Conclusions and recommendations
Finance remains one of the main obstacles to the development of SMEs in Latin America, despite the progress that has been made in developing and deepening the financial system. Many SMEs are unable to access formal credit conditions due to high interest, high collateral requirements and complex technical and bureaucratic requirements brought about by asymmetrical information. Instead, they are forced to use internal funds or request credit from suppliers. The other problem they have is the type of access, as SMEs that receive finance regularly cannot access the instruments or loan maturities they need. These kinds of limitations are in stark contrast to the conditions offered to large firms, which have better and greater access to commercial credit. The unequal conditions of access to credit have become another form of inequality and structural heterogeneity for the region’s production sector, holding back development.
The development and structure of Latin America’s financial system partly explain the failures in the finance mechanisms for SMEs and their access to credit. Commercial banks’ business models have moved from relationship banking to multi-service banking due to the introduction of unique credit-risk assessment methods based on payment capacity rather than the feasibility of the project, together with inflexible finance schemes, high collateral requirements and banks’ increased dependence on banking fees; this transition made it harder for smaller firms to access finance. Other features of the financial system, such as banking consolidation, high margins, foreign ownership and even dollarisation also affect credit mechanisms and can help shed light on the ongoing difficulty of ensuring there is greater access to credit.
SMEs must prepare for new international regulations on managing liquidity (Basel III), which will have implications for the cost and availability of credit. Higher capital requirements for banks could result in less available credit. In terms of regulation, the recent crisis seen in OECD countries illustrates the importance of having a set of indicators exclusively for SMEs, which would enable supervisory bodies to act in real time. These indicators can be put together using information available from financial regulatory bodies.
Since commercial banks continue to prefer financing large firms, public financial institutions are essential to improve the financing of SMEs in Latin America, as they can gear their policies towards SMEs. Development banks are particularly important. They have different criteria on profitability, risk management and funds, so they play a key role in providing countercyclical finance in sectors with no private-sector involvement or in economically important sectors with growth potential.
In recent years there has been a new change of perspective on the role of development banks in Latin America. The development banks are returning to the fore, and some countries are seeing a transition to a system that combines first-tier and second-tier institutions, which has proved to be beneficial. However, the financial sustainability and additionality of these institutions must be ensured, and they must be given the appropriate governance structures, control mechanisms and incentives. The choice between a first-tier or second-tier development-banking scheme depends on the context of the financial system. Consideration must be given for how developed the financial system is and whether there are other public financial agents, such as public banks and guarantee funds, that can complement the work development banks do to support SMEs. A business-friendly environment will only come about if there is co-ordination and complementarity among public financial institutions.
Guarantee systems have become more firmly established almost throughout the region in recent years as an effective form of public action. Although guarantee systems that use public or mixed finance have spread, they encounter a number of problems (repayment arrears, lack of resources, instalments, etc.), which strain the relations with the banks that provide the loans. To overcome these problems commercial banks must work together with the guarantee systems so that the guarantees are accepted and properly valued, and so that the credit lines are managed together with the guarantees. Guarantees should generate additionality by enabling banks to increase their customer base, bringing in new business customers.
Guarantee societies are one possible answer to the limitations of guarantee funds, which are mainly privately owned. These societies have begun to spring up across the region, but their coverage is still very limited. A special case is MGSs, which aim to be financially self-sufficient and stimulate greater private-sector involvement through tax exemptions for partners who finance the risk funds. Despite being private, guarantee schemes are a public-policy instrument that should be considered when defining how institutions will be used to promote the development of production. The state’s role in this area is crucial and involves fitting the necessary, essential independence of guarantee societies into the framework of general policies for SMEs.
Thanks to the presence of public institutions such as development banks and development agencies, the development of a financial system is being promoted in the region that will be able to respond to the needs of the entire, diverse production sector by incorporating new, novel instruments specifically designed for smaller firms. Successful examples of these mechanisms include the development of online instruments, lease-purchase contracts, factoring, guarantee schemes, incubators, seed-capital initiatives and the development of venture-capital markets. In particular, as Internet access has grown, new online instruments have been developed that have often markedly streamlined the process of providing credit and other financial services.
Since one of the main obstacles making it difficult for Latin American SMEs to access credit is asymmetrical information and a lack of information, many new instruments are being introduced to provide a broader package of business services that reaches beyond credit and to improve knowledge of the financial instruments available to smaller firms. Public policy can play a leading role in this respect by helping supply to match demand and by furnishing businesses and retail banks with legal and financial training. Financial assistance for SMEs must therefore be accompanied by technical-assistance policies.
Public policy must be sufficiently flexible to stimulate private equity funds. For innovative and technology-based start-ups, public intervention is important to encourage their inclusion, since these kinds of firms are highly dynamic and can generate positive externalities through their innovation, productivity and jobs. A financial support strategy must offer alternatives for the different business stages, allocating resources to firms during their start-up phase and their first few years in business. Initial support is key, fostering, for example, business incubation, the creation of seed capital or the involvement of business angels rather than venture-capital investors, who usually focus on later stages of the cycle. Due to the limited development of these support mechanisms in Latin America, appropriate initiatives need creating to open the way for more private capital. Such initiatives could include, for instance, tax reductions for investors.
In addition to entirely new instruments and a stronger institutional structure, the introduction of monitoring and impact-assessments mechanisms is also vital. Impact assessments must monitor the programmes’ coverage and how they affect additionality, their development goals (productivity and employment), their role as a catalyst for attracting the financial sector, and knowledge transfer, among other objectives.
Although more instruments and services to support SMEs have been introduced in recent years, they are still in the early stages of their development and reach only a small fraction of the sector. There is ample space in the region for a wide range of financial products to be developed that take into account the diversity and specificities of the production sphere. Public policy has a duty to play a key role by generating incentives and necessary instruments. Policies need to be designed and implemented with the inclusion of tools to support businesses in their various stages of development and the provision of services to improve business management, training and technical consultancy.
Finally, systems to finance and provide access to credit for SMEs cannot be defined in isolation. These systems are part of a comprehensive system of support for smaller firms in which supporting training, production linkages and innovation are also critical.