About the SME Finance Forum

The SME Finance Forum works to expand access to finance for small and medium enterprises—a critical engine of job
creation in emerging economies.

The Forum brings together financial institutions, technology companies, and development finance institutions to share
knowledge, spur innovation, and promote the growth of SMEs.
Managed by IFC, the SME Finance Forum was established by the G-20 in 2012.

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Table of contents

Foreword...................................................................................................................................... iii

Acknowledgments.......................................................................................................................iv

Acronyms......................................................................................................................................v

Introduction...................................................................................................................................1

Case Studies.................................................................................................................................9

Loan Guarantees.....................................................................................................................11

El Salvador: Loan Guarantee Fund for MSMEs.....................................................................11

Indonesia: Establishment of Regional Credit Guarantee System......................................... 13

Italy: Loan Guarantee Fund for SMEs................................................................................... 17

The Russian Federation: State Program for SME Support................................................... 19

United Kingdom: Enterprise Finance Guarantee.................................................................. 21

Government Funding for SME Finance................................................................................ 23

Swaziland: Access to Finance for Local Indigenous SMEs................................................... 23

The Russian Federation: Federal Law on Microfinance/SMEs............................................. 27

Turkey: Angel Investment Scheme........................................................................................ 31

Turkey: G43 Anatolian Venture Capital Fund........................................................................ 33

Turkey: Istanbul Venture Capital Initiative............................................................................. 35

Turkey: Venture Capital Investments.................................................................................... 37

United Kingdom: Business Finance Partnership................................................................... 39

Regulations Requiring SME Finance................................................................................... 41

Bangladesh: Accelerating SMEs’ Access to Finance through Targeted Lending

With Greater Women’s Participation...................................................................................... 41

India: Policy Initiatives in Cluster Financing.......................................................................... 45

i
Table of Contents

Policies and Infrastructure for SME Finance....................................................................... 49

France/Europe: Improving Financial Infrastructure through a Common

Securitization Vehicle............................................................................................................ 49

Pacific Islands: Pacific Private Sector Development Initiative I............................................. 53

Pacific Islands: Pacific Private Sector Development Initiative II............................................ 57

Peru: Credit Bureau Implementation..................................................................................... 61

Republic of Korea: Improving Women’s Access to Finance Through

Family-Friendly Companies.................................................................................................. 67

Republic of Korea: Win-Win Loan Package.......................................................................... 69

Republic of Korea: Intellectual Property for Secured Loans................................................. 71

The Philippines: Policies to Implement Microfinance Plus.................................................... 73

The Russian Federation: Laws and Regulations for Electronic Means of Payment............. 77

References................................................................................................................................. 79

ii
Foreword

These case studies are the result of a global effort to collect and codify real-life examples of policy interventions and regulatory
changes that promote the growth of small and medium enterprises (SMEs) through improved access to finance.

In aftermath of the financial crisis, the need for policy and regulatory support for SMEs came sharply into focus. Many
countries enacted policy reforms intended to promote SME growth. Yet little was really known about which policy levers are
most effective in different contexts to promote the growth of SMEs.

Even as progress has been made in recent years to identify current gaps and challenges for SME finance, and highlight the
important contribution SMEs must make to new job creation, little solid evidence exists on policy interventions that work. The
Global Partnership for Financial Inclusion (GPFI) SME Sub-group initiated this project to capture successful policy initiatives
from G-20 and other countries in response to that need.

The resulting case studies cover a range of policy interventions from direct funding for SME finance and loan guarantees to help
shore up finance for SMEs, to regulatory reform, and policies and support for infrastructure. They include several innovative
mechanisms for securitization, e-money, mandatory targets, and the collateralization of movable assets and establishment of
effective registries.

We are grateful to the government and non-government officials from G-20 countries and Alliance for Financial Inclusion
(AFI) members who submitted contributions. This report is a tribute to their genuine commitment to learn from one another.

We would particularly like to acknowledge the work of the SME Finance Forum in pulling together, and publishing this report.

We hope that these case studies contribute to global learning on good policy practices in SME finance, and chart a course for
future policy interventions that help SMEs to grow and contribute to economic development.

Susanne Dorasil
Head of Division, Sustainable Economic Policy; Financial Sector, Federal Ministry for Economic Cooperation and
Development (BMZ), Germany

Aysen Kulakoglu
Head of Department, General Directorate of Foreign Economic Relations, Undersecretariat of Treasury, Turkey

In-Chang Song
Director General, Ministry of Strategy and Finance, Korea

iii
Acknowledgments

This report was compiled and published by the SME Finance Forum on behalf of the G-20 Global Partnership for Financial
Inclusion SME Sub-group.

We are grateful to the government and non-government officials from G-20 countries and Alliance for Financial Inclusion
(AFI) members who submitted the case studies.

We would like to thank members of the SME Sub-group for initiating this work, for their guidance throughout, and input on the
resulting studies. In particular, we want to thank the three co-chairs of the SME Sub-group, Susanne Dorasil, Aysen Kulakoglu,
and In-chang Son, for their guidance and valuable inputs throughout the process. Our appreciation goes to all GPFI colleagues,
especially Antonio Desocio, Leyla V. Castillo, Roelof Goosen, Marius Kahl, Daniela Krahl, Aridaman Kumar, Chan Ju Lee,
and Robin Newnham, for their comments and suggestions to improve the publication.

We would like to acknowledge the work of the SME Finance Forum team, Matthew Gamser, Jeanette Thomas, Hourn Thy, and
Robert Vogel, on this report. We also appreciate further review from WBG colleagues Jennifer Chien, Douglas Pearce, Peer
Stein, and Panos Varangis.

iv
Acronyms

ADB Asian Development Bank

BFP Business Finance Partnership (U.K.)

BSP Bangko Sentral ng Pilipinas (The Philippines)

CFCU Central Finance and Contracts Unit (Turkey)

CMAC Municipal Non-Banking Institutions (Peru)

CRAC Rural Non-Banking Institutions (Peru)

EFG Enterprise Finance Guarantee (U.K.)

EIB European Investment Bank Group

EIF European Investment Fund

EMP Electronic Means of Payment (Russian Federation)

ESNI Euro Secured Notes Issuer (France/Europe)

FG Fondo di Garanzia (Italy)

IDB Inter-American Development Bank

IFC International Finance Corporation

IPA Instrument for Pre-Accession Assistance (Turkey)

iVCi Istanbul Venture Capital Initiative (Turkey)

KDB Korea Development Bank

KOBI VCIT Kobi Venture Capital Investment Trust (Turkey)

KOSGEB Small and Medium Enterprise Development Organization (Turkey)

KPO Korea Patent Office

MFO Microfinance Organizations (Russian Federation)

MSME Micro, Small, and Medium Enterprise

v
Acronyms

NBFI Nonbank Financial Institutions

NBG National Bank of Greece Group

NGO Nongovernmental Organization

OJSC Open Joint-Stock Company (Russian Federation)

PPKD Credit Guarantee Corporations (Indonesia)

RCC Consolidated Credit Report (Peru)

RCD Debtors Credit Report (Peru)

RCO Credit Report by Operations (Peru)

SBS Superintendency of Banking, Insurance and Pension Funds of Peru

SCA Swazi Commercial Amadoda (Swaziland)

SCB Scheduled Commercial Banks (India)

SFLG Small Firms Loan Guarantee (U.K.)

SIDC Swaziland Industrial Development Company

SLBC State Level Bankers Committee (India)

SME Small and Medium Enterprise

SMESPD SME & Special Programmes Department (Bangladesh)

SPV Special Purpose Vehicle

TKB Development Bank of Turkey

TTGV Technology Development Foundation of Turkey

UNIDO United Nations Industrial Development Organization

vi
Introduction

In the last few years, there has been growing recognition enterprise, complicated and time-consuming procedures
of the importance of small and medium enterprises (SMEs) to complete the process, as well as taxes that registered
for job creation and economic development, not just in businesses are required to pay, and stricter labor regulations
emerging economies but in developed countries as well. The may all hold back informal businesses from registering. Yet,
impact of the financial crisis that began in 2008 highlighted measures to simplify business registration and reduce such
the importance of access to finance for the SME sector as costs have shown little impact. Paying firms to register has
particularly in need of attention.1 Notwithstanding this not worked either. Further research is needed to find out how
increase in interest, there is still limited information available to get businesses to register.4
on best practices to support SMEs, particularly on effective
policy tools to support SME access to finance. Other barriers to SME growth that are particularly acute
in developing countries include a lack of infrastructure for
Research conducted under the aegis of the G-20 Global finance and, on the lender side, a lack of good data to enable
Partnership for Financial Inclusion (GPFI), IFC, and others effective risk management. To overcome these problems,
during the last four years points to some clear findings.2 regulatory reforms to support an enabling environment and
SMEs are critical for job growth, but the level of growth strengthening financial infrastructure are critical. In addition,
depends significantly on SME access to finance, and on the public programs and private initiatives specifically tailored
so-called “gazelles,” the fast-growing SMEs that produce for SMEs (e.g., enabling the use of collateral through both
the majority of new jobs. laws and registries) are needed.

SMEs themselves report lack of access to finance to be one In that context, the GPFI SME Finance sub-group called
of the greatest barriers to their growth. Half of SMEs in attention in 2013 to the importance of policy and regulatory
emerging markets are credit constrained. Seventy percent support, especially for financial markets infrastructure
of micro, small, and medium enterprises (MSMEs) have development and for innovations involving data-driven
no access to external finance, and another 15 percent are approaches for SME finance.5 The sub-group determined
under-financed. All this adds up to an estimated credit that a set of case studies of successful policy initiatives
gap of US$3.2-US$3.9 trillion (US$2.1-US$2.6 trillion in from G-20 and other countries was needed that could inspire
emerging markets).3 further reforms.

Informality also hinders SME growth. But there are few The resulting case studies presented here are intended to
examples of effective incentives for informal businesses promote the wider adoption of good policy practices in
to formalize. Lack of information on how to register an SME finance. They capture the strengths and weaknesses of

1. The recent crisis also made access to finance more difficult because of increased risk concerns, especially for SMEs, with certain government
policies tending to have negative impacts (BASEL II/III norms for credit risk restricting SMEs and with banks becoming more restrictive even
ahead of BASEL timetables).
2. See, for example: IFC, Scaling-Up SME Access to Financial Services in the Developing World, 2010; IFC, SME Finance Policy Guide,
2010; IFC, Strengthening Access to Finance for Women-Owned SMEs in Developing Countries, 2011; IFC, Scaling Up Access to Finance for
Agricultural SMEs: Policy Review and Recommendations, 2011; and GPFI/IFC, Small and Medium Enterprise Finance: New Findings, Trends
and G-20/Global Partnership for Financial Inclusion Progress, 2013.
3. IFC/McKinsey & Company, Two Trillion and Counting: Assessing the Credit Gap for Formal and Informal SMEs, 2013, p. 3.
4. IFC, Closing the Credit Gap for Formal and Informal Micro, Small and Medium Enterprises, 2013.
5. GPFI/IFC, Small and Medium Enterprise Finance: New Findings, Trends and G-20/Global Partnership for Financial Inclusion Progress, 2013.

1
Enhancing SME Access to Finance – Case Studies

current and on-going policy initiatives and, since high-level a committee whose members include representatives from
government officials mainly submitted them, often reflect firms and bank associations.
the reality of implementing initiatives that involve interested
parties in the private sector and a range of government The maximum amount guaranteed by the fund for a
entities. single borrower is less than US$3.3 million, and the
guarantee covers a maximum of 80 percent of the loan.
The case studies have been grouped along four main types of The characteristics of the loan (interest rate or duration)
policy intervention: Loan Guarantees for SMEs; Government are settled between the bank and borrower. Application
Funding for SME Finance; Regulations Requiring SME procedures are quite cumbersome, notwithstanding the use
Finance; and Policies and Infrastructure for SME Finance. of a scoring system. To investigate the impact of the fund,
the Bank of Italy conducted an external evaluation, which
found that the guarantee fund has a positive impact on
Loan Guarantees for SMEs the volume of bank loans and even a slight impact on
interest rates.
In the 20-plus case studies submitted by AFI and G-20
countries, loan guarantees are one of the two most frequent In the case of El Salvador, loan guarantees existed but were
types of interventions, but there are many different varieties not taken seriously because of a lack of adequate funding
of loan guarantees. In Indonesia, for example, loan guarantees to pay guarantees, the lack of laws to deal with movable
are seen primarily as substitutes for limited collateral and as collateral, and haphazard operations such as lengthy delays
tools to mitigate credit risk, and guarantee entities are created in guarantee processing. However, the financial crisis
at regional levels by provincial governments after sufficient beginning in 2008 and the acquisition of several important
interest has been mobilized to initiate them. In fact, even local banks by foreign banks made access to credit much
with laws and regulations in place, promoting interest and more difficult for SMEs, especially for those SMEs that had
coordination among stakeholders has been a major challenge, not formalized. Given this situation, government entities
requiring workshops and other means of disseminating responded, with BANDESAL (a government development
information and facilitating discussion. In addition, initial bank) and the Central Bank coming together, and with
capital has to be provided by provincial governments, so support from a new law on guarantees passed by the
that they must be convinced that the guarantee entities can Legislative Assembly, to help overcome the difficulties that
operate in a sustainable manner. Bankers must also see them SMEs were experiencing by offering an apparently highly
as useful tools for reducing risk. effective loan guarantee program.

As of 2014, only eight of Indonesia’s 34 provinces have them, The resulting major improvements in program operations
but another four are approved, and 10 more are in process of (e.g., in transparency and speed in the processing of claims,
getting approval by their local governments. Nonetheless, together with a model to estimate risks and expected loses)
from 2010 to the end of 2013, more than 53,000 MSMEs led to a quick response with 4,117 guarantees for US$18.8
have been reached with guaranteed loans amounting to million covering loans totalling US$32.4 million by June
US$101 million and guarantee coverage reaching US$85 2013, increasing to 10,087 guarantees for US$42.2 million
million – and with credit, amounts guaranteed, numbers of covering loans totalling US$74.4 million by April 2014.
borrowers and employment generated all increasing by at With this rapid increase, an average loan size of somewhat
least a factor of four from 2010 to 2013. over US$7,000 and an average guarantee of slightly over
US$4,000 the guarantee program not only indicates its
The loan guarantee example from Italy, where the initial success but also a focus on SMEs and a reasonable
government’s loan guarantee entity was created in 2000, only distribution of risks. Of course, given the very recent
became important with the onset of the financial crisis in initiation of this new loan guarantee program it is not yet
2008. In fact, only US$15 billion of guarantees were created possible to assess losses rates.
from 2000 through 2008, but US$55 billion from 2009
through 2013, with more than 77,000 loans to more than The central government of the Russian Federation has
51,000 firms guaranteed in 2013 alone. The loan guarantee supplied capital to regional guarantee funds in 80 provinces
entity was created for the usual reasons that SMEs lack both that has enabled them to provide support for SMEs,
collateral and adequate financial statements. While it is under guaranteeing up to 70 percent of an SME’s liabilities. The
Italy’s Ministry of Economic Development, it is managed by total capitalization of these guarantee funds reached US$1.2

2
 Introduction

billion as of the beginning of 2014, and with this it has issued these operations have been active, US$2.2 billion has
over 39,000 guarantees for a total of US$3.6 billion, thereby been made available to 32 mid-sized businesses, of which
attracting over US$7.7 billion in loans for these SMEs. In US$410 million was supplied by the U.K. government and
2013 alone, more than 7,000 guarantees were provided the remainder by the private sector.
to SMEs for US$.9 billion, which supported more than
US$2 billion in loans. The Russian Ministry of Economic Turkey has four separate government investment operations
Development rates the efficiency of these regional funds by that provide funding for SMEs. The first, called the “Angel
the ratio of capital to the amount of loan guarantees and, Investment Scheme,” is designed to provide financing and
while the average is 3, more than 10 regional funds have technical assistance for small, start-up SMEs that lack
multipliers for loans that are between 5 and 7 times capital. adequate collateral and also need help with the essentials
of good business practices. The Turkish Treasury, with the
As in various other countries, the Enterprise Finance undersecretary in charge, offers tax incentives for angel
Guarantee (EFG) in the United Kingdom was established in investors (75 percent of the amount invested can be deducted
2009 in response to the financial crisis that began in 2008, from taxes, and up to 100 percent in the case of SMEs that
with a focus on SMEs that had adequate cash flows but lacked are involved in government-supported technical projects).
adequate security. The guarantee process is totally driven by Angel investors can own up to 50 percent of the shares in the
lenders, with the government having no role in the decision- SME, with the shares held for at least two years, and are also
making process and providing only the financial backing. expected to provide technical assistance to their SMEs. The
Guarantees are for 75 percent of the value of the loan, with minimum amount to be invested is just under US$10,000,
lenders required to undertake all collection procedures, while the maximum is just over US$475,000. During the
including the realization of security, before turning to the first year of the program, 182 business angels have been
EFG for reimbursement. Because of the earlier existence licensed and several networks of angel investors are also
of a similar loan guarantee system and the beginning of the being added to the program. This fairly rapid start-up can be
financial crisis in 2008, there was no opposition to the EFG attributed to efforts to mobilize supporters, in both the public
and start-up was very quick, with just three months between and private sectors, with the enabling legislation also being
the idea and its operational realization. Between 2009 and prepared with similar support. During just the first year of the
late 2013 some 20,000 businesses accessed more the US$3.3 program, there have been five angel investments for slightly
billion in guarantees. An external assessment conducted by under US$850,000 and for an average of about US$170,000,
Durham University Business School in 2013 was highly with others currently being assessed for support.
favorable.6
The second Turkish program is a venture capital fund for
the 43 provinces of Anatolia, funded primarily by EU’s
Government Funding for SME Finance Instrument for Pre-Accession Assistance (IPA), with the
collaboration of two Turkish government agencies, the
Direct financing of SMEs has also been undertaken in
Ministry of Science, Industry, and Technology as the
several countries, including the United Kingdom, Turkey,
operating structure, and the Small and Medium Enterprises
Russia, and Tanzania, but in quite different ways. In the
Development Organization (KOSGEB) as the recipient
United Kingdom, the Business Finance Partnership (BFP)
of assistance. The European Investment Fund (EIF) is the
has mainly helped medium-sized firms that do not have easy
trustee administrator for the EIF-IPA Commitment. An
access to capital markets, but doing so on fully commercial
initial agreement was signed in August 2011, with a further
terms and in conjunction with the private sector. Although
agreement in December, and operations starting at the end
most businesses had hoped for quick access to funding, the
of 2013. The fund manager and the Istanbul Venture Capital
usual time period for processing has been rather long, 12
Initiative (iVCi) are also investors in the fund. Although
to 18 months. On the other hand, while BFP funds could
research for investments in SMEs has started, no funds have
be made available up to 50 percent of the total amount
as yet been disbursed.
requested, the average amount supplied with BFP funds
was actually only about 20 percent because private funders
found collaboration quite attractive. In the two years that

6. [Link]

3
Enhancing SME Access to Finance – Case Studies

The third Turkish program, the KOBI Venture Capital charge, the Ministry of Economic Development, supports
Investment Trust, began operations in 2006 with three only MFOs whose founders are regional or municipal
main partners, including both the public and private sectors government bodies and provides them with funds for on-
(KOSGEB, TOBB, and Halkbank), with the purpose lending to clients. Clients receive loans from these MFOs on
of investing in local SMEs that show high potential for quite favorable terms, mainly at interest rates of 10 percent,
innovation. In providing both financial and managerial but limited to 12 months duration. Beginning in 2005,
support to qualifying SMEs, KOBI’s investments are government funding was only US$.85 million for use in 16
limited to 49 percent of the SME’s capital and can range regions, but had increased to US$72.4 million in 35 regions
from US$250,000 up to US$1 million, depending mainly by 2013. At the end of 2013, there were 3,860 MFOs, but
on the wide range of business types supported. Potential only the 130 governmental MFOs receive government
investments are based on a detailed list of specific criteria funding. Some 58 percent of MFO loan portfolios now go
and also include a position on the SME’s managerial board. to SMEs, with an average loan size of just over US$16,000.
Thus, after the investment is made, KOBI remains highly Overdue percentages on loans from government MFOs
involved: preparing and implementing business plans, amount to just 6.4 percent, as compared to 7.1 percent for
carefully measuring both targets and accomplishments and, MFOs overall.
at times, even in day-to-day operations. Given this extreme
care, investing in only 10 of 2,124 applicants, it is not The second program included in this case is carried out by the
surprising that these 10 businesses are all highly successful, OJSC “SME Bank,” which evolved in 2011 from an earlier
with sales and profits increasing every year in virtually every government banking entity. The OJSC “SME Bank” provides
case, and their excellent growth often requiring substantial funding for a range of entities and activities including private
additional investments. and government banks, leasing and factoring companies,
and both MFOs and MFIs. It operates in 82 regions, working
The fourth Turkish program, the Istanbul Venture Capital with 134 partner banks and with 150 other types of financial
Initiative (iVCi), established in 2007, is also partly funded entities, and with a particular focus on SMEs that are in the
by the EU through its European Investment Fund, along manufacturing sector, are innovation driven, or in regions
with the National Bank of Greece Group (NBG), Garanti with difficult socio-economic situations. By early 2014,
Bank, and various Turkish government entities, including funding provided to SMEs by the OJSC “SME Bank” had
KOSGEB, the Technology Development Foundation of reached over US$2.7 billion and, unlike the other program,
Turkey (TTGV) and the Development Bank of Turkey has a focus on longer-term loans of one to two years
(TKB). The iVCi invests for a long time horizon, six to (48 percent) and on more than two years (50 percent), and
10 years, and in private equity and venture capital funds, as with interest rates around 15 percent rather than at the market
well as directly, along with other funds, in SMEs. As of the rate for SMEs of over 20 percent.
end of March 2014, it had invested over US$95 million, with
commitments of over US$195 million. As a “fund of funds,” The only case from Africa is from Swaziland and also
iVCi believes that its main contribution has been to stimulate involves the financing of SMEs. Although the main
the development of various other funds by demonstrating governmental entity involved is called the Micro Finance
what can be done directly, as well as by investing in other Unit, the main focus of the program is SMEs, which are seen
funds. Fourteen SMEs had benefited directly from iVCi in general to have difficulty in accessing bank credit in spite
investments as of the end of March 2014, with 25 percent of of excess liquidity in local banks. The Swaziland Industrial
its investments ultimately going to SMEs. Development Company (SIDC), the country’s development
finance institution (DFI), implements the program, which
In addition to the case study on loan guarantees discussed is based on a facility of US$1 million. However, the SIDC
above, Russia has also provided two examples of direct has had some administrative challenges due to the range and
financing for SMEs in a single case study. The first of volume of requests for funding without any standardized
these is based on the law “On Microfinance,” but where format. As a result, standards were subsequently introduced,
microfinance also includes both SME and consumer loans, including financial modelling to test for feasibility and
with an upper limit on loan size of just over US$30,000. Two various measures of risk, along with mentoring for potential
types of entities are involved, Microfinance Organizations SME clients that enabled some of them to produce basic
(MFOs), which include both government organizations and business plans. The average loan size requested was only
private entities, and credit cooperatives, which are called about US$5,000, but many of the smaller businesses could
Microfinance Institutions (MFIs). The government entity in not present the needed information, so that the average loan

