# **Executive Summary**

The purpose of this paper, which forms part of a broader World Bank regional project, is to shed light on current trends and policy challenges in the financing of smalland medium-sized enterprises (SMEs) by banks in Colombia. The paper is motivated by the well-documented financing gap for SMEs, whose causes are complex and multidimensional. The topic is particularly pertinent for Colombia, since access to credit has been cited as one of the most important constraints for SMEs.

In terms of approach, the paper is primarily based on data collection and interviews with a representative sample of Colombian credit institutions and other relevant entities. The focus is on banks – the largest suppliers of external finance to SMEs – by analyzing the business and risk management models they use in this market segment, as well as the factors constraining their ability to provide more financing. Since the same exercise had already been undertaken for Argentina and Chile as part of the regional project, these countries serve as a benchmark with which to compare Colombia. While other important dimensions of SME financing – such as the demand side and broader non-financial sector considerations – are not analyzed in detail, the paper should only be considered as part of a broader effort to ‘crack the multi-dimensional nut’ of SME financing.

SMEs represent an important part of the Colombian economy, although they are not well documented in official statistics. In particular, there does not exist sufficient periodic data as to their characteristics, evolution, or overall contribution to the economy – in most cases, SMEs tend to be bundled together with micro enterprises in official statistics. The true size of the market is understated due to informality. Lack of access to finance has been cited as an important problem in recent surveys. However, there are significant differences in perceptions as to the size and causes of the financing gap. While there is strong evidence to support its existence following the 1999 crisis, the significant growth of this market in recent years raises some questions as to whether such perceptions remain valid.

Public policy towards SMEs is coordinated by the _Sistema Nacional de Apoyo y Promoción de las Mipyme_ . Government programs to support SME financing include long-term development funds (rediscounting lines at below-market rates) and partial credit guarantees by state-owned, second-tier credit institutions, especially Bancóldex and FNG. A recently-approved government document (CONPES 3484, August 2007) identifies some of the deficiencies in the micro-enterprise and SME segments and describes policy measures to promote these sectors. In addition, the authorities have recently embarked on the so-called ‘ _banca de las oportunidades_ ’ initiative to improve financial access, including for SMEs.

The SME definition used by credit institutions is generally based on annual sales, but differs substantially between domestic and foreign banks. The former define SMEs within a much narrower annual sales range of around US$0.1-5 million with differences largely determined by their respective target market, while the latter have adopted a common (and rather broad) definition across their global operations. Banking market practice does not therefore correspond with the legal definition of SMEs in Colombia, which is based on a firm’s assets and number of employees.

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