Financing for small businesses

Small and medium enterprises (SME’s) represent a significant share of emerging economies’ business fabric – including that of Guyana and the Caribbean. Nevertheless, they continue to face multiple challenges in meeting their financing needs. While there have not been any definitive studies for Guyana, we most likely match Latin America where SME’s account for nearly 99% of businesses and employ up to 67% of its employees.
Access to finance for Guyanese firms in general is extremely unequal – with the largest business conglomerates owning their own banks. Most small businesses would identify sourcing of finance as a serious restriction on their growth and increased productivity. The gap in funding small businesses might be gleaned from the fact that while total outstanding loans to businesses hover around $100 billion only 3% is covered from the three institutions that cater exclusively to small businesses. There is no reason to believe that SME’s in Guyana receive the 12% share of financing in Latin America – which pales to the 25% in the OECD zone. And this is so even though costs of financing to SME’s are far higher than that to larger businesses.
Because of their financing gap and their consequent low productivity, however, it means that SME’s contribute relatively little to GDP. Many countries have recognised that to push their growth rates they have to get more finances into the hands of SME’s. Public financial institutions have come to play an active role in addressing these financing gaps through new operational mechanisms and adapted instruments. This is especially noticeable in Latin America yet Guyana has resisted the strategy.
The region’s transition from relational banking to multi-service banking explains, in part, some recent developments. Financial innovation and prudential regulation have led to a risk-focused approach, incorporating a standardised screening process for firms. Other drawbacks of relationship lending, such as high mobility costs for companies and hold-up risk, were not overcome by multi-service banking, and in some cases increased these pivotal problems. The results are poor credit risk assessments, less flexible financing schemes, high collateral requirements and higher banking fees for small and medium enterprises.
In addition, small and medium enterprises lack substantial information on financial instruments. This gap between the financial sector and small and medium enterprises has prevented small companies from applying for existing tools and often leads to self-exclusion from the market.
Public financial institutions have become prominent actors in the region to mitigate the financial constraints of small and medium enterprises.
Public financial institutions, which include development banks, public commercial banks and guarantee funds, among others, provide medium- and long-term resources for investment by devising financial instruments and complementing private banks. Public financial institutions in the region have had a sustained annual growth of 15%, tripling their loan portfolio to 600 billion dollars between 2000 and 2009. Even before the financial crisis, their growth was favoured by the lack of interest from private banks and their specialisation in sectors in which private actors lacked experience.
SME financing programmes in public financial institutions are normally run by promotion agencies in co-ordination with development banks, usually based on second-tier systems or mechanisms for channelling direct loans. However, public institutions are diversifying their support systems for SME’s beyond credit, integrating and implementing environmental sustainability and new sectors for long-term industrialisation in areas such as technology, energy, and infrastructure.
For instance, BANCOLDEX, Colombia’s biggest public development bank, has strongly prioritised its SME and micro-lending business lines, focusing on medium- and long-term debt for fixed capital investments. This increased both the average maturity of loans and the bank disbursement to SME’s.
A major obstacle to small and medium enterprise financing, the lack of collateral, has also been the object of public financial institutions’ activities through credit schemes. In recent years, the coverage of national guarantee systems – including public sector participation – has rocketed. The GoG needs to look at this finance gap of SME’s.