Three out of four financial institutions expect an increase in their SME portfolio in the next two years
A large majority of banks in Latin America and the Caribbean consider small and medium-sized enterprise (SMEs) as a strategic part of their business and plan to increase their credit portfolio for this sector in the next two years, according to a survey conducted by the IDB Group and the Latin American Banking Federation (FELABAN).
Out of 190 banks surveyed in the region, 73 percent expect an increase in their SME portfolio, and 83 percent expects the economic situation of these businesses to improve in the next two years. The main motivation behind extending credit to SMEs are higher profits and risk diversification in a segment that is experiencing an economic upturn. Other important factors are an interest in the development of the country and a tendency toward greater bank specialization in the sector.
The survey also shows that the IDB Group remains the most important multilateral financing institution for banks in the region seeking to expand their SME portfolio.
The main objectives of the survey was to learn about the perspectives for bank lending to SMEs in the region, and compare the results to previous surveys. Fifty-eight banks from South America, 46 banks from Central America and the Caribbean, and five Mexican banks were surveyed this time.
The survey reveals an increase in confidence in SMEs as a strategic business sector for banks in the region: 89 percent of participants have an active lending policy toward this sector, 13 percent higher than in a survey conducted in 2008 and 20 percent higher compared with a 2004 survey.
The new survey shows that banks primarily provide loans to SMEs to finance their working capital. In relative terms, it is interesting to note that larger banks have a larger offering of leasing products than smaller banks, while factoring accounts for a larger percentage of credit to SMEs at smaller banks when compared with larger financial institutions.
The survey also reveals that most banks, when approving or denying credit, take into account a business’ financial statements and the business owner’s management and capital, but not the industry to which their client belongs.
Generally, banks use an average of two different mechanisms to promote credit for SMEs, with direct contact with the client still being the most important action for this purpose.
Banks in South America depend on their own capital whereas banks in Central America and the Caribbean are the biggest beneficiaries of international credit lines and financing from international institutions.
The survey was conducted by Argentine consulting firm D’Alessio, with contributions from the following IDB Group’s private sector windows: the Multilateral Investment Fund, the Inter-American Investment Corporation (IIC) and the beyondBanking program of the IDB’s Structured and Corporate Finance Department.
The Multilateral Investment Fund
Established in 1993, as part of the Inter-American Development Bank (IDB) Group, the Multilateral Investment Fund (MIF) was created to develop effective approaches to support economic growth and poverty reduction through private sector-led development in support of micro, small and medium-sized enterprises (MSMEs) benefitting the poor—their businesses, their farms, and their households.
The Inter-American Investment Corporation
The IIC is a multilateral financial institution that is a member of the Inter-American Development Bank (IDB) Group. The IIC’s mission is to promote the economic development of its regional member countries by encouraging the establishment, expansion, and modernization of private enterprises, particularly those that are small and medium in size. It does so by providing financing (in the form of equity investments, loans, guarantees, and other instruments) and advisory services to private enterprises in Latin America and the Caribbean. In 2010, the IIC reached $1.4 billion in assets and approved 49 operations channeling $374.8 million to SMEs in the region.
Banking on global sustainability is a program developed by the Financial Markets Division of the IDB’s Structured and Corporate Finance Department that seeks to promote sustainable environmental, social and corporate governance principles among Latin American and Caribbean financial intermediaries through financial and technical cooperation.
The Latin American Banking Federation, or FELABAN, is a non-profit institution established in 1965 in Mar del Plata, Argentina. It convenes, through its respective associations in 19 countries in the continent, more than 500 banks and financial institutions in Latin America.
- Romina Tan Nicaretta