Local banks are a core component of the market architecture in Latin America and the Caribbean with the potential to catalyze innovation and growth. As I return from the Americas Competitiveness Forum in Trinidad & Tobago, my third visit to the country this year, I am reminded how dynamic and innovative its business environment is and how multilaterals can better engage Caribbean business. Here are three ways we support local banks and drive innovation.
1. Small and medium enterprise scoring
Small and medium enterprises (SMEs) contribute to GDP, employment, innovation and competitiveness. Yet in Latin America and the Caribbean, access to finance constrains them. Regional SMEs receive 12 percent of total credit compared to 25 percent in OECD countries. The region’s estimated credit gap is $125-155 billion.
Targeted and innovating credit scoring models can support local banks to close the gap. We have seen the success of non-traditional credit assessment methodologies, such as Entrepreneurial Finance Lab (EFL). EFL is a cost-effective, automated way to assess borrowers’ willingness to repay without relying on formal credit history.
In 2012, we approved a facility focused on local banks lending to MSMEs with EFL. Banco Interamericano de Finanzas in Peru was first to participate. Technical assistance to incorporate EFL is being provided to 13 other financial institutions, such as Haiti’s Sogesol and the Dominican Republic’s BHD.
Another way to address access to finance is through local rating agencies. We have engaged CariCRIS in the Caribbean to expand SME ratings and to build local bank capacity to better understand the rating system. The project targets 60 SMEs and four commercial banks in the Caribbean.
2. Women entrepreneurs
Women entrepreneurs have tremendous potential to create jobs, innovate and foster competitiveness. In the Caribbean, the number of firms with female managers is higher (24 percent) than in Latin America (19 percent). We have seen women entrepreneurs pilot new technologies and diversify the product and service offerings in local economies. From 2000 to 2010, the rise of women’s incomes alone contributed to a 30 percent reduction in extreme poverty in Latin America and the Caribbean.
However, only one in five women-led SMEs in the region have their working capital needs financed by banks. Yet research demonstrates women are less likely to default and more loyal and likely to take advantage of cross-selling opportunities – an ideal client segment.
To reach women, who still make up $86 billion of the regional credit gap, the IDB Group targets banks through the women entrepreneurshipBanking program. We now have $110 million in approved loans plus technical assistance to local banks with the goal of reaching 100,000 women SMEs by 2019. Lending strategies inclusive of women can benefit banks and provide the financing solutions that support business innovation.
3. Environmentally-friendly green lines
The region is slowly realizing that a thriving planet correlates with a thriving business environment. Local financial institutions are one cost-effective channel to support renewable energy, energy efficiency, sustainable agriculture, forestry and other “green growth” projects. Banks are increasingly being approached by “green” project developers seeking finance. Until recently, few banks knew what to do.
Multilateral financial products and technical knowledge can provide private banks working capital and know-how.Training can include energy efficiency audits for sub-borrowers to identify energy saving investments and consulting to understand which financing products are most appropriate. This mitigates banks’ perceived risks and strengthens local capacity to originate in the sector.
Currently, we have 14 approved planetBanking Green Lines deploying $626 million in IDB capital to local banks. Additionally, this portfolio relies on borrowers’ and other co-financing partners’ resources to de-risk and build capacity.
With some of the world’s highest energy costs, businesses in the Caribbean are especially poised to benefit from innovative banking products that finance alternatives to traditional sources of energy or promote efficiency.
Supporting local banks to target SMEs, women and green growth, we as multilaterals can positively impact sustainable business, innovation and economic and social development.
Originally posted on the IDB’s blog, Sustainable Business.