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Supporting Small Business in Latin America

A U.S. plan to catalyze market-based bank lending to small businesses in Latin America.


Latin America...is moving towards its enormous potential as an engine of growth, opportunity and poverty reduction for its own citizens and for the global economy. In recent years, a number of governments have strengthened their policies – shored up public finances, reduced debt vulnerability, opened markets, and laid the foundation for the growth we are now seeing. (...)

Spreading economic opportunity within and between the nations of the Americas is urgent and possible. President Bush often refers to the growing ties between Western Hemisphere nations. We share two-way trade flows of more than $1 trillion and two-way investment of more than $1 trillion. Last year workers from the region employed in the United States sent an estimated $45 billion home to their families. The U.S. acts in our own and, we believe, the region's best interest when we help neighboring nations build open economies and create opportunity for all their people.  This includes those who have not yet benefited from this progress.


A key to spreading prosperity is supporting entrepreneurs. More people share in the benefits of economic freedom and growth when small businesses thrive.  Small businesses tend to be labor intensive and are usually responsible for over 50 percent of new job creation. They are the engine of job and wealth creation in most economies. So, in March, when the President asked the Treasury and State Departments to develop an initiative to "help U.S. and local banks improve their ability to extend good loans to small businesses," I was pleased to accept his charge. 

A thriving small business community can reduce poverty and inequality, as well as create jobs. When individuals turn their ideas into productive businesses, they make a transition from workers to owners. Ownership helps create sustainable and stable economies with broader opportunities for all citizens. Economic and social mobility have always been at the core of the U.S. system. We want to help Latin American countries create the same mobility for their citizens. 

We need to get real support to these entrepreneurs. They have good ideas, markets to serve and the skills to operate in an often tough environment. They can also form constituencies that drive governments to strengthen their business climates and improve governance. 

But, they often are frozen out of the formal financial sector. It is estimated that only 10 percent of small businesses in Latin America have access to financing from banks and commercial lenders. The other 90 percent depend on friends, relatives or other informal sources of capital that can charge 10 percent or more in daily interest.

One key barrier to credit is that banks lack information about, and experience with, smaller companies.  Banks are often more comfortable lending to larger companies that have collateral, formal financial statements and documentation. Small companies may not yet have these resources, and so traditional lending criteria don't apply. Banks need the tools necessary to assess the value and risk of these smaller companies. 

Lack of finance may mean the difference between success and failure, growth or stagnation. These entrepreneurs need capital to expand into bigger space, purchase additional inventory to serve growing demand and new markets, to buy capital equipment. We see evidence in economies around the world that greater availability of finance not only enhances growth, it reduces poverty and inequality, and helps to build a middle class. 

I'm pleased to announce our answer to President Bush's call – we have developed a three-part plan to catalyze market-based bank lending to small businesses in Latin America. By breaking down the barriers that block commercial bank financing, we can work to build this necessary function in developing economies. 

This initiative targets small, profitable firms with growth potential, and it has three elements. The first two will provide support to banks willing to commit to specific and ambitious targets for small business lending. The third will address the regulatory environment.

First, we will promote the spread of new lending models that fit the unique characteristics of smaller companies. We will offer the tools to adopt these models so that banks can build capacity to quickly and accurately assess the credit quality of small companies. This capacity building facility would be housed in the Multilateral Investment Fund, MIF, of the Inter-American Development Bank. We have committed to replenish this fund and we are actively working with the MIF to develop a program which would provide up to $50 million over five years for this purpose. 

Second, the Overseas Private Investment Corporation, OPIC, and the IDB Group's Inter-American Investment Corporation, IIC, will assume a portion of the risks associated with this lending. OPIC has already identified banks with the potential to provide up to $150 million using OPIC support through various vehicles that address particular market needs. The IIC will also build upon its relationships in the region to offer a similar menu of options to banks under the initiative.  These vehicles include credit guarantees to banks to support small business on-lending by banks in Latin America; local currency guarantees on small business loan portfolios held by local banks; and partial guaranties for bond issues to fund small business loans.

A third and equally important step is making sure that small business lending isn't unnecessarily constrained by burdensome regulations or bureaucracy. Treasury's Office of Technical Assistance and the MIF will work with local authorities to review existing regulations. The team will identify and address obstacles to small business lending, such as excessive collateral and capital requirements and interest rate restrictions. The MIF, with support from Treasury, will also engage with regional banking regulators and supervisors to define and promote the adoption of best practices in micro, small and medium lending.

Taken together, these three steps – building new lending models, sharing the initial risk for early-stage loans and helping to ensure a constructive bank regulatory environment – will open new opportunities for banks to lend and for small businesses to grow. Public efforts and funds will leverage private money to support small businesses, and create the foundation for sustainable, non-governmental market-based lending. We'll kick-start the model to help existing businesses in the region best positioned to expand, and to help entrepreneurs with good ideas get started.  

Once participating banks demonstrate that it is profitable to lend to small businesses, competition will bring other banks into the market and the need for on-going assistance should diminish. Application of this model in Eurasia has created over $12 billion in new small business lending to nearly two million companies and, especially for small countries, transformed financial sectors.

Household financial education is also vital to the success of this initiative. Many entrepreneurs get their start using their own savings or personal loans. Treasurer Anna Cabral will host a Latin America Regional Conference this fall to discuss ways we can enhance access to financial services, including financial service access of entrepreneurs in the region.

Our interest in Latin America is strong, and it will continue. The countries of the Americas are brought together by geography and history, and bound together by common interest. The United States is committed to helping Latin America reduce poverty, fight corruption, build the middle class, and generate more opportunities for people who feel excluded from the region's growing prosperity.

Since becoming Treasury Secretary, I have visited Colombia, Guatemala, Peru and Mexico. This region is a high priority for me, and I will return to South America in July. I'll also continue discussing with my regional colleagues how we can work together to improve economic and social opportunities for people throughout Latin America. 

Henry M. Paulson, Jr. is the US Treasury Secretary and former Chairman of Goldman Sachs. This column is based in his remarks at Americas Competitiveness Forum in Atlanta, USA June 12, 2007.

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