Small Business Finance – What Works, What Doesn’t?

Wednesday, May 14, 2008

May 5 and 6 saw an interesting research conference here in DC on Small Business Finance, looking at which banking practices and government interventions help foster small businesses’ access to external finance. Twelve interesting papers and a stimulating panel discussion addressed an array of issues, ranging from banks’ lending techniques over competition, government policies to informal and trade credit. Many papers and speakers questioned conventional wisdom on what we know and what policies are helpful.

Bank-level surveys show that banks engage more with SMEs than commonly thought, and beyond just offering credit services. Interestingly, differences in banking practices, such as collateral requirements, appraisal techniques and interest rates are more pronounced between developed and developing countries, but less so between small and large enterprise lending within the same country. All types of banks perceive SMEs as a core and strategic business and are catering to SMEs. Indeed, larger multiple-service banks and foreign banks have a comparative advantage in offering a wide range of products and services in large scale, through the use of new technologies, business models, and risk management systems. On the other hand, analysis for the U.S. suggests that large banks do not have comparative advantages over small banks in all of the hard lending technologies and the comparative advantages of large banks in the hard technologies are not increasing in firm size.

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Source: PSD Blog (link opens in a new window)