1. Finance and Development Conference
Promoting SME Finance: When and How? Comments on How Collateral Laws Shape Lending and Sectoral Activity by Charles Calomiris, Mauricio Larrain, Jose Liberti, Jason Sturgess
Discussion by
Sergio Schmukler
Finance and Development Conference
November 2, 2016
World Bank
Washington, DC 1

2. Two difficult tasks
Comment on a great paper, already accepted for publication
Discuss broad issue of SME finance posed by the session
Does fostering SME finance matter for economic growth?
What works and what does not work in fostering SME finance?
The role of the government in promoting SME finance
Do all this in about 10 minutes
And provide comments to own co-authors

3. Calomiris et al. paper Need of collateral for lending
Movable vs. immovable collateral
Weak laws hamper use of movable collateral & might tilt production toward immovable-intensive sector
Contribution
Great paper
Several pieces of evidence, including financial and real activity
Proprietary bank data in 12 emerging economies
Case study of Slovakia
Sectoral data
Innovative and persuasive, tackling main issues
Need for this kind of research, which adds to cumulative evidence
Still leaves questions for further research

4. Calomiris et al. paper More obvious points, some already addressed
Omitted factors
Reverse causality, endogeneity of collateral laws
Conclusions: distortions in financial and economic activity?
Other effects besides LTV
How firms use more finance
Effects on immovable collateral
Mitigating factors
Leasing, technological innovations (blocking devices), financial innovations (bitcoin), formal solutions (NAFIN), informal solutions
Might make movable collateral laws less relevant
Effects of collateral laws vs. other laws

5. Does more SME finance matter for economic growth?
Would need to answer at least three challenging questions
Do SMEs need more financing?
If SMEs receive more financing, do they grow more?
If SMEs grow more, how much do they matter for overall growth?
Difficult to address even the first question
Fact: SMEs borrow less and in worse terms than other firms
Due to problems in supply- or demand-side of capital?
If supply-side problem, which one?
Many possible, concurrent answers, with unclear relative importance
Better off intervening?

6. What works and not in fostering SME finance?
Big push to provide more financing to SMEs
Based on
Evidence of SMEs not getting good finance
Probable, real problem of access to finance for SMEs
But even if there is a problem, of which type of financing is needed?
Just more? Lower cost? Equity? Long-term debt?
Solution depends on
How risks get mitigated
How risks get redistributed: creditors vs. debtors
Even if more financing pushed, not clear what SMEs would do with it
Don’t know this even for large corporations

7. Role of the government
Do more than providing good macro and institutional environment?
Even under market failures, can government failures be avoided?
General principles
Identify binding constraints
Crowd in private sector
Work closely with private sector
Still …
Which instruments/policy should be used?
Which institutions should conduct interventions?

8. Role of the government – Policy
Type of policy
Example
Verdict
Contractual-based measures
Calomiris et al. 
Information-based measures
Credit bureaus
Market infrastructure
NAFIN, Mexico
Catalytic role
FIRA, Mexico
Public guarantees
FOGAPE, Chile ?
Direct lending
Public banks: retail and wholesale

9. Role of the government – Institution
Type of institution
Example of interventions
Verdict
Ministry of Finance/Economy
Subsidies ?
Central bank
Regulations, bureaus
Superintendencies
SME programs
Public banks
From traditional to innovative
International organizations
World Bank, IADB, CAF: loans, guarantees, others

10. Thank you! 10