Innovative Experiences in Access to Finance:
Market Friendly Roles for the Visible Hand?
Augusto de la Torre and Sergio Schmukler
World Bank
UN International Forum on the Eradication of Poverty
New York, November 15-16, 2006
Based on
De la Torre, A., J.C. Gozzi, and S. Schmukler, 2006.
“Innovative Experiences in Access to Finance: Market
Friendly Roles for the Visible Hand?” World Bank, Latin
America and Caribbean Regional Study.
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Contents
Motivation and objective of study
Conceptual building blocks
Role of the state – alternative paradigms
Market friendly roles for the visible hand?
Illustrative experiences
NAFIN – Internet-based market for receivables finance
FIRA – Working capital structured financing scheme
FIRA – Inventory Finance
Questions for future policy research
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Motivation and Objective of Study
Rising interest in access as key to financial development
Observed levels of access to financial services in developing
countries is strikingly low, even the middle income
Access-related stories are predominant in the theorizing on channels
through with financial development leads to growth
Finance fuels “creative destruction” by leveling the opportunity playing
field (Rajan and Zingales 2003)
Some evidence that broader access might reduce poverty, although
channel not identified
Buirgess and Pande (2005)
Investigate scope for, and nature of, market-friendly
government interventions to broaden sustainable access
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Conceptual Building Blocks
Narrow definition of problem of access (≠ lack of access)
A project that would be internally financed if own resources were
available does not get external finance
“Wedge” between the expected internal rate of return of the
project and the rate of return required by external investors
Drivers of the “wedge”
Principal-agent problems
Adverse selection
Moral hazard
Transaction costs
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Conceptual Building Blocks (cont.)
Role of contractual institutions
Weak contractual institutions  agency problems are mitigated
through personalized relationships and fixed collateral
Access limited to a circumscribed network of participants
Weak institutions affect differently different credit markets
Strong contractual institutions  enable arm’s-length financing
Contracts are impersonal and rely on transparency and enforcement
of general rules by a third party (generally courts)
Path dependence
Self-reinforcing arrangements due to increasing returns
Transplantation of isolated legal or regulatory change from one
institutional milieu to another can backfire
Role of technological and financial innovation
Microfinace thriving even where contractual institutions are weak
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Role of the State – Alternative Paradigms
Virtual consensus that some type of government
intervention is crucial to foster financial development…
…but views vary on specific nature of intervention
Three typological views:
Interventionist – widespread market failures require government
direct involvement in mobilizing and allocating financial resources
Laissez-faire – focus only on improving the enabling environment
and let the market do its magic
Pro-market activism – in addition to long-term institution building,
direct government actions are required in the transition to promote
and complete financial market development
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Market Friendly Roles for the Visible Hand?
An evolving list of interventions to
Solve coordination failures, overcome first mover disadvantages,
align incentives of multiple stakeholders
Promote achievement of economies of scale to lower costs
Encourage adoption of technological and financial innovation
Pool risk and group otherwise atomized borrowers
Share risk (e.g., through partial credit guarantees)
“Smart subsidies”
Selective interventions focused on solving specific market
failures by “crowding in” the private sector
Tailored to specific needs and institutional settings
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Illustrative Experiences from Latin America
Public provision of market infrastructure
BANSEFI (Mexico)
NAFIN’s Reverse Factoring Program (Mexico)
Correspondent Banking (Brazil)
Structured finance
FIRA’s working capital and inventory financing schemes (Mexico)
Partial credit guarantee programs
FOGAPE (Chile)
Transaction cost subsidies
FIRA’s SIEBAN program (Mexico)
Microfinance
BancoEstado (Chile)
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NAFIN – Internet Based Receivables Finance
The Problem
Mexican SMEs had limited or no access to working capital
financing from banks
SMEs required to grant trade credit (30-90 days) to their
buying clients, many of which are big and reputable firms
Receivables not perceived as good collateral
Lack of reliable registry system for receivables
Ample room for double-pledging or forging of receivables
No effective way to “bridge” part of the problem by taking
advantage of creditworthiness of issuers of receivables
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NAFIN – Internet Based Receivables Finance
The Solution
Functioning of NAFIN’s Reverse Factoring System
Payment of full amount of negotiable document
LARGE
BUYERS
Delivery of
purchased
goods
SUPPLIERS
(SMEs)
BANKS
Online posting
of negotiable
document
(representing
accounts
payable)
NAFIN
website
Online
interest
rate quote
Selection of
desired lender
Payment of amount of negotiable document less interest rate
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FIRA Working Capital Financing
The Problem
Strong reduction in bank lending to the primary sector after
the 1994-95 crisis
Shrimp producers with limited or no access to working
capital finance from banks
Lack of collateral
Costly and difficult to screen and monitor small producers
Price uncertainty
Supplier credit was the only credit source available to
producers
Unfavorable conditions
Only covered about 50 percent of their costs
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FIRA Working Capital Financing
The Solution
Functioning of Working Capital Structured Scheme
Transfer of
credit rights
OCEAN
GARDEN
$100
BANKS
$100
Loan for
working
capital $100
Supply
Agreement
SHRIMP
PRODUCERS
TRUST
FUND
Participation
certificates
Payments
FIRA
Feed
SHRIMP FEED
SUPPLIERS
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FIRA Working Capital Financing
The Solution (cont.)
Functioning of Working Capital Structured Scheme in Case of Default
OCEAN
GARDEN
Default on
supply
agreement
SHRIMP
PRODUCERS
Global guarantee
(up to 25% of
total fund value)
Guarantees
(49%)
TRUST
FUND
Individual
guarantee
(9%)
BANKS
Second loss
guarantee (46%)
Individual
guarantee
(15%)
FIRA
SHRIMP FEED
SUPPLIERS
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FIRA Inventory Financing
The Solution
Functioning of Scheme
SUGAR
MILL
Funded
Participation
Agreement
$80
BANKS
CDs Repo
Inventories
$100
CDs $100
WAREHOUSES
Sugar
Inventories
CARGILL
Screening
and
Monitoring
$80
FIRA
Margin Calls
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FIRA Inventory Financing
The Solution (cont.)
Functioning of Scheme in Case of Default
SUGAR
MILL
BANKS
Default
Loss:$3.2
CARGILL
Inventories (book
value $100, market
value ?)
WAREHOUSES
Inventories (book value $100;
market value ?)
Put option
$64
Guarantee
$76.8
FIRA
Loss:$12.8
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Questions for Future Policy Research
How to isolate specific value added of pro-market activists
policies?
Why does the private sector not do it by itself?
What conditions determine most appropriate role for
market friendly visibly hand?
Lender (2nd tier), risk-sharer (for a price), coordinator, subsidy
provider?
How to ensure professionalism, transparency, and
accountability in interventions, given complexity of
schemes?
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Questions for Future Policy Research (cont.)
How to minimize unintended harm of second-best?
Governments may be distracted away from the first-best solutions
Given path dependence, second best solutions may lead to traps
that are difficult to exit
To what extent can we separate the organization (e.g.,
development bank) from the instrument?
Even if experiences are replicable, should government create
organizational capacities where they do not exist?
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END
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