Access to Finance for SMEs involves addressing the barriers and challenges that small and medium-sized enterprises face in securing the resources needed for their growth and development. Despite progress, there is still considerable room for improvement in both the regulatory and institutional frameworks, as well as in the existing sources of financing, financial education programmes, and policies supporting SMEs facing bankruptcy in each LA9 country. This chapter presents the results of the Access to Finance dimension and highlights regional policy recommendations.
SME Policy Index: Latin America and the Caribbean 2024
Towards an Inclusive, Resilient, and Sustainable Recovery
SME Policy Index
5. Dimension 3: Access to Finance
Abstract
Assessment Framework
Access to Finance for SMEs encompasses the barriers and challenges confronted by small and medium-sized enterprises in obtaining resources to facilitate their growth and development. These issues may stem from either supply-side factors, such as transaction costs and information asymmetries, or demand-side constraints, including limitations in entrepreneurs' knowledge and competencies to navigate financial institutions effectively.
Within the index, this dimension analyses the institutional framework supporting SMEs' access to essential financial services, vital for amplifying their productive activities and fostering growth. This entails evaluating the efficacy of public policies and programmes in mitigating barriers and challenges, alongside assessing the collaborative institutional efforts among governments, regulatory bodies, and public and private entities to address both supply and demand aspects of accessing finance.
The significance of this dimension lies in recognising that restrictions in accessing specialised financial products and services tailored for SMEs, coupled with inadequate institutional support, impede the growth of this business sector, which significantly contributes to economies worldwide. The development of these dimensions carries profound implications for productivity, economic expansion, and their downstream effects on poverty alleviation and societal well-being.
To confront the hurdles impeding SMEs' access to finance various elements, such as the design and implementation of policies, regulatory frameworks, and the effectiveness of financial intermediaries in catering to the diverse needs of SMEs across different jurisdictions are considered.
A substantial methodological change has been introduced in this dimension since the previous evaluation. First, the assessment framework for the four sub-dimensions has been enhanced with additional questions, aiming to provide a more detailed assessment. Second, indicators from the World Bank’s Doing Business report, previously used to evaluate creditor rights and credit information bureau, are no longer considered for scoring due to the discontinuation of that exercise. Hence, the Legal, Regulatory and Institutional Framework on Access to Finance sub-dimension has adjusted the scores from the SME Policy Index (SME PI) 2019 to maintain comparability between assessments.
The assessment framework for this dimension comprises (see Figure 3.1):
Legal, Regulatory and Institutional Framework on Access to Finance: This sub-dimension consists of three equally weighted sub-sub-dimensions, each accounting for 33.3%. The first explores banking regulations aimed at facilitating credit access for SMEs. The second, closely linked, examines other areas of the regulatory framework for commercial loans, including the accessibility of tangible and intangible asset registries usable as collateral. The third focuses on the existence of a formal stock market and mechanisms facilitating SMEs' access to these financing channels.
Diversified sources of enterprise finance: This sub-dimension investigates various sources of business financing. It comprises three sub-sub-dimensions.
The first refers to bank loans and traditional banking, carrying a weighting of 65%, and verifies (i) whether traditional banking offers schemes for SMEs for export financing (70%). (ii) the existence and features of credit guarantee schemes mitigating market failures affecting SMEs, particularly collateral shortages (30%).
The second addresses microfinance topics, with a lower weighting of 10% and including, (i) information on the scope of microfinance organisations.
The third deals with alternative sources of business financing, weighing 25% and including (i) the availability of asset-based financing mechanisms like factoring or purchase of orders for SMEs (40%), (ii) crowdfunding mechanisms (30%), (iii) other instruments for capital investments via angel investors and venture capital funds (30%).
Financial Education: This sub-dimension underscores the importance of financial education initiatives equipping entrepreneurs with tools and basic knowledge for sound financial decisions.
