Small and medium enterprises in developing countries generally face a number of barriers to expanding their businesses and employing more workers, including limited access to credit and other financial services. In Colombia, where SMEs report that access to finance is among the largest constraints to operating their businesses, researchers are evaluating the impact of the Secured Transactions Reform—which will provide a legal framework for the use and enforcement of movable collateral—on firm-level outcomes such as sales and employment.
Small and medium enterprises (SMEs) are thought to be an important source of innovation and employment in developing countries due to their flexibility in responding to new market opportunities and their potential for growth. However, entrepreneurs face a number of barriers to expanding their businesses and employing more workers, including limited access to credit and other financial services. For many firms, especially small and medium enterprises, collateral requirements are often an obstacle for getting access to finance. Banks usually require potential borrowers to provide collateral such as land or real estate, and will not accept collateral in the form of movable assets such as vehicles, machinery, or inventory, which SMEs are more likely to own. This mismatch prevents entrepreneurs from applying for and receiving formal loans. Banks may be unwilling to accept movable assets as collateral if there is no legal framework to govern and enforce this type of lending or if they lack knowledge on how to conduct movable asset-based lending. It is possible that regulatory reform providing such legal framework will encourage banks to adopt movable asset-based lending, helping SMEs access much-needed credit to expand and grow. Additional research is needed to understand how such programs should be designed and to what extent such regulatory reform actually expands access to credit for individual firms.
Project ongoing. Results forthcoming.
Read more about this project here.