Bank financing has been the traditional source of external financing to SMEs; however, since the global financial crisis that started in 2007, there has been an active debate about the role that capital markets can play in SME financing. In advanced economies (AEs), several factors have triggered the emergence of new capital markets solutions, including bank deleveraging in some countries; the low interest rate environment that has affected institutional investors’ portfolios and the investors’ increased interest in environmental, social, and governance (ESG) factors to guide their investment decisions; and financial technology. Some of these factors are not applicable to EMDEs. However, the mere size of the gap does call for an expansion of SME financing channels. The growth of pension funds in need of diversification, internet penetration, and the increased participation of retail investors in EMDEs’ capital markets via mutual funds all provide a positive outlook for the development of new financing solutions for SMEs.
This report seeks to enhance practitioners’ understanding of the potential role that capital markets can have in SME financing in EMDEs. To do so, the report reviews global experiences in the use of capital markets solutions and, more generally, in market-based solutions to expand SME financing with a view to identifying key preconditions and challenges for EMDEs implementing the solutions. The term market-based solutions is used intentionally, because many of the solutions that will be analyzed do not fit neatly into a traditional definition of capital markets but do share the characteristic of being nonbank financing alternatives that leverage financing from capital market investors.