Efficient procedures for dealing with bankruptcy: This sub-dimension provides insights into the design and implementation of procedures for handling insolvency and bankruptcy.
Figure 5.1. Assessment framework – Access to Finance
Analysis
In the Access to Finance dimension, the 9 Latin American countries participating in this study (LA9) achieve an overall average score of 3.25 points (see Figure 3.2), indicating that significant room for improvement still exists in both the regulatory and institutional framework, as well as in the existing sources of financing in each country, their financial education programmes, and the programmes and policies addressing SMEs facing bankruptcy. The latter two sub-dimensions score the lowest averages among the LA9 countries at 2.93 and 2.27 points, respectively.
Among LA9 countries, Argentina achieves the highest score of 4.00. Among the other participating countries, Colombia and Chile stand out with the highest scores in this dimension after Argentina (3.40 and 3.34, respectively).
Comparing the averages of the 7 participating countries in 2019 (Argentina, Chile, Colombia, Ecuador, Mexico, Peru, and Uruguay) with the average of these same 7 countries in 2024, there is a general decline in this dimension, dropping from 3.77 in 2019 to an average of 3.26 points in 2024.
Figure 5.2. Weighted scores for Dimension 3: Access to Finance
Note: Scores are on a scale of 1 to 5, with 5 being the highest. The comparison with 2019 is not exact due to changes in the methodology. Please refer to Chapter 2 for further information on the methodology. 2019 data for Brazil and Paraguay are not available as they did not participate in the 2019 assessment.
Sub-dimension 3.1: Legal, regulatory and institutional framework on Access to Finance
The development of the Legal, Regulatory, and Institutional Framework is the sub-dimension achieves the second-highest average score out of the four sub-dimensions evaluated in Access to Finance, with 3.46 points (see Table 3.1).
Table 5.1. Sub-dimension 1: Legal, regulatory and institutional framework on Access to Finance
Note: Scores are on a scale of 1 to 5, with 5 being the highest. 2019 data for Brazil and Paraguay are not available as they did not participate in the 2019 assessment.
One of the biggest barriers preventing SMEs from obtaining commercial bank loans is often the stringent collateral requirements imposed by banks on small and medium-sized entrepreneurs (OECD/CAF, 2019[1]). Regarding the three sub-sub-dimensions analysed in this category, in terms of aspects related to the existence of banking regulations to facilitate access to credit for SMEs, LA9 scores 3.56 points, representing the highest average of the three sub-sub-dimensions evaluated.
On the other hand, one of the most significant obstacles to obtaining commercial loans is the insufficient assets available to serve as collateral in the event of non-payment. Borrowers need access to detailed information about the nature and value of their collateral assets. Moreover, an effective regulatory framework is necessary to facilitate dispute resolution and the recovery of collateral in default situations (OECD/CAF, 2019[1]). The Legal Regulatory Framework for Commercial Lending, especially the existence and accessibility of tangible and intangible asset registers that can be used as collateral for these loans, scores 3.50 points, whit big disparities between countries.
Furthermore, the sub-sub-dimension referring to the presence or conditions for the development of a formal stock market, in terms of assisting SMEs in meeting listing requirements or having a separate section or market for low-cap SMEs, scores 3.33 points. In LA9 all countries have a formal stock market, but only some have a specialised platform for SMEs.
Sub-dimension 3.2: Diversified sources of enterprise finance
The sub-dimension of Diversified sources of enterprise finance evaluates the availability of financial products, including credits from traditional banking, microfinance offerings tailored for SMEs, and alternative sources like venture capital funds or equity instruments. This sub-dimension attained the highest average score with 4.32 points among the LA9 countries, out of the four sub-dimensions considered in the Access to Finance dimension. This suggests a robust framework covering most recommended best practices for accessing financing from diverse sources.
