This chapter provides an overview of the evolution of SME financing policies across Scoreboard countries over the last decade, focusing on the immediate post-crisis period (2008-11), the early recovery years (from 2012) and the most recent emerging policy trends. It also documents developments in the regulatory environment for SME financing. It draws heavily from information received for the Scoreboard exercise since its inception as well as other work on SME access to finance conducted for the OECD Working Party on SMEs and Entrepreneurship.
Financing SMEs and Entrepreneurs 2020
An OECD Scoreboard
Financing SMEs and Entrepreneurs
2. Policy developments in SME finance a decade after the global financial and economic crisis
Abstract
Overview
In the aftermath of the 2008 global financial and economic crisis, countries around the world took decisive action to counter the impact of the recession on a broad segment of the SME population. These measures were accompanied by financial reforms to strengthen banks’ resilience, such as the Basel III framework, which introduced new minimal capital requirements and designed new rules for liquidity management. The crisis had a strong immediate impact: bankruptcies in Scoreboard countries grew strongly year-on-year from 2007, peaking at a 22.14% median growth in 2009. Only in 2012 did the median growth in bankruptcies start decreasing again.
Small businesses were hit particularly hard by the recession, with the share of SMEs in total business lending flows falling to 19.7% in 2009, against 25.6% in 2007 (in median terms). In Portugal, for instance, new lending in 2012, adjusted for inflation, stood at just 42% of 2007 volumes. In the United States, the Small Business Lending Index (SBLI), which measures the volume of new loans normalised to the base year of 2005, fell from 118.7 in 2007 to 73.7 in 2009. That same year, non-performing loans reached their highest mark for both SMEs and total business loans in the United States.
Venture capital investments also fell significantly in the aftermath of the crisis, reaching their lowest levels in 2011 at 0.025% of GDP (median value), against 0.043% of GDP in 2007 among participating countries (OECD, 2019[1]).
Recovery has come at a slow pace in many advanced economies. Pre-crisis levels of output have not yet been reached in a majority of high-income countries and investment levels are, on average, only at 75% of pre-crisis levels (Chen, Mrkaic and Nabar, 2019[2]).
These developments prompted national governments to take muscular action on many policy fronts, particularly regarding SME access to finance, which remains a policy priority to foster economic growth and well-being.
Policy responses to the crisis were significant. In the 2009-12 period, many governments set up or expanded direct lending and guarantee schemes, as well as credit mediation and other measures to ease SME access to credit, as a response to the drastic reduction in lending activities in the private financial sector.
While these measures largely remained in place in later years, the emphasis of policies as a whole shifted as the recovery took hold. Generally, equity instruments gained more attention as the crisis subsided, and credit measures (credit guarantees, direct loans) were increasingly targeted to specific subgroups of the SME population (innovative firms, women entrepreneurs, start-ups, etc.). This marked a shifting focus, from cyclical issues to more longstanding structural issues in SME access to finance.
Policy developments are increasingly shaped by megatrends such as globalisation, digitalisation and ageing. Digitalisation in particular offers new opportunities, but also challenges, both for policy makers and for SMEs seeking finance. Fintech, defined as technology-enabled innovation in financial services, is becoming more and more important in easing SMEs’ access to finance. It is also ensuring financial inclusion for some segments of the SME population that are traditionally unserved or underserved by financial institutions and markets (OECD, 2019[3]).
Using technologies such as digital ID verification, distributed ledger technologies (DLT), big data and marketplace lending, new suppliers are offering an array of innovative services with the potential to revolutionise SME finance markets. Mobile banking, (international) mobile payments and the use of alternative data for credit risk assessment can significantly reduce information asymmetries and transaction costs, tackling structural barriers SMEs face when accessing finance. Fintech will likely become a more central feature in the range of SME financing options in the coming years.
Generally, incumbents in the financial sector are adopting techniques and instruments introduced by Fintech, blended models are emerging, and “Big tech firms” (such as Amazon or Alibaba) are entering the financial services realm (OECD, 2019[3]).
The Scoreboard has been mapping developments in SME finance since the pre-crisis benchmark year of 2007. The time series and yearly register of policy trends provide a reference for the analysis of governmental policy responses and their effects. More than ten years after the financial crisis, it is an opportune moment to take stock of the evolution in SME financing policies. Table 2.1 summarises general trends in SME finance policy that are analysed in this chapter and describes development in terms of the types of policies introduced to support debt and equity, target beneficiaries, and relevant regulatory measures and approaches.
Table 2.1. Overview of the evolution in SME finance policies
The chapter focuses on the major changes in the SME finance environment since the financial crisis, along with the principal policy responses. It first analyses the most important counter-cyclical instruments used in the immediate aftermath of the crisis, such as credit guarantees and direct lending. It then moves to the policy approaches that gained traction in the early recovery years and remained in the policy mix in most jurisdictions in later years. Initiatives related to equity and asset-based finance, digitalisation of financial services, tackling payment delays, and strengthening the financial acumen of entrepreneurs and business managers are analysed, drawing from policy cases from OECD Scoreboard countries and from the exercise undertaken to develop G20/OECD Effective Approaches for Implementing the High-Level Principles on SME Financing (Koreen, Laboul and Smaini, 2018[4]).
This overview of policy developments is timely, at a moment when SMEs around the world are once again facing mounting difficulties to access funding in the context of the coronavirus pandemic of 2020. Despite important differences between the 2008 financial crisis and the crisis brought on by the global pandemic, the policy experiences from the 2007-12 period may hold lessons for policy makers who want to cushion the impact on SMEs.
Policy action in the aftermath of the crisis (2008-2012)
The global financial crisis was one of the most severe crises to hit the global economy since the Great Depression. The underlying banking crisis resulted in a sovereign debt crisis and a recession across many countries, which prompted governments to take strong action.
As a result of the financial meltdown of 2008, 91 economies worth two-thirds of the global GDP in purchasing-power-parity faced a decline in output the following year (Chen, Mrkaic and Nabar, 2019[2]). GDP contracted 0.1% globally and 3.3% in advanced economies in 2009 (IMF, 2019[5]). The median loss in output in 2014 was estimated at 3.5% across all OECD countries (Ollivaud et al., 2015[6]). Moreover, the crisis gave rise to a “credit crunch”, whereby credit became scarce and credit standards tightened significantly, making access to bank finance for SMEs more difficult (OECD, 2012[7]).
In 2008-09, loan rejection rates increased significantly in most countries, while application rates often decreased. The share of SME loans among all business loans dipped well below the SME contribution to national income and employment (OECD, 2012[7]). Meanwhile, insolvencies increased and SMEs’ ability to self-finance shrank significantly.
Support to stimulate debt financing increased significantly in the immediate aftermath of the financial crisis.
As early as 2008, policy makers turned to different tools in order to counter the effects of the recession (WPSMEE, 2010[8]). This included primarily the creation and expansion of existing credit guarantee schemes (CGSs) and direct lending programmes. These policy instruments grew in importance immediately post-crisis, both in terms of the number of schemes in operation and in terms of guaranteed volumes of schemes already in place. The coverage rates of guarantees also increased. Guaranteed volumes continued to grow at moderate rates after 2009, sometimes evolving into more targeted programmes after 2012.
In the immediate years after the crisis, many measures were not targeted to a specific sector or firm segment, but concerned the bulk of the SME population, or even the business population at large.
