This paper presents recent research on access to finance by small and medium-size enterprises (SMEs). SMEs form a large part of private sector in many developed and developing countries. While cross-country research sheds doubt on a causal link between SMEs and economic development, there is substantial evidence that small firms face larger growth constraints and have less access to formal sources of external finance, potentially explaining the lack of SMEs’ contribution to growth. Financial and institutional development helps alleviate SMEs’ growth constraints and increase their access to external finance and thus levels the playing field between firms of different sizes. Specific financing tools such as leasing and factoring can be useful in facilitating greater access to finance even in the absence of well-developed institutions, as can systems of credit information sharing and a more competitive banking structure.

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Small and medium-size enterprises: Access to finance as a growth constraint

We propose a more complete conceptual framework for analysis of SME credit availability issues. In this framework, lending technologies are the key conduit through which government policies and national financial structures affect credit availability. We emphasize a causal chain from policy to financial structures, which affect the feasibility and profitability of different lending technologies. These technologies, in turn, have important effects on SME credit availability. Financial structures include the presence of different financial institution types and the conditions under which they operate. Lending technologies include several transactions technologies plus relationship lending. We argue that the framework implicit in most of the literature is oversimplified, neglects key elements of the chain, and often yields misleading conclusions. A common oversimplification is the treatment of transactions technologies as a homogeneous group, unsuitable for serving informationally opaque SMEs, and a frequent misleading conclusion is that large institutions are disadvantaged in lending to opaque SMEs.

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A more complete conceptual framework for SME finance

The widely publicized finding that "aid promotes growth in a good policy environment" is not robust to the inclusion of new data or alternative definitions of "aid," "policy" or "growth." The idea that "aid buys growth" is on shaky ground theoretically and empirically. It doesn't help that aid agencies face poor incentives to deliver results and underinvest in enforcing aid conditions and performing scientific evaluations. Aid should set more modest goals, like helping some of the people some of the time, rather than trying to be the catalyst for society-wide transformation.

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Can Foreign Aid Buy Growth

Economic Commission for Africa

The weak link between public spending in health and education, and health and education outcomes can be partially explained by the fact that the delivery of services that are critical to human development -- health, education, water and sanitation -- are widely failing poor people. The money is often spent on private goods or on the non-poor; it often fails to reach the frontline service provider; incentives for service delivery by providers are weak; and poor people sometimes fail to demand these services. This paper examines the experience with alternative mechanisms for service delivery -- contracting out to the private and NGO sectors, community participation, co-financing by service beneficiaries -- and shows that this, as well as the experience of more traditional public sector provision, can be interpreted by looking at three principal-agent relationships in the service-delivery chain: between policymakers and providers; between clients and providers; and between clients (as citizens) and policymakers. Weaknesses in one or more of these relationships can lead to service-delivery failure, while attempts to strengthen one may not always work because of deficiencies in other links in the chain. Copyright 2004, Oxford University Press.

Making Services Work for Poor People

Credit reporting is a critical part of the financial system in most developed economies but is often weak or absent in developing countries. It addresses a fundamental problem of credit markets: asymmetric information between borrowers and lenders that can lead to adverse selection and moral hazard. The heart of a credit report is the record it provides of an individual's or a firm's payment history, which enables lenders to evaluate credit risk more accurately and lower loan processing time and costs. Credit reports also strengthen borrower discipline, since nonpayment with one institution results in sanctions with others.This book provides the first comprehensive review of credit reporting systems worldwide and documents the rapid growth in the industry. It offers empirical and theoretical evidence of the impact of credit reporting on financial markets, using examples from both developed and developing economies. Credit reporting, it shows, significantly contributes to predicting default risk of potential borrowers, which promotes increased lending activity. The book also covers the role of public policy in the development of credit reporting initiatives, including the role of public credit registries managed by central banks; and the role of legal, regulatory, and institutional factors in supporting credit reporting.

