From psychometric testing to enabling lenders to use grain as collateral, development banks are finding increasingly novel ways of resolving the perennial problem of how to finance the small and medium enterprises (SMEs) that account for 99% of business and employ 67% of workers in Latin America.
The financing gap for SMEs in Latin America and the Caribbean is between $330bn and $410bn, estimates the IADB. The OECD has repeatedly highlighted their importance, saying SMEs must play a “central role in unleashing Latin America’ growth potential”.
But Francisco Naranjo, CEO of Guatemalan bank Interbanco, says that, in Central America at least, “banks have been lending more to larger companies with a more solid financial situations”.
It is with that in mind that the International Finance Corporation (IFC) is in the final stages of discussions with Interbanco regarding a $10m warehouse finance programme to improve access to finance for small agribusinesses in Guatemala, Honduras and El Salvador.
As these companies do not generally have fixed assets to back the loan, the programme enables them to use grain stored in warehouses as collateral.
And Naranjo said more initiatives of this kind were needed to improve access to credit for SMEs.
It is the first time the IFC will complete a warehouse financing in Central America. Zuberoa Mainz, who works in the trade and supply chain in the IFC, said the deal was a demonstration of an “alternative form of funding SMEs beyond traditional ways of financing”, and that there could be similar agreements to follow.
Nancy Lee, head of the IADB’s Multilateral Investment Fund (MIF), told Emerging Markets that private sector banks are more interested in SMEs than previously, given there is more competition and they can’t rely solely on large clients for their profits.
Gema Sacristan, chief of the financial markets division at the IADB, said one of the key problems for promoting lending to SMEs is helping them to undertake the risk assessment.
On Friday, Brazil’s BDMG became the latest LatAm lender to sign up to a programme to implement psychometric testing of potential SME clients and thus help it carry out risk assessment. The 10 banks to have implemented the testing include BBVA Bancomer in Mexico and Peru’s BanBif.
In 2012, the IADB established a credit facility to help lenders implement the technology, which was developed by Harvard’s Entrepreneurial Finance Lab.
In addition, the IADB will sell Brazilian real denominated bonds so that it can lend to Brazilian companies in local currency – the first time it has done this in Brazil.