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G-20 up close: Access to finance for micro, small and medium-sized businesses

Backbone of economy, 61% of MSMEs consider bank loans main financing path.

>> See the WSBI Intitutional Positions for G20 decision makers (.pdf)

​​​BRUSSELS, 19 September 2016 – MSMEs are the backbone of economies throughout the world and are a key source of economic growth, dynamism and flexibility. MSMEs not only contribute to economic output but also to the creation of jobs and other social objectives. They account for around 99% of all enterprises in the world and are the largest source of employment in the world.

WSBI welcomes the G20 initiative to focus on SME development and employment. WSBI supports Principle 2 of the G20/OECD high-level principles on SME financing that calls for a strengthening of SME access to traditional bank financing. Policy makers should take measures to reinforce current credit guarantee schemes, to allow for the development of a high-quality securitisation framework and to provide an environment for adequately provisioning for loan losses. Regarding Principle 3 on enabling SMEs to access diverse non-traditional bank financing instruments and channels, alternative sources of finance such as capital market instruments, in a broad sense, may be useful for some SMEs in some stages of their life cycle, but should come as a complement to bank lending. MSMEs are generally too small to benefit from these products (for instance, in Europe 90% of MSMEs have less than five employees). The financial inclusion policies presented in Principle 4 are strongly supported by WSBI. In response to the World Bank Universal Financial Access 2020, WSBI is striving to reach out to a large number of SMEs and reduce informality through the design of innovative and affordable financial products. WSBI is in favour of policy makers designing regulation that supports SME Financing (Principle 5).

As mentioned above, MSMEs are best served by banks, as banks have the deposits that can be transformed into adequate lending, also as a result of their knowledge of and contact with local communities. The bank’s intermediary role may, however, accompany this evolution through, for instance, the development of high-quality securitisation; this way, depositors are protected and the contact with local communities is maintained. Banks will continue to be the main point of contact as, when any problem arises, the customer will come to its local bank that provides loans. In this securitisation process, banks will keep their role of customer care, and thanks to the securitisation, the bank will receive fresh money that it will be able to reinvest.

WSBI members are traditionally natural business partners of MSMEs and follow their business development throughout their lifecycle. Important factors for the close relationship between savings and retail banks and businesses are the savings and retail banks’ local presence and their clear focus on retail banking. It is for that reason that MSMEs are very important for savings and retail banks due to their importance in the real economy and in the development of the local economy. Savings and retail banks are also in adequate positions to thoroughly assess credit risk due to their well-established regional network and their in-depth knowledge of their MSME clients. Moreover, in developing countries where a majority of the population still relies on the physical banking network to do the financial transactions we think it is essential that conventional banking services, banking network expansion and technological application be carried out at the same time.

This focus on the real economy and, more concretely, on MSMEs is demonstrated by the fact that nonbank loans awarded by WSBI’s European members during 2013 amounted to around 80% of the total loans awarded. They were destined to individuals, corporates and governments. The loans were distributed as follows: in terms of total amount, 54% were for individuals (consumer loans, housing loans, etc.), 40% for companies (60% for MSMEs and 40% for large corporations) and 6% for governments and public authorities. Hence, MSMEs are an essential segment of clients for savings and retail banks. Since loans to MSMEs are smaller than loans to bigger corporates, this means that the number of loans awarded to MSMEs is much higher than the number of loans to big corporates.

To give an example of how our members promote SMEs, the German Savings Banks Association accounts for 42.6% of the market share amongst SMEs in Germany. 53% of Spanish SMEs are CaixaBank customers. Lloyds Banking Group has a 31% market share amongst SMEs in the UK, and Groupe BPCE is the No. 1 for SMEs in France, with a 38% penetration rate.

Belarusbank takes many steps to help MSMEs in Belarus. It actively participates in workshops which improve the financial awareness of people and MSMEs in particular. It issues loans to MSMEs on regular terms, and provides them with microloans with a simplified issuance procedure which requires a minimal set of documents. Belarusbank uses trade finance schemes to ease the financial burden of MSMEs, and takes part in investment projects carried out by MSMEs with the support of the state, creating new jobs.

However, MSMEs are facing a global problem when trying to access financing. Indeed, MSMEs could be involuntarily excluded from the credit market because of an excessive lending risk profile (worsened by the economic crisis that made the rate of non-performing ratios increase) or due to government or market imperfections (poor information environment, agent problems e.g. moral hazard and adverse practices).

Moreover, recent observations confirm the issue is essentially not one of supply, but rather the fact that the demand for loans has been dropping significantly in the last few years, due to a more careful entrepreneurial approach from MSMEs. A reinforcement of their equity base and a tendency to finance investments from internal resources may be the driving force behind the reduction in bank loans, probably complementing supply reasons. In addition, a survey jointly undertaken by the European Commission and the ECB (September 2014) on the access to finance of enterprises in the euro area highlights that bank-related products remain the favourite source of external financing for MSMEs. Thus, 61% of MSMEs consider bank loans as the most relevant way of financing their activities. For these reasons and because they are particularly appropriate for MSMEs (especially the small ones) bank loans should be further encouraged.

Although WSBI acknowledges that supranational organisations and governments are undertaking support measures, it considers that more initiatives should be put in place. ​

SME finance; Microfinance; G20; European Institutions