For example, the United Kingdom launched the Enterprise Finance Guarantee (EFG) in 2009, replacing the Small Firm Loan Guarantee Scheme (SFLG), in operation since 1981. The new scheme enlarged the number of eligible firms and increased the upper limit of loans four-fold (to GBP 1 million). The upper limit of the turnover for beneficiaries increased from GBP 5.6 million to GBP 25 million and later to GBP 41 million to address the needs of larger SMEs that were facing increasing difficulties in obtaining finance. The number of loans that were granted under the scheme doubled between the first and the second quarter of 2009, from 1 202 to 2 339 (BBB, 2019[9]).
In OECD countries, there was a three-fold increase in the share of guaranteed loans in the total loan stock between the start of the crisis and 2010. Guarantees typically had the specific aim to support counter-cyclical lending to viable SMEs that were facing difficulties accessing credit because of the post-crisis environment, but would be able to secure lending from banks under normal circumstances (Cusmano, 2013[10]). The increase thus sought to satisfy an increased demand for government guarantees.
In addition, several countries increased the coverage rates of their guarantees, with the Czech Republic reporting a 10 percentage point increase (from 58% to 68%) for instance, and BpiFrance raising its coverage rate to 90% (written exchanges with experts from the European Association of Guarantee Associations – AECM).
In a few cases, the coverage rate reached 100%. Korea, for example, implemented an “Intensive Rescue Plan” via its credit guarantee fund (KODIT) in 2009. The Plan increased the coverage ratio to 100% and substantially reduced the screening of borrowers (Cusmano, 2013[10]). Members of CESGAR in Spain also increased the coverage rate to 100% (written exchanges with experts from the European Association of Guarantee Associations – AECM).
Figure 2.1. Trends in guaranteed loans and direct government loans for SMEs after the crisis
Year-on-year growth rate, Scoreboard median (%)
Source: OECD, Financing SMEs and Entrepreneurs: An OECD Scoreboard, 2012-2019.
Finnvera, Finland’s state-owned financing company, was authorised to grant counter-cyclical loans and guarantees between 2008 and 2012. Finnvera loans were designed for working capital and catered to firms with less than 1 000 employees whose profitability or liquidity had declined because of the crisis. The SME applications grew by 12% in 2009 and SME loans and guarantees granted increased from EUR 801 million in 2007 to EUR 1 067 million in 2009, at its peak. The Finnish Government considers that the programme played an important role in safeguarding employment in SMEs during the years of the financial crisis. According to one estimation, job losses could have been twice as numerous in 2009 without the loans, which means over 20 000 positions were maintained with the help of the finance granted by public organisations (OECD, 2016[11]).
In European countries such as Belgium, France, Germany and Spain, various forms of credit mediation were introduced, with many SMEs eligible to benefit (Cusmano, 2013[10]). Credit mediation schemes were planned to be phased out within a few years but sometimes remained in place, evolving into a longer-term initiative to support SMEs in these countries (Wehinger, 2014[12]). In Germany, the programme was discontinued in 2011, as initially planned. Ireland created a Credit Review Office in 2010, and Spain and the United Kingdom implemented similar facilities in 2011 and 2012 respectively. The British facility is an independent credit review system that oversees the process of appeal to credit rejection in the largest UK banks.
Equity financing also suffered in the crisis aftermath, but was not the main focus of policy attention in the early post-crisis years
In the aftermath of the financial crisis, credit tightening in the financial sector made SMEs’ dependence on bank finance increasingly problematic. What is more, alternatives to traditional debt finance, such as venture capital, growth capital and angel investing were even more severely affected by the financial crisis, thus penalising innovative SMEs in need of finance.
Figure 2.3 illustrates the strong decline in growth and venture capital volumes between 2008 and 2010 (OECD, 2015[13]). In 2014, venture capital investment volumes were still below pre-crisis level in most countries under study, often by a wide margin (OECD, 2015[13]). The pro-cyclical nature of private equity instruments is clearly visible in the median year-on-year growth rate, with two strong dips in 2009 and 2012, corresponding to two periods of recession in most countries under study.
Figure 2.2. Growth capital and venture capital, 2008-2018
Median year-on-year growth rate (%)
Note: Data is year-on-year change of current USD volumes, at the exception of Chile, Colombia, China, Indonesia, Malaysia, Mexico, Turkey and Ukraine for which the indicator captures variations of volumes in current local currencies.
Source: OECD Entrepreneurship at a Glance; based on the Entrepreneurship Finance Database, and data compiled from the individual country profiles of Financing SMEs and Entrepreneurs 2020 when the information was not otherwise provided.
During this period, a number of governments maintained or created new equity support measures, although their focus continued to be on supporting SME access to debt. Sweden, for instance, created a public equity fund in 2009 (Almi Invest) and France launched the Fonds d’investissement stratégique in 2010. The Netherlands expanded its Growth Facility (GFAC), which offered banks, private equity enterprises and other financiers a 50% guarantee on newly issued equity or mezzanine loans. The total budget allocated to this scheme was raised from EUR 5 million to EUR 25 million during the crisis years. Canada, Chile, Denmark, Finland, Italy, New Zealand and the United Kingdom also provided assistance to equity financing throughout the crisis years (OECD, 2012[14]).
In Europe, national efforts were often supported at the regional level, with initiatives undertaken through the European Commission and European Investment Bank (EIB). These policy efforts sought to play a counter-cyclical role, but generally there was a decrease of capital available for investing in VC funds,1 and there was a decrease in the valuation of VC-backed firms due to the recession, which in turn affected VC funds.
Box 2.1. Venture capital policy initiatives: Denmark and the United Kingdom
Denmark has high investment levels in venture capital when measured as a share of GDP, especially in early-stage investment. Venture and growth capital in Denmark have expanded significantly since 2016, with a 78% year-on-year growth rate over 2016-17, largely driven by growth capital, which stood at a record DKK 267 million in 2017 (OECD, 2019[15]). The Danish Growth Fund (DGF) is a state investment fund that has existed since 1992 and has funded 7 900 companies since its creation, with a total commitment of more than DKK 24.9 billion. Its instruments comprise direct investments, fund investments, fund-of-fund investments (through Danish Growth Capital, which is managed by DGC) and syndication loans (Rogers, 2016[16]). The rationale behind these instruments is the chronic underinvestment in innovative ventures in Denmark. There has been heavy public involvement in the development of the VC market, yet all investments are made on private terms with private investors (Rogers, 2016[16]) and DGC remains a highly independent structure. Overall, DGF has been showing strong performance and has experienced profitable exits.
A decrease in the importance of banks in the supply of financing for UK SMEs has been observed in recent years, in part due to the growth of private equity (UK Finance, 2018[17]). The UK Government has been involved in fostering this diversification, including through direct investments made through the British Business Bank. The need to encourage alternative instruments was recognised in the immediate aftermath of the crisis, in the 2012 Breedon Report and in the Young Reports (UK Finance, 2018[17]). The 2010 Taskforce review requested the creation of the Business Growth Fund (BGF), which serves an underserved segment of SMEs, namely SMEs requiring between GBP 2 million and GBP 10 million in equity funding. In addition to this, the United Kingdom implemented three tax incentive schemes for equity investors in SMEs between 1994 and 2012 (OECD, 2015[13]). While equity gaps remain, the equity market in the United Kingdom is now comprehensive and public resources have been strongly mobilised to foster alternative finance for SMEs.