Credit reporting systems and the international economy

The Millennium Development Goals set quantitative targets for poverty reduction and improvements in health, education, gender equality, the environment, and other aspects of human welfare. At existing rates of progress many countries will fall short of these goals. However, if developing countries take steps to improve their policies and increased financial resources are made available, significant additional progress toward the goals is possible. Devarajan, Miller, and Swanson provide a preliminary estimate of the additional financial resources which would be required if countries would work vigorously toward meeting the Millennium Development Goals. Two estimates of the resource gap are developed, one by estimating the additional resources necessary to increase economic growth so as to reduce income poverty, the other by estimating the cost of meeting specific goals in health, education, and the environment. Both estimates yield a figure in the range of $40-$70 billion in additional assistance per year, which is in line with estimates from other international development agencies and which would roughly represent a doubling of official aid flows over 2000 levels. While the authors believe this is a reasonable first approximation of the costs associated with achieving the Millennium Development Goals, it should be interpreted with caution for several reasons, including the lack of empirical data in many countries to estimate the relationship between expenditures on health or education and related outcomes, or the relationship between investment and growth, the sensitivity of the results to changes in the policy environment (both at the macroeconomic and sector level, and with respect to international trade), and opportunities for increased - and more efficient - domestic resource mobilization. This paper - a product of the Office of the Vice President, Human Development Network, and the Development Data Group - is part of a larger effort in the Bank to accelerate progress toward the Millennium Development Goals.

https://papers.ssrn.com/sol3/Delivery.cfm/13269.pdf?abstractid=636102&mirid=1

Goals for Development: History, Prospects, and Costs

Purpose – Influencing positive financial behaviors is the natural next frontier for social marketers to “get serious about”, as there are clear behaviors that, once adopted by target populations, will improve the quality of life for individuals as well as society. The purpose of this paper is to describe a study conducted on behalf of the Consultive Group to Assist the Poor (CGAP), an independent policy and research center dedicated to advancing financial access for the world's poor.Design/methodology/approach – The seven best practices presented in this paper are based on original research undertaken in 2009‐2010 which examined more than 100 cases around the world where a social marketing approach was used to influence a financial behavior.Findings – Relevant behaviors identified, including those related to establishing a bank account, increasing savings, using credit wisely, avoiding over indebtedness, applying for micro finance loans, adopting new technologies, reducing chances of fraud, choosing the r...

Influencing positive financial behaviors: the social marketing solution

Regulating Alternative Finance – Results from a Global Regulator Survey is a report that details the key findings from a global regulatory survey that was jointly conducted by the World Bank and the Cambridge Centre for Alternative Finance (CCAF) at the University of Cambridge Judge Business School. This study intends to understand the global regulatory landscape and regulators from 111 jurisdictions around the world participated in the survey.

Highlights from the report: Alternative finance is still typically unregulated – but bespoke regulation is catching on. Despite a boom in alternative finance regulation since 2015, the relevant activities are still not formally regulated in most jurisdictions – only 22 per cent of jurisdictions formally regulate P2P lending, as opposed to 39 per cent for ECF and 22 per cent in the case of ICOs. More often, they are subject to bespoke regulatory frameworks, particularly in the case of P2P lending (12 per cent of jurisdictions) and ECF (22 per cent of jurisdictions).

The potential of alternative finance speaks to a new set of regulatory objectives. Policymakers globally are keen to explore the promise of alternative finance. A clear majority are optimistic about its potential to improve MSMEs’ and consumers’ access to finance (79 per cent and 65 per cent respectively) and stimulate competition in financial services (68 per cent). Such expectations chime with regulators’ emerging priorities, as many now have statutory objectives to support financial inclusion, economic policies or competition. While regulation is not the norm today, by mid-2021 most jurisdictions will be regulating ECF and more than a third intend to regulate P2P lending and ICOs; bespoke frameworks will likely become even more common.

Benchmarking drives global regulatory change. Regulatory benchmarking is used by more than 90 per cent of regulators when reviewing alternative finance regulation, and lessons learned from other jurisdictions have prompted changes in regulation more frequently than any other trigger (56 per cent to 66 per cent of regulators, across the three activities). The most benchmarked-against jurisdiction is the UK, followed by the USA and Singapore, but emerging markets such as Malaysia, the UAE and Mexico also rank among the top 10.

Alternative finance regulation is about making the sector safe at scale. Alternative finance regulation seeks to make the sector fit for the mass market, including both individual investors and MSMEs. Ensuring liquidity or minimizing the potential for capital losses do not appear to be prioritized over those goals. This may be an indication of how regulators interpret their consumer protection mandates in relation to alternative finance.

Alternative finance regulation isn’t ‘light touch’. There is little evidence yet of regulators purposefully creating light-touch regulatory frameworks for alternative finance. If anything, purpose-built regulatory frameworks tend to have more obligations in place than pre-existing ones – out of 20 potential obligations examined in the survey, the average bespoke frameworks for P2P lending or ECF featured nine, against five for pre-existing ones. For ICOs, the balance was five versus three. They tend to prioritize checks on investor exposure, rigorous due diligence on fundraisers, client money protection and appropriate online marketing standards.

