banking markets
• Policy/political instability
• Banking regulations (Basle II)
• Governments often interfere in financial
  contracts
• Maximum interest rates (11 countries)
• Mandatory investments (7 countries)
• Credits targeted to some sectors (5 countries)

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What to do?

• Lower risk perception by improving creditor
  rights
• Property rights, collateral
• Bankruptcy laws AND procedures AND courts AND
  alternative methods of resolution AND enforcement
• Lower risk perception by reducing information
  uncertainty
• Support for proposal preparation
• Independent credit assessments

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What to do? Policies and institutions

• Lower costs by
• Appropriate methodologies (subsidies?)
• Foster bank competition
• Macroeconomic stability
• Eliminate regulations
• Extend tenor by
• Macroeconomic stability
• Government intervention (very carefully)

13
What to do? Public interventions

• Credit subsidies?
• Official bank credits?
• Credit guarantees?
• Basle II

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Ten macro conditions

• Macroeconomic stability
• Open economy
• Competitiveness of the supported sector
• Repayment culture
• Adequate legal and regulatory frameworks
• Efficient and effective judicial system
• Effective enforcement
• Private markets

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Ten micro conditions

• Internally consistent policies
• Market conditions on source and uses of resources
• Interventions directed at imperfections
• Profitable projects with developmental impact
• Multisectoral, not project oriented
• Professional management
• Political independence
• Time and size bound

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What to do? Non-Bank Finance

• Leasing
• Factoring
• Equity markets
• Venture capital

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What do we, at the IDB, do?

• Provide direct and indirect long term lending and
  equity (limited)
• Support business climate by removing obstacles
• Banking regulation and competition
• Credit information
• Property rights, creditor rights, bankruptcy
• Guarantee schemes
• Capital markets development
• Business development services

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Closing remarks
JUST DO IT!
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Access to SME Finance in Latin America What to
do?
Antonio Vives Deputy Manager Inter-American
Development Bank Private Enterprise, Financial
Markets and the Environment