Evolution of SME finance policies during the recovery period (2012 onwards)
SME financing has recovered at different paces in different countries, reflecting a number of factors in the domestic and global economy. Despite these cross-country differences, a visible shift in policies can be identified starting in 2012. As the crisis waned and recovery began to take hold, access to finance became a less pressing issue for many SMEs. In Europe, SMEs reporting access to finance as an extremely pressing problem steadily decreased from the first half of 2012 onwards (See Figure 2.4). In economies like Belarus, New Zealand, Ukraine, and the United States, the stock of outstanding business loans starting increasing again in 2012-13 following decreases or stagnations in the aftermath of the crisis. In Japan, the percentage of small businesses perceiving conditions as accommodative versus severe turned slightly positive in 2011 and the rise in the percentage of small firms with positive attitudes gained pace between the last quarter of 2012 and 2016 (Bank of Japan, 2019[18]).
Figure 2.3. Access to finance as a pressing problem for European SMEs
As a percentage of SMEs
Source: (European Central Bank, 2019[19]).
Nevertheless, SME financing remained a prominent policy priority in many countries in order to stimulate economic growth and well-being. In addition, international instances such as the G20 and the G7, as well as regional groupings such as Asia-Pacific Economic Cooperation (APEC), the European Union (EU) and the Association of Southeast Asian Nations (ASEAN), made SME finance a political priority in the years following the crisis.
In fact, the OECD developed this SME financing Scoreboard in part as a response to the crisis. Its first edition was published in 2012 following a pilot phase, in order to increase the evidence base and provide a tool to monitor the state of SME financing (see Box 2.2). In 2015, the OECD developed the G20/OECD High-Level Principles on SME Financing. The G20 Global Partnership on Financial Inclusion (GPFI) also developed the G20 Action Plan on SME Financing.2 That same year, ASEAN included Access to Finance as a main goal in its Strategic Action Plan for SME development 2016‑25, launched in November (ASEAN, 2015[20]).
Box 2.2. G20/OECD High-Level Principles on SME Financing
1. Identify SME financing needs and gaps and improve the evidence base
2. Strengthen SME access to traditional bank financing
3. Enable SMEs to access diverse non-traditional financing instruments and channels
4. Promote financial inclusion for SMEs and ease access to formal financial services, including for informal firms
5. Design regulation that supports a range of financing instruments for SMEs, while ensuring financial stability and investor protection
6. Improve transparency in SME finance markets
7. Enhance SME financial skills and strategic vision
8. Adopt principles of risk sharing for publicly supported SME finance instruments
9. Encourage timely payments in commercial transactions and public procurement
10. Design public programmes for SME finance which ensure additionality, cost effectiveness and user-friendliness
11. Monitor and evaluate public programmes to enhance SME finance
Source: (OECD, 2015[21]).
Despite marked improvements in SME access to finance since 2012, most policy instruments introduced during the crisis have largely been kept in place. Nonetheless, they have undergone transformation in their design, and in some instances, have been redirected to tackle structural problems concerning specific segments of the SME population.
Instruments to support SME lending were increasingly targeted to specific segments
Broadly, the trend towards segmentation can first be discerned in 2011, with the emergence of programmes that were more tailored to specific SME segments (OECD, 2013[22]). One objective of these changes was to ensure additionality, so that government support would reach firms that would not be able to access financing otherwise, and so as not to crowd out private sector initiatives.
Evidence indicates that some segments of the SME population face more difficulties to access appropriate sources of finance. These include fast-growing, innovative firms, micro-enterprises, start-ups, young SMEs, businesses located in remote and/or rural areas and women-owned enterprises (OECD, 2018[23]). With counter-cyclical policies becoming less relevant, the structural obstacles faced by these firms secured a place at the top of the policy agenda.
The rising number of countries that designed loan and guarantee programmes for start-ups is one example of this trend. Among Scoreboard participants, 2 countries out of 11 reported that this policy was in place in 2012, against 21 countries out of 46 in 2018.3 Moreover, in 2017, around two-thirds of the countries surveyed for the implementation of the G20/OECD Principles were targeting either young entrepreneurs, SMEs located in remote areas or women entrepreneurs with specific policies (Koreen, Laboul and Smaini, 2018[4]).
Credit guarantee schemes were also increasingly tailored to disadvantaged segments of the SME population, such as innovative start-ups, women entrepreneurs, and SMEs in underserved regions. Several conditions need to be fulfilled in order to make CGSs accessible to disadvantaged or underserved entrepreneurs (OECD/European Commission, 2014[24]). These may include increasing the coverage ratio, making sure that the guarantee period is below five years, subsidising the price of the guarantee product, and offering non-financial support (OECD/European Commission, 2014[24]).
Turkey is a good example of this segmentation, with grants and loan guarantees applied with preferential rates to SMEs led by women entrepreneurs and combined with non-financial support. A recent partnership between the European Bank for Reconstruction and Business (EBRD) and the Turkish guarantee fund (KGF) unlocked EUR 300 million to support women’s entrepreneurship (Rosca, 2018[25]). Korea represents another example, with certain policies aimed at innovative firms. KIBO (Korea Technology Finance Corporation), which offers guarantee products that are tailored for start-ups and innovative firms, was an early adopter of this strategy (OECD, 2013[22]).
It is important to note that the number of beneficiaries of loan guarantees continued to increase, if more slowly, after 2012. The role of guarantees thus shifted from a primarily counter-cyclical one to a tool to overcome market failures in a more stable economic context. Most programmes were maintained after the crisis (written exchanges with AECM). Segmentation and financial regulation also played a role in the continued demand for loan guarantees (see section 1.5).
Other efforts to target innovative SMEs in need of finance focus on providing support to enable them to collateralise their intangible assets. Indeed, these firms often possess little tangible collateral, and financial institutions are often reluctant to provide credit to them for this reason. Governments have recognised the importance of enabling fast-growing, intangible asset-rich firms to access appropriate sources of financing, and that market failures for these types of SMEs are at play.
A steadily increasing number of countries, particularly in Asia, have set up special schemes to address the challenges associated with collateralising intangible assets. Initiatives range from funds established by development banks, as well as the combination of subsidies and guarantees to encourage private sector engagement. Additional efforts to overcome the problems of valuation and high transaction costs are also being deployed (Brassell and Boschmans, 2018[26]).
In Japan, for example, recent efforts have focused on influencing lender behaviour by providing subsidised intellectual property (IP) evaluation reports to regional banks and credit unions. China is the most active market for state-backed IP financing, having first experimented with bank lending against intangible assets in 2006. It has a wide range of policy measures in support of IP. In Korea, the government has provided a range of support to knowledge-based SMEs in recent years. The Korea Development Bank (KDB) operates a “Techno Banking” initiative providing loans for purchasing, commercialising and collateralising IP. KODIT, the Korea Credit Guarantee Fund, offers underwriting of up to 95% of an IP valuation for lending or securitisation, while the valuation activity is subsidised by the Korean Intellectual Property Office (KIPO), and the valuation work itself is done by others such as the Korea Invention Promotion Association (KIPA) (Brassell and Boschmans, 2018[26]).
With the specialisation of programmes, governments gained increased awareness of the need to produce disaggregated data in order to strengthen the evidence base. Indeed, disaggregated data collection remains a challenge to support evidence-based policies in support of these targeted approaches (Alliance for Financial Inclusion, 2017[27]). Box 2.3 provides an overview of some of the issues and policy initiatives to leverage data for better policy targeting.
Box 2.3. The role of data for policy targeting
An increasing number of countries are reporting improvements and new initiatives in granular data to grasp the heterogeneity of SMEs. Nonetheless, much remains to be done in this area. The United Kingdom’s British Business Bank developed a typology to support better targeting for its initiatives. It clusters SMEs based on attitudes and needs according to data from a UK demand-side survey. The characteristics taken into account to cluster SMEs include the need for and the use of finance as well as SMEs’ openness to external information about finance and how they obtain it. With these categories, rather than focusing on the nature of “average” SMEs, policy makers and practitioners target SMEs with similar characteristics, especially separating those groups with high ambition and growth mind-sets from the others (OECD, 2019[15]).