Brazil secured the highest score in this sub-dimension with 4.62 points (see Table 3.2). Argentina and Colombia followed with the next highest scores after Brazil, achieving 4.57 and 4.56 points respectively. On the contrary, Peru, and Paraguay faced greater challenges in improving financing source availability for SMEs, scoring below the LA9 average with 3.24, and 4.15 points respectively.
Table 5.2. Sub-dimension 3.2 scores: Diversified sources of enterprise finance
Note: Scores are on a scale of 1 to 5, with 5 being the highest.
All countries in the region offer banking credits or financial products specifically tailored to support SMEs
The LA9 countries provide a range of banking credits and financial products tailored specifically to support SMEs, featuring various characteristics such as access to subsidised rates, technical assistance, and training programmes. Notable examples include Brazil's Banco Nacional de Desenvolvimento Econômico e Social (National Bank for Economic and Social Development, BNDES), Argentina's Banco de la Nación (National Bank, BNA), Colombia's Bancóldex, and Chile's Banco de Chile and Corporación de Fomento de la Producción (Production Promotion Corporation, CORFO), all of which offer multiple financing options for SMEs and specific credit lines for micro-enterprises.
In addition to regulatory measures and specialised banking products aimed at empowering SMEs, particularly those engaged in exports, credit guarantee systems play a vital role in addressing one of the main hurdles to SMEs' access to credit: the inability to provide collateral in case of default. In this regard, all countries have established guarantee schemes, with Mexico notably implementing a programme of guarantees to Financial Intermediaries Abroad (IFE) through the Banco Nacional de Comercio Exterior (Bancomext). Chile's Export Loan Coverage Programme (COBEX) by CORFO is a noteworthy example, providing guarantees against potential non-payment by SMEs seeking financing specifically for exports. Similarly, Argentina's guarantee fund (FOGAR) offers guarantees to promote and enhance access to financing for entrepreneurs and SMEs.
The implementation mechanisms, private sector involvement, national and sectoral scope, and provision of complementary training and support services vary across LA9 countries
In Brazil and Colombia, members of the private sector have decision-making power as part of the Board of Directors; in Argentina, they do so through an advisory council. Additionally, in Argentina, Brazil, Colombia, Paraguay, and Uruguay, there are no geographical or sectoral restrictions on which companies can benefit from these schemes. Lastly, in countries like Argentina, Brazil, Chile, Colombia, Paraguay, and Peru, public guarantee schemes coexist with other private initiatives that serve similar roles.
The region has a solid framework for the development of microfinance institutions
Ecuador and Colombia have established regulatory and institutional frameworks to foster microfinance activities. Various financial entities operate in this sector, including traditional commercial banks offering products tailored to SMEs, specialised microfinance institutions providing financial services to underserved segments, and local savings and credit cooperatives. However, countries like Paraguay and Uruguay have scored lower, primarily due to deficiencies in their regulatory frameworks for microfinance operations and limitations in deposit mobilisation capabilities.
Alternative financing mechanisms for SMEs have gained increasing relevance alongside the products offered by traditional banking and the microfinance segment in LA9 countries
Among the various sources of financing, notable options include:
ABL, or Asset-Based Lending, referring to any form of loan or liquidity solution secured by a company's assets. This category encompasses solutions such as factoring, a common arrangement where a company sells its invoices or accounts receivable to a third party. Other notable solutions include warehouse receipt financing, which allows the use of goods as collateral; purchase order financing, used to enable companies to process orders they could not fulfill without financing; and leasing, also known as financial leasing, which involves a lease contract allowing the use of assets acquired by a third party for a specified period. In the LA9 countries, a similar level of development is evident for five out of the ten countries with the highest scores. While Chile, Colombia, and Ecuador have utilised and regulated these types of products, further development and depth are needed.
Crowdfunding, standing as an online financing tool enabling diverse users to contribute funds to support specific business ventures or projects. Presently, four primary categories of crowdfunding exist globally: donation-based, reward-based, loan-based, and equity-based crowdfunding. While these financing avenues are accessible across all LA9 countries in the region, their regulatory frameworks differ, influencing the extent to which various crowdfunding categories can develop.
