92282 Obtaining Finance in Latin America and the Caribbean1 REV. 8/2014 Enterprise Survey data provide detailed Basic Definitions information on firms’ applications for and Countries surveyed in 2010 and how they are grouped use of credit, information that can be used to measure their credit constraint status for analysis: Caribbean Series Note No. 5 In 2010, Enterprise Surveys (ES) interviewed 12,855 Firms use financial resources and services to make or enterprises in 30 Latin American and Caribbean receive payments and investments, or to manage cash countries. In addition in 2009, 1,802 firms were interviewed in Brazil also following the standard flow. Firms often have insufficient funds to meet their ES global methodology. needs and seek external financing from banks or other sources of credit. Good financial services are therefore For analytical purposes, the 31 countries are categorized crucial for firm growth. Enterprise Surveys measure the into 3 groups: sources and uses of firm financing, including the sources Small Caribbean countries: Antigua and Barbuda, The of credit, the role of internal resources, and the utilization Bahamas, Barbados, Belize, Dominica, Grenada, of financial services and instruments such as deposits, Guyana, Suriname, St. Kitts and Nevis, St. Lucia, and St. loans, and collateral. Vincent and the Grenadines Medium-size countries: Bolivia, Costa Rica, Dominican Since the 1990s, the Latin America and the Caribbean Republic, Ecuador, El Salvador, Guatemala, Honduras, region (LAC) has experienced accelerated growth in the and the Jamaica, Nicaragua, Panama, Paraguay, Uruguay, and banking sector, as well as in the bond and stock markets; Trinidad and Tobago financial market participation has also grown, as has Large countries: Argentina, Brazil, Chile, Colombia, financial inclusion. Enterprise Surveys make it possible to Mexico, Peru, and Republica Bolivariana de Venezuela. assess whether these developments have translated into World Bank Group Latin America Two waves of Enterprise Surveys, 2006 and 2010: greater firm access to financial markets and services, or if, as recent sources have speculated, the expansion has Fifteen countries were surveyed in 2006 using the been biased in favor of consumption (de la Torre, Ize, and ES global methodology: Argentina, Bolivia, Chile, Schmukler 2012). Comparing survey responses in 2006 Colombia, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, and 2010 can help determine whether private sector and Republica Bolivariana de Venezuela. In total, participation in financial markets increased between 10,930 firms were interviewed in 2006, of which 3,535 these years. were re-interviewed in 2010. With respect to the credit side of financial services, the Reference periods of the survey data: Enterprise Surveys collect rich information regarding The information collected in the surveys refers to firm-level financing decisions in the fiscal year prior to characteristics of the firm at the moment of the the surveys: the various sources of financing for working survey (2006, 2010 and 2009 for Brazil) or to the capital and investment on fixed assets; applications for last completed fiscal year (2005, 2009, and 2007, loans or lines of credit from banking and credit-only respectively). In addition, sales, employment, and institutions; the motivation for the applications as well labor productivity annual growth rates are calculated as their approval or rejection. This information can be comparing data from the last complete fiscal year of used to measure the extent to which firms were credit each survey and recall data. Consequently, growth rates refer to the period 2002-05 for the 2006 surveys, constrained.2 All firms are divided into one of two 2004-07 for the 2009 Brazil survey, and 2007-09 for categories: those that are non-credit constrained, and the 2010 surveys. 1 FIGURE 1 Credit-constrained firms by size and region 60 58% 50 46% Percentage of Firms (%) 41% 41% 40 34% 33% 29% 29% 29% 30% 30 28% 22% 22% 19% 20 17% 10 0 Sub-Saharan Africa East Asia Eastern Europe Latin America South Asia and Pacific and Central Asia and the Caribbean Large (100+ employees) Medium (20-99 employees) Small (<20 employees) Source: Enterprise Surveys. those that are partially or fully credit constrained. Firms because of the prevailing market terms and conditions. that are non-credit constrained are those that have Partially or fully constrained firms, consequently, had to received credit from financial institutions, or that are resort to other sources of external finance or to their own fully satisfied financing themselves with internal funds or internal funds. using other external sources of finance.3 Partially or fully constrained firms are those whose applications for loans The Latin America and Caribbean region or lines of credit were rejected by financial institutions, or those that did not apply for these types of financing fares relatively well globally when it comes to the share of private sector firms that are credit constrained FIGURE 2 Credit-constrained firms in Latin Based on global surveys, nearly 38 percent of firms America and the Caribbean surveyed worldwide would classify as credit constrained. 40 In the Latin America and the Caribbean region, the 36% performance is better: less than 32 percent of firms fall 35 34% 35% into the credit constrained category. Indeed, LAC, along Percentage of Firms (%) 30 28% 28% with Eastern Europe and Central Asia, are the two regions 25 23% 24% in which firms are least likely to be credit constrained. 