4
 Introduction

granted was about US$33,000, with only 56 percent of the Goals for SME finance were set initially in 2010 and have
funds available being lent and just to 17 SMEs. An important been increased significantly each year so that they have more
challenge, which is beginning to be met, is to convince than doubled by 2014, with achievement ratios of at least
more of the applicants that presenting a loan request is a 115 percent (except for 2011 when it was only 94 percent).
serious activity. In addition, the SIDC is encouraging the Rural lending has increased impressively, attributed to
development of better information and more appropriate the focus on smaller SMEs, as well as on the rural areas
loan products (e.g., involving value chains and invoice themselves. However, notwithstanding special attention
financing). to the barriers facing women entrepreneurs and, even with
significant increases in SME loans to women, these have not
yet surpassed 4 percent of total SME lending.
Cases Involving Policies and
Infrastructure in Support of SME Finance The SME case study from India also provides an example
of targeting, but of a rather different type, indicating first
Given the significant involvement of government officials in
a requirement that every village with more than 2,000
the production of case studies, including especially central
inhabitants is to have a bank branch of some type. Moreover,
bankers and other regulators of financial entities, and given
to overcome the major barrier to financial services for SMEs,
that all the remaining cases provide examples of initiatives
seen to be mainly credit risks due to lack of information,
in areas of policy and infrastructure, it is perhaps somewhat
government policy makers have decided that policy must
surprising that there are no cases that deal directly with the
involve compulsion, specifically targeting “clusters” of
traditional regulatory issues of risk and risk management,
enterprises in contiguous areas producing similar products
with Basel initiatives rarely mentioned. In fact, some cases
or services.
that involve financial policies to promote SME finance are
focused on requiring lenders to provide financial services
The Reserve Bank of India has taken the lead in this,
to SMEs.
instructing the State Level Bankers Committees (SLBCs)
to focus primarily on the 388 clusters identified by the
Required Lending Targeted to SMEs United Nations, supplemented by a focus on 121 “Minority
Concentration Districts,” areas with difficulties designated
Targeted lending to SMEs is a policy approach that has by Indian government agencies. As part of the promotion of
been used in some countries, Bangladesh in particular, this approach, SLBC member banks are required to display
where government officials were concerned that SMEs lists of these clusters on their websites, as well as maintain
were receiving only a small share of credit relative to their specialized branches and have specially trained personnel. In
importance in the economy. After listing a variety of barriers addition, regional offices of the Reserve Bank of India are to
to SME finance, policy makers decided to adopt a system hold promotional meetings in cluster areas, especially those
where banks and nonbank financial institutions (NBFIs) that are under-banked. The results of all this as monitored
would participate in establishing annual targets for loan by the Reserve Bank of India is showing positive results, as
disbursements to SMEs, of which at least 40 percent would the numbers of branches and numbers of loan accounts at
go to small enterprises, and women would also be favored. both public and private banks have increased substantially
Achievement of these targets by banks and NBFIs would from 2011 to 2013, and the amounts lent even more so, from
influence the licensing of their branches and determination US$30.5 billion in 2011 to US$44.8 billion in 2013.
of their CAMELS ratings.

Banks and NBFIs also participate in high-level discussions

Innovative SME Case Studies Involving
with Central Bank officials to see the benefits from
Policies and Infrastructure
establishing units dedicated to SME finance and their Korea has presented an innovative case study, which falls in
profitability, while receiving funding support. In addition, the category of “removing barriers to women entrepreneurs’
the Central Bank organized activities to encourage the access to finance,” and which is called “Certification
participation of nonfinancial entities in supporting SMEs and of Family-Friendly Companies,” but which may in fact
has also obtained support in this from various international have wider applications. A scoring system for the “family
development agencies. friendliness” of SMEs has been created, which includes
such variables as flexible work hours, support programs for

5
Enhancing SME Access to Finance – Case Studies

child birth, child care and education, as well as support for raised US$90 million in 2013 to invest in IP, and, as of
dependent family members and even for employees. April 2014, 10 companies had already received investments
of US$46 million. Furthermore, the largest company with
The Ministry of Gender Equality and Family is in charge expertise in IP not only promises to purchase secured IP but
of certifications and, in addition to SMEs, public agencies also to respond to patent-related lawsuits filed by foreign
and local government are eligible to participate, with SMEs companies, with the development of a valuation model for
accounting for over one-third of participants. SMEs with such IP remaining the main challenge for promotion of a
scores exceeding a certain level can receive benefits from market.
various government agencies including: subsidized interest
rates for accident prevention and procurement of equipment;
special offers of loans for SMEs; a discount for the fee Securitization of Movable Assets and
for a technical evaluation; expansion of guarantee limits; Reducing Barriers to Formalization
and lower interest rate loans from two commercial banks.
Another case study that falls in the area of improving of
The program was initiated in 2008, with an increase in its
“collateralization of movable assets and the establishment
annual operating budget for 2014, which covers promotional
of effective registries,” can be of particular interest for two
activities and various fees, to over US$1.1 billion. In a
reasons: the case is from two small islands in the Pacific,
recent evaluation by an independent agency, “Certified
thereby showing that even small countries can move
Family-Friendly Companies” showed superior performance
forward; and it also demonstrates how both collateralization
to uncertified companies in several areas, including growth
and registries are essential for success. SMEs in these islands
and profitability, as well as improvements in debt ratios and
found it virtually impossible to access bank credit without
capital adequacy.
fixed property as collateral, and the process of reform was
not simple as it required both economic and legal analysis
A second innovative case study from Korea, called the
as well as convincing a variety of participants of the value
“Win-Win Package Loan,” falls into the category of “the
of these reforms.
use of marketing channels to provide financing” and was
introduced in 2010. It allows SMEs to draw on the “financial
Developing an efficient legal basis for using movable
creditability” of the larger firms they deal with (as suppliers
property as collateral required completely new legislation,
in particular) and thereby to secure better credit terms.
as the existing framework was not only costly but also
Typically the larger firm takes charge of fund raising and
not fully secure. On the other hand, replacing the existing
arranges for the partnering SME to obtain credit from the
physical registries with online ones was primarily a matter
lending financial institution at a lower interest rate, as
of taking advantage of new electronic technologies, which
accounts receivable essentially become collateral. In 2013,
now provide both public notice and a priority date. Results
the amount of such loans had already reached US$.32
have shown impressive increases in the use of registries for
billion, with 355 large firms having signed agreements with
both filings and searches on security interests, especially
partnering SMEs.
in Vanuatu but also in the Solomon Islands. The access
of women-owned SMEs to bank credit appears to have
A third innovative case study from Korea also involves
improved, but access in rural areas has not yet increased
collateral and falls closest to the category of “the
significantly in either country. Although there is now a wide
securitization of moveable assets,” although in this case the
consensus on the value of these reforms, and especially their
assets are intellectual property rights (IP) held by an SME.
use by NBFIs, commercial banks have still tended to require
These assets are property rights recognized by the relevant
land as collateral, with much higher rates of nonperforming
legislation as “patent rights, trademark rights, design rights
loans resulting–and with a further challenge to increase the
and copyright.” The IP secured loan was introduced only
awareness of the potential value of these reforms among
recently, in September 2013, with the process of evaluating
SMEs.
the IP developed by the Korea Intellectual Property Office,
plus the formation of a fund to facilitate investments in and
A parallel case study emerges from two Pacific Island
collection of IP secured loans with support from the Korea
countries (the Solomon Islands and Samoa) on “reducing
Development Bank and the Korea Patent Office. By the
the barriers to finance that the lack of formalization creates,”
end of 2013, fifteen companies had already benefited from
which shows how the inconveniences and high costs of
such loans, with an amount outstanding equal to US$15.4
registration of an SME (or any business) can be overcome.
million. In addition, another IP Fund has been created that

6
 Introduction

Again, success required the involvement of both lawyers Ongoing Improvements in Data for
and economists, as well as bringing together interested Risk Management that Can Help SMEs
parties to mobilize support, and to recognize clearly the
unnecessary legal complexities and other delays, including Another case study also focuses on improved infrastructure
even a required trip to the capital city to register, all of which for SME finance, but in an entirely different aspect:
favored informality. “enhancing the credit report system, enabling better access
to micro, small and medium enterprises (MSMEs) financial
The new Companies Act that was adopted includes a model information.” In 1997 the Peruvian Superintendency of
set of rules that a company can easily adopt for registration, Banking began a long series of changes that made credit
but which can also include innovative company structures, bureaus there far more effective in reducing risks and costs
while registration itself can be done online. As a result, the in lending, and to MSMEs in particular. The two most
numbers of new registrations increased dramatically in the important initial changes were the inclusion of all loans, not
two countries, first in the Solomon Island and somewhat just large loans, in the required information and the extension
later in Samoa. Furthermore, the standardized information in of coverage to a range of nonbank entities (municipal banks,
these online registrations can readily be accessed by banks rural banks, and micro and SME developmental lenders).
and other potential lenders, thereby providing important
information for lending decisions and thus significantly By 2001 further important changes had been made,
reducing such costs–while also allowing other legitimately including especially the availability of this information to
interested parties to obtain information. private credit bureaus and the inclusion of an even wider
range of debts and, most importantly in 2004, the disclosure
France provides another case study that involves of positive as well as negative information. For lending
securitization in order to increase SME access to finance. to MSMEs, this has meant far lower costs and better risk
This case involves major participation by France’s Central management. In 2001 there were 1.2 million clients with
Bank, which plays an especially important role by providing debts under US$5,000 who had no credit records previous
credit assessments of companies, noting that SMEs have to that date. By the end of 2013, there were 4.4 million.
been a resilient source of collateral for credit operations These changes also led to a more competitive market and
with central banks even during the crisis. In fact, SME a significant decrease in interest rates. Of course, there are
credit qualifications are validated by the Central Bank, challenges that remain such as the technical demands of
which has an internal credit assessment system that covers handling increasing amounts of data, the need to continue
some 300,000 companies, so that these debts can readily be improving timeliness of data and maintaining its quality,
securitized as “Euro Secured Note Issues” (ESNI) and thus as well as the fact that neither credit unions nor nonprofit
provide a source of liquidity for banks that lend to SMEs. entities are as yet required to participate, although some of
them already voluntarily provide information.
Widespread support is indicated by the number of banking
and professional entities involved, as well as representatives
of regulatory and supervisory agencies, such that the Attempts to Introduce E-Money that
process of design and implementation could be completed Could Help SMEs, Especially in
in one year, with existing standard legal frameworks for Rural Areas
securitization and collateral already being used. In fact, A third Russian case study has a totally different focus:
the first issuance of ESNI securities took place in April the use of electronic payment systems, which is based on a
2014 for some US$3.5 billion. Furthermore, given such law adopted quite recently in 2011. Although this law with
standardization, costs to both public agencies and the private its accompanying regulations was fully supported by the
sector have been negligible, nor would it be costly to extend Central Bank, the legislature, and the private sector as an
to other jurisdictions. In addition, because of the credibility important innovation, there has been little implementation as
of the parties involved and the simplicity of instrument, the yet. The lack of use appears to be mainly a result of concerns
involvement of credit bureaus or other rating agencies has about some of the regulations initially put in place that are
not been seen as necessary. seen to be unnecessarily restrictive, so that businesses do not
see the value of using the electronic payment system as it
currently exists.

7
Enhancing SME Access to Finance – Case Studies

Moving into SME Space Requires More Summary and Conclusion

Than Just Success in Microfinance
Following the financial crisis that began in 2008, many
Based on its significant success in microfinance, the governments turned to what seemed likely to have the
Philippines has made efforts to move up-market into SME most direct and immediate impact: loan guarantees and
finance, clearly recognizing the existence of a “missing direct infusions of funds for lending to SMEs. Thus, a
middle” and the need to overcome this as a major part of its substantial number of the present case studies focus on
financial inclusion goals. But this has been less than fully such interventions. Nonetheless, a significant number of
successful as this case study shows. After initiating its efforts the current case studies take a longer-run view and focus on
in microfinance in 2001, by 2002 119 banks were already financial infrastructure or policies that can promote lending
engaged in microfinance, lending to over 390,000 micro- to SMEs, even though such new infrastructure and policies
borrowers some US$57 million. Moreover, by the end of may take more time to put in place and then to have an
2013 there were 182 banks participating and reaching over a impact on SME access to financial services.
million clients with about US$200 million in loans. On the
other hand, its SME lending, which is called “Microfinance Among the impressive efforts described in the case studies
Plus” and allows loans twice as large (PhP300,000 rather are the development of credit bureaus that can help to
than the limit of PhP150, 000 on microloans), had only 20 measure the likely risks of lending to specific SMEs, or
banks offering Microfinance Plus loans by the end of 2013, improving the collateralization process that can reduce
reaching just 6,000 clients with only about US$2.5 million in risks through improved laws and registries. Some of these
loans. Philippines officials state that they hope that ongoing innovative cases involve using intellectual property rights
work toward the establishment of a comprehensive credit as collateral or formalizing the debts that arise in marketing
information system and a collateral registry may eventually chains as collateral to reduce the risks in lending to the
enable banks to ascertain the creditworthiness of potential smaller participants. Another case study describes a highly
SMEs. innovative program that rewards SMEs that give better
treatment to women and other family members and even to
employees, which then show better growth, profitability, and
improvements in debt ratios and capital adequacy. Finally,
one case even reveals the need to “do something more for
SMEs” through improved policies and infrastructure--in this
case simply allowing even highly successful micro-lenders
to move “up-market” to SMEs—has so far led to little lender
participation or added finance for SMEs.

8
 Case Studies
Loan Guarantees Regulations Requiring SME Finance
El Salvador: Loan Guarantee Fund for MSMEs Bangladesh: Accelerating SMEs’ Access to Finance
through Targeted Lending With Greater Women’s
Indonesia: Establishment of Regional Credit Participation
Guarantee System
India: Policy Initiatives in Cluster Financing
Italy: Loan Guarantee Fund for SMEs
The Russian Federation: State Program for Policies and Infrastructure for SME Finance
SME Support
France/Europe: Improving Financial Infrastructure .
United Kingdom: Enterprise Finance Guarantee through a Common Securitization Vehicle
Pacific Islands: Pacific Private Sector Development
Government Funding for SME Finance Initiative I
Swaziland: Access to Finance for Local Pacific Islands: Pacific Private Sector Development
Indigenous SMEs Initiative II
The Russian Federation: Federal Law on Peru: Credit Bureau Implementation
Microfinance/SMEs
Republic of Korea: Improving Women’s Access to
Turkey: Angel Investment Scheme Finance Through Family-Friendly Companies
Turkey: G43 Anatolian Venture Capital Fund Republic of Korea: Win-Win Loan Package
Turkey: Istanbul Venture Capital Initiative Republic of Korea: Intellectual Property for
Turkey: Venture Capital Investments Secured Loans

United Kingdom: Business Finance Partnership The Philippines: Policies to Implement

Microfinance Plus
The Russian Federation: Laws and Regulations
for Electronic Means of Payment
 Loan Guarantees

El Salvador:
Loan Guarantee Fund for MSMEs

Started in 2012

Implementing parties: BANDESAL (Development Bank of El Salvador),

Central Bank of El Salvador.

Background and Rationale Results and Lessons Learned

The financial crisis that began in 2008 had an especially As of June 2013, there were 4,117 guarantees amounting
adverse impact on small and medium enterprises (SMEs) to US$18.8 million, covering loans worth US$32.4 million
and their access to finance. In addition, and perhaps even with an average guarantee of US$4,566 (note again the
more significant, several important local banks were small average loan size, suggesting many SMEs among the
acquired by foreign banks. SME loans were then sent clients). Later figures from BANDESAL for March 2014
to foreign headquarters where the SME borrowers were show the numbers of guarantees and the amounts guaranteed
unknown. The credit policies of these international banks doubling.
have been stricter for all types of credit, due in part to
informality, which impacts SMEs in particular. Furthermore, As of April 2014:
laws in El Salvador were not adequate for dealing with Amount of loans with participating financial institutions:
movable collateral, so this could not mitigate risks. Although
El Salvador did have various guarantee programs, they were l US$74.4 million
often undercapitalized, and required lengthy bureaucratic
practices. l Amount guaranteed: US$42.2 million

l Number of guarantees given: 10,087

Description of the Intervention l Average amount of loans: US$7,380
A new law was quickly passed by the Legislative Assembly
l Average amount of guarantees: US$4,180
to strengthen the loan guarantee system. BANDESAL,
El Salvador’s well-regarded second-tier bank, is in charge of l Average percent of coverage: 56.65 percent
the loan guarantee intervention.
l Average period of guarantee: 31 months
The need for an improved guarantee system was fully
accepted by the banking system and bank regulators. When During 2013, the amount of the loans guaranteed ranged
23 financial entities were asked about their support for the from US$1,311 to US$35,711, with an average of US$8,000,
new loan guarantee system, 15 immediately responded indicating clearly that it is serving small borrowers.
favorably (five commercial banks, two cooperative banks Furthermore, less than 1 percent of claims were rejected.
and eight “cajas de credito”). Of those responding, 93
percent said they intended to use it, and 77 percent stated One of the main points made by users of loan guarantees
that they were having good experiences with its functioning. was that BANDESAL and Central Bank staff were strongly

11
Enhancing SME Access to Finance – Case Studies

Figure 1. Number of Guarantees—Distribution by Type of Borrowers

100%
4%

75% 78% 17% 1%

50%

25%

0%
MICRO PEQUENA MWSIANA PERSONA NARURAL

Source: BANDESAL

committed to the effective design and functioning of the loan new program is adequately capitalized and more efficiently
guarantee system and that there was an operating manual run (e.g., with transparency and rapid processing of claims).
that was both transparent and followed what the users saw to Moreover, the new loan guarantee system pays close attention
be “best practices.” to risks and has a model to estimate expected losses.

Unlike earlier loan guarantee programs, the Central Bank Submitted by:
and BANDESAL worked together under the new law. The Ricardo Contreras Perla, Senior Financial System Analyst
Central Bank of El Salvador

12
 Loan Guarantees

Indonesia: Establishment of
Regional Credit Guarantee System

Started in 2007

Implementing parties: Ministry for Economic Affairs, Ministry of Cooperatives

and SMEs, Ministry of Home Affairs, Bank Indonesia, and Indonesia Financial
Services Authority.

Background and Rationale Description of the Intervention

Micro, small, and medium enterprises (MSMEs) in Presidential Instruction No. 6/2007, concerning The Policy
Indonesia comprise 99.9 percent of total business units in the of Accelerating the Development of the Real Sector and
country, or 56.5 million business units. MSMEs contribute small and medium enterprises, and Presidential Regulation
around 57.9 percent to GDP, and account for a very high No. 2/2008, concerning guarantee institutions created
proportion of employment (97.2 percent), significant shares the legal basis for establishing regional credit guarantee
in investment (50 percent), and a significant proportion of corporations. Implementing these regulations to establish
exports (16.4 percent). credit guarantee corporations (PPKD) required close
coordination among stakeholders. In light of this, a joint
Thus, MSMEs have an important strategic role to help effort at the national level was initiated by the Ministry of
achieve equitable economic development. However, their Cooperatives and SMEs, Ministry of Home Affairs, Bank
access to finance is still limited. Financial access is crucial Indonesia, and the Capital Market and Financial Institution
to MSMEs for expanding their businesses so that they can Supervisory Agency (now Financial Supervisory Agency).
increase their contribution to the economy. The effort was coordinated by the Coordinating Ministry for
Economic Affairs. It carried out the following activities:
One of the main barriers for MSMEs in accessing finance
from banks is the limited ownership of assets to be used as l Issued regulations related to the establishment of
collateral. A survey conducted by Bank Indonesia in 2010 PPKD. Regulation of the Minister of Finance No.
indicated that limited collateral was the largest barrier 222/PMK.010/2008 has been issued as guidelines for
for MSMEs in accessing finance, followed by the lack of establishing PPKD. The regulation was then amended
guarantee corporations and MSMEs’ lack of knowledge. by regulation No. 99/PMK.010/2011, which adjusted
the capital requirement for PPKD, from IDR50 billion to
Loan guarantee schemes can substitute for MSMEs’ limited IDR25 billion, to further enhance PPKD establishments.
collateral, and help banks mitigate credit risk. Regional To encourage banks to guarantee their MSME loans,
credit guarantee systems will help banks disburse sustainable Bank Indonesia issued Bank Indonesia circular No. 13/6/
loans to MSMEs and reduce the barriers to finance caused by DPNP dated Feb. 18, 2011, concerning Guidance for the
businesses’ lack of collateral. The establishment of regional Calculation of Risk-Based Asset for Credit Risk using a
credit guarantee corporations (at the provincial level) seeks standard approach. Banks may get lower risk-weighted
to address these barriers to finance, and to increase MSMEs’ assets.
role in achieving equitable economic development.
l Promoted and increased awareness of the stakeholders
regarding the benefit of regional credit guarantee
corporations, including increased access to finance by
MSMEs.