Instruments for equity financing, including i) angel investors - individuals who invest directly in new ventures in exchange for equity ownership; ii) venture capital, that typically acquire minority stakes in high-growth potential companies; and iii) private equity, focused on more established companies and characterised by acquiring majority or even total ownership of these enterprises. According to the findings in this thematic area, these types of financial activities are fully developed and regulated in 6 out of the 9 countries. However, countries like Peru, Paraguay, and Ecuador lack regulation for all these equity instruments.Top of Form
Sub-dimension 3.3: Financial Education
This sub-dimension addresses the policies designed to equip entrepreneurs with the necessary financial and economic planning tools to make informed business and financial decisions conducive to the development and growth of their ventures. Despite its relevance, the average score achieved by the LA9 is 2.93, indicating that there is still much ground to cover for the countries in the region in terms of their financial education policies, particularly those targeting SMEs.
Table 5.3. Sub-dimension 3.3 scores: Financial Education
Note: Scores are on a scale of 1 to 5, with 5 being the highest.
While all LA9 countries have gathered data on the financial literacy of their populations, the majority of these assessments have not specifically targeted the knowledge levels of micro-entrepreneurs.
Between 2012 and 2023, all LA9 countries benefited from CAF’s support in conducting financial capability surveys for individuals using the OECD-established methodology. Local supervisory institutions, such as central banks and regulatory agencies, collaborated in this effort, with one exception: Mexico. In Mexico, the Comisión Nacional Bancaria y de Valores (National Banking and Securities Commission, CNBV) conducts the National Financial Inclusion Survey every three years, incorporating financial education questions in collaboration with the National Institute of Statistics and Geography (INEGI). Additionally, within the framework of OECD's Programme for International Student Assessment (PISA), measurements of financial literacy among school-aged youth (15 years old) have been carried out in Brazil, Chile, and Peru. However, while financial capability surveys primarily target individual financial literacy, they do not specifically address SMEs.
All LA9 countries incorporate financial education and entrepreneurship programmes into their school curricula, while only Mexico, Argentina, Brazil, and Peru have clearly defined monitoring and evaluation indicators for financial education programmes
In Argentina and Peru, financial education and entrepreneurship programmes are integrated into the school curriculum as compulsory subjects, whereas in other LA9 countries, they are included as part of competency-based training. Additionally, government entities across all LA9 countries offer various training programmes on financial decision-making for SMEs. Nevertheless, there are variations in the availability and accessibility of these resources. As well as monitoring and evaluation practices.
Sub-dimension 3.4: Efficient procedures for dealing with bankruptcy
Starting a business is a multifaceted process influenced by numerous variables, many of which are beyond the control of entrepreneurs. Consequently, numerous entrepreneurial ventures fail to establish long-term sustainability. Despite these setbacks, innovative and responsible entrepreneurs should not be deterred from seizing new opportunities to introduce their products and services to the market (OECD/CAF, 2019[1]).
This sub-dimension addresses the regulatory and institutional framework governing insolvency and bankruptcy proceedings, as well as the provision of support for entrepreneurs navigating such situations, enabling them to develop strategies and skills for recovery or initiating new ventures. As of 2019, this remains the most challenging aspect within the Access to Finance dimension across all LA9 countries, with an average score of 2.27 points. Argentina stands out with the highest score of 4.42, while Mexico (2.52) and Colombia (2.40) slightly exceed the average (see Table 3.4).
Table 5.4. Sub-dimension 3.4 scores: Efficient procedures for dealing with bankruptcy
Note: Scores are on a scale of 1 to 5, with 5 being the highest.