20 19% While small and medium-size enterprises are slightly more likely to be credit constrained in Latin America and 15 11% the Caribbean than in Eastern Europe and Central Asia, 10 they are considerably less likely to be constrained than 5 similar firms in Sub-Saharan Africa, East Asia and the Pacific, and South Asia (Figure 1). 0 Small Caribbean Medium-sized Large Economies Economies Economies Within the LAC region, the small Caribbean countries Large (100+ Medium (20-99 Small (<20 have larger percentages of credit constrained firms than employees) employees) employees) the medium-sized or large countries of the region (Figure Source: Enterprise Surveys. 2). This result holds across all firm sizes: small, medium, 2 obtaining finance across countries. Some countries, such as Panama, 5 Obtaining Finance FIGURE 3 Firms that are partially or fully Argentina, and Honduras, saw substantial increases in credit-constrained by region the share of credit constrained firms (increases of 17, 16, 60 and 15 percentage points respectively). Meanwhile, in Bolivia, Paraguay, and Uruguay, the percentage of credit 50 constrained firms fell by more than 10 percentage points Percentage of Firms (%) 40 24% over the same period. 30 20% 24% 9% Latin America and the Caribbean has the 10% 20 lowest share of fully credit constrained 29% 10 21% 20% firms in the world but the second highest 14% 16% share of partially credit constrained firms 0 Sub-Saharan East Asia Eastern Europe Latin South Asia Africa and Pacific and America Credit constrained firms are either fully or partially credit Central Asia and the Caribbean constrained. Both types were either explicitly rejected on their attempts to get credit from financial institutions or Partially Credit Constrained Fully Credit Constrained self-selected out of formal financial markets because of Source: Enterprise Surveys. the prevailing market terms and conditions. Fully credit constrained firms, however, were also unable to raise any other form of external finance, whereas partially credit and large-sized firms. The large economies of the region constrained firms were able to obtain some external exhibit, on average, the lowest share of credit constraint, finance from sources other than financial institutions, across all firm sizes. Still, there is considerable variation such as input suppliers, informal moneylenders or friends even among large economies. In Chile, only 11 percent of and relatives. firms are credit constrained, while in Argentina the figure is slightly greater than 54 percent. The Latin America and Caribbean region, together with the Eastern Europe and Central Asia region, has the Cross-sectional data from 14 countries surveyed in 2006 lowest share of fully credit constrained firms of all regions and again in 2010 show no major change in the share of the world for which Enterprise Survey data is available of credit constrained firms over this period, 27 percent (Figure 3). The region’s share, 9 percent, is much lower and 28 percent, respectively. But there is large variation than the global average of 17 percent. However, the LAC FIGURE 4 credit-constrained firms by size and country 70 60 Percentage of Firms (%) 50 40 30 20 10 0 ile ra il ay ica olo a Re bia Bo s cu a or en eru Ur nes Gr uay M a o a r Ba vis Pa da a a st ia ca Su lize m me Ja he Ho ica To as Do go ge a a Ba blic tig ts & do o Pa az an i ad gu Gu nam al Ar inic in Ni exic liv Co Luc ad r Ri Ch gu ad ,T ba u Ne a em nt m ad ndu ha ina P Br Be An Kit lva i ug uy en ra rb m pu ad m rb a as ca . G at r a St E St El S & C & Gr n ua Ba & id . in nt in m Tr ce Do in .V Large (100+ employees) SME (<100 employees) St Source: Enterprise Surveys. in Latin America and the Caribbean 3 region has a high share of partially credit constrained Credit constrained firms in LAC are firms; the second highest share across all regions, behind associated with lower productivity and low only Sub-Saharan Africa. These results highlight the employment growth importance of alternative sources of external finance to the private sector in the LAC region. Credit constrained firms in the region were significantly more likely to experience low labor productivity. Considered by firm size, there are large differences Credit constrained firms are also associated with across countries in the percentage of firms that are credit low employment growth. These results were found constrained. Small and medium-size enterprises (SMEs) to be significant after accounting for other potential are more likely to be credit constrained throughout the explanations, such as the age composition of the firms, region, except in three countries: Ecuador, Antigua and their size, their type of ownership, and overall growth Barbuda, and Saint Lucia (Figure 4). On average, an SME in each economy. These results, however, do not imply is 1.7 times as likely to be credit constrained as a large causality: productive firms might enjoy more access to firm: 32 percent for SMEs versus 19 percent for large credit because they are more productive, or firms might firms. Considering only fully credit constrained firms, the be more productive due to enhanced access to credit. four countries in the region with the largest proportion Nonetheless, the association between performance and of fully credit constrained SMEs are in Central America: credit constraint seems to suggest that financial markets Panama, Honduras, Costa Rica, and Nicaragua. A fifth in the region are bringing capital to productive firms. Central American country, Guatemala, is sixth on the list. Comparing estimates from 2006 and 2010 for the 14 Latin American firms rely more on external