1. Improving SME Access to Finance: the Role of Government
Workshop on Improving Access to Finance for SMEs in the Asia-Pacific Region Shanghai, June , 2008
Improving SME Access to Finance: the Role of Government
Qimiao Fan
Lead Economist, The World Bank

2. Outline of the Presentation
Why Is It Difficult for SMEs to Get Finance?
Traditional Government Strategy to SME Finance
What Should Be Done?
The Role of the Government
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WBI Investment Climate Program

3. Why Is It Difficult for SMEs to Get Finance?
A universal problem: small firms are more constrained than large firms:
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WBI Investment Climate Program

4. Why Is It Difficult for SMEs to Get Finance?
Higher risks due to inadequate or lack of credit information on SMEs
Inconsistent SME financial statements and audits
Lack of third party information providers in the marketplace
Higher cost of obtaining credit information on SMEs
Lower quality of credit information
2019/4/21
WBI Investment Climate Program

5. Why Is It Difficult for SMEs to Get Finance?
Higher unit transactions costs, and therefore low profitability, of lending to SMEs
small loan size relative to fixed transactions costs
Higher processing costs per loan and per dollar
Lower profitability per loan and per dollar
Traditional financial institutions not equipped with technology and skills to process SME loans
2019/4/21
WBI Investment Climate Program

6. Why Is It Difficult for SMEs to Get Finance?
Intrinsically higher risk of lending to SMEs
Capital highly liquid – more likely to default
More vulnerable to market changes
Limited or inadequate management capabilities
High “death rates” – average annual closure rate is above 20% in most countries
Imperfections in collateral markets
2019/4/21
WBI Investment Climate Program

7. Why Is It Difficult for SMEs to Get Finance?
Financial sector policy distortions
Interest rate ceilings make it unprofitable to make SME loans
State ownership and segregated markets discourage competition among financial institutions
Poor regulations discourage innovation in new forms of financing
Direct credits to large companies and state-owned enterprises disadvantage SMEs
Weak judicial and legal framework and lack of property rights make secured lending difficult
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8. Traditional Government Strategy to SME Finance
Focusing on bank lending
Directed credit by government to SMEs through banks and other financial institutions
Subsidized interest rates
Portfolio requirements on banks – often supplemented by credit guarantee schemes
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9. Traditional Government Strategy to SME Finance
Achieved little to increase SME access to financial services
Failed to deal with the fundamental problems that make banks reluctant to service SMEs: high transactions costs and high risks
Inhibited the development of sustainable financial institutions
Fostered a nonpayment culture among firms
Created distortions in financial markets
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10. WBI Investment Climate Program
What Should Be Done?
Focuse on reducing risks and transactions costs associated with lending to SMEs
Increase competition in financial markets and strengthens capacity of financial institutions to service smaller clients
Promote profitable and sustainable lending to SMEs
2019/4/21
WBI Investment Climate Program

11. The Role of the Government
Set a sound financial sector policy framework
Liberalizing interest rate regime
Refraining from direct public sector intervention such as directed lending
Fostering competition
Invest in financial infrastructure
Information infrastructure
Legal, judicial and bankruptcy environment
The tax and regulatory environment
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WBI Investment Climate Program

12. The Role of the Government – Information Infrastructure
Accounting
Strong and consistent accounting standards
Credible and independent accounting firms
Credit information sharing
Lowers information asymmetry and allows more efficient credit allocation
Allows lenders to more accurately evaluate risks and improve portfolio quality
Reduces adverse selection problems and lowers costs of credit for good borrowers
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WBI Investment Climate Program

13. The Role of the Government – Information Infrastructure
The role of credit bureaus
They are critical elements of the institutional framework for modern financial system
They provide rapid access to standardized information of potential borrowers
Survey results show availability of credit bureau information reduces loan processing time, costs and default rates by more than 25%
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14. The Role of the Government – Information Infrastructure
An adequate legal and regulatory environment necessary for the operation of credit bureaus
The legal and regulatory environment affects the usefulness of credit reports
An enabling environment encourages information sharing
Balance between protection of privacy and consumer rights is critical
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15. The Role of the Government – The Legal and Judicial Environment
Property rights
Bankruptcy laws and systems
Laws on security interests (collaterals) and secured transactions
Enforcement
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16. The Role of the Government – The Tax and Regulatory Environment
An efficient taxation system that
is stable and transparent
minimizes inconsistent and discretionary interpretations
avoids negative impact on new financing instruments
An enabling regulatory environment that
encourages innovations in new forms of financing
fosters competition in the financial sector
levels playing field for firms of all sizes
2019/4/21
WBI Investment Climate Program