The Multilateral Investment Fund (MIF), the Beyond Banking program of the Structured and Corporate Finance Department (SCF) and the Inter-American Investment Corporation (IIC) together with the Latin American Banking Federation (FELABAN) carried out a survey in 2011 on the predisposition of Latin American and Caribbean banks to finance regional SMEs (small and medium enterprises). The results indicated that the IADB (Inter-American Development Bank) continues to be the most important multilateral financing institution for banks in Latin America and the Caribbean seeking to expand their SME portfolio.

Banks located in Central America and the Caribbean are still benefitting from foreign credit lines as well as funding from international financial institutions

SMEs are positioning themselves as a strategic branch oBanks located in Central America and the Caribbean are still benefiting from foreign credit lines as well as funding from international financial institutions banking operations in Latin America and the Caribbean (LAC), while banks are increasingly pushing for more active policies when it comes to the financing of SMEs. 109 banks from 22 Latin America and Caribbean countries participated in the survey. Three previous surveys were conducted in 2004, 2006 and 2008.

According to the results of the fourth regional study, 73 percent of the banks surveyed expect an increase in their SME portfolio, and 83 percent expects the economic situation of these businesses to improve in the next two years. The banks surveyed indicated that the main motivation behind extending credit to SMEs are higher profits and risk diversification in a segment that is experiencing an economic upturn. The study also shows that banks primarily provide loans to SMEs to finance their working capital.

The survey also highlights that most banks do not take into account the particular industry sector of the SME when weighing their credit decisions In other words, they don’t give priority to any specific sector of the economy. About 90% of the largest banks do not pay attention to the sector, as compared to 61% and 58% of the medium-sized and smaller ones, respectively. The following sectors were evaluated in the study: trade, industry, services, agriculture, and construction, among others.

There are also important regional differences. For example, Central American and Caribbean banks tend not to focus on an exclusive business sector at the time of offering a credit, while South American ones do. According to the study, in the foreseeable future, banks are planning to offer SMEs an average of four different services and products, and in particular credit portfolios.

Weighing Risk

The study also illustrates that banks do take into account three aspects of the SMEs when evaluating credit risks. In the first place, 63% of banks gave “a lot of importance” to bad management or the lack of corporate management. Another important factor taken into account was the informality of corporate management and the lack of financial statements. The third and final factor when evaluating credit risk is the tangible assets of the business owner – 6 out of 10 banks care about it while 5 out of 10 also prioritize the company’s assets-.

On the other hand, since the 2008 report, credit scoring has gained ground with 5 out of 10 banks adding it to their priority list, compared to 3 out of 10 in the previous survey. This method applies a statistical model that assigns a risk score to the probability of default.

Financing

The study found significant differences when it comes to the financing that banks in the region provide. While South American banks tend to rely on their own capital for the financing of SMEs, banks located in Central America and the Caribbean are still benefiting from foreign credit lines as well as funding from international financial institutions. This is a trend that was already described in the 2006 report. In this scenario, the IADB is one of them.