As supervision stretches their resources, regulators are turning to innovation. Alternative finance supervisors see fraud, capital loss and money laundering as significant risks. Enforcement cases are also common, particularly in unregulated ECF and ICO sectors. Regulators are also looking to more innovative solutions to overcome these limitations in regulation and supervision. Among respondent regulators, 22 per cent have created regulatory sandboxes, 26 per cent have innovation offices and 14 per cent have active RegTech/SupTech programmes.

Alternative finance regulation needs better support and a stronger global evidence base. To design regulations for alternative finance, regulators have thus received support from a wide range of sources. Most common is for regulators to be supported by multilateral institutions such as various development banks (23 per cent), followed by their peers, for instance, through associations of financial regulators (17 per cent). Nevertheless, 77 per cent of regulators would like more support. Comparing how often sources of support are currently available and desired, there are sizeable gaps. The gap appears larger in the case of support from academics: 13 per cent have received this, but 61 per cent would like to.

Emerging-market regulators highlighting new regulatory objectives in regional clusters. Most regulators in Sub-Saharan Africa, Latin America and the Caribbean now have statutory inclusion objectives, while regulators in Latin America are more likely than their peers elsewhere to have competition objectives. Regulators in lower income jurisdictions are twice as likely as those in high income jurisdictions to be tasked with supporting governments’ economic policies (42 per cent vs 20 per cent), and those in Sub-Saharan Africa are about three times as likely (64 per cent). After a slow start, most regulatory changes in alternative finance are now taking place in lower-income jurisdictions and emerging markets.

Lower-income jurisdictions are between three and four times less likely than high income ones to already regulate alternative finance activities (13 per cent versus 36 per cent for P2P; 19 per cent versus 67 per cent for ECF; 10 per cent versus 42 per cent for ICOs). However, lower income jurisdictions are catching up in some areas: they are almost three times as likely as high income ones to review their regulatory frameworks for P2P lending (43 per cent vs 16 per cent). Most jurisdictions in Latin America and the Caribbean are planning changes to their ECF or ICO regulations, and most jurisdictions in Sub-Saharan Africa are reviewing their ECF or P2P regulatory frameworks.

Aligning multiple regulators might be challenging for regulators in lower-income jurisdictions. The regulators that we surveyed in lower income jurisdictions normally do not have explicit statutory mandates for regulating online alternative finance activities (35 per cent vs 64 per cent for regulators in high-income jurisdictions). Therefore, their views of the sectors’ risk profiles and supervisory challenges are still evolving. They also reported a particular challenge in coordinating regulatory and supervisory work in ‘multi-peak’ jurisdictions with multiple regulators responsible for same activities.

Higher and lower income jurisdictions tap into different expert networks. There are significant differences in how regulators in higher and lower income markets access external support. Regulators in lower income markets are slightly less likely to benefit from advice and input from their peers than those in higher jurisdictions (19 per cent versus 26 per cent). The similar pattern can be seen in relation to support from academics (12 per cent v 23 per cent). Regulators from lower income markets are, however, more likely to obtain support from multilateral organizations (34 per cent versus 16 per cent).

Lower income jurisdictions need more appropriate regulatory innovation options. Lower income jurisdictions are generally less likely to have active regulatory innovation initiatives in place than high income ones. At the global level, the difference is substantial (14 per cent versus 53 per cent for innovation offices, 28 per cent versus 35 per cent for sandboxes and nine per cent v 28 per cent for RegTech/ SupTech programmes). At the regional level, however, the competing influences of legal institutions and policy trends have produced a more mixed picture. For example, regulatory innovation initiatives are rare in Latin America and the Caribbean, while, in Sub-Saharan Africa, a regulatory sandbox is in place or in development in nearly one in three jurisdictions (32 per cent). In some of the resource-constraint jurisdictions, regulatory innovation initiatives such as the establishment of an innovation offices could prove to be a cost-effective option.

Regulating Alternative Finance: Results From A Global Regulator Survey

The report, financial infrastructure, building access through transparent and stable financial systems draws largely on the Bank Group's efforts in the following key areas: payment and securities settlement systems, remittances, credit reporting, and secured transactions and collateral registries. It defines the space, and presents a literature review, an estimate of the size of the market, develops an index for benchmarking financial infrastructure, and discusses the implications of financial infrastructure for access, transparency, better governance and stability in financial markets. This report is aimed at policy makers, regulators, practitioners, academics as well as other interested parties.

Margaret Miller

Papers

Credit reporting systems and the international economy

Goals for Development: History, Prospects, and Costs

Influencing positive financial behaviors: the social marketing solution

Regulating Alternative Finance: Results From A Global Regulator Survey

Financial infrastructure : building access through transparent and stable financial systems