13
Enhancing SME Access to Finance – Case Studies

l Held workshops to disseminate information and facilitate The following steps were taken to cope with the challenges:
discussion among stakeholders, which include local
governments, legislators, academics, MSMEs, and banks. l Revised regulations to lower the capital requirements for
establishing PPKDs.
l Disseminated information. A guideline book covering
PPKD establishment was issued as a reference for local l Built communications with stakeholders.
governments that intend to establish regional credit
l Issued regulations to support the use of the guarantee
guarantee corporations.
system.
There were many challenges to establishing the credit
guarantee system. Some of these included: Results and Lessons Learned
l The need for sufficient amounts of capital provided by Results are measured by the number of PPKDs established.
local governments to establish PPKDs. The coordinator at the national level arranges regular meetings
for evaluation and monitoring, as well as identification of
l The need to assure the related stakeholders about the
constraints and problems. However, there is still a need for
importance and benefit of PPKDs for supporting access
further evaluation and monitoring to determine the impact of
to finance by MSMEs.
PPKDs on MSMEs receiving credit from banks.
l Achieving both profit and social objectives. By helping
MSMEs’ access finance, expand their businesses, and Currently, there are eight PPKDs operating in eight out
create jobs, PPKDs could contribute to regional economic of the 34 provinces in the country. There are another four
development. However, PPKDs bear the risk of loss if provinces that already have approval from parliament and
loans guaranteed to MSMEs are nonperforming, thus are in the process of getting licenses from the Financial
impacting the ability of the PPKDs to generate profit and Supervisory Authority (FSA), while 10 other provinces are
be sustainable. in the process of getting approval from parliament.
Table 1. List of PPKDs Established
In addition, supporters of the intervention needed to be
Table 1. List of PPKDs Established
mobilized to make implementation successful through
socialization, workshops, and focus group discussions. PPKD Year of establishment
The targets of this mobilization were local governments, PT. Jamkrida Jawa Timur 2010
parliament, banks, academics, and MSMEs, with the
PT. Jamkrida Bali Mandara 2010
objective of promoting the importance and benefit of
PT. Jamkrida Riau 2012
PPKDs, and disseminating rules and regulations regarding
their establishment. PT. Jamkrida NTB Bersaing 2012

PT. Jamkrida Jawa Barat 2013

Communication and coordination with stakeholders are
PT. Jamkrida Sumatera Barat 2013
important, particularly among executive and legislative
PT. Jamkrida Sumatera Selatan 2014
branches to promote the legislature’s approval for
establishing PPKDs and their capital fund. PT. Jamkrida Kalimantan Selatan 2014

Communication and socialization with MSMEs, as well as There is increased use of the guarantee scheme by banks,
banks, was also important so that banks would be willing to as shown in Figure 1 by the increase in credit limits and
use the guarantee system to mitigate risk and increase loan values guaranteed for PT Jamkrida Jawa Timur in East Java
disbursements to MSMEs. Additional benefits are provided Province. The guarantee scheme reached 53,725 MSMEs,
through banking regulations that provide incentives for which received loans from banks totaling IDR1.2 trillion
banks to use credit guarantee schemes as tools to mitigate (US$101 million). The total guarantee coverage by the
credit risk. PPKD reached IDR1.1 trillion (US$85 million). The total
number of these MSMEs could absorb about 160,701
employees, based on information from the PPKD.

14
 Case Studies: Loan Guarantees—Indonesia

Figure 1. Trend of Loans for MSMEs Guaranteed by Another lesson learned is that stakeholders do not always
PPKD Jawa Timur have similar views regarding the importance of PPKDs, and
PPKD establishment depends on approval by parliament. Post
600 80 approval, a PPKD might still have obstacles in operating due
to the failure of the regional government (either provincial
70
500 or municipal) to provide adequate capital for the PPKD or in
60
selecting qualified personnel for the board of directors.
400
50
Rp billion

Success of the PPKDs will depend on:

000
300 40

30
200 l approval from parliament;
20
100 l capacity of the regional governments to provide capital;
10

0 0 l commitment of the shareholders to provide additional

2010 2011 2012 2013 capital when needed;
Credit limit 105.00 257.65 325.14 525.05
(Rp Billion)
l willingness by banks to trust and use the credit guarantee
Guaranteed Value 93.30 222.55 268.52 434.80
(Rp billion) system; and
Debtor/MSME 5.44 11.81 13.61 22.86
(000) l ability, willingness, and discipline of MSMEs to pay their
Employment (000) 16.31 35.43 40.80 68.15 obligations.

Recommendations to accelerate the use of credit guarantee

schemes:
One lesson learned from the East Java Province is that success
l Urge the re-guarantee mechanism to increase the capacity
of a PPKD is mainly due to a strong commitment from the
of PPKDs.
government and the link between the PPKD and local banks
(especially rural banks and the regional development bank). l Issue a new guarantee act to provide a stronger legal
Some reasons that a PPKD was not more successful were basis.
that banks were unwilling to join the program because of
a lack of adequate incentives, and because of competition Submitted by:
from other government guaranteed programs. Ms. Wini Purwanti A., Deputy Director, Bank Indonesia

15
 Loan Guarantees

Italy: Loan Guarantee Fund

for SMEs

Started in 2010

Implementing parties: Ministry of Economic Development, Banks and

Mutual Guarantee Fund, Management Committee of the Fund.

Background and Rationale the parties. The guarantee can be requested for loans aimed
at covering both investment and/or working capital needs.
Fondo di garanzia (FG) aims to ease the access to credit for The amount of the total loan guarantee could be up to €2.5
creditworthy but financially constrained SMEs. The rationale million, and the guarantee covers a maximum amount of 80
of the intervention is related to some characteristics of SMEs percent of the loan. Since 2009, the FG has benefited from a
that exacerbate the problem of asymmetric information in counter-guarantee by the Italian government, allowing banks
a lending relationship (e.g. lack of information in financial to have a zero capital requirement for loans guaranteed by
statements, lack of collateral). These are long-standing and the FG.
well-known issues, but they became prominent during the
two recessions experienced by Italy over the last five years The expected benefits coming from the use of the public
when the increase in borrowers’ credit risk was coupled with guarantee funds were related to easing of credit constraints,
increasing risk aversion by lenders. These developments as banks had the possibility to share credit risk and thus
help to explain the much greater role assumed by the FG reduce the impact of lending to SMEs on regulatory capital.
during the economic downturn, as illustrated below.
The main potential risk related to this instrument concerns
its effectiveness in terms of the additional lending induced.
Description of the Intervention If the firms that receive the guarantee would have been
financed anyway, there would be scarcely any impact on
The scheme involves three parties: the FG, a firm, and
private sector access to credit. Moreover, the scheme has to
a bank (or a mutual guarantee fund). FG is controlled by
be designed to avoid banks’ moral hazard due to the limited
the Ministry of Economic Development and is managed on
liability mechanism and the related costs for government
its behalf by a committee that includes representatives of
finances. Using their private information on borrowers’
associations of both firms and banks.
quality, in fact, banks could be prone to asking for the
guarantee for firms closer to defaulting.
Eligible firms are financially and economically sound
non-financial SMEs (as evaluated by data on the last two
By using regression discontinuity techniques, a preliminary
balance sheets). Some sectors such as agriculture, mining,
evaluation was performed by the Bank of Italy (which is not
automobiles, and transportation are excluded. The guarantee
involved in the management of the fund). Based on firm-level
could be direct on a loan (requested by the lender) or could
information, it found that, at the threshold between eligible
be a counter-guarantee (requested by a mutual guarantee
and non-eligible firms, the program had a positive impact on
fund).
the volume of bank loans to firms, with a more muted impact
on the interest rate charged by the banks. No relevant effects
The FG does not intervene in the characteristics of the loan
were found for firm investments and sales, although the FG
(such as interest rate or length), which are determined by
considerably eased the financing of working capital.

17
Enhancing SME Access to Finance – Case Studies

Results and Lessons Learned A few aspects of interventions by the FG needed refinement,
which were partly implemented over the last few years. For
Since FG began in 2000, the volume of bank loans guaranteed instance, before 2012, banks were authorized to demand the
has gradually gone up. With the inception of the economic FG guarantee also after having already granted the loans to
and financial crises, the recourse to the FG increased greatly. their borrowers. In these cases the effective transmission of
From 2009 to 2013, more than €41 billion (more than the benefits of FG intervention to firms (in terms of lower
US$55 billion) of loans to SMEs benefited from the public interest rates or more credit) was extremely uncertain. Since
guarantee (about 9 percent of loans below 250,000 euros, a 2012, banks have to ask for the guarantee before the firms’
proxy for loans to SMEs). The total amount of guaranteed financing, and they must signal the interest rates that the firm
loans between 2000 and 2013 was €52 billion (about US$70 would have to pay in both cases (i.e. with and without the
billion). guarantee).

Data are available on the number of loans backed by the FG Application procedures remain complicated and costly, so it
from 2007 to 2013 (around 300,000). The number of firms is mainly larger banks that rely on it.
that benefited is lower, as firms can obtain a guarantee from
other banks. In 2013, over 77,000 loans were guaranteed, and The main issue that arose during the crisis and challenged
more than 51,000 firms benefited from the FG interventions. policy makers was the change in the threshold that
distinguished eligible from non-eligible firms. On one hand,
The greatly increasing role of the FG after the financial crisis an increase was needed due to the general worsening of
in 2008 and the subsequent recessions reflect the growing firms’ financial conditions. On the other hand, an excessive
importance of this supporting measure to facilitate SMEs’ opening of the selection process would have resulted in a
access to credit. It represented by far the main instrument large impact on the FG’s funds.
to achieve this objective. The increase in resources granted
to the FG and the guarantee of the Italian government since Submitted by:
2009 were two important factors in ensuring the use of the Antonio De Socio, Economist
FG by banks. The public guarantee funds also proved crucial Bank of Italy
in leveraging as much as possible the limited government
resources.

18
 Loan Guarantees

The Russian Federation:

State Program for SME Support

Started in 2009

Implementing parties: Russian Ministry of Economic Development.

Description of the Intervention In 2013, SMEs were given more than 7,000 guarantees in
the amount of US$0.9 billion, which allowed them to attract
The Ministry of Economic Development of the Russian loans of more than US$2 billion. As of Jan. 1, 2014, the
Federation has developed a program to ensure SMEs access outstanding portfolio of loans issued under the guarantee of
to financial services. The federal budget funds are provided regional guarantee institutions was US$3.5 billion, which is
as a subsidy to regions (on the principles of co-financing with 2.2 percent of the outstanding loans to SMEs in the Russian
the regional budget) for establishment and capitalization of Federation (US$158 billion as of Jan 1, 2014). These are
regional guarantee institutions (regional guarantee funds). guaranteed thorough guarantee institutions that are part of
Regional guarantee institutions were established in 80 the Ministry of Economic Development of Russia program.
regions of the Russian Federation to provide guarantees for This is a good coverage ratio. Other SMEs find their own
loan obligations of SMEs. sources to provide guarantees of loan repayment for banks–
collateral or guarantees of third parties (individuals, etc.).
Guarantees are provided for credit, loan, leasing (financial
lease) and bank guarantee contracts of SMEs. Liability of The Ministry of Economic Development of Russia estimates
regional guarantee funds under the guarantee contracts shall the efficiency of guarantee programs in each guarantee
not exceed 70 percent of an SME’s obligations. institution by the following “efficiency rate:” volume of
loans to SMEs secured by guarantees to the capitalization of
the guarantee institution. The average at the national level is
Results and Lessons Learned
3. In more than 40 regional guarantee institutions the volume
As of Jan. 1, 2014, the total capitalization of the guarantee of loans secured by guarantees exceeds the capitalization by
institutions is about US$ 1.2 billion. Six funds (in Moscow, three or more times. In particular, in Voronezh, Kostroma,
St. Petersburg, Samara, Novosibirsk, Rostov regions, and Murmansk, Saratov, Ulyanovsk and Yaroslavl Regions,
Khanty - Mansiysk Autonomous Okrug) have capitalization Karachay-Cherkessia, Altai and Komi Republics, as well
over US$31 million. as in Zabaykalsky Krai and Stavropol Krai, the guarantee
programs all received ratios between 5 and 7.
Since the beginning of their activities, regional guarantee
institutions have issued more than 39,000 guarantees Submitted by:
totaling US$3.6 billion. This volume of guarantees has Elena Stratyeva, Director
allowed SMEs to attract loans in the amount of more than Russian Microfinance Center
US$ 7.7 billion.

19
 Loan Guarantees

United Kingdom:
Enterprise Finance Guarantee

Started in 2007

Implementing parties: Capital for Enterprise Ltd., British Business Bank.

Background and Rationale Participating lending institutions were already involved with
the predecessor Small Firms Loan Guarantee (SFLG) scheme
SMEs with viable propositions have difficulty accessing and so were generally content to shift to using the new
finance as they lack the adequate security for normal intervention. Although the overall extent of the guarantee
commercial loans. The Enterprise Finance Guarantee (EFG) cover provided was less generous, the approach to operating
aims to increase the supply of debt finance to viable SMEs the intervention was more closely aligned with their normal
who fail to meet lenders’ borrowing criteria. commercial lending processes. SME representative and
lobbying groups were also generally positive. There were
few opponents as, at the time the intervention was launched,
Description of the Intervention
there was an almost unanimous view that government should
The EFG is a loan guarantee scheme to encourage banks act to assist SMEs facing difficulties accessing finance.
to make additional lending to viable SMEs. Participating Where there was adverse comment it tended to be because
lenders determine whether a business is viable (able to meet the commentator wished to see greater intervention, rather
the monthly loan repayments and repay the loan in full) than objecting to the intervention provided.
but lacking adequate security to meet the lender’s standard
lending requirements. Lenders can then consider using EFG The principal challenge to implementing the scheme related
to facilitate provision of a loan. to the timeframe in which politicians demanded that the
intervention be delivered. The idea was floated in late
The scheme is demand-led and acts as a complement to November 2008, the main parameters were agreed shortly
commercial lending, rather than a replacement. The delivery before Christmas that year, and the intervention was to be
of EFG, including all lending decisions, is fully delegated to operational from mid-January 2009.
the lender who will decide whether use of EFG is appropriate.
While the government provides a guarantee to the lender, it An important secondary challenge concerned communications.
has no role in the decision-making process with respect to Politicians were particularly keen to see the intervention
individual loans. operational and to promote it to business as government
responding to the impact of the financial crisis on SMEs.
Lenders are provided with a government-backed guarantee As a result, there were instances of it being presented as
for 75 percent of the value of each individual loan, which a solution to other difficulties beyond the inadequacy of
provides additional security to the lender in the event security. The lesson learned for other policy makers would
of default by the borrower. If defaults occur, the lender be to focus on clarity of objectives, and to ensure consistent
is obliged to follow its standard commercial recovery application of those objectives in all aspects of operational
procedure, including the realization of security, before it can design, partner engagement, and wider communications.
make a claim against the government guarantee.

21
Enhancing SME Access to Finance – Case Studies

Results and Lessons Learned At the outset, the objective was to have an intervention in
place and available to service demand, rather than for it to
More than 20,000 businesses have accessed £2 billion of be driven towards delivering specific numerical outcomes.
borrowing that would not otherwise have been possible. Capacity was provided to meet all reasonable demand, so
The wider economic benefits have been examined via an the principal objective was to maximize appropriate lending
independent external evaluation conducted by Durham while ensuring that the lending was additional and that
University Business School.7 the guarantee was not simply facilitating the transfer to
government of commercial risk that the lender would have
To date, EFG has facilitated over $3.3bn of lending to SMEs otherwise carried in the normal course of its SME lending.
since launch in January 2009 to Q3 2013. In total, nearly
20,000 EFG loans have been drawn since launch. Submitted by
Emma Sharp, Senior Policy Advisor
British Business Bank Strategy and Finance

7. [Link]

22
 Government Funding for SME Finance

Swaziland: Access to Finance

for Local Indigenous SMEs

Started in 2013

Implementing parties: Microfinance Unit, Swazi Commercial Amadoda,

Swaziland Industrial Development (SIDC), SAMKHO Corporate Services.

Background and Rationale did not follow a certain form for the applications, there was a
challenge for the appraisal process, as SIDC did not have the
According to the “Making Access Possible Diagnostic capacity to deal with the large volume of varied applications.
Study for Swaziland” conducted by CENFRI8 (2014),
about 15 percent of the local adult residents are self-employed.
It is estimated that 84 percent of these businesses are micro. Description of the Intervention
The government’s goal is to support the promotion of the
The Micro Finance Unit10 identified the need to help SIDC
MSME sector to promote economic growth, particularly
come up with an appropriate financial product that would
employment. Despite the local banks being high in liquidity,
accelerate the screening, appraisal, and decision on loan
access to finance for the MSMEs has been recognized as a
requests.
key constraint.
The financial product includes:
The Swaziland Industrial Development Company (SIDC)
is a local development finance institution that provides
l Standardized Administration. This includes legal
leasing and equity finance. Its target group is mainly bigger
contracts, credit procedures, application process flows,
businesses. Realizing the need to extend to the MSME
and automation where possible to reduce administrative
sector, SIDC in 2012 expressed its intention to support the
costs.
Swazi Commercial Amadoda (SCA) by extending credit to
the micro and small entrepreneurs.9 A facility of SZL10.0 l Product Feasibility. Financial modeling to determine
million (US$1 million) was proposed. The SCA has a feasibility and ensure SIDC profit criteria are also met.
membership of about 12,000 entrepreneurs mostly involved
in retail, services, and transport. l Scorecard Metrics. Collateral/security provided,
insurance, business history, contribution by business
The loan requests included start-up capital, working capital, owner, business industry, loan required, etc.
and asset leasing for the business sector. Since the applicants

8. A comprehensive study of the demand and supply situation for access to financial services in the country, conducted by the National Statistical
Bureau with support from the FinMark Trust in South Africa, which engaged the Centre for Financial Regulation and Inclusion to assist in
developing a Financial Inclusion Strategy.
9. According to the Revised MSME Policy a micro entrepreneur has 0-3 employees, assets valued at US$5,000 and an annual turnover of
US$6,000. The small entrepreneur employs 4–10 people, with value of assets up to US$200,000 and annual turnover up to US$300,000.
The medium enterprise employs 11–50 people, asset value up to US$500,000 and an annual turnover up to US$800,000.
10. The Micro Finance Unit is the entity of the Ministry of Finance that has been mandated to facilitate the development of an enabling environment
for access to finance for SMEs, which entails working with the Ministry of Commerce to improve business start-up and their growth, and the
Central Bank to make it easier for banks and nonbanks to extend outreach.

23
Enhancing SME Access to Finance – Case Studies

l Risk Profiling. High, medium, and low (e.g. previous During the implementation, there was an initial
loan experience, risk classification, loan size, feasibility, misunderstanding about the requirement for applying for the
auto accept/reject, credit committee, and accept/reject). loan relative to the need for a simple business plan. Training
for applicants in use of a simple business plan format helped.
l Loan Amount. New or veteran applicant, loan size, and The low level of literacy of some potential applicants was
the repayment period. also a challenge. Some entrepreneurs thought that since the
l General Issues. Commensurate interest rates, provision credit facility targeted the group, all of the applicants would
for bad debts and the cost of the product (both cost of be granted the credit. Further, SIDC did not have sufficient
capital and the operation), and the mentoring of the staff capacity to conduct visits, and this was also not cost
entrepreneurs. effective, given the dispersion and limited size of the
businesses. Applicants were also disappointed by the long
The Micro Finance Unit supported building capacity in response time on loan applications.
business management skills for entrepreneurs interested in
accessing credit. The training entailed capacity in business It would be prudent for government policy to support the
idea generation, market research, business feasibility, cash- development of an effective database system that could
flow analysis, bookkeeping, and costing and pricing. This provide accurate and timely data on the market situation
culminated in a process in which the entrepreneur could and price information for key business sectors. It could also
conceptualize and write a simple business plan. facilitate a framework that could enable credit information
service providers to better assess credit history, and support
The Micro Finance Unit provided intensive leadership and the development of appropriate lending products for the
business management training for 30 committee leaders MSMEs, such as the value-chain, and asset-based and
for all 12 SCA branches to enhance the operations of their invoice financing.
branches and provide advisory services to entrepreneurs
that would present loan applications. Also provided was There was also a need to mobilize the entrepreneurs for
engagement with Samkho Corporate Services and Altersol business management training to ensure that they provided
Consultants (business support entities) for mentoring and simple business plans. Some of the entrepreneurs withdrew,
coaching to the entrepreneurs. as they could not provide sufficient information to justify
their business plans.
The responsible entities include: Micro Finance Unit, SCA,
SIDC, Samkho Corporate Services and Altersol Consultancy
Results and Lessons Learned
Services.
It was mostly the bigger MSMEs that were able to benefit
Some of the challenges faced during implementation from the credit facility. US$560,000 was disbursed to 17
included: businesses, representing 56 percent of the original target.
The lack of information and the fragmentation of the small
l Volume: a large number of applications for credit. businesses required other complimentary mechanisms that
l Loan size: the average loan requested was about would facilitate the pre-screening of the loan applicants and
US$5,000, hence high administration and transaction pooling together of the microloans to reduce transaction
cost. costs for SIDC.

l Information asymmetry: insufficient information on the The intention is to develop the capacity of intermediaries
businesses and the owners (lack of financial statements that will receive the wholesale amount to manage the
and good records). documentation required for authorizing the disbursements
through established supply chains.
l Bankable business plans: the lack of data to justify market
share and revenue. The intermediaries will monitor the performance of these
loans and develop data on the various types of businesses.
Fragmentation: the wide dispersion and small size of the
The loan recipients will individually be responsible
l

businesses.
for repayment, which will reduce the transaction and

24
 Case Studies: Government Funding for SME Finance—Swaziland

administration costs for the banks. The evaluation of the business support entities. The financial product provided
interventions is based on monitoring by the implementing the right mechanism for SIDC to disburse the credit facility.
agencies. Larger businesses have a better chance to receive finance
as the businesses might have better data to support their
The experience from this intervention indicated that the business plans and some credit track record.
need to address the lack of access to credit for the MSME
sector requires collaboration with various sectors, such as Submitted by:
the government (policy environment), entrepreneurs, and David Mfanimpela Myeni, National Programme Director
Micro Finance Unit, Swaziland

25
 Government Funding for SME Finance

The Russian Federation:

Federal Law on Microfinance/SMEs

Started in 2010

Implementing parties: Russian Ministry of Finance, Russian Ministry for

Economic Development.

