SME Finance Policy Guide

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80 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION • Include the agribusiness sector in diagnostics of demand and supply for SME finance. • Strengthen contract enforcement, to support the contract rights for creditors, farmers, and SMEs that underpin value chain structures and facilitate finance to all market participants. • Ensure that financial infrastructure is also relevant to agrifinance, for example that credit bureaus include value chain finance providers, that land tenure and land rights issues are addressed, and that agricultural equipment can be used as collateral through asset registries. • Coordinate policies intersecting both the financial and agriculture sectors, which is critical to facilitate access to finance for farmers and agricultural SMEs. • Governments should invest in the regular collection and dissemination of reliable data related to agricultural finance, including to underpin indexbased insurance. • Support capacity building – which is necessary to enhance the capabilities of staff in financial institutions to serve agricultural clients – and the financial literacy and management skills of agricultural SMEs and farmers.
G-20 SME FINANCE POLICY GUIDE 81 ANNEX I Access to Finance for SMEs in LDCs Access to finance remains a key constraint to SMEs development especially in emerging economies. 93 For example, data from World Bank Enterprise Surveys indicate that access to finance is disproportionately difficult for SMEs in Least Developed Countries (LDCs). As shown in Figure 1, 41 percent of SMEs in LDCs report access to finance as a major constraint to their growth and development, compared with 30 percent in middle-income countries (MICs) and only 15 percent in high-income countries. 94 Figure 1 Access/Cost of Finance as a Major Constraint 60 50 40 30 20 10 0 15 High Income 30 Middle Income 41 Least Developed Countries SMEs in their early stages of development rely on internal sources of funding, including the owner’s personal savings, retained earnings, or funding through the sale of assets. As firms starts expanding, external sources become more important and their availability can determine the firms’ growth possibilities. External finance is positively and significantly associated with productivity and conversely, while financing from internal funds, and other informal sources, is typically negatively associated with growth and firm performance. 95 Figures 2 and 3 show how SMEs use different financing sources for working capital and fixed investments by country income groups. LDC SMEs show a higher dependence of internal financing compared with SMEs in more developed countries. Their use of bank financing 96 is significantly lower than high- and medium-income groups. Supplier credit, an arrangement between two businesses that allows delaying payment for the goods and services purchased, seems to be a substitute for bank financing to meet shortterm working capital needs. Bars indicate standard deviation across countries Source: World Bank Enterprise Surveys, 2006-2009 Figure 2 SME Working Capital: financing sources 100 80 60 40 20 0 10 7 6 8 11 11 15 67 70 76 High Income Internal Financing Middle Income Supplier Credit Financing Source: World Bank Enterprise Surveys 12 Bank Financing 8 Least Developed Countries Other Financing 15 12 9 6 3 0 15 8 High Incom Bank Other 93 See Beck, Demirgüç-Kunt and Maksimovic (2005) 94 Numbers by income group are simple averages of all countries, with data available, that fall in the group. 95 Beck, Demirgüç-Kunt, and Levine. (2005) 96 See Beck, Demirgüç-Kunt and Maksimovic (2008)
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