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  • 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
  • 3. 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 90 80 70 60 50 40 30 20 10 0 High Rates Access Collateral Paperwork Credit info LAC OECD Source: WBES, World Bank
  • 5. Financial Markets: Underdeveloped Middle East Latin Developed South and East Sub-Saharan Transition Indicators Caribbean and North America Countries Asia Africa Economies Africa Bank Credit to Private Sector 24.20% 43.20% 75.90% 41.00% 44.30% 14.40% 26.40% over GDP Overhead Costs 5.90% 4.70% 2.60% 2.30% 2.60% 5.50% 5.60% Net Interest 5.80% 4.50% 2.50% 2.70% 3.10% 5.70% 5.40% Margin Stock Market Capitalization over 17.20% 29.00% 65.90% 36.00% 81.60% 16.30% 14.30% GDP Stock Market Value Traded over 3.81% 2.67% 42.18% 12.70% 46.00% 1.66% 25.90% GDP Source: The Latin American Competitiveness Report 2001-2002, World Economic Forum and Harvard Center for International Development
  • 6. Credit Crunches Frequency (% months with crunch) 45 40 35 30 25 20 15 10 5 0 America Latina Desarrollados Otros en Medio Oriente Sur y Este Asia Paises desarrollo Norte Africa Transición
  • 7. 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)
  • 11. 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
  • 12. 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
  • 14. 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
  • 15. 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
  • 16. What to do?: Non-Bank Finance  Leasing  Factoring  Equity markets  Venture capital
  • 17. 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
  • 18. Closing remarks JUST DO IT!
  • 19. 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