Gender-disaggregation of data on SMEs has also been recognised as essential for fostering women’s entrepreneurship, and most countries are behind on the collection and analysis of such data. Gender-disaggregated data started being produced by the Chilean financial sector regulator (SBIF - Superintendencia de Bancos e Instituciones Financieras de Chile) in a gradually expanded process that started in 2001. Supply-side data feeds into the annual report “Gender and the Financial System” and the information, made available for over a decade, has supported the creation of programmes targeting women as a distinct segment by Chilean financial institutions.
BancoEstado has put in place its Crece Mujer Emprendedora program, derived from the SBIF data set. The programme targets women entrepreneurs through access to capital, education and networking. The Chilean Financial Cooperative Sector started producing gender-disaggregated data for their operations and the Chilean Banking Association publishes research notes on women’s banking trends aiming at highlighting growth opportunities such as increasing women’s participation in credit markets and higher repayment rates (Data2X et al., 2016[28]). The OECD is also working to enhance the collection of more disaggregated SME finance data along a number of dimensions; ongoing work is outlined in Chapter 1 of the report.
Equity financing became a key focus of SME financing support policies
Government support for private equity markets continued following the immediate post-crisis years and often played a pivotal role in the development of these markets. In Europe, public funding bodies were found to support first-time investment funds more often than private investors, and their participation in venture capital (VC) funds generates positive signalling effect on private investors (Kraemer-Eis, Signore and Prencipe, 2016[29]).
The importance of first movers in the development of active VC environments is recognised and the experience of various countries shows that public support can play an important role as an initiator for a viable VC industry (Kraemer-Eis, Signore and Prencipe, 2016[29]).
In addition, VC markets in 2018 had often not recovered to pre-crisis levels. There are economic benefits of public support for equity instruments, hand in hand with market-led developments, as well as the potential for public investments in these markets to generate financial returns.For these reasons, instruments to stimulate equity markets for SMEs have increasingly attracted policy attention. Initiatives to stimulate private equity gained momentum following the growing recognition that overreliance on debt calls for a diversification of financing instruments (OECD: SME Ministerial Conference, 2018[30]).
In 2019, 40 out of 46 countries reported having policies in support of private equity financing for SMEs in place and 27 had specific programmes related to business angel investment. Policies have mainly consisted of supply-side measures (direct public investments, co-investment between the private and public sector, tax incentives and government support to networks and associations) (OECD, 2015[13]).
The creation of funds-of-funds also became more common. Funds-of-funds are pooled funds that invest in smaller VC funds instead of investing directly into firms. This helps bridging the gap between larger investors (including institutional investors) and firms in need of private equity. Funds-of-funds also offer an opportunity to diversify and mitigate risk for investors. While it is difficult to evaluate the success of these measures in general, it is clear that public actors play an important role in private equity markets in many economies, alongside private players.
Attention to venture and growth capital support policies grew as recovery began to take hold
As part of their initiatives to stimulate innovative start-ups and high-potential SMEs, many governments included equity finance support measures related to this group of SMEs from 2012, and many public investment vehicles and co-funding schemes were created.
In 2013, Canada announced the Venture Capital Action Plan, in which it pledged to invest CAD 400 million over the following 7 to 10 years to reinvigorate the VC sector. That same year, the governments of Estonia, Latvia and Lithuania, together with the European Investment Fund (EIF), set up the Baltic Innovation Fund. Greece launched the New Economic Development Fund (Taneo), which takes minority participations in venture capital funds. The Italian Fund for Sustainable Growth launched its first call for proposals that year, with 60% of its total volume of EUR 300 million directed to investments in SMEs. In 2014, Finland introduced a growth financing programme to co-fund investment in growth start-ups with private investors, and the Swedish Government also strengthened the budget for its venture capital programmes (OECD, 2015[31]).
In Chile, the Early-Stage Fund (Fondo Etapas Tempranas) is in place since 2013. This fund-of-funds supports new investment funds that provide high-growth SMEs with equity financing. In 2013, the Netherlands, in cooperation with the EIF, introduced a fund of funds for later stage venture capital investments as a new policy measure in support of SME equity finance. It included a demand-side element: together with banks, the government also promoted the diffusion of information to SMEs with regard to these types of instruments (OECD, 2017[32]).
In the United Kingdom, various policy initiatives as well as direct government investments made through the British Business Bank (BBB) since the crisis have had a clear effect on the diversification of supply (UK Finance, 2018[17]). Denmark has shown a similar trend with the Danish Growth Fund (DGF) (see Box 2.1). The European Investment Fund (EIF) noted that 2010 can be singled out at the starting year for the expansion of profitable EIF-backed investments (Prencipe, 2017[33]). Even though the causes of this trend are multiple, the counter-cyclical role of such institutions is clear. Some empirical studies have shown show that EIF-supported VC investments have a positive effect on start-up growth, leading to higher capitalisation, higher revenues and higher job creation, and higher investment and borrowing levels in the first five years after the VC investment (Pavlova and Signore, 2019[34]).
Policy support for business angel investments also expanded
Business angels (BAs) are financially independent, high net worth individuals who invest their private money in start-ups or seed companies, in return for ownership (OECD, 2015[13]). BAs, who are often entrepreneurs or former entrepreneurs, are known to be more involved in the firms that they finance, and often add value by getting involved in management and strategy themselves. While BA activity has existed for centuries, the sector has been receiving strong recognition and is increasingly structured by associations and networks. This is particularly the case in Europe, where awareness of this instrument was traditionally less widespread than in the United States, for example.
The activity slowed down significantly as a result of the recession, although not as dramatically as VC activity (OECD, 2015[13]). Like venture capital, business angel activity is increasingly supported by policy makers, who recognise its complementarity with venture capital in early-stage finance for high-growth and innovative firms. Policy attention generally increased a few years after the financial crisis, as the BA market recovered only slowly, and there was mounting evidence of a shortage of early-stage investment capital.
Tax incentives to boost innovation and the creation of fast-growing SMEs are commonly targeted at business angel investors. In Turkey, business angel investors are able to deduct up to 75% of capital invested in SMEs from the annual tax base since 2013. In December of that same year, Sweden introduced a tax break for private business angel investors, totalling SEK 800 million annually of tax relief (OECD, 2015[31]).
Progressively, more varied supply-side policies in favour of BAs have mainly taken the form of co-investment via dedicated funds (this is the case in the Netherlands and in the United Kingdom, for instance), alongside with tax exemption schemes like in Italy and Japan – see Box 3 (OECD, 2015[13]). In August 2014, the Austrian Government established its “aws Equity Finder”, a contact platform which facilitates matchmaking between start-ups and SMEs and providers of risk capital, business angels, crowdfunding or other alternative financiers. Moreover, aws provides subsidies up to 50% (capped at EUR 50 000) to ease the external costs of publishing a capital market prospectus, one of the few demand-side policy support measures that explicitly targets SMEs by reducing the barrier to raise funds via capital markets above the regulatory threshold (OECD, 2016[11]).
Another important trend since the crisis is the strong formalisation of the BA sector, with the setting up of networks, associations and syndicates, sometimes with public support. Gaps in the evidence base remain to be filled, and survey tools as well as statistical instruments are expected to develop in the years to come.