Background and Rationale 1. Support Program for SMEs Through Microfinance

No 1 – the Ministry of Economic Development of the Russian
The microfinance sector in the Russian Federation includes Federation
not only loans to SMEs, but also consumer loans. The term
“micro” refers not to the division between micro and other Description of the Intervention
enterprises, but to the division between micro (loans up to
RUR 1 mln. or US$30,620 as of Jan. 1, 2014, which are The ministry supports only microfinance organizations
defined as “microloans” in the Federal Law N 151-FZ of whose founders are regional (or municipal) government
July 7, 2010 “On Microfinance Activity and Microfinance bodies. Such organizations are able to lend to small
Organizations”) and other loans. businesses relatively quickly and on favorable terms,
resulting in bigger profits not only for an entrepreneur, but
The microfinance sector is represented by the following also for the microfinance organization.
financial institutions: microfinance organizations
(hereinafter – MFOs, as defined by the Federal Law N 151- Microfinancing of businesses, especially small businesses,
FZ of July 7, 2010) and credit cooperatives (hereinafter – can be deemed the best option for getting funds to establish
CCs, Federal Law N 190-FZ as of July 18, 2009, “On Credit and develop an enterprise, provided that loans to SMEs do
Cooperation”), both referred to as microfinance institutions not exceed 1 million rubles (or US$30,620 as of Jan. 1,
(MFIs). 2014−the maximum size of “microloan” is determined by
Federal Law N 151-FZ of July 7, 2010) and the loan term
The government program for SME development, is not more than 12 months. The term is determined by the
implemented by the Ministry of Economic Development of rules of the microfinance support program for SMEs of the
the Russian Federation, has many ongoing activities, one Ministry of Economic Development of Russia.
of which is a program for the development of microfinance
organizations. This program helps provide access to loans for Subsidies to regions for the development of microfinance
small businesses that for some reason cannot use traditional have been provided since the start of the program in 2005.
banking products (e.g., due to small loan amounts, lack of The system works as follows:
credit history, remote business area).
l Money goes from the federal budget to the regional
budget.
A second program in this area provides financial support for
SMEs through financing at reduced interest rates. l Money from the regional budget is then distributed to
regional MFOs (the founders of these MFOs should be
the regional (or municipal) government bodies).

l MFOs then provide microloans to local SMEs.

27
Enhancing SME Access to Finance – Case Studies

Results and Lessons Learned from 2. Support Program for SMEs Through Microfinance No 2
MFO Program – Open Joint-Stock Company “Russian Bank for Small and
Medium Enterprises Support”
The volume of support to MFOs under the program has been
increasing year on year. In 2005, subsidies from the federal Description of the Intervention
budget in the amount of 23.5 million rubles (US$0.85
million at the exchange rate on June 1, 2005) were allocated Open Joint-Stock Company “Russian Bank for Small and
to implement the program in 16 regions of Russia. By 2011 Medium Enterprises Support” (since 2011 – OJSM “SME
and 2012 this figure had increased to more than 2.1 billion Bank”) was established in 1999. One hundred percent
rubles annually (US$69.2 million at the exchange rate on of the bank shares are owned by the state corporation,
June 1, 2011 and US$65.2 million at the exchange rate on Bank for Development and Foreign Economic Affairs
June 1, 2012). In 2013, 2.2 billion rubles (US$72.4 million (Vnesheconombank). Vnesheconombank is part of the
at the exchange rate on June 1, 2013) were allocated for government’s plan to diversify the Russian economy, and to
the development of microfinance in 35 regions of Russia. do so it receives funds directly from the general state budget.
The major part of these regional subsidies from the federal
budget (on the principle of co-financing with the regional OJSC “SME Bank” implements a program of financial
budget) was for creation and capitalization of state (regional support for SMEs, including the provision of financing for
and municipal) MFOs. There were 3,860 MFOs in the private and state banks, leasing and factoring companies,
registry as of Jan. 1, 2014, which issue both consumer and microfinance institutions (first- and second-tier MFOs and
SME loans, but only state MFOs receive such support. CCs) at reduced interest rates.

As of Jan. 1, 2014, there are more than 70 regional MFOs (a The bank focuses on the priority areas of the program. It
founder of a regional MFO is a regional government body) supports SMEs in the manufacturing sector; innovation-
and more than 60 municipal MFOs (a founder of a municipal driven SMEs; and entrepreneurs in regions with difficult
MFO is a municipal government body) created under the socioeconomic situations. Two microfinance products for
program of the Ministry of Economic Development of the SMEs are particularly noteworthy: microcredit (up to 3
Russian Federation with total capitalization of 18 billion million rubles), implemented through banks, and microloan
rubles (US$551.2 million). The existing loan portfolio is​10.5 (to 1 million rubles), implemented through first- and second-
billion rubles (US$321.5 mn, 24,500 loans), which means tier MFIs (MFOs and CCs).
that the share of state MFOs is around 29 percent of the loan
portfolio of all MFOs, and 58 percent of the MFOs’ portfolio OJSC “SME Bank” started to support SMEs through MFIs
of loans to SMEs. The state MFOs provide microloans at an in 2009. As of Feb. 1, 2014, the bank has cooperated with 26
interest rate of 10–12 percent. The program has a restriction MFIs. Up to now, MFIs have received 5,884 million rubles
on the margin of no more than 10 percent for loans given (US$167.3 million) in loan funds, from which 7,189 SMEs
under the program. More than 10 percent is allowed in the have received more than 5,943 million rubles of support in
case that an MFO borrows from addition sources. the form of soft microloans (at the decreased interest rate).
The outstanding loan portfolio under agreements with SMEs
As of Jan. 1, the share of overdue loans in the total loan amounted to 1,442 million rubles. The number of active
portfolios of state MFOs is 6.4 percent, which is 0.7 percent borrowers was 3,627.
lower than the national average for all MFOs (on Jan. 1, 2014
– 7.1 percent). An average loan amounts to 524 thousand Since 2010, support has been provided through banks
rubles (US$16,045). that include microcredit in their product lines. As of Feb.
1, OJSC “SME Bank” has cooperated with 35 banks of
As of Jan. 1, 67.5 percent of microloans have been provided this type. Upon receipt of 7,154 million rubles (US$203.4
to SMEs in the non-trading sector, including: 18.2 percent million) in loan funds, it has provided soft microcredits to
for SMEs in manufacturing, 13 percent in agriculture, 3,303 SMEs amounting to more than 5,621 million rubles
7.8 percent in consumer services, and 28.5 percent in (US$159.8 million). Outstanding credit portfolios under
construction, transport, and other areas. agreements with SMEs amounted to 2,288 million rubles
(US$65 million), and the number of active borrowers to
The share of microloans with terms of 6 months to 1 year is 2,137.
76.1 percent.

28
 Case Studies: Government Funding for SME Finance—The Russian Federation

Results and Lessons Learned: OJSC 11,566 existing support agreements with SMEs. SMEs’
liability under these agreements is 20.32 billion rubles
The following results have been achieved by the OJSC (US$0.6 billion).
“SME Bank” (as of Feb. 1, 2014):
l 0.15 billion rubles (US$4.3 million) were allocated to
l Total amount of support provided to SMEs is about create financial infrastructure for SMEs’ support.
96,713 million rubles (US$2,749.1 million).
l Number of partners in the program for the entire period
l The program has expanded to 82 regions of Russia. of its implementation totaled 247 banks, and 198 financial
infrastructure institutions.
l There are 134 active partner banks: 12,884 existing
support agreements with SMEs. SMEs’ liability under l Number of loan agreements between partners and SMEs
these agreements is 76.40 billion rubles (US$2.2 billion). for the entire period of program implementation totaled
more than 65,000.
l There are 150 active partner infrastructure institutions
(leasing and factoring companies, microfinance Submitted by:
institutions (first- and second-tier MFOs and CCs) and Elena Strateyeva, Director, Russian Microfinance Center

29
 Government Funding for SME Finance

Turkey:
Angel Investment Scheme

Started in 2013

Implementing parties: Undersecretary of Treasury, Ministry of Finance-

Revenue Administration.

Background and Rationale sector entities (specifically angel networks and the union of
trade chambers) all participated in preparing the legislation
SMEs and early stage firms in Turkey have limited access by sharing their experiences, knowledge, expectations,
to finance because of their small size and lack of collateral and views.
required by traditional financing sources, such as banks.
They also need mentorship to develop their business. In this According to the law, business angels can either be
context, a business angel scheme is a crucial mechanism experienced investors or high net worth individuals in
to ease access to finance for entrepreneurs, increasing order to be licensed. Licensed angel investors can deduct
professionalism and improving business culture and ethics 75 percent of the capital they invest in certain SMEs
in this market. Government support has been essential to from their annual tax base. This deduction ratio will be
boost this sector. 100 percent for those investors investing in SMEs whose
projects are supported by the Ministry of Science, Industry
and Technology, the Scientific and Technological Research
Description of the Intervention Council of Turkey, and the Small and Medium Enterprises
The law regarding the promotion of business angel Development Organization during the past five years.
investments was enacted by Parliament June 13, 2012, and
the secondary legislation for implementation was put in In this system, business angels can hold less than 50 percent
force Feb. 15, 2013. The law encourages angel investments, of the SME’s shares, and the acquired shares must be held
which provide capital for SMEs by licensed business angels by investors for at least two years. An individual angel
and introduces a new system for entrepreneurs and early investment amount for an SME is a minimum of 20,000 TL
stage companies having difficulties in accessing finance. (US$8.928) and a maximum of 1,000,000 TL (US$446.376).

The Turkish Treasury licenses business angels who want Business angel networks are defined in the legislation and
to benefit from tax incentives for their investments. The accredited by the undersecretary in accordance with the
Undersecretariat of Treasury is in charge and has conducted business angel scheme legislation. They are the Treasury’s
the activities and research concerning legislation for the most important partners for the performance of the new angel
business angel scheme. The undersecretary is also responsible investment system in terms of increasing entrepreneurial
for executing all activities regarding this legislation. culture, awareness of the system, and the number of angel
Revenue Administration is in charge of providing tax investors and investments. Since January 2014, license
support for the investments of licensed business angels. For applications have been taken on accredited business angel
this reason, the opinion of the administration was taken into networks.
account while the legislation was being prepared. Also, the
Support for the intervention had to be mobilized. All related
Small and Medium Enterprise Development Organization
public institutions and private sector actors were asked to
(KOSGEB), other related public institutions, and private

31
Enhancing SME Access to Finance – Case Studies

share their experiences, expectations, and problems with In fact, no major challenges were encountered during the
entrepreneurship, SMEs, and the start-up of the sector. implementation due to detailed planning, and the active
Then the legislation and other related actions for the system participation of all the relevant stakeholders to create the
were prepared in compliance with the views of all possible legislation.
supporters. Also, numerous meetings and seminars were
arranged to increase awareness of the need for the angel
investment scheme. Thus, supporters of the intervention have Results and Lessons Learned
been mobilized by enabling all related actors to participate in Since February 2013, 250 business angels have been
the creation of the system and by communicating explicitly licensed, and five business angel networks have been
why the system is crucial for the success of Turkey’s accredited. Applications of three other angel networks
financial system. are being evaluated. Also, seven angel investments of
2.950.882TL (US$1.318.454) have been approved for tax
Since the law entered into force, this regulation has often
support, and two investments of 420.000TL (Sept. 22, 2014,
been reported in the press. Providing tax support has also
US$187.572) are being assessed for tax support.
had a positive impact on the sector. The government expects
an increase in the number of angel investors and the volume The number of licensing applications from business angels
of angel investments supporting early stage companies in exceeded expectations for the first year. Success was driven
terms of institutionalization, guidance, and financing. This mainly by having sufficient resources, the capacity and
mechanism will encourage the establishment of innovative commitment of the implementers to respond quickly to
start-ups, increase the dynamism of the economy, and the problems of all actors in the system, and activities to
contribute to stronger and more sustainable economic increase awareness of the program. Also, commitment and
growth. full support of other related public institutions and private
sector actors have increased the success of intervention.
Major challenges that we anticipated include lack of solid
entrepreneurial culture, low levels of awareness concerning Submitted by:
the business angel scheme, and the risk that angel investors Hakan Ertürk, Undersecretary of Turkey, and
might take control of firms.
Kübra Öcal, Assistant Turkey Expert, Republic of Turkey

32
 Government Funding for SME Finance

Turkey: G43 Anatolian Venture

Capital Fund

Started in 2011

Implementing parties: Ministry of Science, Industry, and Technology, Small

and Medium Enterprise Development Organization (KOSGEB), the European
Investment Fund.

Background and Rationale and the Development Bank of Turkey (Türkiye Kalkınma
Bankası AI). Garanti Bank, NBG Group, and the EIF are
The G43 Anatolian Venture Capital Fund Project (G43 also partners in iVCi.
Project) aims to develop financing instruments, and is being
implemented under the European Union’s Instrument for Functions and roles of all governing bodies in iVCi also apply
Pre-Accession Assistance (IPA)-Regional Competitiveness to the programme, specifically the Investment Committee,
Operational Programme (Council Regulation (EC) No. the Board of Directors, and the Advisory Board. The iVCi
1085/2006 of July 17, 2006). The project was developed Investment Committee is responsible for the approval of
to improve the alternative investment market in Turkey, investments submitted by EIF. The implementation of the
focusing especially on SMEs. Operation will be monitored by the Steering Committee.

The results of the G43 project are identified as the

Description of the Intervention establishment of a venture capital fund (by year 3) and
The Ministry of Science, Industry, and Technology is the equity capital provided to SMEs. The fund was established
Operating Structure for IPA funds allocated for the Regional in 2012. The project will end in 2017. The term of the fund
Competitiveness Operational Programme. KOSGEB, the is determined as 10(+1) years.
leading organization for the support to SMEs in Turkey, is
a key partner in the project and the End Recipient of the Results and Lessons Learned
Assistance. KOSGEB is responsible for the management
and performance of the operation. The EIF, through a The project was activated with the signing of the Contribution
Contribution Agreement, is the trustee administrator of Agreement Aug. 31, 2011, between CFCU (later the Ministry
the EIF-IPA Commitment. iVCi is the first dedicated fund of Science, Industry and Technology), EIF and the EU. The
of funds and co-investment programme, established in fund was established under the platform of iVCi with the
November 2007, for the benefit of the development of collaboration of EIF in 2012. Following the completion of
venture capital in Turkey. iVCi is used for the G43 Anatolian the selection process, the fund manager was introduced to
VC Fund project as it is an established investment platform the region on Nov. 29, 2013, and it has started its research
created by both public and private actors for the benefit of for investing in SMEs.
the development of venture capital in Turkey. G43 leverages
on iVCi which is directly supported by KOSGEB, the Submitted by:
Technology Development Foundation of Turkey (TTGV), KOSGEB SME Finance Department

33
 Government Funding for SME Finance

Turkey: Istanbul Venture

Capital Initiative

Started in 2007

Implementing parties: Istanbul Venture Capital Initiative

(Specialised Investment Fund Company).

Background and Rationale The venture capital and private equity (VC/PE) market was
a nascent market when the initiative started in Turkey. The
Entrepreneurs in Turkey have great difficulty in obtaining purpose of the program is to develop alternative investment
the financial resources they require for putting their business vehicles in an undercapitalized market.
ideas into practice. Apart from financing the companies in
which they invest, venture capital funds offer managerial The total amount of commitments of iVCi is EUR 160
and strategic support, which in turn makes a significant million with the contribution of the investors. Total funds
contribution to each company’s growth prospects. raised by iVCi portfolio funds reached EUR 1.5 billion.
iVCi has signed 10 commitments including a co-investment
amounting to EUR 1,527 million. The total number of
Description of the Intervention investments performed by iVCi’s portfolio funds reached
iVCi, founded in 2007, was Turkey’s first dedicated fund 33 companies. According to the subscription agreement of
of funds and co-investment program. The investors in iVCi iVCi, it is envisaged that at least 25 percent of aggregate
are KOSGEB, the Technology Development Foundation of commitments shall be invested into other funds or in direct
Turkey (TTGV), the Development Bank of Turkey (TKB), co-investments having SMEs as end beneficiaries.
Garanti Bank, the National Bank of Greece Group (NBG)
and the EIF, which is the advisor to iVCi.
Results and Lessons Learned
iVCi leverages the experience of the EIF, the EU’s Already 45 percent of aggregate commitments have gone to
specialized financial body for SMEs and the risk capital SMEs (leveraged US$92,128,088) as of March 31, 2014.
arm of the European Investment Bank Group (EIB Group).
iVCi’s objective is to invest in assets representing risk capital Fourteen SMEs have been reached as of March 31, 2014.
over a long investment horizon (6-10 years). iVCi intends to
achieve its objectives by constructing a balanced portfolio KOSGEB has had a considerable impact on the market.
and investing primarily in: When iVCi was established, there were only two
independently managed VC/PE funds in the market. iVCi
l funds that invest their assets in private equity or venture stimulated the market and enabled several first-time teams
capital (including first time funds, established funds, to establish funds serving the market. In addition to the
experienced funds, portfolio funds), and capital these funds provide to SMEs, they are instrumental in
maintaining financial discipline and corporate governance,
l direct co-investments, alongside other pre-selected funds
two traits that are becoming more important for international
(co-investors) in companies or undertakings.
competitiveness.

35
Enhancing SME Access to Finance – Case Studies

The current net aggregate investment of iVCi into companies the country, further easing the access to finance problems of
is EUR 74 million. This has leveraged EUR 525 million of SMEs. VC/PE funds look for companies with high-growth
investment into companies. potential and therefore target a niche segment of SMEs or
companies. While such investments are very much needed
iVCi as a fund of funds has been instrumental in stimulating in a country like Turkey, involvement of public agencies
the VC/PE market. VC/PE investments are hands-on require a very good understanding of the long term, private,
investments with a long-term horizon (typically three to five and exclusive nature of the asset class.
years). With the potential success of underlying portfolio
funds, Turkey will have a number of funds with good track Submitted by:
records, and will be proven as a PE market. As a result, KOSGEB (Small and Medium Enterprise Development
more investors will be willing to invest in funds targeting Organization) SME Finance Department

36
 Government Funding for SME Finance

Turkey:
Venture Capital Investments

Started in 2006

Implementing parties: KOBI Venture Capital Investment Trust

Background and Rationale The project applications are evaluated in line with KOBI
VCIT’s following investment criteria:
Currently in Turkey, it is virtually impossible for
entrepreneurs who do not have adequate experience, capital, l Entrepreneurial companies should comply with the
or collateral to provide the initial capital required to begin a definition of an SME (The definition under the latest
business, or the additional capital necessary for expanding published declaration by the Ministry of Industry).
their businesses through the traditional means of utilizing
various bank resources. Our company was set up by three l A project must be capable of creating differences and
main partners: TOBB, Halkbank, and KOSGEB to invest providing competitive advantages in the market or
in local SMEs with innovative ideas that offer high growth presenting a new product/service portfolio with a potential
potential by entering new markets, using new technology, or for development.
introducing new products and new ways of production.
l The company should not have any outstanding tax, social
insurance, or bank debt for immediate payment that is not
Description of the Intervention seen to be payable when compared with expected short-
term cash flow.
KOBI VCIT provides financial and managerial support to
SMEs that lack resources or capacity, even though they have l The owners of projects should be knowledgeable of the
an advantage over their competitors in terms of production relevant technicalities of their business and also have
and services. This support is given by the authority and knowledge about the market, the company’s customers,
supervision of our main partners, with SMEs then receiving and business administration.
both financial and managerial support. These amounts range
l The project owners should have a feasible business plan.
from US$1 million-US$5 million, based on the evaluation of
the SME. The investment is such that the company acquires l The owners of projects and their respective team members
a minority-preferred share of the SME for a planned period should be innovative, experienced, active, and honest.
of five to six years.
l KOBI VCIT may exit from the project in five to six years.
Regional and sectorial presentations and meetings take The company should be aware of this plan.
place from time to time when the need arises. The purpose
is to make our presence known to the market where our KOBİ VCIT invests up to 49 percent in a company, and
resources and knowhow can be used if and when the prefers to be the minority holder at all times. Investment is
applying SME meets KOBI VCIT’s investment criteria. made depending on the project’s capital needs and also on
the following: for projects at start-up stage, approximately
US$250,000; for information technology sector projects

37
Enhancing SME Access to Finance – Case Studies

with an existing company, at least US$500,000; and for There have been 2,124 applications by SMEs, but only 10
other sectors, a minimum of US$500,000 and a ceiling of have received investments. Even though this is a major area
US$1 million. of criticism, the reason for such low numbers is that KOBI
VCIT’s strict investment criteria have been set forth in our
To date, we have made 10 investments with SMEs operating establishing notes by our main partners, which we heavily
in sectors ranging from machinery to medical, plastic, rely on.
and lighting. The main challenges include preparing and
implementing business plans, following the company’s The successes of the SME investments are measured based
strategy and even, at times, their day-to-day operations. The on their mid and year-end figures and to the extent that they
respective business plans have even been modified for some have managed to meet the targets set forth in their business
companies. plans. All of our subsidiaries have increased their year-end
sales figures dramatically since the investment date. This is
The main two challenges are to set up a manageable business largely due to KOBI VCIT’s successful strategic decisions
plan, operate according to that plan, and to modify the plan and our major effect on their access to capital/finance, either
when necessary. As each Turkish SME has its own particular through us or their credit lines via public and private banks.
challenges and difficulties, so do the sectors in which
they operate. In other words, a “one-size-fits-all” business All investments have proven to promote higher sales figures.
plan is impossible to implement. We often, if not always, Access to capital via KOBI VCIT, combined with our
face the situation where the business plans or models of managerial help, have allowed these companies to achieve
each investment have had to be modified according to the higher returns. In cases where we have had to make major
company, sector, or economic need. This also includes strategic decisions, including the demise of certain areas of
injecting further capital into respective investments or operation or production, the SME was better able to focus
subsidiaries if the need arises. on income-generating areas, and better allocate labor and
financial resources, all fruitful for the company’s financial
results. The success of respective SMEs comes from easier
Results and Lessons Learned access to finance via KOBI VCIT, and the ability of KOBI
Since 2006, KOBI VCIT has allocated approximately VCIT to supply managerial assistance through its presence
34.8 million TL (US$20.5 million) to its investments or on the managerial board of each company.
subsidiaries in the Turkish SME market, including both
Submitted by:
original investments and latter capital injections.
Onur Oktem, Deputy Manager Business Development
KOBI Venture Capital Investment Trust

38
 Government Funding for SME Finance

United Kingdom:
Business Finance Partnership

Started in 2012

Implementing parties: HM Treasury.

Background and Rationale that without the investment they would not have established
a subsequent fund.
The government is investing alongside private sector
investors on fully commercial terms through managed Expected results were achieved with less funding than
funds that lend directly to mid-sized businesses in the anticipated. The market is now attracting much higher levels
United Kingdom. The Business Finance Partnership (BFP) of private funding than were required under the terms of
aims to ease the flow of credit to businesses in the country the scheme. The results are measured by the activity of the
by helping to diversify the sources of finance available. funds and by actual loans made. We have full sight of the
evidence as HMT is required to draw down funds for each
The BFP forms part of a package of credit-easing measures loan as and when required. The funds are obliged to share
to support smaller and mid-sized businesses that do not have information about the loan including name of the business,
ready access to capital markets. This summary refers to annual turnover, number of employees, and terms of the
the scheme for mid-sized businesses. There is also a much loan. This provides a good overview of activity and regular
smaller scheme targeting smaller businesses. performance reports are provided by the funds.

