SME Finance Policy Guide

G-20 SME FINANCE POLICY GUIDE
15
Regulators and supervisors play a key role in the
design and implementation of an enabling environment
for SME finance, which includes providing the
legal and regulatory framework in support of SME
access to finance, and can also include interventions
promoting SME finance, and the collection and analysis
of data on financial inclusion. While data collection
can support the prudent development of SME
finance through enabling effective supervision of
expanding provision of financial services, and
through providing much needed market data to
financial institutions, other regulatory measures
have risked distorting markets or have been
counterproductive.
For example, interest rate ceilings designed to make
finance more affordable may actually depress SME
lending volumes, while directed lending, for example
through requirements for banks to set up branches in
rural areas or to lend to certain SME sectors, can add
costs and risks for SME lending. Exemptions on
reserve requirements have been used to try and stimulate
SME lending, and in some cases to lower the
interest rates for SME borrowers. For example, the
Egyptian central bank waived its 14 percent reserve
requirement on loans to SMEs, for an amount equal
to the SME lending of each bank. The Jordanian central
bank also reduced reserve requirements for an
amount equivalent to SME lending, on the condition
that banks lent at a lower rate (relative to the prime
rate) to SMEs.
Standards, guidelines, good practice
The policy and regulatory framework should be proportionate
with the risks involved in such innovative
products and services, and is based on an understanding
of the gaps and barriers in existing regulation.
Under a proportional regulatory framework, regulatory
requirements vary with the benefits and risks
associated with a financial service or the provider of
the financial service. The aim should be for regulatory
policies that enable, rather than inhibit, appropriate
innovation in connection with regulated activities in a
way that manages risk. The challenge lies in tailoring
regulation to mitigate the risks of specific types of services
and delivery approaches without imposing an
undue regulatory burden that could stifle innovation.
Proportionality in regulation can be accomplished, for
example, by setting different requirements correlated
with the differing levels and types of risk involved in
different activities. Regular, thorough diagnostic exercises
that identify the gaps and barriers in current
policy and regulation should inform sound innovative
financial inclusion policy formulation, as the experiences
of Argentina, Russia, and Mexico demonstrate.
Such reviews are important because the barriers and
gaps in existing regulation that prevent innovative
financial inclusion reaching scale rapidly, yet safely,
are not necessarily obvious.
While designing and enforcing an enabling environment
and intervention mechanisms in support of SME
access to finance, regulators need to keep overarching
objectives in mind: ensuring the stability of the financial
system, promoting financial literacy and consumer
protection, and respecting Anti-Money Laundering
(AML) and Combatting the Financing of Terrorism
(CFT) regulations. The pursuit of these objectives can
involve trade-offs with measures aimed at widening
access to finance. The design of access to finance
reforms needs to be balanced with these overarching
objectives in mind, and the South Africa example on
page 17 illustrates how this can be achieved in an
emerging market.
Regulators can also collect and evaluate data on SME
access to finance, building on credit registry and
other reporting data that they do or could collect.
Financial inclusion data is critical in supporting evidence-based
policymaking, helping inform the prioritization
of efforts, and tracking progress of the
proposed targets. Without standardized, comparable,
and regularly updated data at the global and national
level, progress tracking and target setting is suboptimal
and lacks direction. Thus, data and measurement
is a key and indispensable area of work that
requires: i) defining measurable financial inclusion