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The Center hosted the Latin American Shadow Financial Regulatory Committee as they discussed access to credit in the region and made recommendations on the subject. The Committee is a group of former finance ministers and heads of central banks who are authorities on financial issues. Prior to this, the group had two days of closed meetings followed by a public announcement of their findings at the Brookings Institution.
Millions of Latin Americans lack access to formal jobs. Small and medium sized enterprises (SMEs) are a major source of employment – up to 50% of formal sector jobs in Latin America. Thus, the limited number of SMEs is the other side of the coin of the employment story. How to finance them is the first chapter in this story, but how do we get there?
The Latin American Shadow Financial Regulatory Committee (LASFRC) applauded the dramatic improvements in banking regulation and supervision that have increased credibility and stability in Latin American financial systems. But according to Committee president Liliana Rojas Suarez, “Regional financial institutions, markets and instruments have simply not caught up – we have better banks but too little lending.”
In their statement the Committee argues that SMEs are particularly hard hit by the combination of strict standards for bank lending and weak institutions and markets. Due to their nature, SMEs worldwide have a higher failure rate than larger firms, are very diverse so hard to rate as a group, and often lack sufficient collateral. In Latin America, they are further restricted by regional financing constraints, their reliance on supplier’s credit and informal sources of finance, poor information about creditworthiness and weak registry systems needed to leverage property into collateral. All of these factors mean that, for investors, SMEs represent a higher credit risk, and relatively high costs for monitoring.