Promoting SME Finance: When and How?

Presentation on theme: "Promoting SME Finance: When and How?"— Presentation transcript:

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Promoting SME Finance: When and How?Comments on How Collateral Laws Shape Lending and Sectoral Activityby Charles Calomiris, Mauricio Larrain, Jose Liberti, Jason Sturgess

Finance and Development ConferenceNovember 2, 2016World BankWashington, DC

Discussion bySergio Schmukler

Two difficult tasksComment on a great paper, already accepted for publicationDiscuss broad issue of SME finance posed by the sessionDoes fostering SME finance matter for economic growth? What works and what does not work in fostering SME finance?

The role of the government in promoting SME finance Do all this in about 10 minutesAnd provide comments to own co-authors

Calomiris et al. paperNeed of collateral for lendingMovable vs. immovable collateralWeak laws hamper use of movable collateral & might tilt production toward immovable-intensive sectorContribution

Great paperSeveral pieces of evidence, including financial and real activityProprietary bank data in 12 emerging economiesCase study of SlovakiaSectoral data

Innovative and persuasive, tackling main issuesNeed for this kind of research, which adds to cumulative evidenceStill leaves questions for further research

Calomiris et al. paperMore obvious points, some already addressedOmitted factorsReverse causality, endogeneity of collateral lawsConclusions: distortions in financial and economic activity?

Other effects besides LTVHow firms use more financeEffects on immovable collateralMitigating factorsLeasing, technological innovations (blocking devices), financial innovations (bitcoin), formal solutions (NAFIN), informal solutions

Might make movable collateral laws less relevantEffects of collateral laws vs. other laws

Does more SME finance matter for economic growth? Would need to answer at least three challenging questionsDo SMEs need more financing?If SMEs receive more financing, do they grow more?If SMEs grow more, how much do they matter for overall growth?

Difficult to address even the first questionFact: SMEs borrow less and in worse terms than other firmsDue to problems in supply- or demand-side of capital?If supply-side problem, which one? Many possible, concurrent answers, with unclear relative importance

Better off intervening?

What works and not in fostering SME finance?Big push to provide more financing to SMEsBased onEvidence of SMEs not getting good finance Probable, real problem of access to finance for SMEs

But even if there is a problem, of which type of financing is needed?Just more? Lower cost? Equity? Long-term debt?Solution depends onHow risks get mitigated How risks get redistributed: creditors vs. debtors

Even if more financing pushed, not clear what SMEs would do with itDon’t know this even for large corporations

Role of the governmentDo more than providing good macro and institutional environment?Even under market failures, can government failures be avoided?General principlesIdentify binding constraints

Crowd in private sectorWork closely with private sectorStill …Which instruments/policy should be used?Which institutions should conduct interventions?

Role of the government – Policy Type

of policyExample

Verdict

Contractual-based measures

Calomiris

et al.



Information-based measures

Credit

bureaus



Market infrastructure

NAFIN, Mexico



Catalytic

role

FIRA, Mexico



Public guarantees

FOGAPE,

Chile

?

Direct

lending

Public banks: retail and wholesale

?

Role of the government – InstitutionType

of institutionExample of interventions

Verdict

Ministry of Finance/Economy

Subsidies

?

Central bank

Regulations, bureaus

?

Superintendencies

SME programs

?

Public banks

From

traditional to innovative

?

International organizations

World Bank, IADB,

CAF: loans, guarantees, others

?

Thank you!