Abstract:
In this paper, the SME financial sectors of Brazil, Mexico and Chile are studied in order to understand some of the obstacles to Small and Medium Enterprise (SME) financing in Latin America and to offer solutions on how the Inter-American Bank’s Multilateral Investment Fund can encourage growth of SME financing. This gap in financing found in Latin America is important because SMEs contribute to a dynamic growing economy. When we compare Brazil, Mexico, and Chile as a group to the non-regional counterparts of Korea and Spain, we find fewer funds available for investment, weaker legal protections, and less developed human capital. When we compare across countries, we find that Brazil’s heavy government involvement and bureaucracy imposes high costs that stifle SME growth and private sector efficiency, while Mexico lacks strong financial guidelines and protections necessary for a nascent SME sector. Chile represents a strong partnership with a proactive and involved government partnering with commercial banks and SMEs in order to grow a healthy SME financial sector. In order to tackle the risk aversion, human resource failings, and institutional barriers that hinder SME financial sector growth, the MIF should develop materials or provide technical advice to banks and governments on how to specifically focus on the SME segment through specialized marketing and information efforts, working capital credit options, prioritizing institutional challenges, training of staff to better serve and understand the SME client, and lastly, on developing government SME loan guarantees that share risk between government entities and private sector banks.