Box 2.4. Fostering business angel activity through tax schemes: Italy and Japan
Tax incentives are part of the supply-side instruments that can be mobilised to encourage business angel activity. The objective of tax incentives is both to increase the number of active business angels and to encourage BAs to invest larger amounts. Italy put such a measure in place in 2008, in the form of a tax relief system. Capital gains on the sale of a start-up’s undertakings are exempt from taxes, provided that certain conditions are met. Amongst other things, shares must be held for more than three years and the gains must be reinvested into another start-up within the next two years (OECD, 2014[35]).
Japan was a precursor in this field, with a similar business angel tax scheme being introduced as early as 1997 and being updated in later years to include an income exemption system. Under certain conditions, business angels can deduct a certain amount of money from their taxes, proportionate to the BA investments carried out in that year (OECD, 2015[13]). In addition, capital losses on BA investments can be carried forward for three years (European Commission, PwC and IHS, 2015[36]). The Japanese system is also one of the only tax incentive schemes to offer loss relief on such a favourable basis.
Governments have sought to consolidate their SME financing efforts and increase efficiency through dedicated national financial institutions
Public financial institutions (PFIs) are a common policy tool to address failures in the financial market and supply financial services to underserved groups. They have long existed in many OECD and non-OECD countries, often pre-dating the 2008-09 crisis, but they attracted increasing attention for the role they played in its aftermath. In many countries, PFIs increased the scale and scope of their activities.
PFIs may engage in first-tier lending, i.e. lending directly to end-consumers, in this case SMEs and entrepreneurs. This includes commercial public banks, often with an explicit mandate to provide funding to SMEs. PFIs can also act as second-tier lenders, providing funding to banks and other financial institutions, which then is lend on by these organisations to businesses. . Some PFIs combine first-tier and second-tier funding mechanisms, and may be active in other areas than debt products (direct loans, trade finance, guarantees), such as equity operations, hybrid instruments and grants .
PFIs also typically provide indirect support related to financial infrastructure (reverse factoring, market liquidity provision, insurance for exports, PPP arrangements, loan securitisation) and non-financial infrastructure, like consulting services.
In the early years of recovery, many governments restructured the PFIs providing these services. In the case of France, Portugal and the United Kingdom, centralised institutions were set up to coordinate and provide all these direct and indirect support facilities for small businesses.
France created a public development bank (Bpifrance) at the start of 2013 through the fusion of several public operators (OSEO, CDC Entreprises, Fonds stratégique d’investissement). Bpifrance offers businesses a local financing service supported by an extended portfolio of financial instruments and consultation options. It provides guarantees, co-financing, direct loans, and manages, on behalf of public authorities government support for innovation and services. It also guarantees venture capital funds. On the equity side, Bpifrance manages several investment funds, including funds-of-funds, mostly targeting SMEs needs (OECD, 2017[37]).
The British Business Bank became operationally independent in late 2014 with the aim to improve the structure of finance markets to the benefit of SMEs by increasing competition and diversity of supply (OECD, 2017[38]). Portugal’s public development bank was created in October 2014 to complement the existing credit institutions. It focuses especially on SMEs and provide credit lines (through other banks), risk-sharing, guarantees, as well as capital to business angel and venture capital funds (Instituição Financeira de Desenvolvimento, 2019[39]).
In Russia, the Bank for Development was first established in 1999 and later became the Russian Bank for Small and Medium Enterprises Support as a subsidiary of Vnesheconombank, a state development corporation, in 2008. It provides low interest rate financing for innovation and modernisation as well as leasing for start-ups and microfinance.
Business development banks have also gathered through the Montreal Group, a global forum for development financial institutions created in 2012 and coordinated by the Business Development Bank of Canada. In 2019, the Group had eight member institutions from Brazil, Canada, China, Finland, France, Mexico, Morocco and Saudi Arabia (The Montreal Group, 2019[40]). The Group acts as a network for the exchange of knowledge and best policy practices for SMEs.
Recent and emerging policy developments
The focus of SME finance policies has transformed in recent years. Among other areas, Fintech and digital tools for SME finance, non-financial support targeting the financial acumen of entrepreneurs and payment delays are three major themes on policy makers’ agenda. More information on each topic is provided below.
There is an increasing policy focus on Fintech developments and digital tools for SME financing
Digitalisation increasingly creates both new opportunities and new challenges for SME financing. This includes new approaches to credit risk assessment and new digital tools for SME financing. Governments have responded to these developments primarily through regulatory measures, which are discussed in section 1.5 below.
Credit instruments are increasingly being affected by digital transformations. New opportunities for data collection have led to new developments in data analytics for financial services. One of the applications of these methods is credit scoring, i.e. the statistical analysis of creditworthiness, on which the decision to grant credit is often based.
While the methods for credit scoring form part of the oldest applications of analytics, they have recently been transformed, not so much by an upheaval of the statistical methods, but by the diversification of data sources (Óskarsdóttir et al., 2019[41]). Most notably, there is a strong interest on the part of financial institutions in broadening their evidence base for credit risk assessment by using so-called “alternative data sources”, i.e. non-credit data (transactional data, behavioural data, social media data) (ICCR, 2018[42]). Use of this data has raised legal and regulatory issues in certain jurisdictions, in particular linked to data protection (see section 1.5).
As recognised by the Financial Stability Board (FSB), the returns from enhanced quality and accessibility of information to financial system participants and regulators could be substantial (FSB, 2017[43]). Better credit scoring mechanisms lead to a reduction of information asymmetries and should lower default rates for firms (OECD: SME Ministerial Conference, 2018[30]). Both of these issues affect SMEs disproportionately. Nonetheless, it is difficult to assess these new models based on big data in the absence of a full credit cycle, and fears of pro-cyclicality and volatility as a result of new analytics are relatively widespread (FSB, 2017[43]).
Meanwhile, several countries have been involved in setting up and expanding information infrastructures for credit risk assessment, such as credit registries and credit bureaus (OECD: SME Ministerial Conference, 2018[30]) (GPFI, 2017[44]). This includes the Credit Risk Database established in Japan in 2001, for example, and the euro-Secured Notes Initiative established in France in 2014 (OECD, 2017[32]).
The growth of Fintech instruments has resulted in a growth in the access to, and convenience of, financial services, whether for households or for SMEs (FSB, 2017[43]). This is particularly the case in emerging markets, where instruments such as mobile payment have greatly facilitated daily payment needs for firms (FSB, 2017[43]). In line with the discussion above, Fintech has also contributed to decrease transaction costs for lenders wishing to reach out to underserved segments of the SME population, such as firms in rural and remote areas, micro-enterprises and informal ventures (OECD: SME Ministerial Conference, 2018[30]), all of which are more common in emerging markets. This trend fits well within the G20/OECD High Level Principles, which comprises financial inclusion, including for informal firms (Koreen, Laboul and Smaini, 2018[4]).
The digitalisation of financial services has also facilitated cross-border investments, although this remains incomplete in the face of regulatory discrepancies. The Financial Stability Board (FSB) has questioned the “cross-jurisdictional compatibility of national legal frameworks” (FSB, 2017[43]). More fundamentally, digitalisation prompts the question of the relevant level for regulation (see Box 3 below), as cross-border transactions often exist in legal grey zones (FSB, 2017[43]). Finally, policy makers are realising that as access to finance increases, so does the importance of financial literacy (FSB, 2017[43]): non-financial support is increasingly included in instruments that target SMEs and entrepreneurs.
