Discouragement and SME Finance Policy

Was at a very interesting meeting of the Alliance for Financial Inclusion (AFI) last week.  AFI is a group of policymakers concerned with financial inclusion, and this meeting was to focus on the SME finance dimension of this larger picture.  The policymakers rightly see that it's not just important that individuals get access to the financial services they need, but also small businesses, who create the jobs that really make economies grow and improve peoples' lives.  But to date, AFI hadn't focused on this topic in its network of senior central bankers and other policymakers from over 80 emerging market countries. The meeting discussed various issues and country experiences in SME Finance - while it certainly didn't resolve the issue of what to do (no one solution works for all countries, anyway), it confirmed strong interest in the topic, and AFI formed a new working group led by Pakistan and Indonesia to develop useful tools and other knowledge for the netwrok. We had a number of knowledgable speakers at the meeting, including Professor David Storey of Sussex University.  David presented to us the interesting concept of "discouragement", as a focal point for setting priorities in SME Finance policy.  By this he meant that we should figure out what's most discouraging small firms from getting the finance they need.  For example, is it that they feel unwelcome at banks?  is it that they don't like pledging their homes in exchange for relatively small amounts of short term finance?  etc... the answers differ country to country - Professor Storey argued that policy reform priorities should reflect the strongest "discouragement" factors in a given case.  Interesting food for thought...it is certainly useful to get empirical information on what are the major obstacles SMEs perceive.  at the same time, I also think we can point to common issues and reform priorities, such as improving financial markets infrastructure to reduce the costs of getting sufficient information about smaller firms to support sound, prudent underwriting.   I haven't been in an emerging market country where there isn't more to be done in this area - particularly in the relatively neglected electronic payments area, which I've blogged about before...but credit information and movable assets reform also are high priority.matt