Financing Dialogue: Private and public sources and their effectiveness
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May 2015
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Financing Dialogue: Private and public sources and their effectiveness
- 1. Financing Dialogue Private and public sources and their effectiveness Mahmoud Mohieldin – Corporate Secretary and President’s Special Envoy
- 2. 2 SME access to finance: a few key facts Source: Two trillion and counting, IFC & McKinsey, 2010 21 9 3 10 #Total MSMEs (formal andinformal) #with Checking account #with Loan/Overdraft #Unserved+ Underserved 52 25 13 27 # Total MSMEs (formal and informal) # with Checking account # with Loan/Overdraft # Unserved + Underserved 20 12 6 10 #Total MSMEs (formal andinformal) #with Checking account #with Loan/Overdraft #Unserved+ Underserved 188 62 23 92 # Total MSMEs (formal and informal) # with Checking account # with Loan/Overdraft # Unserved + Underserved 78 34 11 36 #Total MSMEs (formal andinformal) #with Checking account #with Loan/Overdraft #Unserved+ Underserved 40 18 4 22 # Total MSMEs (formal andinformal) # with Checking account # with Loan/Overdraft # Unserved+ Underserved Latin America and Caribbean Middle East and North Africa Europe and Central Asia East Asia and Pacific South Asia Sub Saharan Africa # of MSMEs (in Mn) # Total MSMEs (formal and informal) # with Checking account # with Loan/Overdraft # Unserved + Underserved 399 197
- 3. 44 28 20 25 14 14 0 5 10 15 20 25 30 35 40 45 50 Low income Middle income High income % %of firms that did not apply for a loan due to high interest rates, complex application procedures,collateral requirements,etc. SMEs Large firms Source:Enterprise Surveys for 120 countries,covering the period 2006 to 2012. SME access to finance: a few key facts
- 4. SME access to finance: a few key constraints • SMEs operations are more opaque and difficult to monitor • SMEs often do not keep adequate records and accounts • SMEs find it difficult to comply with complex credit application procedures • SMEs may not be able to meet high collateral requirements • SMEs may operate in the informal economy • SMEs face interest rates that are higher than for larger firms
- 5. SME access to finance: a few key solutions • Banks : • could seek out creditworthy SMEs through client relationships with large firms • could provide nonfinancial services to SMEs that improve their creditworthiness • Governments: • could ensure the existence of competitive and contestable markets for financing • could put in place laws and regulations that allow for movable collateral and registries • could focus on standardizing financial reporting for SMEs and facilitate their collection to improve credit information • could strengthen insolvency regimes • could improve the legal framework for factoring and leasing
Editor's Notes
- Thank you for allowing me to provide you with some insight from the rich work the World Bank Group has undertaken in access to finance and SME finance in particular. I want to show you a few key facts about access to finance for SMEs, key constraints they face in accessing finance and some of the solutions that our research has shown to work in low and middle income country settings. It is clear that SMEs are important for development SMEs contribute to innovation, productivity growth and foster competitive markets SMEs with 250 or fewer generate 86 percent of the jobs and economy generates Through this job creation are a major force in eliminating poverty and reducing inequality But this does not happen by itself in developing countries.
- TPS with the slide: Weak legal and financial institutions, often limit business expansion of SMEs into larger firms and therefore limit their potential contribution to GDP growth compared to the experience with SME growth in high income countries SME access to finance: It is well established empirical fact that Lack of access to finance is a key constraint to SME growth in Developing countries Let me show you a few key facts: globally out of 400 million SMEs, 197 million are unserved by the financial system. It is surprisingly similar across the developing regions the WBG is engaged in: Europe and Central Asia: 50 percent of SMEs are unserved Middle East and North Africa: slightly below 50 percent Latin America and the Caribbean: slightly above 50 percent East Asia and the pacific: slightly below 50 percent South Asia: slightly below 50 percent And in Sub Saharan Africa: slightly above 50 percent Hence, a lot of potential growth is untapped in all developing regions because of limited aces and use of financial systems
- If we compare across income levels and distinguish between SMEs and larger firms. The data coming from our enterprise surveys shows that among SMEs, 44 percent in low-income countries, 28 percent in middle-income countries, and 20 percent in high-income countries were involuntarily excluded from applying for a loan during 2006-2012
- There are various reasons why SMEs find it difficult to access credit SMEs operations are more opaque and difficult to monitor SMEs often do not keep adequate records and accounts SMEs find it difficult to comply with complex credit application procedures SMEs may not be able to meet high collateral requirements SMEs may operate in the informal economy As a consequence of all of this and the higher cost of processing and higher perceived risks SMEs face interest rates that are higher than for larger firms.
- Various solutions though can be pursued Banks could seek out creditworthy SMEs through client relationships with large firms In Argentina and Chile, for example, banks often seek out creditworthy SMEs through client relationships with large firms. They also ask their large clients for references on their most dependable buyers and suppliers, which, in many cases, are SMEs. Banks could provide nonfinancial services to SMEs that improve their creditworthiness For example, banks offer training and consulting services that can improve recordkeeping among SMEs, thus permitting banks to assess more easily the creditworthiness of these SMEs. Governments could ensure the existence of competitive and contestable markets for financing For example, by minimizing entry barriers, ensuring a level playing field, and otherwise facilitating bank competition, and by allowing the functioning of other intermediaries—leasing companies, private equity investors, venture capitalists— that can also provide long-term finance, the government can shape and potentially play a role in expanding the supply of long-term finance Governments could put in place laws and regulations that allow for movable collateral and registries Indeed, according to the enterprise survey, about 79 percent of loans or lines of credit require some form of collateral, and in the developing world, 78 percent of the capital stock of businesses is typically in movable assets such as machinery, equipment, or receivables. Governments could focus on standardizing financial reporting for SMEs and facilitate their collection to improve credit information Credit scoring technologies, credit rating agencies focused specifically on SMEs, as in India, credit registries or bureaus are examples of processes or of institutions that improve the effectiveness of credit information Governments could strengthen insolvency regimes An effective insolvency framework can help regulate efficient exits from the market, ensure fair treatment through the orderly resolution of debts incurred by debtors in financial distress, and provide opportunities for recovery by bankrupt entities and their creditors But many countries have substantial legal gaps such that insolvency frameworks are unable to deal with SMEs effectively. The SME facing financial distress cannot seek temporary protection from its creditors, in the event of liquidation Governments could improve the legal framework for factoring and leasing In closing, the constraints are clear but the solutions do not happen so easily by themselves, they do require policy interventions and capacity building not only in the public sector but also in the private sector and Banks.