Policy support increasingly includes efforts to enhance the financial acumen of business owners and entrepreneurs
Evidence suggests that financial support is most effective when it is provided alongside non-financial support, which includes mentoring, counselling, consulting, or general financial education (OECD, 2017[32]). This is because SMEs sometimes face not only a financing gap but also a skills gap (OECD, 2019[3]). Tackling this skills gap has moved up policy makers’ agendas. An increasing number of countries, close to 60 in 2015, have adopted a national strategy for financial education with a nationally co-ordinated approach. Many of the approaches prioritise specific groups and SMEs are among the main target audiences for these strategies globally (OECD/INFE, 2015[45]). Box 2.5 puts a spotlight on the Portuguese model.
Box 2.5. Promoting financial literacy in Portugal
Since 2016, Portugal has set up its “Core Competencies for Financial Training” that provides guidelines to all actors in financial education for business in the country. The initiative aims at harmonising programmes and promoting good practices. It was submitted to public consultation and was later fine-tuned during a series of pilot training actions.
The document is the result of a joint effort between the financial sector supervisors, the Agency for Competitiveness and Innovation (IAPMEI) and the Agency for Tourism (TP). It is part of the “Portuguese National Action Plan for Financial Education”, a broader government scheme for financial literacy. It was set up in 2011 and revised in 2016 and involves a large group of stakeholders including ministries, financial sector and consumer associations, trade unions, business associations and universities.
The ambition of the Portuguese action plan is not only to boost financial knowledge among business owners and managers, but also to restore confidence and trust between the business community and the financial sector, which was damaged considerably by the financial crisis.
In 2017, the cooperation protocol members delivered a series of courses in order to form a pool of trainers in the country. Participants were part of business associations, universities and polytechnic institutes. Out of the 34 participants, 10 were certified as trainers in the pool, coordinated by IAPMEI and TP.
In 2018, the pool of trainers began its activities, delivering 24 sessions to entrepreneurs and managers. These training sessions were held in different parts of Portugal, mainly in the premises of local business associations, town councils and business, tourism and hotel schools. They were attended by a total 382 trainees.
In addition to regular courses, IAPMEI and TP will maintain an annual conference to raise awareness of the importance of financial education in the management of SMEs.
Source: Written correspondence with experts from CMVM.
Non-financial support has emerged as a finance policy tool
The G20/OECD High-Level Principles on SME Financing called for the enhancement of SMEs financial skills and strategic vision, as part of the eleven policy priorities approved by G20 Finance Ministers in 2015 (Koreen, Laboul and Smaini, 2018[4]). A study commissioned by Canada’s Business Development Bank in 2013 showed that consulting services, notably focusing on financial literacy, significantly enhanced business performance, as measured by the growth in sales, employment, productivity and profits, as well as the firms’ survival rates (Boschmans and Pissareva, 2017[46]).
In 2018, twenty-seven Scoreboard countries reported that they had a non-financial support tool in place as part of their policy range for SME finance (OECD, 2018[47]). They vary greatly in their design, but a few categories can be drawn from the myriad of policy examples:
Advisory support as part of the institutional mission of public financial services providers (e.g. Austria, Brazil, Colombia, Georgia, Israel, Malaysia, Sweden );
Multiple advisory facilities, mainly through partnerships with the private and non-profit sector (e.g. Australia and New Zealand);
Finance-specific Public Advisory Facilities (e.g. Finland, the Netherlands);
Specific programmes combining debt finance products and advisory services (e.g. Belgium – Flanders region and the Czech Republic);
Web-based advisory services (e.g. Belgium – Walloon region and France);
Coaching and mentoring provided together with loan guarantees by guarantee institutions (e.g. Austria, Belgium and Finland) (written exchanges with experts from the European Association of Guarantee Institutions – AECM).
Non-financial support is also provided as part of business accelerators and incubators
There has been a proliferation of public-private business support provided through accelerators and incubators. Business accelerators are often associated with venture capital funds in the United States and stem from mixed public and private investments in Europe. Incubators and accelerators typically provide both financial and non-financial support to start-ups and SMEs with high growth potential. Their target populations, business models, and service portfolios differ greatly (see Table 2.2).
Incubators tend to provide more comprehensive but less specialised training and mentoring, while accelerators often provide targeted support with management skills and strategy. One common denominator is the opportunity for business owners and entrepreneurs to benefit from a local network. Different initiatives have arisen at different levels, whether local or national. One of the early adopters of the public-private model is Finland, which launched the VIGO accelerator programme in 2009 (see Box 5). Generally, there has been a trend for incubators and accelerators to target more specific populations like women, youth, migrant, or senior entrepreneurs and business owners (European Commission / OECD, 2019[48]).
Table 2.2. Differences and similarities between business accelerators and business incubators
Source: (OECD / European Commission, 2019[49]), adapted from other sources.
Box 2.6. Accelerators and incubators in Finland: from VIGO to Start-up Refugees
The VIGO venture accelerator programme (Finland) – 2009-15
The VIGO venture accelerator programme reflects the conviction that capital alone (supply-side measures) is not enough to help Finnish start-ups reach the global market, but rather must be complemented with know-how (demand-side measures). The programme was shaped by different groups of entrepreneurs who formed teams of “accelerators”. It was up to these teams to invest their own private money into the start-ups and to coach them. Accelerator companies could apply for up to EUR 1 million from Finnvera in equity, and up to EUR 1 million from Tekes in the form of a grant. Both financing companies are state-owned. The VIGO programme is currently discontinued, but as of 2014 it had hosted 100 start-ups and was still hosting 80 more. The programme has been recognised for combining public and private investment in an innovative way and for catalysing the Finnish VC and accelerator market. It also led to the emergence of high-growth ventures (Halme et al., 2018[50]). As one of the first large-scale projects of this type, VIGO can be seen as a pioneering model that was later replicated in other jurisdictions
Startup Refugees – 2015-ongoing
Two Finnish entrepreneurs set up an initiative in November 2015 to encourage refugees to launch their businesses. They had observed that refugees were often highly skilled, which offered many untapped opportunities, but also that in a context of growing unemployment in Finland, entrepreneurial initiatives would be all the more welcome in order to create jobs (European Commission / OECD, 2019[48]). Startup Refugees started by mapping skills and employer needs with the help of volunteers, in order to match employers with potential employees. The second phase saw the launch of an incubator programme operating in various refugee reception centres (European Commission / OECD, 2019[48]). The incubator connects aspiring entrepreneurs with mentors and potential investors, including business angels. The initiative is partly funded by the Finnish Ministry of the Interior and the Finnish Immigration Service, and was complemented with a specific programme targeting women (European Commission / OECD, 2019[48]). While the initiative remains modest in size, it is a good example of the growing importance of policies geared towards specific segments of SMEs and entrepreneurs
Governments are taking action to tackle payment delays
Evidence shows that late or non-payments (whether B2B or government-to-business) are detrimental to the growth and even survival of enterprises. This is especially the case for small businesses, which often lack cash-flow management capacities and have limited options to smooth their cash flows. Moreover, SMEs suffer from a negotiation power asymmetry in B2B transactions, which may push them to agree to poor payment terms, especially when the survival of their business depends on securing the contract. The Federation of Small Businesses estimates that reducing or ending late payments could reduce the total number of business failures by up to 50 000 per year in the United Kingdom (Federation of Small Businesses, 2016[51]).
The EU, for its part, has estimated that one in four bankruptcies in the EU is due to late payments. As of 2019, the EU estimated that 6 out of 10 firms in B2B transactions are still being paid later than was agreed in the contract, with SMEs reporting an even higher rate. This has prompted a number of policy responses in different jurisdictions, with initiatives multiplying around the world in recent years.
