Plan Estratégico

Small business owners and individual depositors and borrowers usually turn to banks for their financial needs. Banks come in different sizes: some are huge multinational, universal banks; others are large; but domestic, while others are small, niche banks.

In terms of resources, universal commercial banks represent the largest single group of financial institutions in most countries. They have the biggest capitalization and offer a wide variety of banking services. These services include trade financing activities (i.e., accepting drafts and issuing letters of credit; and discounting and negotiating promissory notes, drafts, bills of exchange and other

debt instruments), accepting savings and demand deposits, buying and selling foreign exchange, and lending money against personal security and property Bank subsidiaries or branches of large foreign multinational banks offer a wide range of financial services. Usually, they have the advantage of international recognition that is useful in trade finance. For example, if you open a L/C with a foreign bank subsidiary, there may be no need to incur the extra cost of having the L/C confirmed by another bank. However, it is important to understand the distinction between a branch and a subsidiary and to appreciate the associated risks and costs. A branch can rely upon the financial standing of the parent, whereas a subsidiary must stand on its own financially and in terms of credibility. A local commercial bank may offer the same services but because its name is not recognized abroad, your foreign counterpart might request another bank to confirm the local bank’s L/C, adding to the cost of the transaction. The disadvantage for SMEs in dealing with large universal banks is that transactions are usually done at arm’s length using strict procedures and processes to analyze the credit risk through impersonal risk-rating technology like credit scoring (discussed in Chapter 5).

Small, domestic commercial banks usually have a limited menu of services. For SMEs, however, they are usually easier to transact business with. They often offer more competitive terms than their larger competitors. Smaller banks are usually more flexible and prompt in making decisions. Large global banks may not develop the same intimate knowledge of local commercial and financial practices, and may be less disposed to supporting SMEs.

Development banks are special types of commercial banks, usually providing targeted forms of financing. Most development finance institutions provide medium- to long-term finance typically to industrial, agricultural and mining projects in keeping with their developmental mission. Some development banks have expanded their lending portfolios to include trade finance, especially short- term working capital for exporters. Some specialized institutions are offshoots or subsidiaries of development finance institutions. Many development banks offer loans on concessionary terms, which is a plus for SMEs. Box 4.1 give examples of development banks.

Box 4.1 Examples of development banks Plantersbank (Philippines)

Planters Development Bank (Plantersbank), is the only private bank in the Philippines exclusively focused on lending to SMEs. Plantersbank provides a wide range of products for SMEs. Among its facilities are short-term working capital lines, term loans, standby letters of credit, check discounting facilities, and project financing under government-administered SME lending programmes funded by multilateral and bilateral institutions.

SIDBI (India)

The Indian financial system caters to the needs of small-, medium- and micro-enterprises (MSMEs) through an institutional network. Small Industries Development Bank of India (SIDBI), established by the Indian Parliament in 1990, provides three main types of assistance: 1) direct finance to the MSMEs sector; 2) indirect finance or resource support to primary level institutions, such as commercial banks, state financial corporations and other specialized institutions, catering to the needs of MSMEs; and 3) promotional and business development services. SIDBI offers financial and non-financial schemes, including project finance, bills discounting, export finance, equity finance, venture capital, marketing finance, finance for technology upgrading and R&D and credit rating. It also offers developmental support for cluster development, entrepreneurship and skill development and rural industrialization programmes.

Multilateral development banks are like domestic development banks, but have far wider reach. They are usually a good source of concessionary loan financing. During financial crises, they often inject confidence in international trading system by providing trade credit insurance and guarantees. However, they do not normally deal with retail financing for individual SMEs. Rather, they direct their financing through governments and banking institutions. Box 4.2 gives some examples of multilateral development banks.

Box 4.2 Multilateral development banks PTA Bank (Africa)

The Eastern and Southern African Trade and Development Bank (PTA Bank), recognizes that SMEs are a critical catalyst to economic growth. As in other parts of the world, most businesses in the region are SMEs. Most exports in Africa are generated by SMEs and they provide support to big industries.

PTA Bank has strategies targeting SME needs by:

Providing lines of credit to national and multinational financial institutions and commercial banks that lend to SMEs;

Participating in organs of the Common Market for Eastern and Southern Africa that promote research and know-how dissemination for the SME sector; and

Participating in private equity funds that target SMEs.

PTA Bank has a loan/guarantee scheme to empower women entrepreneurs. The mechanism provides seed capital to spur growth. Its main objective is to provide collective borrowing power and resource mobilization to finance individual projects.

CABEI (Central America)

The Central American Bank for Economic Integration (CABEI) promotes the integration and economic and social development of the Central American countries. CABEI seeks to improve the quality of life of the Central American people, playing a regional leadership role in the design of financial solutions for poverty reduction, regional integration and the competitive integration of Central America in the global economy.

CABEI has specialized units in agribusiness, energy and environment, science and technology, infrastructure, housing, and small-, medium- and micro-sized enterprises (SMMEs). Resources from CABEI and other development agencies are channelled through the SMME programmes.