A large majority of banks in Latin America and the Caribbean consider small and medium-sized enterprise (SME) as a strategic part of their business and are upbeat about expanding their business to this sector in the next two years, according to the Latin American Banking Federation, Feleban.
Out of 190 banks in the region surveyed by the Inter American Development Bank for Feleban, 73% expect an increase in their SME portfolio, and 83% expects the economic situation of these businesses to improve in the next two years.
The main motivation behind extending credit to SME are higher profits and risk diversification in a segment that is experiencing an economic upturn. Other important factors are an interest in the development of the country and a tendency toward greater bank specialization in the sector.
The survey also shows that the IDB Group remains the most important multilateral financing institution for banks in the region seeking to expand their SME portfolio.
The main objective of the survey was to learn about prospects for bank lending to SME in the region, and compare results to previous surveys. A total of 58 banks from South America, 46 from Central America and the Caribbean, and 5 Mexican were surveyed this time.
The survey reveals an increase in SME confidence as a strategic business sector for banks in the region: 89% of participants have an active lending policy toward this sector, 13% higher than in a survey conducted in 2008 and 20% higher compared with a 2004 survey.
The new survey shows that banks primarily provide loans to SME to finance their working capital. According to the survey, larger banks have a larger offering of leasing products than smaller banks, while factoring accounts for a larger percentage of credit to SME belong to smaller banks when compared with larger financial institutions.
The survey also reveals that most banks, when approving or denying credit, take into account a business’ financial statements and the business owner’s management and capital, but not the industry to which their client belongs.
Generally, banks use an average of two different mechanisms to promote credit for SME with direct contact with the client still being the most important factor.
Banks in South America depend on their own capital whereas banks in Central America and the Caribbean are the biggest beneficiaries of international credit lines and financing from international institutions.
The survey was conducted by Argentine consulting firm D’Alessio, with contributions from the following IDB Group’s private sector windows: the Multilateral Investment Fund, the Inter-American Investment Corporation (IIC) and the beyond Banking program of the IDB Structured and Corporate Finance Department.
Feleban is a non-profit institution established in 1965 in Mar del Plata, Argentina. It is the federation of associations in 19 countries in the continent representing more than 500 banks and financial institutions in Latin America.