The main challenges were linked to the timing of fundraising

Description of the Intervention in the private sector versus a political desire to complete the
The government invested in new loan funds that can lend investments quickly. It is not unusual for fundraising to take
directly to mid-sized businesses, and offered to co-invest 12-18 months and managing expectations was difficult.
up to a maximum of 50 percent of any such fund. There is
no sectoral restriction on where BFP funds can be invested
Results and Lessons Learned
and no blanket cap on the government funding that can be
invested in any particular project. But, in order to ensure a Thirty-two loans have been made to date by six funds to
spread of loans, limits of 10-20 percent of the total fund that 32 mid-sized businesses across a wide range of sectors.
could be invested in individual businesses or sectors were The loans have enabled these businesses to expand with
established. loans over tenors that are generally longer and offer more
flexibility than those offered by banks (10 years).
Fund managers participating in the BFP can only lend to
U.K. businesses with turnover of up to around £500m. Expected results were achieved with less funding than
anticipated. The market is now attracting much higher levels
The scheme helped to create a deeper market and as such did of private funding than were required under the terms of the
not disadvantage existing players directly. As an example, scheme.
one of the few existing funds in the market only created its
second fund on the back of HMT funding. They confirmed

39
Enhancing SME Access to Finance – Case Studies

Having invested in six funds, we anticipated that HM While the program has been successful, there remains a
Treasury would be investing 50 percent of each loan made to limited appetite from U.K. investors in this asset class.
businesses. These expectations have been exceeded to date It is important not to flood the market with too many
with HMT contributing less than 20 percent and therefore opportunities at once as this could undermine the entire
leveraging a greater percentage of private sector investment. scheme as multiple funds were seeking co-investment from
the same pool of investors. By phasing the investment across
To date, a little over US$2.2 billion has been generated, two tranches and six funds we were able to minimize this
including matching private sector funds (HMT has risk. But there was evidence that a seventh fund struggled
contributed $410 million). Over the life of the scheme, there to attract investment as a result of the six successful funds
is the potential for more than US$6 billion to be generated. having already tapped the market.

Submitted by:
Matthew Gill, Head of Enterprise Policy, HM Treasury

40
 Regulations Requiring SME Finance

Bangladesh: Accelerating SMEs’ Access

to Finance through Targeted Lending with
Greater Women’s Participation Bangladesh

Started in 2010

Implementing parties: 56 Scheduled commercial banks

Background and Rationale Description of the Intervention

Reducing poverty remains a formidable challenge for Bangladesh Bank created the SME & Special Programmes
Bangladesh. Although Bangladesh experienced a stable Department (SMESPD) with a focus on enhancing access to
growth rate of more than six percent on average during financial services by the underserved or unserved millions of
fiscal years 2007-13, steps are needed to increase this rate. micro and small entrepreneurs so that the financial services
Acceleration of the growth rate, however, requires substantial are extended to more people. The department started its
increases in private investment. Given the structure of journey toward the development of SMEs in Bangladesh by
private enterprises in Bangladesh, micro, small, and medium improving the existing environment in the banking sector
enterprises (SMEs) dominate and any development initiative through regulatory and policy interventions. Among others,
must take them into consideration. the following interventions tremendously increased the level
of MSMEs’ access to finance:
Bangladesh Bank, the Central Bank of Bangladesh, has
undertaken numerous policy initiatives, regulations, and 1. Target-based lending activities by all banks and
other activities for the development of SMEs by intervening NBFIs.
specifically to reduce barriers that limit their access to finance
2. Women’s entrepreneurship development strategies.
and reduce or remove barriers to women entrepreneurs’
access to finance.
1. Target-Based Lending
There was market failure in targeting the sector by the market
For the first time in the history of the financial sector of
participants prior to Bangladesh Bank interventions. The
Bangladesh, a target-based SME lending program was
share of SME credit to total loans and advances remained at
initiated by Bangladesh Bank in 2010. Target-based lending
a low level of 22 percent. Finance from banks and nonbank
has two distinct dimensions:
financial institutions (NBFIs) to SMEs did not match SMEs’
contribution to GDP. This mismatch is due to their limited
Target-1: Annual credit disbursement target to SMEs.
access to formal finance in terms of collateral, loan maturity
periods, and lack of regulatory support systems. In addition, Target-2: Credit disbursement target to small enterprises
banks and NBFIs working in Bangladesh did not consider (at least 40 percent).
the SME segment as a profitable business line due to the
perceived higher risk associated with SME financing. The banks and NBFIs independently decide their targets.
Bangladesh Bank simply monitors the achievement with
predetermined indicators (achievement of disbursements to
SMEs; loans to the small sector; disbursements to women

41
Enhancing SME Access to Finance – Case Studies

entrepreneurs; disbursements to manufacturing, service, and to promote entrepreneurship and to help create new
trading concerns; nonperforming loan ratios; and percentage entrepreneurs.
of SME loan to total loans outstanding).
With the help of JICA, the IFC, and the Asian Development
All 57 scheduled banks and 31 NBFIs have to set an annual Bank (ADB), Bangladesh Bank has trained more than 1,000
target for credit disbursements to SMEs. The performance entrepreneurs countrywide. Recently, Bangladesh Bank also
in achieving these targets is considered while licensing signed a project agreement with ADB to provide market-
branches of each bank and NBFI. Bangladesh Bank also oriented training to 10,000 youths over three years.
puts significant weight on the performance of targets and
achievements (including women entrepreneurs’ financing)
in determining the CAMELS rating of banks. Results and Lessons Learned
In 2010, a target of BDT 388.58 billion was set up for all
The SMESPD conducted several meetings with all banks and
banks and NBFIs. They disbursed BDT 535.45 billion to
NBFIs and motivated them to take MSME business as a separate
308,950 enterprises (which was 138 percent of the target).
business segment. The department encouraged the banks and
The target for MSME credit disbursement for 2013 was
NBFIs to promote MSME banking through high-level policy
fixed at BDT 741.87 billion, (BDT 151.75 billion higher
dialogue and seminars with chief executive officers, boards and
than for 2012). All banks and NBFIs together disbursed
training programs for bank officials to showcase how MSME
BDT 853.23 billion to 744,228 enterprises, which was 115
banking can be made a profitable business.
percent of the annual target for 2013. For 2014, all banks and
NBFIs have set an indicative annual target of BDT 887.53
It also provided liquidity and funding support to the accredited
billion for extending credit to MSME clients. This success
banks and NBFIs at the refinance and pre-finance facilities bank
is clearly attributable to the target-based lending approach
rate (currently five percent). With the efforts and interventions
along with promotional activities and indirect incentives in
of SMESPD, all banks and NBFIs have opened a separate
loan provisioning.
department for dealing with SMEs. They now consider the
MSME segment as a profitable business. Moreover, there have
As a result of this intervention, an increasing number of
been a number of banks and NBFIs that have specialized in
enterprises now have access to formal financial institutions,
SME banking, such as BRAC Bank Ltd. and IDLC Finance
and the trend has shown momentum in recent years. During
Ltd.
the last four years, 1.84 million enterprises were financed
with an amount of BDT 2623.40 billion (Figure 2).
In addition to these supply-side interventions, Bangladesh
Bank came forward with demand-driven endeavors with
The vast majority of micro and small enterprises are
different organizations, chambers, and stakeholders to boost
scattered throughout the rural areas of the country and play a
entrepreneurship. With the help of all banks and NBFIs
critical role in creating employment and rural development.
and other MSME organizations, Bangladesh Bank is also
Bangladesh Bank therefore puts major emphasis on
organizing seminars, workshops, and training and skill
small enterprise financing by its SME Credit Policies &
development for MSME entrepreneurs. Most significantly,
Programmes. In 2010, it instructed all banks and NBFIs
Bangladesh Bank also joined with different associations
(e.g., Dhaka Chamber of Commerce and Industries (DCCI)
and Institute of Diploma Engineers Bangladesh (IDEB)) Figure 1. Target-Based Lending: 2010–2013
853.23
741.87
697.53
Table 1. Target-Based Lending to SMEs
569.40 537.19 590.12
Year Target Disbursement Achievement 535.44
(BDT in No. of Amount 388.58
billions) Enterprises (BDT in billions)
2010 388.58 308,950 535.44 138%
2011 569.40 319,340 537.19 94%
2012 590.13 462,513 697.53 118%
2013 741.87 744,228 853.23 115%
2010 2011 2012 2013
2014 887.53 – – –
Target Achievement
Source: Bangladesh Bank

42
 Case Studies: Regulations Requiring SME Finance—Bangladesh

Figure 2. Number of Enterprise Financed Description of the Intervention

744,228 In Bangladesh, more than half of the population is women.
Empowerment for women is one of our millennium
462,513 development goals. We cannot progress as a nation if we
319,340
leave women behind. Women face stricter requirements
308,950
in accessing financial services from formal financial
institutions. One of the priority areas for Bangladesh Bank is
broadening financial inclusion to achieve inclusive economic
2010 2011 2012 2013
growth. Promoting women’s entrepreneurship was chosen
as a tool for broadening financial inclusion, job creation, and
to disburse at least 40 percent of their credit to the small women’s economic emancipation.
segment of SMEs. This has helped link rural, micro, and
small enterprises, the vast majority of which are in rural A number of policy initiatives for women entrepreneurs have
areas, to formal financial services. been taken so far to address the constraints causing the lack
of access to finance, such as inadequate business knowledge
In this regard, Bangladesh Bank exempted banks and NBFIs and imperfect marketing policies. They include:
having SME ratings of disbursing credit up to BDT 3.0
l Bangladesh Bank is managing several refinance funds
million to the small segment of SMEs. The bank instead
for entrepreneurs. Fifteen percent of the total refinance
established a mechanism for measuring the performance of
funds for the SME sector has been allocated to women
SME financing by all scheduled commercial banks.
at a capped interest rate of the bank rate plus 5 percent
As a result, banks and NBFIs have extended their attention (currently 10 percent).
to financing rural SMEs, which in turn increased the share l There is a provision for extending collateral-free loans
of small enterprise financing in total SME credit from 43 to women entrepreneurs up to an amount of BDT
percent in 2010 to 52 percent in 2013 (see Figure 3). 2.5 million.

2. Women Entrepreneurs’ Financing and Development l Group-based lending is allowed so that micro level
women entrepreneurs have wider access to the formal
The ratio of financing to small enterprises reached its highest financial system.
level of 54 percent in 2012, but declined slightly to 52
percent in 2013. However, the number of small enterprises At the outset, banks and NBFIs were not much encouraged
and the amount of disbursements grew significantly by 68.43 to finance women entrepreneurs. One of the reasons for their
percent and 17.14 percent respectively in 2013. On the other reluctance was that women entrepreneurs lack the ability to
hand, the number of medium enterprises financed in 2013 provide collateral. Women entrepreneurs also sometimes
grew by 37.32 percent from 2012. lack knowledge of business.

In this regard, Bangladesh Bank emphasized motivational

Figure 3. Ratio of financing to Small and
measures for both bankers and prospective women
Medium Enterprises (2010–2013)
entrepreneurs. To make bankers engage with women
entrepreneurs in financing, Bangladesh Bank used “moral
57% 52% 46% 48% persuasion” at meetings with bankers. While providing
refinancing to banks and NBFIs to cover their financing,
priority was given to the cases of women entrepreneurs.
Through December 2013, BDT 7.54 billion were
54% 52%
43% 48% refinanced to 9,612 women entrepreneurs, which was 22
percent of total refinancing. However, the share of women
2010 2011 2012 2013
entrepreneurs financing to total SME financing by banks
and NBFIs was only 3.60 percent. Thus, to create demand
Small Medium
for women entrepreneurs’ credit, Bangladesh Bank has

43
Enhancing SME Access to Finance – Case Studies

Figure 4. Women Entrepreneurs Access to Finance

45,000 45.00
41,695
40,000 40.00

35,000 35.00
33.46

Amount in Billion
30,000 30.00

25,000 25.00
Number

20.48 22.44
20,000 18.05 20.00

15,000 15.00
13,831 16,696 17,362
10,000 10.00

5,000 5.00
0 0.00
2010 2011 2012 2013

Number Amount

launched an awareness-building campaign through road The private sector credit by the banking system in
shows, encouraging women’s chambers, and also providing Bangladesh is still concentrated toward large enterprises or
training. corporate sector financing. The results-oriented initiatives
of Bangladesh Bank, especially its target-based lending and
women’s enterprise development strategy, greatly increased
Results and Lessons Learned access to formal finance by SMEs. Bangladesh Bank expects
to pursue this results-driven approach to SME growth in
The result of these initiatives is clearly shown in
the future.
disbursements of SME credit to women entrepreneurs from
2010 to 2013 (Figure 4). Compared to 2010, the number of
Submitted by:
women entrepreneurs financed and the amount of financing
Md. Masum Patwary, General Manager, Md. Ashraf Alam
increased by 201 percent and 85 percent, respectively, as of
Deputy General Manager, and Syed Nazrul Islam
the end of 2013.
Deputy Director, Bangladesh Bank

44
 Regulations Requiring SME Finance

India: Policy Initiatives in

Cluster Financing

Started in 2004

Implementing parties: Ministry of Micro, Small and Medium Enterprises,

Government of India, Reserve Bank of India, Banks and Financial Institutions.

Background and Rationale out financial inclusion plans for drawing up an action plan
to provide banking facilities in villages with populations of
In India, the MSME sector plays a vital role in manufacturing, less than 2,000 through multiple channels. Progress is being
exports, and employment generation, employing an closely monitored by the Reserve Bank of India.
estimated 59.7 million people spread over 26.1 million
enterprises. The MSME sector accounts for about 45 percent Lenders are constrained from providing services to MSEs
of manufacturing output and 40 percent of total exports for a number of reasons, the foremost of which arises from a
of the country. Public policy has accorded high priority to general perception among banks that the credit risk in lending
this sector to achieve balanced, sustainable, equitable, and to small and medium borrowers is very high. MSEs’ lack of
inclusive growth in the country. accounting records and inadequate financial statements or
business plans also make it difficult for potential creditors to
MSMEs primarily rely on bank finance for their operations, assess the creditworthiness of MSE applicants. In addition,
and so a timely and adequate flow of credit to the sector has high transaction costs for lending small amounts reduces the
been an important public policy objective. Over the years attraction for banks for MSE financing.
there has been a significant increase in credit extended to
this sector by banks. At the end of March 2013, the total Recognizing the important role played by MSMEs
outstanding credit provided by all Scheduled Commercial in economic development and their contribution to
Banks (SCBs) to the micro and small enterprises (MSEs) employment and GDP, and realizing that financial access
sector stood at Rs. 6,848 billion (US$114.13 billion) as is critical for MSME growth and development, the Indian
against Rs. 5,277 billion (US$87.95 billion) in March government and the Reserve Bank of India are taking the
2012, an increase of 29.77 percent. Nonetheless, access to lead in supporting initiatives that improve access to finance.
adequate and timely credit is still one of the constraints faced Financial inclusion, including MSME finance, and the drive
by the sector. to universal access is a national mandate, and so improving
MSME access to finance is no longer a policy choice, but an
To expand access to banking services in all parts of the imperative.
country, banks were advised to develop a roadmap for
providing services through an outlet in every unbanked
village with a population of over 2,000 by March 2012. Description of the Intervention
The Reserve Bank of India advised banks that such banking
India has adopted the cluster development approach as a key
services need not necessarily be extended through a brick-
strategy for enhancing productivity and competitiveness,
and-mortar branch but could be provided through business
as well as capacity building, of MSEs. This approach was
correspondents (BCs) or through any of the various forms
developed to provide banking services more economically,
of Information and Communication Technology (ICT). In
reducing costs and improving availability of services to
addition, the Reserve Bank of India has advised banks to roll
MSEs.

45
Enhancing SME Access to Finance – Case Studies

A cluster is a group of enterprises located within an identifiable Organization (UNIDO), which are spread over 21 states
and, as far as practicable, contiguous area and producing in various parts of the country.
the same or similar products or services. The essential
characteristics of enterprises in a cluster are: similarity or l The Ministry of Micro, Small and Medium Enterprises
complementarity in methods of production, quality control has also approved a list of clusters under the scheme to
and testing, energy consumption, pollution control; similar improve the credit flow to identified clusters of micro
levels of technology and marketing strategies or practice; and small entrepreneurs in 121 Minorities Communities
channels for communication among the members of the Concentration Districts. In order to ensure smooth
cluster; and common challenges and opportunities. implementation of cluster financing by banks, the SLBC
convener banks have also been advised to display on their
Banks have been advised that a full-service approach to respective websites the list of clusters identified by the
catering to the diverse needs of the MSE sector may be Office of the Development Commissioner (MSME). They
achieved through extending banking services to recognized are also asked to identify MSME clusters where banking
MSE clusters by adopting a 4-C approach: customer focus, facilities are inadequate, to enable banks in the state to
cost control, cross selling, and containing risk. Banks have come forward to provide services in these clusters.
been advised by the Reserve Bank to increasingly adopt
l Banks have been advised to open more MSE-focused
the cluster-based approach for SME financing, since it can
branch offices near different MSE clusters. Banks have
reduce transaction costs and mitigate rirks. A cluster-based
also been permitted to categorize their general banking
approach to lending is more beneficial for the following
branches having 60 percent or more of their advances
reasons:
to MSME sector as specialized MSME branches. Public
l Banks deal with well-defined and recognized groups. sector banks will maintain specialized MSME branches
in identified clusters or centers with a preponderance
l There is appropriate information for risk assessment. of small enterprises. to allow entrepreneurs to have
easy access to bank credit and bank personnel with the
l Clusters can be monitored by lending institutions. requisite expertise. Although their core competence will
be used to extend finance and other services to the MSME
Clusters are to be identified based on factors such as trade sector, they will also have operational flexibility to extend
records, competitiveness, growth prospects, or other cluster- finance and render other services to other sectors and
specific data. borrowers.

The entities involved in the implementation of the cluster- l To reach out to MSE entrepreneurs, the regional offices
based approach include the government of India, which has of the Reserve Bank have been advised to organize two
identified the clusters; the Reserve Bank of India, which to three town hall meetings each year in MSME cluster
has issued policy guidelines to banks to encourage cluster areas, preferably unbanked or under-banked clusters, to
financing; and the scheduled commercial banks that are create awareness of banking facilities among MSEs and
implementing the guidelines. There has been no opposition link them to the formal banking system. The idea is also
to the initiative, as the guidelines have been issued by the to obtain feedback on problems faced by enterprises in
Reserve Bank in its capacity as regulator of the commercial accessing bank finance and thus create a base for two-way
banks. communication among stakeholders.

Adoption of the cluster approach by the government and

the Reserve Bank has resulted in implementation of the Results and Lessons Learned
following measures:
The results of the initiative have been measured by the
l At the state level, there is the State Level Bankers Reserve Bank of India. Tables 1, 2, and 3 reflect data received
Committee (SLBC), the highest body of bankers, which from 22 major public sector banks, 10 private sector banks,
discusses state-specific issues relating to credit flow. Such and 32 domestic commercial banks.
committees have been advised by the Reserve Bank to
review the institutional arrangements for delivering Outstanding credit from branches in MSME clusters stood at
credit to the MSME sector, especially for the 388 clusters US$44,818.93 million as of March 31, 2013, with public and
identified by United Nations Industrial Development private sector banks accounting for US$31,451.14 million

46
 Case Studies: Regulations Requiring SME Finance—India

Table 1. 22 Major Public Sector Banks

Date as on No. of No. of Amount Outstanding Amount Outstanding *
Branches Accounts (Rs in Crores) (USD in millions)
31.3.2011 14032 1228435 143520.4 23920.07
31.3.2012 15288 1272439 163171.52 27195.25
31.3.2013 16524 1364431 188706.85 31451.14

Table 2. 10 Private Sector Banks

Date as on No. of No. of Amount Outstanding Amount Outstanding *
Branches Accounts (Rs in Crores) (USD in millions)
31.3.2011 3255 369157 39690.77 6615.13
31.3.2012 3633 559439 64006.73 10667.79
31.3.2013 4219 718403 80206.74 13367.79

Table 3. 32 Domestic Commercial Banks

Date as on No. of No. of Amount Outstanding Amount Outstanding *
Branches Accounts (Rs in Crores) (USD in millions)
31.3.2011 17287 1597592 183211.17 30535.20
31.3.2012 18921 1831878 227178.25 37863.04
31.3.2013 20743 2082834 268913.59 44818.93
*USD 1 = INR 60

and US$13,367.79 million, respectively. Outstanding loans The success of the initiative can be attributed to the capacity
by MSME branches of the 32 domestic commercial banks and commitment of the implementing agencies. The active
located in clusters constitute roughly 40 percent of the total participation by public and private sector banks resulted in
outstanding MSME credit by these banks. a win-win situation for the banks as well as the units in the
MSME sector, with banks getting bankable projects and the
There has been an increase in the number of branches in MSME units getting access to timely and adequate credit.
MSME clusters, the number of accounts, and outstanding
credit of 17.76 percent, 11.07 percent and 31.48 percent, Notwithstanding these measures by the government of India
respectively, from March 31, 2011, to March 31, 2013 in and the Reserve Bank, many of the clusters still suffer from
the major public sector banks. The corresponding figures for problems arising from infrastructure bottlenecks. India’s
the 10 select private sector banks were 29.62 percent, 94.61 new manufacturing policy aims to address these issues
percent, and 102.08 percent, respectively, during the same wherever industry is able to organize itself into clusters and
period. The strong growth in credit can largely be attributed adopt a model of self-regulation.
to this initiative.
Submitted by:
Aridaman Kumar, Deputy General Manager
Reserve Bank of India

47
 Policies and Infrastructure for SME Finance

France/Europe: Improving Financial

Infrastructure through a Common
Securitization Vehicle
Started in 2013

Implementing parties: Banque de France, international banks, Fédération

Bancaire Française (French banking association), SNPP Securities
Services, others.

