Leasing is an extremely popular SME financing product in Colombia. Asobancaria figures, which are based on the legal definition of SMEs, show that the use of financial leasing has more than quadrupled over the last four years and now accounts for almost one-fifth of SMEs’ total credit and a much greater proportion of their long-term investment financing. In fact, according to Euromoney’s _World Leasing Yearbook_ , Colombia was the highest ranked Latin American country in 2005 in terms of annual leasing volume as a percentage of GDP (1.8 percent), ahead of Brazil (1.2 percent), Peru (0.9 percent), Chile (0.8 percent) and Argentina (0.2 percent). This can be attributed to the reactivation of the Colombian economy in recent years, leasing’s favorable tax treatment, and the fact that enforcement procedures are easier since ownership of the asset remains with the leasing company until full repayment of the loan<sup>46</sup> .

By contrast, the use of factoring is still incipient. Factoring can represent one of the most important financing methods for higher-risk, informationally opaque SMEs, since the credit provided by a lender is explicitly linked to the value of an SME supplier’s accounts receivable and not to the supplier’s overall creditworthiness; this allows highrisk suppliers to transfer their credit risk to their high-quality buyers<sup>47</sup> . However, this instrument is rarely used in Colombia. According to CONPES 3484 of August 2007, factoring represented only around 0.5 percent of commercial bank lending<sup>48</sup> over the period 2003-06. Some banks extend collateralized loans against receivables as an alternative to factoring, although there is apparently a large invoice discounting market outside the official banking system. In an Asobancaria survey of 5 major banks in February 2007, factoring was mentioned as the least developed product that they were offering to SMEs. Several hypotheses were identified by credit institutions and other participants during the interview process, including legal problems (e.g. framework for secured lending), tax issues (e.g. treatment of interest payments on factoring services), the absence of a cost-effective technology, and business considerations (e.g. competition from the relatively efficient “ _mercado extrabancario_ ”, or the perceived unwillingness by major retailers to allow their invoices to be used for discounting purposes by their SME suppliers). However, there is no comprehensive study that analyzes the causes of this phenomenon in Colombia. The forthcoming introduction of a reverse factoring product (“ _Liquidex Cadenas Productivas_ ”) by Bancóldex will likely shed further light on the prospects and constraints of this instrument.

> 46 See Arbeláez et al. (October 2004) for more details.

> 47 See Klapper (May 2005) for details, and Berger and Udell (2005) for a description of different transactions lending technologies for SMEs.

> 48 In addition, the Center for Latin American Monetary Studies – The World Bank – FIRST Initiative (January 2005) reports that factoring is not a major source of financing and that there are few factoring companies in Colombia. Factors Chain International also reports a very low annual factoring turnover (EUR 100 million) for Colombia in 2006, compared to other Latin American countries such as Chile (EUR

> 11.3 billion), Argentina (EUR 333 million) and Peru (EUR 563 million).

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