How does your proposed innovation leverage public intervention in catalyzing private SME finance?
The impediments in mobilizing available private SME capital, is the high cost of source capital, high transaction cost and higher consideration for the risk associated with SMEs. Sri Lanka private banks have higher liquidity ( as witnessed by decreasing interest rates- 24% per annum two years ago to 16% per annum at present, still coming down); and hence even if the banks wants to provide funds for SMEs, their returns are not justified considering the effort in administering higher number of smaller loans and extreme follow up services associated with SME financing. On the other hand during liberal fiscal structures and market economies, the banks tend to minimize risk and increase their profits. Non Performing Loans (NPLs) does affect the bottom line, SMEs are associated with higher NPLs. The more comfortable solution for the banks is to avoid financing SMEs. In the case women focused SMEs this situation is worse.
The Women focused Credit Guarantee Fund is an intervention to provide a comfort level to private SME financiers (banks); to lessen the burden of project risk, NPL risk, and counter support transaction and follow up cost. With the SMEs risk ( at optimum to a maximum of 50%) being taken up by the guarantee fund, the banks will lend start up and expansion capital to SMEs. Another key area is the involvement of local business chambers to provide support in preparation of SME business proposals, evaluate the business proposals and recommend financing options and do the follow up together with BDS services. This approach will lessen the administrative burden of the Bank, hence lessen transaction cost. The benefit the Chamber is that they will have growing membership base which will contribute to the sustainability of the chamber, and capture clientele for their BDS services.
The proposed Women’s Credit Guarantee Fund addresses the issue of “Access to Finance” by women focused SMEs.
What barriers does your proposed solution address?
Asymmetry of information, Lack of collateral, Unavailability of financial products tailored to SME needs, Lack of institutional capacity of financial intermediaries, High transaction costs for financial intermediaries to serve SMEs, Lack of competition / incentives for financial intermediaries to serve SMEs, Lack of financing to women entrepreneurs.
If you checked any of these barriers, describe how your solution addresses them
Asymmetry of information AND lack of collateral : From the supplier’s side (banks) the most commonly said drawback of SMEs is the asymmetry of information coupled with lack of collateral. Banks usually carry out extensive due diligence on project finance and one area they particularly look for is the credible information about the business starting from the business plan. Any deficit in such due diligence needs to be backed by collateral. SMEs are known for lack of both, credible information and bankable assets, which results in higher premiums to cover “perceived “ risk of SMEs. Women being less business prone are assessed high risk and because of their dependency does not command adequate collateral. Women focused credit guarantee funds reduce the perceived risk level of women focused SMEs, through combination of provision of capacity building in information management and covering the credit exposure risk.
Unavailability of financial products tailored to SME needs AND Lack of financing to women entrepreneurs : SMEs financial performances are different from conventional high investment enterprises. SMEs face seasonality, fluctuating markets, macroeconomic disturbances and often may take longer periods to recover. Banks assessment terms are common for all financing requirements, and hence SMEs face more vulnerability from external financing. Cash flow based financing are yet to come to Sri Lanka as a common practice. There are no specific financing for women entrepreneurs SMEs as well. One important element of women focused SME financing should be the bank’s ability to consider co-ownership of assets as bankable assets (as more often it’s the husband who owns most of the family assets in south Asian context). Women’s Credit Guarantee Fund assures the financing institutions in lowering the credit risk of women SMEs, by intervening procedures and practices.
Lack of institutional capacity of financial intermediaries AND High transaction costs for financial intermediaries to serve SMEs AND Lack of competition / incentives for financial intermediaries to serve SMEs : Serving SMEs is considered costly, partly because of smaller scale of financial operations and higher costs of operations of banks. SMEs are spread mostly in outstations and hence follow up costs are high. The use of regional chambers as facilitates in assessing and follow up of SMEs reduces the cost of operation for the bank, provide incentives for the bank their credit officers are relived of following up on smaller SMEs and can be deployed on more profitable larger loans, while mainlining SME portfolio. Hence establishment of women SME credit guarantee fund provides a solution for lack of institutional capacity as well.