The Euro Secured Notes Issuer (ESNI) initiative established the central banks (Eurosystem eligibility assessment under
a common securitization vehicle that: review).

l facilitates the refinancing on interbank markets of bank Supporting a more efficient mobilization of credit claims
loans to SMEs; and to SMEs in the form of securities for collateral purposes is
expected to increase the liquidity of these bank loans and to
l relies on Banque de France’s credit assessment of ease credit provision to nonfinance companies.
nonfinancial companies (nearly 300, 000 companies
in France) and on banks’ internal ratings-based (IRB) Increasing the overall amount of collateral that can be
approach, validated by supervisors to ensure the high mobilized on the interbank market through the securitization
credit quality of the underlying assets. of credit claims will offer banks more flexibility to manage
their collateral baskets and address the additional needs for
collateral that they face following the financial crisis.
Background and Rationale
In Europe, most SMEs do not have direct access to financial
markets, and therefore they depend on banks for access to Description of the Intervention
finance. At the same time, banks face difficulties refinancing
SME loans on the financial markets. The French “Haut Comité de Place” (High Level Market
Place Committee) began to explore the possibility of setting
In this context, French banks were looking to identify the up a marketplace structure facilitating the refinancing of
conditions under which the use of credit claims as collateral SME loans in 2012. This high-level committee is chaired
could be increased, especially between credit institutions. by the Ministry of Finance and composed of representatives
of the banking and financial sectors. The ESNI initiative is
Bank loans to nonfinance companies, and to SMEs in thus a private sector initiative that has benefited from strong
particular, have proven to be a resilient source of collateral support from Banque de France. A single and standardized
in credit operations with central banks during the financial Special Purpose Vehicle (SPV)–the ESNI–was established
crisis. However, they are underused as collateral both with by several private banking groups in March 2014.
central banks and their use is close to nil in a cross-border
context. The first securities issuance performed by the ESNI took
place on April 11, 2014, for EUR 2.65 billion. This is
The ESNI initiative offers a new way to mobilize credit claims expected to be followed by additional issuances in 2014.
in the form of securities. It aims to finance the real economy,
especially SMEs, by allowing banks to use these loans as The sponsoring banks were strong drivers of this initiative,
collateral to obtain liquidity, either on the market or from setting up the structure and issuing the first securities. But

49
Enhancing SME Access to Finance – Case Studies

the scheme also benefited from the input of several working ENSI created a simple (no tranching) and transparent
groups involving a range of market participants (i.e., instrument that aims at being replicated in several
French credit institutions and other European banks active jurisdictions.
in France, as well as professional associations including
the French Banking Federation). Representatives from the A single and standardized SPV was set up and shared by
securities, regulatory, and banking supervisory authority several banks. Each participating credit institution has
have also been involved to ensure that the envisaged scheme its own independent compartment(s)11 in the single SPV.
is compliant with existing regulations. Each compartment is bankruptcy remote from the other
compartments of the SPV and is not submitted to any
After the first issuance, the banks began to promote the tranching. The issuance process consists in the issuance of
use of these securities as collateral (and potentially as an securities by the credit institution’s dedicated compartment,
investment product in later stages) on the interbank market these securities being secured by the credit claims
for repo operations, as well as for margin calls to increase collateralized in favor of the considered compartment
the exchange of these securities as collateral. (See Figure 1).

Finally, the Eurosystem is analyzing the conditions under Banque de France provides information on the credit quality
which this type of asset could be accepted as eligible of the SME loans, as it operates an internal credit assessment
collateral in Eurosystem monetary policy operations. system that covers nearly 300,000 companies in France. The
use of Banque de France’s internal credit assessment system,
complemented by the banks’ IRB, has allowed the issuance
independent of rating agencies.

Figure 1. Illustrative View of the Euro Secured Notes Issuer’s Structure

Euro Secured Notes Issuer

Assets Liabilities

Collateralised loan from Security ISINs Z Standard legal

Eligible CC only
BNPP = documentation

Collateralised loan from

Rating transparency: BPCE/Natixis = Security ISINs Y
Embedding existing
portfolio look- requirements
throughapproach
Collateralised loan from
Crédit Agricole = Security ISINs X

Prudential treatment: Collateralised loan from

Non-securitisation = Security ISINs W Easy mobilisation
HSBC

Collateralised loan from

Over-collateralisation Société Générale = Security ISINs V No tranching

Collateralised loan from Security ISINs...

bank... =

Matching maturity
No swap, no liquidity line

11. Each credit institution can have one or several compartments in the SPV. The compartments of a bank are fully segregated from the
compartment(s) held by other banks participating in the SPV, hence ensuring bankruptcy remoteness.

50
 Case Studies: Policies and Infrastructure for SME Finance—France/Europe

The ESNI has been designed to be as simple, secured, sector are very limited, thanks to the standardization of the
and as transparent as possible. This approach has allowed legal and operational structure, as well as the simplicity
implementation of the structure and performance of the first of the structure. In jurisdictions providing a securitization
issuances within a relatively short timeframe (about one framework, legal and regulatory adaptations are either very
year between the first version of the blueprint and the first limited or unnecessary.
issuance of securities).
One potential concern with this model could be the absence
No legal impediment was identified in setting up the ESNI , 12
of rating from a credit rating agency. However, several
as this SPV relies on the standard legal securitization and interested counterparties have attested that this was not an
collateral framework. Setting up a common structure based impediment in practice, given the transparency and simplicity
on standard legal and contractual documentation used by all of the instrument and the credit assessment performed
participating banks paves the way for an increasing use of by banks and central banks on the underlying assets. The
the vehicle in a cost effective manner. promotion and development of alternative credit assessment
systems (either central banks’ systems or commercial banks’
IRB) may be key for gaining independence from credit
Results and Lessons Learned rating agencies.
It is still too early to assess results. More time will be needed
The acceptance of these securities as collateral for central
to measure the use of these securities as collateral on the
banks’ operations would send a powerful signal regarding
interbank market and the impact on credit provision to
the willingness of public authorities to gain independence
SMEs.
from credit rating agencies.
However, the first issuance is promising, given the significant
Other banks (French or international) are expected to
amounts issued and the involvement of the participating
join this vehicle as soon as possible, and after seeing the
banks. Initial feedback from the market is positive.
performance of the first issuance several new banks have
In the future, indicators such as new issuances; the number expressed interest in joining. Meanwhile work on duplicating
of new banks participating in the process from France or the scheme in other jurisdictions is underway. The scheme
elsewhere; the amount of trading of the securities on the could be particularly instrumental in countries where the
repo market and their use for margin calls; as well as the use of credit claims is not widespread, either due to legal
impact on credit provided to companies, will be scrutinized constraints for the direct mobilization of credit claims to the
to assess the success of the initiative. Eurosystem or due to operational impediments faced by the
central bank.
The significant commitment of the French banking
community and select international banks has been key to The stock of loans that could be covered by this initiative in
setting up the ESNI. This ensures that the vehicle is open to France alone amount to several tens of billions EUR/USD.
every bank.
Submitted by:
This kind of initiative can be implemented at no extra Alexandre Gautier, Head of Market Operations
cost for public authorities, and costs borne by the private Department, and Thomas Ros, Deputy Head of Monetary
Implementation Division, Banque de France

12. Some clarifications were necessary from the tax authorities, but this did not lead to identifying any roadblocks.

51
 Policies and Infrastructure for SME Finance

Pacific Islands: Pacific Private

Sector Development Initiative I

Started in 2007

Implementing parties:13 Governments of the Solomon Islands and Vanuatu,

Asian Development Bank.

Background and Rationale law strong enough to support secured lending. Secured
lending was organized around various costly legal forms,
The vast majority of businesses in Pacific island economies some subject to registration and others not. Registries were
are either formal SMEs or informal microenterprises, with cumbersome and offered limited information that was often
the large majority falling into the latter category. Even the unreliable. Other problems included:
largest businesses employ no more than a few hundred
people, with economic activity overwhelmingly undertaken l The secured lender’s priority against third parties was not
by SMEs and informal businesses. established by registration, but rather by legal formality,
which technicality failed to consider all potential
Extensive analytical work preceding secured transactions competing claims.
reforms indicated that SME and microenterprise access
to formal finance has been extremely limited. Financial l The system was costly for borrowers because they had to
institutions have been unwilling to lend unless borrowers pay substantial legal fees associated with loan documents,
were able to provide fixed property (land and buildings) each of which was unique and had to be drawn up by
as collateral. Since the vast majority of land in the Pacific a lawyer.
region is communally owned, and therefore unavailable to
l Enforcement was expensive and uncertain.
be pledged as security for loans, SMEs were effectively
shut out of access to finance. This not only reduced their l Lawyers needed to physically search several registries to
ability to invest and expand, but also weakened incentives determine if an asset had been pledged to another lender.
to formalize, so that a significant portion of economic
activity took place in the informal sector. Further, women l The result was very limited access to financing by many
were especially disadvantaged because they had no rights to businesses, especially smaller and unincorporated entities.
the limited amount of land that was allotted through Since access to finance is one of the reasons for firms to
individual title. formalize, informality burgeoned because there was less
reason to enter the formal sector.
Before reform was implemented, traditional legal support for
secured lending in both countries had its roots in legal forms
established by either statute or common law derived from Description of the Intervention
English law. Although uncertainties often surrounded land To achieve reform, extensive analytical work was initially
ownership and titles, many lenders considered mortgage undertaken to highlight the shortcomings and opportunity

13. The Pacific Private Sector Development Initiative (PSDI), a regional technical assistance program to promote private sector development
in the Pacific region, implemented these reforms. The Australian Department of Foreign Affairs and Trade (DFAT), the New Zealand Aid
Program and the Asian Development Bank fund PSDI.

53
Enhancing SME Access to Finance – Case Studies

costs of the existing system, using a combination of economic registrations are not examined, and no certificates are
and legal analyses. This was then used for advocacy with issued to provide evidence of the existence or validity of
both the private and government sectors to demonstrate the a security interest. Thus, the registry requires very little
potential advantages of reforming the system. This resulted, input from personnel, which greatly reduces costs.
in both countries, in formal requests for assistance from the
government to the ADB. Registration serves only two purposes:

A team of technical experts was formed, consisting of l To provide notice to the public to inquire further before
lawyers and economists, to help draft the law and undertake buying or taking a security interest in property of the
economic analysis. An important part of the process was same nature described in the notice.
establishing local steering committees to review the draft
l To establish a priority date (the registration date) by
law. Because of the extensive consultations and seminars
which competing claims to collateral can be settled.
that highlighted benefits, opposition to changes did not pose
a major challenge to achieving the reforms.
Results and Lessons Learned
Both countries reformed traditional secured lending laws
by establishing simplified “notice filing” registries, which The new system is inexpensive. In both countries, registration
operate electronically and without government registrar and filing fees for security interests are approximately
intervention. US$30, compared with several hundred dollars before the
reforms.
These registries need the following information:
Vanuatu has had a steadily increasing level of registrations,
l Name and address of the secured party (the entity while the Solomon Islands have experienced considerable
providing the loan or credit). fluctuations. Figures 1 and 2 show the transactions filings
and registry searches for both countries through December
l Debtor’s name and address (the borrower).
2013.
l Collateral description (general or specific), including
asset serial numbers (as when a security interest in a Registrations data indicate that the majority of credit
motor vehicle is recorded). transactions involve borrowers located in the main province
of each country, although Solomon Islands has a wider
l Registrations are paperless, online and instantaneous, geographic distribution for credit transactions due to more
eliminating uncertainty about the exact time and date developed centers of economic activity beyond the capital
of recording the security interests. The overall cost of city, Honiara (Table 1). The proportions have remained
the reforms was relatively small, involving technical consistent over 2009–2013, especially for Vanuatu. However,
assistance to change the law and the installation of a expanding mobile banking, greater awareness of the features
registry, amounting to approximately $300,000 and of the reform, financial institution acceptance, and greater
$100,000 respectively. Documents submitted for rural investment means that trends may change. At least

Figure 1. Solomon Islands Figure 2. Vanuatu

12,000 12,000

10,000 10,000

8,000 8,000

6,000 6,000

4,000 4,000

2,000 2,000

0 0
2009 2010 2011 2012 2013 2009 2010 2011 2012 2013

Filings Searches Filings Searches

54
 Case Studies: Policies and Infrastructure for SME Finance—Pacific Islands

one financial institution in each country has expressed firm In Solomon Islands, the largest equipment finance company
interest in expanding loan services in rural areas using indicated that lending had increased by a factor of six as of end
nonconventional joint ventures that will undertake supply 2013, as a direct result of the reforms. Similarly, in Vanuatu,
chain financing using secured transactions to collateralize a large building and equipment wholesaler is beginning to
loans. provide financing for purchases, which it secures by the
use of the new secured transactions framework. Both the
Information on Gender of Borrowers: Both countries’ equipment financier and the wholesaler indicated that their
registries software was upgraded to collect information on nonperforming loan ratios were less than two percent as of
borrower gender, in July 2010 in Vanuatu and in August end 2013.
2010 in the Solomon Islands. Women are actively using the
secured transactions framework either as equal parties or as It is ironic that commercial banks still rely on lending
majority members of a borrower group (Table 2). Although secured by fixed property, which they say is extremely
women have registered a much smaller number of security challenging to manage in the event of default, and on which
interests than have men, the simplified registry process and nonperforming loan ratios exceed 20 percent. Lenders have
the greater certainty introduced by the new framework are not had problems seizing assets in the event of default.
clearly encouraging women to take out loans.14 Their legal right to do so has been tested and upheld by the
legal system. In practice, lenders have had little difficulty in
In both Solomon Islands and Vanuatu, there was wide repossessing and selling pledged assets without recourse to
consensus among financial institutions, lawyers, and central obtaining court orders.
bank staff that: (i) the reforms had strengthened the potential
for the financial system to provide financing to SMEs and By contrast, the nonperforming loans secured by moveable
microbusinesses; and (ii) both the laws and registries are property—around 8-15 percent of all bank loans—total less
functioning effectively. Procedurally, the registries have than 4 percent. For finance companies and wholesalers,
operated effectively to enable financial institutions to ensure who are the most active users of the new framework, the
that they have priority as the secured creditor, while the costs nonperforming loan ratio is less than 2 percent. Bank
of processing loans have fallen dramatically. Of particular regulators are beginning to ask about lending using the
note is that nonbank financial institutions are using the new new framework and have shown active interest in its wider
framework more intensively than commercial banks. adoption.

Table 1. Geographic Distribution of Security Interests—Solomon Islands and Vanuatu

Year 2009 2010 2011 2012 2013
Solomon Islands–
63.0 90.9 48.8 56.5 61.1
Main Province
Solomon Islands–
37.0 9.1 51.2 43.5 38.9
Other Provinces
Vanuatu–Main Province 84.1 87.1 83.1 88.6 87.2

Vanuatu–Other Provinces 15.9 12.9 16.9 11.4 12.8

Source: Solomon Islands Secured Transactions Filing Office, [Link] Vanuatu Personal Property Securities Registry; [Link].

Table 2. The Gender of Borrowers with Secured Loans—June 2013

Country Equally Men and Women Majority Women Majority Men Indeterminable
Solomon Islands 51 567 1656 7457
Vanuatu 166 222 919 1719
Sources: Solomon Islands Secured Transactions Filing Office, and Vanuatu Personal Property Securities Registry.

14. Because gender disaggregated data were not available during the transitional filing periods and the first year of operation, it is not possible
to ascertain whether larger numbers of women are borrowing compared with the old system. Anecdotal evidence suggests that they are.

55
Enhancing SME Access to Finance – Case Studies

Because secured transactions registries do not record the Success of the reforms also depends on working with lenders
value of loans, data on the value of financing under the to help them use the framework and develop new financial
new framework are not available. It is also hard to estimate products.
exactly how many SMEs have been assisted. However,
interviews with lenders revealed that they were already These measures will lead to more intermediation that uses
providing financing to all of the large companies in both the substantial liquidity that exists in the financial systems of
countries. They stated that almost all the increase in lending Pacific island economies. They will deepen the reforms and
was to smaller businesses. Of the 8,000 new loans made in further open access to credit. Given the positive reception
the two countries since the reforms, bankers and finance of the reforms, familiarity will increase through the passage
companies stated that a significant majority of recipients of time, with intensive implementation leading to the
were either individuals or SMEs. framework being more fully used.

The most surprising aspect of the reform is the continued Even with somewhat limited implementation, lending
conservatism of commercial banks, which are far from fully has expanded significantly. But much remains to be done
using the new framework. In some cases they are not even before the full potential for financial market development
aware that without registration of security interests, their from secured transactions reform is realized. Lenders need
loans have no priority over secured lenders nor that there assistance to develop the far larger range of instruments
is significant potential for creating new financial lending to finance business activities than are now available. The
products. Banks in the Pacific region are highly profitable benefits of secured transactions reform will take time
because of substantial charges for bank services, especially to be realized and for new forms of lending to evolve. It
money transfers. Incentives to lend are therefore weaker is not realistic to expect an overnight transformation of
than they might be in other regions. lending. Full implementation could require up to a decade.
However, the evidence from such reforms in New Zealand,
A central lesson learned is the importance of implementation. Canada, and some countries in Eastern Europe shows that it
It is clear that achieving the full potential of secured provides a powerful tool to increase financing to businesses,
transactions reforms depends on further publicizing the particularly those that are smaller or unincorporated.
advantages of the new framework for businesses, many of
which are unaware of its potential [Link] more Submitted by:
substantial effort to increase awareness, the new framework Paul Holden, Lead Economist, Pacific Private Sector
will continue to be under-used, and lending policies in both Development initiative
countries will remain overly cautious and conservative.
Chambers of commerce would be natural partners, although
they will first require significant training.

56
 Policies and Infrastructure for SME Finance

Pacific Islands: Pacific Private

Sector Development Initiative II

Started in 2007

Implementing parties15: Government of Samoa, Government of the

Solomon Islands, Asian Development Bank.

Background and Rationale to register a business was to travel to the capital, where
the company registry was located and wait while all the
The goal of the initiative is to remove the obstacles arising legal processes were completed. Usually it was necessary
from inadequate and outdated company laws in Samoa to hire a lawyer, which involved substantial expense. The
and the Solomon Islands for individuals who would like to requirements for establishing companies also involved many
engage in commercial activity using a company as the legal outdated legal forms, such as minimum capital requirements,
entity. These obstacles include: company seals, and several directors, all of which raised
costs without serving any business purpose. In many cases,
l high costs and delays in setting up a company; women were required to obtain signatures of male relatives
l business and company structures that are overly before they could form companies.
complicated and inflexible; and

l difficulty in accessing financial services and obtaining Description of the Intervention

credit. To achieve the reform, extensive analytical work was
initially undertaken highlighting the shortcomings and
While most of these barriers also apply to men, they
opportunity costs of the existing system, using a combination
particularly disadvantage women who, in many cases, are
of economic and legal analysis. This was then used as an
already discriminated against in engaging in economic
advocacy tool with both the private sector and the public
activity. The processes were so complicated and almost
sector to demonstrate the potential advantages of reforming
invariably required costly legal advice and assistance, so
the system. This resulted in formal requests for assistance in
that many business owners simply chose to remain in the
both countries.
informal sector, with the associated low productivity and
difficulty in accessing finance. Moreover, informality is not A team of technical experts was formed, consisting of
conducive to sustainable business success. The company lawyers and economists, to assist with the drafting of the law
law and registry reforms aim to facilitate a transition to the and undertaking economic analysis on the implications. An
formal economy. important part of the process was the establishment of local
steering committees to review the draft law, to ensure that
Before reform was implemented, in both countries, business
momentum was not lost, and to lobby government officials
registration was slow and costly. It was especially difficult
in these widely scattered countries because the only way

15. The Pacific Private Sector Development Initiative (PSDI), a regional technical assistance program to promote private sector development in
the Pacific region, implemented these reforms. The Australian Department of Foreign Affairs and Trade (DFAT), the New Zealand Aid Program
and the Asian Development Bank fund PSDI.

57
Enhancing SME Access to Finance – Case Studies

and politicians. This helped overcome the main challenge of In the Solomon Islands, a community company structure
inertia in the political system that could have extended the has also been introduced, which is a more transparent and
reform period far beyond what was actually achieved. accountable alternative to informality or to establishing
trusts and cooperatives. It has great potential for managing
The Companies Act reform commenced in Solomon Islands royalties received from resources and payments received
and Samoa in 2010 and 2012, respectively, accompanied by from leases of customary land. There were 17 community
the installation of fully electronic company registries. companies in the Solomon Islands as of Dec. 31, 2013.

The new company laws provide for simplified and automated

incorporation processes, which significantly reduce the Results and Lessons Learned
monetary and time costs of establishing a business. For example,
The new registries are accessible from anywhere with
while companies are still free to adopt their own tailored
Internet access, 24 hours a day, 7 days a week. The online
rules on matters such as the appointment, removal, powers
registry has made it cheaper and faster for new businesses to
of directors, rules for meetings, and shareholder rights, doing
incorporate by cutting through red tape, such as ministerial
so is no longer mandatory under the new Companies Acts.
approvals for company names, requirements to produce
company seals, and eliminating the need to hire a lawyer
Companies can simply adopt the model rules already
to travel back and forth to the main centers of Honiara in
contained in the new acts, eliminating the need for lawyers
the Solomon Islands and Apia or Savai’i in Samoa, except
and reducing costs. The provisions for online application
to make payments. Cost of incorporation is SBD 1,250
and payment also make company incorporation considerably
(approximately US$100) in Solomon Islands and ST 250
more convenient. In addition, electronic incorporation
(approximately US$106) in Samoa. Typically, before
processes eliminate discretion (administrative and political),
the reform, the cost of incorporation using a lawyer was
which makes it very difficult for any gender discrimination
US$1,000–US$2,000. For someone in the provinces, travel
to occur. Furthermore, the new processes directly identify
cost would double this amount. The time taken to form a
any reporting and disclosure failures, which keep records up
company has been reduced to a maximum of one to two
to date and reduce administrative costs.
days from six weeks in the Solomon Islands and two to three
weeks in Samoa as a result of the reforms.
The new company laws also include innovative company
structures, such as the single shareholder company, designed
As Figures 1 and 2 show, registrations in both Samoa and the
to allow maximum flexibility for entrepreneurs to set up
Solomon Islands have increased substantially after the launch
and manage a business without other external ownership
of the electronic registries. There are now on average 271 new
influences. For example, this gives women greater control
companies incorporating each year in the Solomon Islands,
over their business operations and income by removing
more than double the pre-reform registration rate. In Samoa,
the need for a second, usually male, owner. In addition,
the number of incorporations following the launch of the
the new Companies Acts provide more flexible regimes of
online registry doubled the average incorporation rate over
company meetings and resolutions, allowing greater ease of
the previous five years (2008–2012).
participation.

