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Financing more small- and medium-sized enterprises

A recent study based on surveys of financial institutions between 2004 and 2006 shows banks' interest in increasing their business activity with small and medium-sized enterprises.  This trend is reflected in the higher percentage of banks that say they now have policies for financing Small and Medium Enterprises (SMEs), including special loan processing departments for these companies.

The 2006 survey—a pool of opinions of executives in charge of SME operations from 85 different banks in 19 countries in Latin America and the Caribbean—shows that nine of 10 banks have an SME section, and eight of 10 regard SMEs as a strategic business component. Yet only six banks provide training and advice on foreign trade, and only in three cases have loans awarded to SMEs exceeded 60 percent of the bank's total lending portfolio.

This survey, commissioned by the Inter-American Investment Corporation (IIC), the Multilateral Investment Fund (MIF), and the Latin American Federation of Banks (FELABAN), reflects a positive overall outlook on the economic prospects of SMEs in the region for 2007–2008: nine of 10 banks surveyed are optimistic.

Banks in Central America and the Caribbean, however, are cautiously optimistic, and have predicted that SMEs will fare "moderately" better (71%), according to the study.

“The most positive and encouraging vision of SMEs’ future is clearly associated with specialization in the sector,” the study shows.  Indeed, traditional working-capital loans are still at the top of the list, but banks incorporated mortgage and secured loans in 2006.

Banks have also demonstrated interest in increasing their operations in microenterprise and remittances, two significant areas for expanding coverage in the region.

Awarding loans
According to the survey’s findings, three elements are included in the cost equation of loans awarded to SMEs in the region: interest rates, insurance and commissions.

A case-by-case analysis of the company’s financial statements, cash flow, and assets is still the risk assessment model typically used before a loan is awarded to an SME. Only three of 10 institutions surveyed systematically use the credit scoring methodology.

The survey also found that seven of 10 banks have centralized databases with information on a company’s credit history and present debt levels.

Facing challenges
Banks still have very limited knowledge of the small and medium-sized enterprises sector, which includes 97 percent of firms, represents 77 percent of jobs, and accounts for 30–60% of gross domestic product (GDP) in the region.

According to the financial institutions surveyed, the most significant barriers that SMEs face in accessing credit are: difficulty proving themselves capable of repaying debts (67%), informality in general (53%), and informality that specifically pervades SMEs’ corporate management (44%).  Another huge barrier is the fact that SMEs are already indebted to other financial institutions, which compounds their problem in earning banks’ confidence.

Although some banks mentioned administrative costs entailed in financing a SME as a barrier, these appeared at the bottom of the list.

In general, banks use the same methods they did in 2004 to finance SMEs: their own capital, first and foremost (65%), followed by foreign lines of credit (14%), and finally, international financial organizations (9%).

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