LA9 countries need to further develop universally applicable laws based on internationally accepted principles that are applicable to state-owned enterprises
While all LA9 countries have a regulatory framework or other procedures for companies in insolvency. Countries need to enhance universally applicable laws based on internationally accepted principles, particularly for state-owned enterprises. This includes establishing early warning systems for insolvency situations and providing alternatives to bankruptcy, such as out-of-court settlements. Additionally, implementing conciliation and conflict resolution mechanisms and establishing special registries accessible to the public are crucial steps.
Regarding support for entrepreneurs facing business failures, this aspect remains underdeveloped within the sub-dimension. Moreover, the absence of regulations for secured transactions, which could allow for asset recovery after business reorganisation or prioritise payment in case of liquidation, is another critical issue. Lastly, the differential regulatory framework between micro and small enterprises concerning insolvency processes, often favouring smaller enterprises with longer payment terms, remains a pending task across most LA9 countries.
Access to finance for the development of women-owned or led SMEs
Significant gender disparities persist in accessing the financial market in LA9
The latest Global Findex data from the World Bank in 2022 reveals that 77% of men have bank accounts compared to only 69% of women. This means that approximately 102 million women in the region lack access to financial services (World Bank, 2022[2]).
Additionally, the financing gap for SMEs owned by women in Latin America and the Caribbean exceeds USD 92 billion (International Finance Corporation, n.d.[3]), making it the region with the widest gender disparity in financing between businesses led by men and women globally.
Beyond the challenges women encounter in accessing financial services, CAF's financial capability surveys (Auricchio et al., 2022[4]) across various regional countries highlight economic accessibility barriers. These include women's limited autonomy in household financial decisions and reduced job opportunities, largely due to their higher participation in the informal sector and unpaid work. Moreover, women also face physical accessibility challenges such as insecurity and mobility restrictions, along with significant gender disparities in digitalisation. Women exhibit lower ownership rates of mobile phones and internet access, coupled with lower levels of digital literacy.
Furthermore, studies supported by CAF in Chile and Colombia underscore the presence of direct or indirect discrimination within financial institutions, resulting in women's limited access to credit markets. Even when women do access credit, they often do so under less favourable conditions than men, receiving smaller loan amounts and facing higher interest rates, despite exhibiting lower delinquency rates on average (Banca de las Oportunidades, & CAF -development bank of Latin America and the Caribbean, 2024[5]).
Given these challenges, it is crucial to integrate a gender perspective into the formulation of public policies, regulatory frameworks, and financial products. This approach is important to adequately address the needs of women entrepreneurs leading SMEs in the region.
The analysis of the financing access dimension results reveals that, except for Colombia and Ecuador, all LA9 countries have implemented public financial education policies specifically targeting women leading SMEs. Notably, Chile stands out in this aspect by offering an extensive array of financial education programmes through various public institutions. Similarly, all LA9 countries express providing specialised business support services or programmes for women, including avenues for accessing financing and opportunities for internationalisation.
The way forward
Table 5.5. Policy recommendations for Access to Finance
References
[4] Auricchio, B. et al. (2022), Capacidades financieras de las mujeres. Brechas de género en las encuestas de capacidades financieras de CAF: Brasil, Colombia, Ecuador y Perú, https://scioteca.caf.com/handle/123456789/1875.
[5] Banca de las Oportunidades, & CAF -development bank of Latin America and the Caribbean (2024), Estudio experimental de género, https://scioteca.caf.com/handle/123456789/2212.
[3] International Finance Corporation (n.d.), Gender Latin America and the Caribbean, https://www.ifc.org/en/where-we-work/latin-america-and-the-caribbean/gender-lac (accessed on 3 June 2024).
[1] OECD/CAF (2019), Latin America and the Caribbean 2019: Policies for Competitive SMEs in the Pacific Alliance and Participating South American countries, SME Policy Index, OECD Publishing, Paris, https://doi.org/10.1787/d9e1e5f0-en.
[2] World Bank (2022), The Global Findex Database, https://www.worldbank.org/en/publication/globalfindex#sec3 (accessed on 3 June 2024).