As early as 2011, the EU passed the Late Payment Directive. The directive, which was transposed in national law by several Member States between 2012 and 2014, states that payments must be settled in under 60 days for B2B transactions and 30 days (exceptionally, 60 days) for government-to-business payments. The directive also provides automatic entitlement for interest and financial compensation. It enables member states to make conditions stricter (e.g. reduce the maximum payment time).
An evaluation of the directive published in 2015 showed that most firms were aware of the legislation concerning payment, and were also aware of the rights conferred to them. Nonetheless, this awareness is lower among SMEs, and usage of the provisions remains low, with 60% of firms reporting that they never claimed interests or compensation following a payment delay. Evidence on the effect of the directive on payment delays remains mixed (DG GROW et al., 2015[52]), even though the legislation put the issue of payment delays in the spotlight. A resolution adopted by the European Parliament in January 2019 called for a better enforcement of the legislation and a diversification of tools to tackle late payment.
Chile introduced the Bill of Timely Payment in June 2018 to encourage the timely payment of invoices. The bill seeks to limit payment terms to 30 days and agreed-upon terms to 60 days. For public procurements, payments to suppliers must be made within 30 calendar days following receipt of an invoice or the respective tax instrument issued, and terms of up to 60 calendar days may be established for a respective auction or public procurement instrument.
In Australia, public entities are required to pay invoices for contracts worth up to AUD 1 million within 20 calendar days since July 2019, compared to the previous policy and industry norm of 30 days. Furthermore, to increase transparency and accountability in complying with the new policy, the government is requiring large businesses to pay small businesses on time by developing an annual reporting framework on payment performance.
New-Zealand puts digitalisation at the centre of its efforts to tackle payment delays. The New Zealand Business Number (NZBN) initiative (first introduced in 2013 for registered companies) makes a globally unique identifier available to all New Zealand businesses, including unincorporated entities. Having a single identifier will make it faster to interact with other businesses and government agencies, as these entities will not have to update their information multiple times and all their primary business data will be kept online.
The government will also encourage the wider adoption of e-Invoicing among businesses in New Zealand through the NZBN. All invoices will be instantly sent to customers through their financial management systems, and manual errors will be minimised. In March 2019, New Zealand joined the Pan-European Public Procurement Online (PEPPOL) framework, and e-Invoicing is expected to be available by the end of 2019. The government also plans to introduce measures to prohibit “unconscionable” payment conduct in B2B transactions and extend the existing consumer protections (under the Fair Trading Act) against unfair contract terms to protect business contracts under NZD 25 000.
The evolution of regulatory approaches
The regulatory environment for SME financing has also faced major changes since the financial crisis. This section highlights the key areas of regulatory focus in the immediate aftermath of the crisis, which centred on financial stability through supply-side regulation, and which have evolved towards providing a framework for financial innovation, often driven by technological developments.
Basel III financial reforms and SME finance in the aftermath of the crisis
The Basel III framework was a central element of the policy response to the global financial crisis. Regulators identified and addressed shortcomings in the pre-crisis framework with the aim to bring more resilience to the banking system and to contain systemic vulnerabilities. A risk based capital ratio, liquidity coverage ratio, leverage ratio and additional macro-prudential requirements for systemically important banks were gradually introduced after the crisis. In this changing scenario, the overdependence of SMEs to banking finance made reforms an important issue for SME finance policy makers in the post-crisis years (OECD, 2012[53]).
One policy response to mitigate possible negative effects of the more stringent regulation on SME lending was the introduction of the SME Supporting Factor Article by European legislators in 2014. The Capital Requirements Regulation (CRR) allowed a capital reduction factor for exposures to SMEs at a discount factor of 0.7619 with the aim to provide stimulus for bank-firms to lend to SMEs (see Box 2.7). Across jurisdictions, non-regulatory measures were also put in place as counter-cyclical measures for SME financing.
Box 2.7. Capital requirements and SME financing: the case of the “Supporting factor”
Rising capital requirements in the wake of the crisis sparked fears that banks would be less willing to lend to SMEs. This is why the transposition of Basel III standards into EU law in 2014 saw the introduction of the “Supporting Factor” (SF) – a reduction of capital requirements associated with SME loans by 23.81%. The aim of this measure is to compensate for the loss in credit availability for SMEs, and to provide an incentive for banks to lend to eligible SMEs.
The authors of a recent study find that the SF has been effective in supporting bank lending to SMEs, with increasing strength over time. Comparing a group of firms that were affected by the reform with a group of similar non-affected firms, the authors find that the SF had a significant effect on lending to SMEs. This analysis suggests that capital requirements impact banks’ decision to lend to SMEs.
In addition, the study also indicates that capital requirements for SME lending do not properly reflect their risk, especially at the portfolio level. In particular, SME exposures are either very weakly correlated or even negatively correlated with exposures for large firms. This means that banks with a diversified portfolio including both SME and large business loans are more resilient to economic cycles.
Source: (Dietsch et al., 2019[54]).
Nine years after the initial Basel III package was agreed upon, results of an ongoing evaluation of the effects of reforms on SME financing find that no material and persistent negative effects on SME financing occurred in general, despite some differentiation across jurisdictions.4 Nonetheless, risk-based capital requirements may have temporarily affected growth and tightened the conditions of SME lending in some jurisdictions when considering the most exposed banks (the least capitalised). In addition, financial institutions have appeared to be more conservative in their decisions to grant credit, redirecting activities towards less risky segments (FSB, 2019[55]). This is in line with the observation that, in some jurisdictions, there has been an increase in demand for credit guarantees in recent years because of banks’ stricter capital and reporting requirements (written exchanges with AECM).
It is noteworthy that anecdotal evidence from this evaluation suggests that macroeconomic conditions and factors other than financial regulation are the most important drivers of SME financing trends. In the aftermath of the crisis, public policies put in place and the positive financial conditions such as the low interest rate environment were important confounding factors that might have mitigated some of the negative effects of financial reforms (FSB, 2019[55]).
Furthermore, in addition to international reforms adopted after the crisis, many countries took measures to tighten bank supervision and regulation, and to tackle the fast expansion of non-performing loans. In Spain, for example, this included the creation of FROB (Fund for the Orderly Restructuring of the Banking Sector), which managed the restructuring process of credit institutions in financial distress, the recapitalisation of banks, resulting in some cases in partial or total nationalisation and the creation of asset protection schemes.
The country also took measures to strengthen safeguards to minimise the probability and severity of future financial crises. Notable measures are new capital requirements, requirements to improve credit transaction management policies and to reduce non-performance, increased liquidity risk assessment systems. Additional information requirements were put in place on restructured and refinanced loans, NPLs, asset quality across different parts of loan portfolios, the concentration by sector of portfolios, etc.
Following the recapitalisation of certain banks, Italy also strengthened supervisory controls and introduced new rules concerning bank loans to SMEs. This included the obligation to put reserves aside (reserve requirements), proportional to credit granted to SMEs, and was a direct attempt to tackle non-performing loans.
Regulation of online alternative finance for SMEs
Alternative finance instruments such as factoring, leasing and online alternative finance have shown sustained growth in recent years, often supported by the development of Fintech. In parallel with these evolutions, recent digitalisation dynamics are presenting new opportunities and challenges for SME finance (OECD, 2019[3]). Fintech, defined by the Financial Stability Board (FSB) as “[t]echnology-enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on the provision of financial services” (FSB, 2017[43]), spans a wide range of financial services, including debt and equity instruments.