Figure 1. New Incorporations Per Year in Samoa Figure 2. New Incorporations Per Year in
Solomon Islands
250 350
300
200
250
150
200
100 150
100
50
50
0 0
2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

58
 Case Studies: Policies and Infrastructure for SME Finance—Pacific Islands

Table 1. Gender of Company Directors and Shareholders in Samoa

Directors Shareholders
Date Male % Male Femal % Female Total Male % Male Female % Female Total
Feb-13 1,749 68% 810 32% 2,559 1,767 62% 1,088 38% 2,855
Dec-13 1,799 68% 845 32% 2,644 1,877 62% 1,139 38% 3,016

Table 2. Gender of Company Directors and Shareholders in Solomon Islands

Directors Shareholders
Date Male % Male Femal % Female Total Male % Male Female % Female Total
Dec-10 2,163 77% 663 23% 2,826 1,934 73% 718 27% 2,652
Dec-13 3,658 78% 1044 22% 4,702 2,622 74% 904 26% 3,526

Table 1 and 2 provide information on the gender of company essential information removes some of the uncertainty that
directors and shareholders in both countries. In the Solomon financial institutions and others have in dealing with SMEs.
Islands, the number of female company directors increased Furthermore, this information can be obtained at no cost.
from 663 to 1,044, while female shareholders increased from
718 to 904 (which represents a slight fall as a percentage The transparency provided by the registries has also been
of the totals). The number of female company directors and useful for police, tax authorities, and journalists in verifying
shareholders also increased in Samoa although given how information for politicians and civil servants, reducing the
recently the reform occurred, it would be premature to draw potential for corruption.
any firm conclusions from these data.
A key element of success of the reform was the extensive
A survey of company administrators and business services pre-reform consultation and the post-reform implementation,
providers one year after the respective launches found that: which will ensure that the reforms are sustained for the
long term. Ongoing engagement with company registries
l registering and maintaining companies was significantly personnel provides the opportunity for feedback and to
easier after the reforms; identify any elements of company law that would benefit
from an updating amendment. In Samoa, for example, an
electronically searching the registry for names of
amendment is being proposed for an easier company removal
l

directors and shareholders and for examining the articles

process to improve efficiency and compliance. In Samoa, a
of incorporation saves substantial amounts of time and
reporting tool has been developed that substantially improves
money; and
the capacity to monitor basic indicators and the compliance
l the ease of access to information has assisted with company of companies, including the filing of annual returns.
administration, accounting, and auditing activities. The
A key issue identified post-reform is the need to develop
company law reforms not only make it easier and more
online payment systems so that registration fees can be paid
affordable to set up a business, but also provide for simple
electronically. Although work toward solutions is being
formal corporate structures, such as single shareholder
undertaken in both countries, electronic payment processes
companies with minimal reporting requirements that are
are not yet in place.
well suited to less developed countries. These are ideal
company forms for SMEs.
Submitted by:
Paul Holden, Lead Economist, Pacific Private Sector
Banks in both countries are actively using the online registries
Development initiative and Melissa Dayrit
to search for information on company ownership, directors,
Monitoring and Evaluation Expert
signing authority, location, and other basic information that
Pacific Private Sector Development Initiative
is part of loan decisions. Again, the availability of reliable

59
 Policies and Infrastructure for SME Finance

Peru:
Credit Bureau Implementation

Started in 1997

Implementing parties: Superintendency of Banking, Insurance and

Pension Funds.

Description of the Intervention market more competitive and transparent. In addition, the
possibility of building a credit history made credit accessible
In 1997, an important expansion of the Credit Bureau of the to more people. This benefit was enhanced in 2004 when
Superintendency of Banking, Insurance and Pension Funds both positive and negative (performing and nonperforming
of Peru (SBS) went into operation. This change consisted loans) information became available. Before that year, only
of going from receiving information from debts above negative information was revealed.
US$5,000 from banks and financial institutions, to receiving
information on all the debts in their portfolios from S/.1 In the field of supervision, information received through the
(US$0.35), and including within the scope microfinance RCD enables a better evaluation of credit risk levels in each
regulated institutions, such as Municipal Non-banking financial institution, as well as regional or sectoral analysis,
Institutions (CMAC), Rural Non-banking Institutions thanks to the different identification parameters included in
(CRAC) and Micro and Small Enterprise Development the report. In fact, many studies for evaluating the feasibility
Entities (EDPYME). of new regulations are made based on this information.

From 1998 to 2001, several more changes occurred in the For financial institutions, credit risk analysis for small loans
design of the formats used to report loan information, to is expensive, especially when there is little information
expand the data captured, including risk classification of available. Since the credit information is publicly available,
debtors, payment indicators, write-offs, and loan portfolio it may also be useful for third parties as references for
sales. Currently, SBS receives through its Debtors Credit business relationships.
Report (Reporte Crediticio de Deudores–RCD) more than
40 items of information per debtor from each reporting To achieve the implementation of the new credit bureau, the
institution. These credit records were also made available SBS had to expand its capacity to process all the information
for private credit bureaus (created by Law 27489 in 2001), that would be received, which was far more than what was
which offer this information to the general public, along with being processed in 1997. Implementation was made possible
additional information from other sources, such as utility by modernization and technological changes inside the SBS
and school fees payments and debts in some nonregulated through various projects and financial support from the
institutions. Inter-American Development Bank (IDB).

The decision to expand the credit bureau was mainly Technology was also a major challenge for financial
intended to strengthen SBS’s credit risk supervision and to institutions, especially microfinance institutions, since they
improve the ability of supervised institutions to evaluate had to make their own systems adequate to comply with the
the risk levels of potential and current clients. Expansion of periodic information requirements and the quality standards
the credit bureau’s coverage carried other benefits as well, demanded by the supervisory authority.
because this information was also used to make the financial

61
Enhancing SME Access to Finance – Case Studies

The detail of information to be revealed to the system more institutions. By January 2001, there were 1.2 million
was another important issue. SBS requires very detailed clients with debt amounts under US$5,000. By December
information about debtors and current debts for supervision 2013, that number rose to 4.4 million. This means that prior
purposes. However, not all of this information can be revealed to the expansion of the scope of the credit bureau system,
outside the system, given the need to evaluate the balance debts of these clients were not registered, meaning that those
between transparency and the protection of information. clients had no opportunity to show the system their credit
Today, the information that is revealed through the records.
Consolidated Credit Report (Reporte Crediticio Consolidao–
RCC) includes identification of debtors, current, contingent, A direct benefit of the credit bureau information is that it has
and total debt to institutions in the financial system, as well allowed the definition and analysis of different types of credit,
as default records and risk classification. Since this is a in particular those granted for business purposes. To assist
regulatory obligation imposed by the supervisory authority, the supervision of credit risk, the Peruvian regulation uses
participation in the new credit bureau is mandatory for all the information on the debtor´s total level of indebtedness
supervised institutions. in the financial system as an important parameter to define
different types of credit granted for businesses purposes.17
Still, there is a universe of unregulated MFIs (mainly credit Based on this criterion, microcredit was defined for the first
unions and nongovernmental organizations) that are outside time in 1997 as a special type of credit,18 different from
the scope of these information requirements. Some of commercial loans, which applied to larger firms. In 2001,
these institutions are resistant to sharing their information, the microcredit definition was adjusted to better match the
especially in an effort to maintain the exclusivity of their size characteristics of the demand.19
clients. However, private credit bureaus have been working
in cooperation with microfinance networks16 in order to Finally, in July 2010, after a careful analysis of the credit
make information available at lower costs for MFIs, while bureau information to identify different risk profiles and
also encouraging these same institutions to share their the characteristics of the debtors, a significant regulatory
information. improvement was made, fine-tuning the definition of
microcredit and disaggregating commercial credit. Thus,
in addition to microcredit, the following types of credit
Results and Lessons Learned granted for business purposes were defined: small enterprise
credit, medium enterprise credit, large enterprise credit, and
The new information managed by the SBS Credit Bureau
corporate credit.20 These definitions allow a more accurate
provided the system with standardized information, both
risk evaluation of debtors, recognizing the different market
positive and negative, thus reducing the cost of credit
segments and making the estimation of loan loss provisions
evaluation for institutions. Clients who show good credit
more consistent with the heterogeneity of the Peruvian credit
records benefit from new opportunities for more and better
market.
access to financial services, as well as being targeted by

16. COPEME, an NGO association, in partnership with EQUIFAX, the leading private credit bureau in Peru, has been very active in promoting
information sharing among microfinance oriented NGOs.
17. This definition is created for supervision purposes. Other definitions exist, based on number of employees and annual sales, which are
provided by the Law N° 28015 “Promotion and Formalization of the Micro and Small Enterprise Law,” and mainly used for tax and labor regulation
purposes.
18. Regulation issued in 1997 differentiated between two types of business credits: Microenterprise and Commercial. Microenterprise credits
were defined as credits granted to physical or legal persons meant to finance production, commercial activities, or services, in enterprises with
a level of assets or total indebtedness in the system no bigger than US$20,000. Commercial loans were any other credit intended for business
purposes that did not comply with the previously mentioned conditions.
19. New regulation increased the limit of total debt in the system to US$30,000 and excluded asset levels from the definition.
20. Until June 2010, regulations contemplated four credit types: Micro Enterprise, Commercial, Consumer, and Mortgage Loans. From July
2010, eight credit types were defined: Micro Enterprise, Small Enterprise, Medium Enterprise, Large Enterprise, Corporate, Revolving Consumer
Credit, Non Revolving Consumer Credit and Mortgage Loans.

62
 Case Studies: Policies and Infrastructure for SME Finance—Peru

Micro and small credit are defined based only on the allow financial institutions to focus on clients with positive
total indebtedness of the borrower,21 both having similar information, making the lending process more efficient.
regulatory treatment. Based on the risk proportionality This also has had a strong impact on borrowers themselves,
criterion and with the purpose of easing access to credit, the who have become more aware of the benefits of maintaining
regulation allows lower client documentation requirements good credit records, and of serious financing limitations they
at the time of loan origination. Debtor´s risk evaluation can could face when they do not.
be based only on the number of days the loan is overdue.
Medium enterprise credit, on the other hand, is defined using In spite of the many ways in which information from the
annual sales as an additional criterion to total indebtedness credit bureau has influenced the development of MSME
and does not have special treatment for micro and small finance, the specific impact of these cannot be quantified.
credits. In any case, the information provided by the credit This is because it was accompanied by many other
bureau improves the ability of financial institutions to focus regulations and actions over time meant to develop a more
on their target market and to better analyze their risks. It also favorable environment, especially for micro and small-scale
helps funding providers in the selection and monitoring of finance, in view of the fact that more than 98 percent of firms
the MSME sector they want to promote. in Peru are micro and small.

In general, a strong credit report system contributes to Nevertheless, there is no doubt that credit bureau information
reducing the information asymmetries that exist between has played a key role in the important expansion observed in
lenders and borrowers. Lending methodologies for micro microfinance, both in terms of the volume of credit provided
and small enterprises especially require loan officers to and the number of debtors participating in the financial
do mostly field work, establishing close relationships with sector. Furthermore, as explained above, since 2010 small
clients to gather information about their businesses. Once and medium enterprise finance became more clearly visible,
they are incorporated into the financial sector, credit records and also performed well. To better interpret Figures 1 and

Figure 1. Number of Borrowers by Credit Type 2001–2014

Number of Borrowers by Credit Type
1,800,000

1,600,000 Change in credit type

definition regulation (SBS
1,400,000 Resolution N 11356-2008)
Number of Borrowers

1,200,000

1,000,000

800,000

600,000

400,000

200,000

0
01-jul-01

01-jul-011
01-ene-11
01-ene-01

01-ene-02

01-jul-07
01-jul-02

01-jul-06

01-jul-09

01-ene-10

01-jul-010

01-ene-12

01-jul-013
01-ene-06

01-ene-09

01-ene-13

01-ene-14
01-ene-03

01-ene-04

01-ene-05
01-jul-04
01-jul-03

01-jul-05

01-ene-07

01-ene-08

01-jul-08

01-jul-012

Micro Enterprise (previous definition) Micro to Enterprise Small Enterprise Medium Enterprise

21. Current definitions for Micro, Small and Medium Enterprises were established by SBS Resolution N° 11356-2008, being:
• Micro Enterprise: Credit granted to physical or legal persons with a total indebtedness in the financial system, not considering house mortgages,
no higher than S/.20,000 (approximately US$7,000) over the last six months, used to finance production, commercial activities or services.
• Small Enterprise: Credit granted to physical of legal persons with a total indebtedness in the financial system, not considering house mortgages,
no higher than S/.300,000 (approximately US$105,000) over the last six months, used to finance production, commercial activities or services.
• Medium Enterprise: Credit granted to legal persons with a total indebtedness in the financial system over S/.300,000, that do not meet
conditions to be considered Large or Corporate Credits (for example, sales over US$7 million in past 2 years, having issued securities, having
audited financial statements).

63
Enhancing SME Access to Finance – Case Studies

Figure 2, it is important to highlight that the ceiling of credit bureau went into operation, the microfinance sector
debtors’ total indebtedness in the financial system to qualify was already expanding, with new institutions entering the
for a microcredit was substantially reduced in 2010, going market and with room to grow, and even some restrictions to
from US$30,000 to around US$7,000. Hence a portion of compete by region.22
what is shown as small enterprise credit was included before
in the earlier definition of microcredit. Today, the Peruvian microfinance system has matured.
Institutions have no restrictions against competing in the
The impact of credit bureaus on transparency and competition same areas, in urban areas especially, and have experienced
is also well recognized, and this has certainly contributed to increasing competition in recent years. To face these new
the substantial decrease in interest rates observed, especially scenarios, institutions are looking for ways to be more
for microenterprise credit, for which there is a longer period efficient so that they can stay competitive.
of information.
In this context, information from the credit bureau is
Finally, information obtained through the credit bureau being used not only as an instrument for risk management,
contributes to a better supervision of credit risk by the SBS. but also increasingly as a tool to target good clients. This
Indeed, the SBS relies heavily on this information to be benefits clients who show good credit records, since they
constantly aware of risk levels in the loan portfolios of each will likely be offered more financing and better conditions
institution, and even in each sector and region, analyzing by competitors in the market. Institutions may also benefit,
their evolution and demanding corrective measures, when since they reduce their evaluation costs for potential clients.
needed, so that institutions maintain adequate risk profiles.
This information is also very important in evaluating over- Nonetheless, some worries have risen in relation to those
indebtedness, a critical issue nowadays in most mature institutions that introduce unbanked clients to the system.
microfinance markets. Evaluation of debtors’ credit behavior, Evaluation of an unbanked client is more costly, since this
number of lenders, and increase in debt are indicators that has to be deeper given a lack of previous credit records.
can help SBS, and the institutions themselves, identify However, institutions may not find enough incentives to
possible problems of over-indebtedness in clients, in order make this extra investment if clients are not likely to remain
to prevent them. with them long enough. Another outstanding issue is that,
despite the development of the microfinance sector, there are
The intense competition observed in the microfinance sector still many areas, mainly rural, that lack access to financial
is presenting some new challenges. At the time when the new services.

Figure 2. Loan Portfolios by Credit Type 2001–2014

Loan Portfolios by Credit Type
20,000

18,000
Change in credit type
16,000 definition regulation (SBS
Resolution N 11356-2008)
Loans (in millions of US$)

14,000
12,000

10,000
8,000

6,000

4,000
2,000

0
01-ene-01

01-jul-01

01-ene-11

01-jul-011
01-jul-03

01-jul-04

01-jul-08
01-ene-02

01-jul-06

01-ene-07

01-ene-08

01-jul-09

01-ene-10

01-jul-010

01-ene-12

01-jul-012

01-jul-013
01-jul-02

01-ene-03

01-ene-04

01-ene-05

01-ene-06

01-jul-07

01-ene-13

01-ene-14
01-jul-05

01-ene-09

Micro Enterprise (previous definition) Micro to Enterprise Small Enterprise Medium Enterprise

22. Until 2002, Municipal Non-Banking Institutions (CMAC) could only operate in their own regions, or any other region where there was no other
CMAC operating.

64
 Case Studies: Policies and Infrastructure for SME Finance—Peru

Therefore, the SBS is continuously evaluating actions receive or produce all that information. Nonetheless, having
that can promote the expansion of the financial system, such detailed information from every operation would
especially to reach those who have limited or no access to strengthen supervision, especially of MFIs, whose loans
financial services. In this area, new methodologies are being show more dynamic behavior than any other type of credit.
explored, such as psychometric models, that may contribute
to bringing access to those clients that are new to the system Regulated institutions have 15 days to send their RCD to the
and have no credit records to show, by making client SBS. Once received, the SBS runs several validations and
evaluation more cost efficient for institutions. revisions to ensure the quality of the information received,
asking for corrections if they are needed. Later, information
Credit Bureau by Operation is consolidated so it can be made available to the system
(Central de Riesgos por Operaciones – CRO) through the Consolidated Debtors Report. This process
results in a delay in information of about a month, and can be
The public credit bureau today shows balances per debtor, more days for private bureaus that run their own processes to
not per operation. In spite of the amount of detail in that consolidate other sources of information.
information, it has some limitations, mainly associated with
the fact that movements in individual operations cannot be The dynamic behavior of the microfinance sector means such
identified (such as the interest rate on the loan, terms, and delays have a greater opportunity cost every day, given the
payments). speed at which clients can take on new debt, show arrears,
or otherwise change their risk condition since the last report
In accordance with the needs of modern supervision, of information. However, it is difficult to reduce this time
the Credit Report by Operations (Reporte Crediticio de without reducing the quality of the information.
Operaciones - RCO), provides more detailed information.
This report is being required only from institutions with Some non-regulated institutions are currently sharing
at least 25 percent of their portfolios allocated to nonretail information with some private bureaus, but the availability of
loans and for credit operations classified as “nonretail.” this information is not standardized or centralized, like that
provided by regulated institutions. An evaluation of the costs
It is expected that in the longer term, all operations will be and benefits of sharing information for those institutions is
included in the RCO, although this means that the SBS and needed. When sharing information, institutions also obtain
other institutions must continue enhancing their capacity to additional information that allows them to improve their

Figure 3. Loan Interest Rates 2003–2014

Financial System: Interest Rates by Credit Type (in percentage)
70

60

50

40

30

20

10

0
01/2003

04/2008

07/2013
04/2005

01/2006
07/2004

04/2011
10/2003

10/2009

01/2012
07/2007
10/2006

07/2010

10/2012

04/2014
01/2009

Micro Enterprise (previous definition) Micro to Enterprise Small Enterprise Medium Enterprise

65
Enhancing SME Access to Finance – Case Studies

credit risk management and, at the same time, decrease the on their debtors, which would then include in public records
risk of over-indebtedness for those clients who are evaluated an important amount of information that is not currently
based only on public records. However, competition in the public. Credit unions would face some challenges in the
sector may discourage information sharing in institutions adequacy of their information systems to comply with the
that are not legally required to do so (such as credit unions requirements of supervised institutions.
or NGOs), since most of their clients are still exclusive and
would probably stop being so once other institutions target Submitted by:
them. Myriam Cordova Luna, Head of Microfinance Supervision
Deparment, Narda Sotomayor Valenzuela, Head of
Another interesting aspect is a proposed law for the Microfinance Analysis Department, and Michelle Paredes
incorporation of credit unions under the direct supervision Gonzalez, Microfinance Supervision Senior Analyst,
of the SBS. Among other issues, this would mean that those Superintendency of Banking, Insurance, and
institutions would be under obligation to report information Pension Funds of Peru

66
 Policies and Infrastructure for SME Finance

Republic of Korea: Improving

Women’s Access to Finance
Through Family-Friendly Companies
Started in 2008

Implementing parties: Ministry of Gender Equality and Family.

Background and Rationale Description of the Intervention

This is a certification program with an evaluation system Applicants scoring above 60 out of 100 are certified as
to certify companies that run family-friendly management family-friendly companies. Evaluation criteria include:
systems. Such management systems include flexible work
hours, support programs for childbirth, childcare and l meeting key requirements for operation;
education, support for dependent family members, and
l progress in implementing a family-friendly system; and
support for employees.
l satisfactory level of family-friendly management.
In response to changes in social trends including lower
birth rates, an aging society, and an increase in the female A detailed description of the evaluation criteria and the
workforce in economic activities, certification of family- scoring method is provided in Box 1.
friendly companies aims to build a more family-friendly
society that enables workforce balance between work Each applicant receives certification through document
and life. screening and auditing by the relevant authority (Korea
Management Association Registrations & Assessments
The program was introduced in 2008, and the Act on Inc.) and review for Certification by the Family-Friendly
the Promotion of Creation of Family-friendly Social Companies Committee (Ministry of Gender Equality and
Environment has been amended to make a basis for Family).
implementation. For 2014, the Korean government budgeted
US$1.1 million to “Projects for Building Family-friendly As many as 26 entities, including central government
Social Environment,” for promotion and screening, an agencies, local governments, and private businesses are
increase of 73.3 percent from US$0.6 million in 2013. This offering 77 incentives for certified companies. Financial
budget will be used for the payment of certification fees, incentives are provided as described below.
consulting fees for certification of SMEs, organizing forums
and promotion. l Ministry of Employment and Labor: priority in receiving
subsidized loans for industrial accident prevention facility
The Ministry of Gender Equality and Family is in charge of (maximum of US$0.3 million for each, with a special rate
certification. Organizations as diverse as companies, public of 3 percent) and subsidy provided for procurement of
agencies, and local governments are eligible to apply. As of equipment (maximum of US$0.02 million for each).
2013, 522 companies and agencies have been certified, with
183 of them being SMEs and making up 35.1 percent. l Small & Medium Business Administration: special offer
of policy-related loans to SMEs (US$4.1 million for

67
Enhancing SME Access to Finance – Case Studies

Box 1. Evaluation Criteria for Certifying Family-Friendly Companies

I. Major Requirement (30 points)

Leadership (12): attention and commitment of top management

Management system (8): teams and human resources allocated to projects to promote family-friendliness (2); budget
allocated to projects to promote family-friendliness (2); regulations related to family-friendliness (4).

Family-friendly culture (10 points): education program to promote family-friendliness (6); accessibility to family
friendliness system (4).

II. Progress in Implementing Family-Friendly System (60 points)

Basic elements (30): health management and support according to life cycle of employees (10), support for childbirth of
employees and their spouses (10), childcare support and support for educational costs for children of employees (10).

Specialized elements*(30): flexible work hours (10), flexibility in working environment (10), health management support
f or f amily members (10), support for leisure time activities (10), support for weddings and funerals (10), social
contribution to promote family-friendliness (10).

III. Satisfaction Level of Family-Friendly Management(10): overall satisfaction level of employees (10)

* An applicant chooses three out of the six specialized elements for evaluation.

