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Bank Involvement with SMEs 2008

Bank Involvement with SMEs

Beyond Relationship Lending

The financing of small and medium enterprises (SMEs) has attracted much attention in recent years and has become an important topic for economists and policymakers working on financial and economic development. This interest is driven in part by the fact that SMEs account for the majority of firms in an economy and a significant share of employment (Hallberg 2001). Furthermore, most large companies usually start as small enterprises, so the ability of SMEs to develop and invest becomes crucial to any economy wishing to prosper.

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The recent attention on SME financing also comes from the perception that SMEs lack appropriate financing and need to receive special assistance, like government programs that increase lending. Various studies support this perception. A number of papers find that SMEs are more financially constrained than large firms.

For example, using data from 10,000 firms in 80 countries, Beck, Demirgüç-Kunt, Laeven, and Maksimovic (2006) show that the probability that a firm rates financing as a major obstacle is 39% for small firms, 38% for medium-size firms, and 29% for large firms. Furthermore, small firms finance, on average, 13% points less of investment with external finance, compared to large firms.4 Importantly, lack of access to external finance is a key obstacle to firm growth, especially for SMEs (Beck, Demirgüç-Kunt, and Maksimovic 2005). On the policy side, there are a large number of initiatives across countries to foster SME financing including government subsidized lines of credit and public guarantee funds.

One example that has been deemed as successful is Chile’s Fondo de Garantía para Pequeños Empresarios (FOGAPE), a guarantee fund to encourage bank lending to SMEs. This fund has many features that make it attractive, including incentives to reduce moral hazard, competition among banks, and self sustainability.

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