Improving Access to Finance for Smaller Enterprises

Abstract

Access to finance is critical for small and medium-sized enterprises (SME), as it allows small enterprises to leverage their limited internal funds and provides additional resources to expand their turnover and their investment. However, due to the high administrative costs associated with small-scale lending, the high risk attributed to small enterprises, asymmetric information and the lack of collateral provided by SMEs, banks and financial institutions have lower incentives to provide credit to SMEs. In the Eastern Europe and South Caucasus region in particular, SMEs face constraints in the form of high real interest rates and collateral requirements as well as reduced possibilities of external financing outside the banking sector. This chapter discusses the challenges facing SMEs in accessing finance and the measure to be taken by policy makers. In the long run, the sustainability of a viable SME sector will depend on such factors as the creation of an efficient regulatory framework, and a sound and competitive financial sector. However, in the near term, a number of options are available to policy makers: A system based on multiple licences should be introduced to allow microfinancing institutions to gradually become self-sustainable. The quality of credit demand should be improved through financial education and entrepreneurial skills training. In the short term, SMEs can also be financially supported through credit guarantee schemes.