Developments include online challenger banks, Fintech credit marketplaces, the digital transformation of private equity instruments, the diversification of potential borrowers and the possibilities offered by new data analytics and distributed ledger technologies.
Online alternative finance activity has been increasingly included in SME finance policy initiatives. Fintech presents potential for enhancing SME access to finance, offering more convenient and accessible services, more effective credit risk assessments and lower transaction costs. These instruments can be a unique opportunity for projects that are too small, too risky, or have a social purpose (OECD: SME Ministerial Conference, 2018[30]), and their strong expansion in particular in the early 2010s has prompted regulators to intervene.
Even though the share of firms that turn to online alternative finance remains relatively low in most markets, they have reached critical mass in others, most notably China, the United Kingdom and the United States. Moreover, recent operational failures highlight the challenges for regulators seeking to ensure adequate consumer and investor protection (Claessens et al., 2018[56]). The underlying question is whether intermediation platforms should have to conform to existing financial services regulation, or whether tailored regulation should be promoted (see Box 2.8).
In the context of the exercise to identify Effective Approaches for implementing the G20/OECD High Level Principles, a large majority of countries reported supporting the development of Fintech solutions as a way of increasing SME access to finance (27 out of 38). Regulatory initiatives comprised 19 out of these 27 measures. In addition, platforms to inform and connect SMEs to Fintech companies, workshops and the creation of Fintech association were also mentioned (Koreen, Laboul and Smaini, 2018[4]).
Regulatory efforts focused on this new industry seek to ensure consumer and investor protection, while at the same time taking care not to stifle innovation. For credit Fintech firms, since 2015, a number of countries have created specific regulation and licencing schemes. Brazil, China and Mexico are among the latest adopters. Finland, France, New Zealand, Spain and the United Kingdom also have frameworks in place. In other jurisdictions such as Germany and the United States, Fintech firms work jointly with a commercial bank to provide the loans channelled by the platform. In Brazil, many firms also work under this partnership models, even after regulation was in place allowing them to issue loans from their own balance sheets.
Regulatory sandboxes are a frequently adopted policy response to uncertainty related to innovative financial service providers. As part of these instruments, firms can test services and business models under the financial regulator’s oversight and in a controlled environment. The Global Financial Innovation Network (GFIN) is a network of regulators committed to supporting financial innovation and protecting the interests of consumers. It was formally launched in January 2019 and comprises an international group of 11 coordinating authorities, 20 members and 7 observers among national and subnational authorities as well as international organisations and fora (see Table 3) (Global Financial Innovation Network, 2019[57]).
Beyond aiming to offer a platform for sharing different experiences and approaches, GFIN provides a more efficient way for innovative firms to interact with regulators. A cross-border pilot for firms wishing to test innovative products, services or business models across multiple jurisdictions is in place and 8 firms among 44 applicants were selected. This first cohort will pilot their services in Australia, Bahrain, Bermuda, Canada (British Columbia, Ontario and Québec), Hong Kong (China), Hungary, Kazakhstan (Astana), Lithuania, Singapore, United Arab Emirates (Abu Dhabi, Dubai), United Kingdom, Guernsey and Jersey (Global Financial Innovation Network and Financial Conduct Authority, 2019[58]).
Table 2.3. Global Financial Innovation Network (GFIN) members
Financial authorities’ sandboxes and international fora, as of June 2019
Box 2.8. Regulatory frameworks for Fintech: sandboxing and other measures
Many government programmes aim to support and regulate Fintech at the implementation stage, when ideas are tested on the market (OECD, 2018[59]). Sandboxing offers a regulatory perimeter for innovative business ideas to be tested in a controlled environment. The rationale behind such an approach is to allow for more flexibility and experimentation for innovative (and typically small-scale) financial activities. Certain conditions are imposed on the businesses in order to ensure consumer protection, and consumer feedback (concerning both the business idea and its regulation) is an essential component of this kind of framework.
Apart from the establishment of a regulatory sandbox, flexible regulation may take the form of reduced licencing requirements, like in the Netherlands and the United Kingdom (OECD, 2018[59]). In return, businesses which benefit from these schemes are sometimes obliged to remain under a certain number of customers or certain sales figures, like in Australia (OECD, 2018[59]). Under certain conditions, a business idea that has failed may also be exempt from certain legal requirements. Often, conditions regarding consumer protection are relatively strict, including the designation of a dedicated point of contact or advisor within the business, with whom regulators can remain in dialogue throughout the process.
Conclusions
The decade following the global financial crisis saw pronounced changes in the policy landscape for SME and entrepreneurship finance. Direct lending activities and credit guarantee schemes were often expanded and broadened in its immediate aftermath. The aim was to counter the cyclical impact of the crisis and mitigate potential unintended consequences of tighter bank regulation. As credit conditions eased, these policies were largely maintained and often targeted more explicitly to certain segments of the SME population. SME access to finance became recognised as a continuing policy priority in many countries, as illustrated by the G20/OECD High-Level Principles on SME Financing and the G20 Action Plan on SME Financing, welcomed by G20 Leaders in November 2015.
In more recent years, the focus in many jurisdictions shifted to addressing SME overdependence on traditional bank debt, in order to enhance SME access to the financial instruments most suited to their needs at different stages of their business cycle, and to increase SME resilience in the face of potential future downturns. Programmes to support private equity became the second most common SME finance policy approach among Scoreboard countries.
Immediate post-crisis financial regulation focused on reforming the banking sector in order to contain systemic risk. The widespread adoption of Fintech and online alternative finance instruments in the second half of the decade prompted regulators to change their focus. Tools also evolved from general macro-prudential measures to new regulatory measures such as sandboxing and relaxing licensing schemes.
While many governments have taken action in recent years to harness the potential of financial innovation, further initiatives can be expected, and the next decade may well witness a profound transformation in how many SMEs access finance. In addition, the experience from the financial crisis provide insights for government responses to current and future crises affecting SME access to finance. This includes the economic fallout caused by the outbreak and spread of the coronavirus (COVID-19) in the first half of 2020. This Scoreboard will continue to monitor financing trends and policy developments closely, building on its rich network of experts.
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Notes
← 1. Institutional investors, especially, displayed risk-averse behaviour.
← 2. The G20 Investment and Infrastructure Working Group (IIWG) and the G20 Global Partnership for Financial Inclusion (GPFI) SME finance Sub-group coordinated efforts related to the promotion of SME financing and compiled a set of priority actions, endorsed by G20 leaders in 2015. The actions encompassed priority reforms in financial market infrastructures as well as a continued knowledge agenda that covered data gaps on SME finance data, innovation in SME finance policies and long-term finance instruments for SMEs (GPFI, 2015[67]).
← 3. This data refers to the number of countries in the Scoreboard that declared policies under various categories throughout the Scoreboard editions. The list of countries is presented in the Trends Chapters in each edition. Categories varied slightly over time. The complete list includes: (i) Government loan guarantees; (ii) Special guarantees and loans for start-ups; (iii) Government export guarantees, trade credit; (iv) Government co-financing/Pension fund co-finance; (v) Direct lending to SMEs; (vi) Subsidised interest rates; (vii) Venture capital, equity funding, business angels; (viii) Business angel co-investment (added in 2019); (ix) SME Banks; (x) Business advice, consultancy; (xi) Tax exemptions, deferments; (xii) Credit mediation/Review/Code of Conduct; (xiii) Bank targets for SME lending, negative. Interest rates for Central Bank deposits; (xiv) CB funding to banks dependent on net lending rate.
← 4. The report has been released for consultation from June-August 2019. In November 2019, a final version will be published.