detailed questionnaire was prepared in order to facilitate the analysis and collect – on a confidential basis – bank-level information on SME financing. Seven private banks and one leasing company, accounting for around two-thirds of the total system’s assets, participated in the interviews and data collection process<sup>2</sup> . In each bank, the team carried out separate interviews with the general manager, the SME business manager, and the credit risk manager, in order to bring together their perspectives on this market. This was complemented by data collection and on-site interviews with the authorities<sup>3</sup> , publiclyowned second-tier credit institutions<sup>4</sup> and other relevant organizations<sup>5</sup> to better understand the broader context and characteristics of the SME financing market in Colombia. Since the same exercise had already been undertaken for Argentina and Chile as part of the regional project<sup>6</sup> , these two countries serve as a benchmark with which to compare Colombia.

It is important to recognize upfront the inherent limitations of the paper’s scope and approach. SME financing can be addressed from many different dimensions, and the paper only aims to provide a bank/supply-side perspective. Other dimensions – such as the demand side (e.g. structure and characteristics of SMEs) and broader non-financial sector considerations (e.g. informality, taxation, business environment etc.) – are mentioned but are not analyzed. The paper also does not describe the Colombian financial system’s characteristics or evolution in detail<sup>7</sup> . Prior analytical work and evidence from other sources is used to complement the questionnaire responses in order to arrive at suitable policy implications. Some of these implications are at a high level either due to data unavailability or because they reflect issues that are outside the study’s scope, meaning that further analysis would be required in order to convert them into specific policy recommendations. The paper should therefore be considered as only part of a broader effort to ‘crack the multi-dimensional nut’ of SME financing, although it provides useful suggestions for potential follow-up work in several related areas.

The rest of the paper is organized in five sections. Section 2 provides an overview of SMEs and their financing patterns, and briefly discusses public policy towards this sector. Section 3 presents stylized facts about the evolution and type of bank involvement in SME financing, while section 4 identifies and analyzes the drivers underlying these stylized facts based on bank responses to the questionnaires. Section 5 describes in detail the business and risk management model that banks use in order to engage in SME lending, while Section 6 concludes and presents some policy implications.

> 2 Since leasing is an important financing instrument for SMEs in Colombia but it cannot currently be provided directly by banks, the interviews have included a major leasing company as well. It is worth noting that virtually all leasing companies belong to banks.

> 3 These included the Ministry of Finance ( _Ministerio de Hacienda y Crédito Publico_ or MHCP _)_ , the National Planning Department ( _Departamento Nacional de Planeación_ or DNP), and the Financial Superintendency ( _Superintendencia Financiera_ or SF).

> 4 These included Bancóldex _(Banco de Comercio Exterior de Colombia_ ) and FNG _(Fondo Nacional de Garantías_ ).

> 5 These included Fundes, ANIF ( _Asociación Nacional de Instituciones Financieras)_ , Fedesarrollo

> ( _Fundación para la Educación Superior y el Desarrollo_ ), Asobancaria _(Asociación Bancaria y de Entidades Financieras de Colombia_ ), ACOPI _(Asociación Colombiana de Medianas y Pequeñas Industrias_ ), SEAF ( _Small Enterprise Assistance Funds_ ) Colombia, and Marulanda Consultores.

> 6  See World Bank (July 2007) for the case studies of Argentina and Chile.

> 7 See Stephanou and de la Cruz (September 2006) for a description of the Colombian financial system.

8