SMEs based in the Seoul metropolitan area, and US$4.5 According to a comparative analysis by the Korean Women’s
million for SMEs based in non-Seoul metropolitan areas Development Institute of companies with certification as
and within 150 percent of sales revenue). family-friendly companies (159) and companies that are
uncertified, it has been shown that certified companies
l Financial Services Commission: 0.1 percent discount for have achieved improvements in profitability, stability, and
the guarantee fee for the technical evaluation by the growth. In particular, the indices of certified companies,
Korea Technology Finance Corp. including the ratio of operating profit to net sales, the ratio of
l Korea Credit Guarantee Fund: expansion guarantee limit net income to net sales, and the return on equity have shown
for SME up to US$2.7 million in the process of guarantee remarkable improvements, while debt ratios and capital
examination.17 adequacy ratios are improving as well. Specifically, certified
companies show increases in productivity rates higher than
l Woori Bank, KB (commercial banks): lower interest rate those of non-certified companies by 0.22- 1.95 percent.
by 1-1.5 percent.
Submitted by:
Jae Hwan Kim, Director, and Chan ju Lee
Results and Lessons Learned Deputy Director, Ministry of Strategy and Finance
Certification for family-friendly companies is expected
to promote family-friendly management and thus create
a family-friendly corporate culture. In addition, it should
improve the quality of life for employees and their families.

17. Korea Credit Guarantee Fund aims to provide assistance for small and medium-sized businesses with limited guarantee capacity in sourcing
funds by guaranteeing their liabilities. Businesses certified for family-friendliness are offered guarantees with an expanded limit.

68
 Policies and Infrastructure for SME Finance

Republic of Korea:
Win-Win Loan Package

Started in 2010

Implementing parties: Hana Bank, Ministry of Gender Equality and Family.

Background and Rationale Note that large-sized corporations refer to a purchasing

company, a contractor to a selling company, and sub-
The Win-Win Package Loan was first introduced in 2010 to contractor to a vendor.
support small and medium-sized subcontractors in light of the
demand for shared growth between large-sized corporations l Win-Win Accounts Receivables Secured Loan: with
and SMEs that are under a business partnership. accounts receivable of a purchasing company (large-sized
corporation) as security, a contracting partner finances
Loans are offered under its program for small-sized itself by executing the loan.
subcontractors, as well as contractors, based on the credit of
the large-sized corporations. It has been designed to ensure l Win-Win Vendor Loan: a contractor takes an accounts
liquidity for SMEs that are partnering with large-sized receivable bond from a purchasing company as security
corporation to supply products to them. By making full use to support subcontractors in receiving payment for
of supply chains based on win-win partnerships, SMEs have delivered goods.
access to finance with relatively cheaper borrowing cost than
when they source finance directly with their own credit. The Win-Win Vendor Purchasing Loan enables sub-
contractors to receive financial assistance under identical
Large-sized corporations take charge of fundraising and conditions as accounts receivables that contractors have
commission financial institutions to offer loans for partnering acquired from purchasing companies, once large-sized
companies at low interest rates. corporations, contractors, and sub-contractors agree to form
a package (these companies sign an agreement in advance).

Description of the Intervention

Results and Lessons Learned
Win-Win Package Loans are offered as follows:
As of 2013, the amount of loans reached US$0.32 billion,
l Win-Win Accounts Receivables Secured Loan, a financial with 355 large-sized corporations signing agreements with
service based on the credit of large-sized corporations for their partnering SMEs (note: large-sized corporations and
contracting SMEs. partnering SMEs need to create a package before applying
for a Win-Win Package Loan).
l Win-Win Vendor Loans offered by supporting
subcontractors throughout the settlement process by The following are the expected results for purchasing
using accounts receivable bonds that contractors normally companies (large-sized corporations), selling companies
receive. (contractors) and vendors (sub-contractors).

69
Enhancing SME Access to Finance – Case Studies

Figure 1. Win-Win Vendor Loans

Large-sized Corporations Contractors Sub-contractors Sub-contractors

(Purchasing companies) (Selling companies) (Vendors) (Vendors)

1 General Contracting 2 Sub-contracting 3 Sub-contracting

4 Delivery of Goods 4 Delivery of Goods 4 Delivery of Goods

5 Accounts Receivable 6 Approval of Win-Win 7 Vendor Loan Approval

Vendor Loan

9 Settlement of
Accounts Receivable 8 Vendor Loan Approval

0 00
0

l Purchasing companies: can improve their corporate l Vendors: with Win-Win Vendor Loans based on credit
image through credit offered to sub-contractors, as well offered by purchasing companies, payment for delivered
as contractors. goods can be made to enable the withdrawal of payment
before the due date. Furthermore, vendors will see
l Selling companies: based on the offering of credit and improvement in the reliability of purchasing companies
the credit rating of purchasing companies, payment of and contractors. In particular, sub-contractors benefit
delivered goods can be made earlier at relatively lower from SME financing through relatively low interest rates
cost or payment of delivered goods from vendors can be based on the credit rating of the purchasing companies, as
made with a receivable as a security. The companies can well as early payments for delivered goods.
thus see improvement in the flow of funds.
Submitted by:
Jae Hwan Kim, Director, and Chan ju Lee
Deputy Director, Ministry of Strategy and Finance

70
 Policies and Infrastructure for SME Finance

Republic of Korea: Intellectual

Property for Secured Loans

Started in 2011

Implementing parties: Korea Development Bank.

Background and Rationale l For start-up companies, loans are offered for purchasing
IP.
IP Secured Loan and IP Fund are part of financial assistance
policy based on intellectual property possessed by SMEs l For venture companies and MSMEs, IP loan guarantees
to foster ventures and start-ups. In this case, intellectual are offered for diversifying sources of financing by
property rights refer to property rights recognized by recognizing intangible assets, IP, as security.
relevant legislation, which includes patent rights, trademark
l For SMEs in their mature stage, IP funding is offered
rights, design rights, and copyright.
for providing a comprehensive financing program (i. e.,
assistance for investment activities and loan programs,
As part of “creative finance” derived from “creative economy”
which include loans, investments, and securitization
pursued by president Park Geun-hye, these programs
of IP).
are significant in providing SMEs with opportunities
for financing by developing new financial markets with
IP Secured Loan was first introduced in September 2013. It
intellectual property rights as a medium for diversifying the
provides funding for SMEs to boost IP finance by offering
market that has conventionally been centered on traditional
guaranteed loans via an evaluation of the IP and forming an
loan guarantees.
organization to facilitate the collection of IP Secured Loans.

Description of the Intervention The IP Secured Loan program is categorized into loans and
collections.
The Korea Development Bank (KDB) offers financial
instruments related to IP according to the stages of growth l Loans: IP is valued by external assessment institutions
that businesses go through: and, based on the results, it is recognized as a security.

Figure 1. Process of IP Secured Loan

Feasibility
Loan Study on Technology Intellectual Loan Intellectual Loan
Consultation and Intellectual Property Evaluation Property Disbursement
Property Valuation Collateralization

External Assessment
Korea Development Bank Korea Development Bank
Institutions

71
Enhancing SME Access to Finance – Case Studies

The valuation process is based on a valuation model whereby a business sells its IP to investors (funds) to secure
developed with support from the Korean Intellectual finance and then pays a license fee to the investors.
Property Office.

l Collections: For nonperforming loans, either a company Results and Lessons Learned
or a fund intervenes to purchase the secured IP, thus
providing relevant assistance in collecting loans. As of 2013, 15 companies benefitted from loans with a total
amount outstanding of US$15.4 million.
To crystallize such ideas and efforts, a fund has been raised
in collaboration with the KDB under an agreement made As of April 2014, 10 companies have benefitted from IP
with the Korea Patent Office (KPO) for cooperation to Fund investments amounting to US$46 million. A Korean
boost IP finance. KPO contributed more than 50 percent retail company, Codes Combine, stands out as the first case
of the fund, and KDB more than 20 percent, to raise in Korea where the IP fund invested in the trademark rights
approximately US$18 million. The fund seeks to invest of businesses. The company so far has attracted investments
in well-performing businesses possessing IP, as well as of up to US$0.9 million with its 88 trademark rights.
purchasing and selling secured IP of businesses that are
IP Fund and IP Secured Loan programs have the momentum
incapable of paying off their debts. Further, Intellectual
to transform IP holders into successful businesses by
Discovery Inc., the largest company with expertise in IP,
offering financial assistance to companies with outstanding
established in 2010, will purchase secured IP to set up a basis
IP, yet lacking tangible assets for guarantees. The funds are
for proactively responding to patent-related lawsuits filed by
anticipated to promote growth and enhance SME value by
foreign companies and thereby boosting IP businesses.
diversifying sources of financing through IP. However, the
The IP Fund raised US$90 million in 2013 with a maturity IP Secured Loan program for patent rights faces challenges
of seven years. The fund aims to support SMEs with IP in valuing intellectual property rights. A high priority is
as a guarantee medium by recognizing IP as an asset that the development of a valuation model and promotion of a
independently generates profit. market for the collection of IP secured loans.

IP Fund can act in various forms such as Sales & License Submitted by:
Back, IP securitization and IP Pool. In Korea, the fund is Jae Hwan Kim, Director, and Chan ju Lee,
currently managed as a form of Sales & License Back, Deputy Director, Ministry of Strategy and Finance

72
 Policies and Infrastructure for SME Finance

The Philippines: Policies to

Implement Microfinance Plus

Started in 2011

Implementing parties: Bangko Sentral ng Pilipinas (BSP).

Background and Rationale Description of the Intervention

Considered the country’s economic backbone, MSMEs The Bangko Sentral ng Pilipinas (BSP), the Philippines’
comprise 99.6 percent of total business enterprises (944,897 central monetary authority, is mandated to support a climate
as of 2012). As of 2012, these sectors collectively employed conducive to inclusive finance. It has put forward several
61.2 percent of the workforce, and accounted for 35.7 percent policy issuances and undertaken initiatives on microfinance
of value added (Department of Trade and Industry). MSMEs and most recently on financial inclusion in general. Building
can be central for the country’s overall economic growth, job on the success in microfinance, the BSP in December 2011
creation and productivity, and they are a central part of the issued a circular that adjusts microfinance regulations to
Philippines government’s inclusive growth strategy. serve the needs of microenterprises growing into SMEs.

MSMEs, however, face many barriers to firm expansion However, more than two years after the regulation’s
including shortages of working capital to finance their implementation, these larger loans comprise only a small
business activities and difficulties in obtaining credit from percentage compared to the traditional microfinance loan
formal financial institutions. Apart from credit, MSMEs portfolio of the banking system, and few formal financial
require other financial products, which they likewise have institutions have actually provided these newly permitted
difficulty accessing, such as savings accounts, insurance, loans. The BSP is thus still faced with the fundamental
remittance, and payment facilities. Moreover, MSMEs question of how to address the credit requirements of
generally lack access to economic safety nets and are thus microenterprises that will foster their growth and ultimately
more prone to shocks. allow them to graduate to small or medium entities.

In recognition of this vulnerability, especially the large base I. Microfinance Landscape of the Philippines
of microenterprises, there is a need to lift these institutions
into larger and generally more resilient entities, and to push The Philippine General Banking Law of 2000 in its Sections
for greater access to financial services for them. This gap 40, 43, and 44 effectively recognizes the importance of the
in the financing pool serves as an opportunity for financial banking sector as a vehicle to provide access to microfinancial
institutions to support enterprises that are considered large services to the public. Mention of microfinance in the law
for microcredit but small for traditional bank borrowing. indicates the importance of the poor’s access to appropriate
Moreover, it is in the government’s interest to cultivate a financial services and suggests that microfinance can be an
financial and investment climate that can support existing effective tool for poverty alleviation and should be viably
microenterprises to grow and engage in activities that are on integrated into the business of financial institutions.
a larger scale.
To implement the provision of the law, the BSP issued
Circular 272 on Jan. 30, 2001, which put forward the

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Enhancing SME Access to Finance – Case Studies

definition of microfinance and highlighted microfinance Data on microfinance activities reported by banks tells
loans as small loans granted to basic sectors that shall not of a positive turnout and progress. The advance in these
exceed PhP150,000. activities suggests that microfinance is a tool that addresses
the financial requirements of clients, while providing viable
With the effectivity of Circular 272 and its implementing business for banks. Improvements in policies to expand the
regulations, 119 banks engaged in microfinance, lending range of microfinance services and products are thus well
some PhP2.6B to 390,635 borrowers in 2002. By end of anchored and can be expected to continue.
2013, a significant growth in microfinance was evident with
182 banks reaching over a million clients and providing them II. Introduction of Microfinance Plus
with PhP8.7B in loans. The various policies and issuances1
crafted by the BSP had mobilized the Philippine banking The microfinance credit technology has been successful
system to deepen its reach to the low-income sectors of the due to its incremental nature (i.e., loan amounts increase
society. after each cycle of good repayment) of the loan where the
credit discipline of the borrower is built over time. Equally
The importance of delivering a variety of financial services important, the microfinance regulatory framework provided
to underserved areas through microfinance is now at the space for banks willing to incorporate microfinance in
forefront of BSP work in financial inclusion, broadening their business models to viably serve the microenterprise
the scope of microfinance to include deposits, insurance and sector. While there seemed to be adequate facilities, at
remittances, among others, that are appropriately designed one level, for microenterprises with relatively small credit
and priced to cater to the needs and capacity of this market. needs and, at the other, for well-established enterprises
that could access traditional windows of banks, businesses
In particular, the BSP issued Circular 694 Oct. 14, 2010, that were in transition—requiring larger loans but not yet
that expanded the range of microfinance products as well fully compliant with traditional bank requirements—were
as increased the threshold amount for loans from up to left without adequate financial services. Some literature
PhP150,000, as originally defined in Circular 272, to calls this the “missing middle,” essentially characterized
certain microfinance loans that can be up to PhP300,000. by its position between large numbers of microenterprises,
In recognition that there are still many unbanked areas in on one hand, a few large firms, on the other, and small and
the country, the BSP also liberalized the establishment medium enterprises mostly lacking access to credit and other
of microbanking offices (MBOs). Less costly to put up financial services.
than a regular bank branch, and authorized to provide
financial services such as deposits, loans, payments, and The BSP, through its group dedicated to financial inclusion,
microinsurance, among others, MBOs are a way of allowing that is, the Inclusive Financial Advocacy Staff (IFAS),
banks to set up office in areas that remain underserved. reviewed the threshold amount of loans to microenterprises
as a response to their growing businesses. Data from 2005-
The loan product Microfinance Plus, covering loans 2010 showed that, while the average loan size was still
of PhP150,001 to PhP300,000 was introduced by BSP around PhP7,400, there were a growing number of clients
Circular 744, crafted in recognition of the needs of growing requiring significantly larger loans. In addition to analyzing
microenterprises that might become SMEs. In the same vein, time series data, banks with microfinance operations with
the average daily balance for microdeposits, initially set at a relatively large pool of clients in this segment were
PhP15,000, was adjusted to PhP40,000. interviewed to understand the credit assessment of these
clients. It was evident that a good repayment record of the
The government has also focused on policies and initiatives client was the main basis for increasing the loan size, in
that can foster the growth and development of SMEs, as well addition to a cash flow analysis of the growing business. A
as micros. In 2008, the Magna Carta for MSMEs (Republic report to the Monetary Board, the highest decision-making
Act 9501, 2008) was amended to further support the sector. body of the BSP, showed that there was a growing demand
In this law, microenterprises were redefined as entities for loans in the PhP100,000 to PhP150,000 range (with
with “total assets, inclusive of those arising from loans PhP150,00 the maximum then allowed for microfinance
but exclusive of the land on which the particular business loans). The report also suggests that microenterprises may
entity’s office, plant and equipment are situated, must have have greater financial requirements than what microfinance-
value…of not more than PhP 3 Million.” engaged banks are allowed to lend to them, but smaller than
what other banks are willing to provide.

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 Case Studies: Policies and Infrastructure for SME Finance—The Philippines

In response to this, under BSP Circular 744 dated Dec. 28, Low take up of Microfinance Plus may be due to the
2011, Microenterprise Loans Plus or Microfinance Plus was following reasons:
added to the types of loans available. Microfinance Plus
is essentially the same as microfinance loans as defined in l For growing microenterprises, growth may not rest only
Circular 272, but with additional features to respond to the on access to larger amounts of credit. At a certain level,
increased risk brought by the higher loan ceiling. Circular microenterprises may need business development services
744 defines Microfinance Plus as “loans granted to the basic to manage growth. Offering a product that only increases
sectors, on the basis of the borrower’s cash flow, for their the amount of credit available without an attendant
growing microenterprises and small businesses. These loans framework for business development may be insufficient.
are from PhP150,001 to PhP300,000. The borrowers that This suggests that such government programs must be
will qualify as recipients of Microfinance Plus shall have a rolled out on a larger scale to reach more such borrowers.
track record of at least two microfinance loan cycles in the
l Microenterprises may be satisfied with the level of their
PhP50,000 to PhP150,000 range demonstrating the success
business. Staying as small or informal as possible may
of the business, its increasing credit demand, and subsequent
actually provide incentives for microenterprises as this
increased capacity to pay. The borrower must also have a
can avoid a business environment that proves to be too
savings account. The delivery of Microfinance Plus will
costly for them to grow (e.g., a progressive income tax
be utilizing microfinance principles and methodologies in
scheme). Regulations also tend to be more onerous (e.g.,
accordance with existing BSP regulations.”
registration, compliance with labor laws, etc.) and be seen
as another deterrent to business growth. The process of
Microfinance Plus thus pushes up the threshold of loans
formalization must therefore be considered in the costs
that may be lent to microenterprises. It is hoped to boost
of transition for these microenterprises to SMEs and may
microfinance lending by allowing the disbursement of larger
thus require some incentive mechanisms.
sums to the micro sector with the hope of bridging the
financing needs for microenterprises that are at the threshold
Lastly, although larger microfinance loans are now made
of growth to become SMEs.
available through the microfinance regulatory framework,
microenterprises do not graduate into SMEs because
Results and Lessons Learned their access to larger loans remains poor. In other words,
funds are there for larger loans, but there remains a
Directly after the issuance of Circular 744, PhP48M problem on how to obtain these larger loans. Perhaps not
was disbursed to 4,024 microenterprises in the form of all of the microenterprises that are potentially offered the
Microfinance Plus loans. In the subsequent quarters, the Microfinance Plus product may be effectively able to access
amounts fluctuated below the PhP90M mark to some 3,000- these due to a lack of credit rating information or asymmetric
4,000 borrowers. At end 2013, growth numbers shifted information on the capacity of the firm to repay its loans.
dramatically shift upward, with PhP111M in total loans to Financial institutions, although mandated by the law to set
more than 6,000 borrowers. aside 8 percent of their loan portfolios for micro and small
enterprises, may remain apprehensive about extending
However, while the loan portfolio shows some growth, credit to these firms due to their perceived high-risk profile.
movement in Microfinance Plus remains modest. Since its Ongoing work in the Philippines on the establishment of a
beginning until 2013, Microfinance Plus has only made up comprehensive credit information system and a collateral
some 1 percent of the total microfinance loan portfolio of the registry may eventually enable banks to ascertain the
banking system, and no more than 20 banks (no more than creditworthiness of potential SMEs.
10 percent of those engaging in microfinance) have offered
this type of loan. This points to low take up, and ultimately Submitted by:
raises questions about how to help microenterprises grow. Mary Ann Cuevas, Supervision and Examination Specialist,
and Pia Bernadette Roman Tayag, Deputy Director
Bangko Sentral ng Pilipinas (BSP)

75
 Policies and Infrastructure for SME Finance

The Russian Federation:

Laws and Regulations for
Electronic Means of Payment
Started in 2011

Implementing parties: Russian Central Bank, State Duma, and

other state bodies.

Background and Rationale Just as for a bank account, corporate EMPs are subject to
reporting to the Federal Tax Service, and to the freezing of
Prior to 2011, in the Russian Federation there was no legal funds in cases prescribed by federal legislation.
basis for using electronic wallets by companies. Instead,
those firms that wanted to receive payments via electronic The implementation of the new regulations was supported
payment systems had to sign agreements with e-payment by the Central Bank of Russia, State Duma, and the private
operators to channel customer money into their bank sector.
accounts.

Introduction of corporate e-wallets could simplify accepting Results and Lessons Learned
payments from customers for various goods and services.
It is still too early to measure results. But the changes in
e-money regulations have raised issues that continue to
Description of the Intervention be discussed. Private sector representatives have voiced
some concerns that the regulatory regime for the corporate
Federal Law “On National Payment System” was adopted EMPs is not consistent with the risks its usage can imply.
in 2011 and instituted three types of electronic means of For example, the same customer due diligence (CDD) and
payment (EMP): non-personified/personified (for natural reporting requirements apply as for a bank account but it
persons) and corporate (for companies and entrepreneurs). also entails certain limits that do not exist for bank accounts.
These three types of electronic means of payment come Therefore, corporate EMPs are rather an addition to a bank
under different regulatory regimes. For the corporate EMP account rather than a “lighter” substitute.
it is as follows:
Another concern of the private sector is a ban on the transfer
l EMP holders should be fully identified as prescribed by of electronic money to nonpersonified e-wallets, which is
Anti-Money Laundering and Combatting the Financing an obstacle for making refunds or implementing cashback
of Terror law. programs. This issue is partly addressed in the legal draft
adopted in December 2013 and scheduled to enter into force
l Total funds of a corporate EMP should not exceed 100,000
in July 2014.
RUB at the end of the operator’s workday (excesses are
transferred automatically to the owner’s bank account).
Implementation of the corporate e-wallets seems to be a case
l Transfer of electronic money to the nonpersonified EMPs of non-proportionate regulation. Private sector feedback
belonging to natural persons exempted from Customer indicates that the value of this service for their business is
Due Diligence is prohibited. very little. Legislation does not differentiate between small
entrepreneurs and large corporations for the purposes of

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Enhancing SME Access to Finance – Case Studies

opening corporate EMPs. Because of rather low demand However, businesses and entrepreneurs still need to have
for that service, some e-money operators do not even opened a bank account. Therefore, these projects expand the
provide it. Beginning around 2011 and afterwards, e-money opportunities for payers rather than payees. Unfortunately,
operators started implementing projects that allow simple Russian legislation makes it de-facto impossible for any
and fast connections to the e-money payment system for business without opening a “classic” bank account. Hence,
the businesses. At the same time, natural persons got the any private initiative cannot overcome this obstacle.
opportunity to pay through the e-money payment system
even without having e-wallet. That became possible by Submitted by:
introducing payment processing capabilities that include not Elena Stratyeva, Director
only e-money transactions but also payment cards, mobile Russian Microfinance Center
commerce, etc., through a single Web form.

78
References

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Finance Corporation.

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