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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.