countries for which there is data for both years, it is funds to finance their working capital than possible to assess how the global financial crisis affected the average firm in the rest of the world the financial condition of the formal private sector. The share of credit constrained firms increased only slightly, When it comes to financing for working capital, the results from 27 percent to 28 percent. Medium and large firms show that firms in Latin America and the Caribbean tend were more likely to experience an increase in credit to rely more heavily on external sources than the average constraint than small enterprises (Table 1). firm in other regions covered by the Enterprise Surveys. Thirty-eight percent of working capital in LAC is financed by external sources, while other regions of the world exhibit percentages below 30 percent. At the same time, Table 1 Credit status in 14 Latin American and there is great variation in the reliance on external sources Caribbean countries, 2006 and 2010 of finance for working capital across countries, ranging from 8 percent in Panama to 60 percent in Colombia. Among the sources of external funds for working capital, Partially Fully Credit- firms in Latin America and the Caribbean rely more on Firm credit- credit- Year + = con- size con- con- strained* credit from input suppliers and customers than any strained strained other region for all firm sizes (Figure 5). Bank financing is second in importance as a source of external finance Small 2006 19% 14% 32% for working capital overtaken only by credit from input Percentage of Firms (%) 2010 17% 15% 32% suppliers and customers. Medium 2006 14% 9% 23% There is also variation in the reliance on external sources 2010 16% 11% 27% to finance working capital based on the size of the economy (Figure 6). Firms in the large economies of Large 2006 7% 6% 13% the region rely more on external sources to fund working 2010 9% 7% 16% capital than firms in medium-sized economies and in the small Caribbean countries. Also, firms in large economies * Due to rounding error, percentages may not add correctly. Source: Enterprise Surveys. utilize credit from input suppliers and customers more intensely than firms in medium-sized or small Caribbean economies. 4 obtaining finance 5 Obtaining Finance FIGURE 5 Percentage of working capital financed by credit from suppliers or customers 20 19 18 18 15 15 Percentage of Firms (%) 15 12 10 8 7 7 7 6 6 5 5 5 3 0 Sub-Saharan Africa East Asia Eastern Europe Latin America South Asia and Pacific and Central Asia and the Caribbean Large (100+ employees) Medium (20-99 employees) Small (5-19 employees) Source: Enterprise Surveys.5 Investment in fixed assets in LAC are most common form of collateral. That said Brazil shows a primarily financed with internal funds surprisingly high use of accounts receivables as collateral. The Enterprise Surveys also provide data on the sources of financing for investment in fixed assets. Private firms in LAC are well integrated Internal funding constitutes the single largest source of with the deposit side of financial markets investment finance in LAC, although it is considerably The private sector in the LAC region is highly integrated less important in large countries. In all 31 countries, with the deposit side of financial markets. At 93 percent, investment is primarily financed through internal funds. the average share of firms using deposit services in the In larger economies, credit from banking and non-banking LAC region is higher than in any other developing region financial institutions is relatively more important when of the world. The use of deposit services is high across it comes to financing investment than in medium-size economies and small Caribbean economies. FIGURE 6 Sources of financing for working capital in the Latin America and The average firm in LAC is required to Caribbean region* pledge collateral on bank loans at a lower rate than equivalent firms around the Small 1 developing world Caribbean 17 16 3 64 Percentage of Firms (%) Economies 2 The LAC region exhibits the lowest share of firms Medium- sized 15 17 3 64 required to pledge collateral when getting a loan or line Economies of credit: 72 percent compared to a 78 percent global 2 Large average. However, in almost all countries of the region Economies 17 23 3 56 collateral is required when getting a loan. In only four 0% 20% 40% 60% 80% 100% countries in the region—Brazil, Paraguay, Suriname and Banks Non-Banking Financial Institutions Peru—are fewer than half of the outstanding bank loans Supplier credit Other Internal recorded as requiring collateral. Land or buildings are the * Due to rounding error, percentages may not add correctly. Source: Enterprise Surveys. in Latin America and the Caribbean 5 most countries in the region. In only four countries does References the level of firms utilizing a checking or savings account fall below 80 percent: Nicaragua, Panama, Mexico, and Ayyagari, M., A. Demirgüç-Kunt and V. Maksimovic. 2006. “How Important Are Financing Constraints? The Role of Finance in the Guatemala. Business Environment.” World Bank Policy Research Working Paper 3820. World Bank, Washington, D.C. Overall, data from the Enterprise Surveys seem to indicate De la Torre, A., A. Ize, and S. Schmukler. 2012. “Financial that in 2010 the private sector in the LAC region fared Development in Latin America and the Caribbean, The Road relatively well compared to other parts of the developing Ahead.” World Bank, Washington D.C. world when dealing with financial markets. The share Kumar, K., R. Rajan and L. Zingales. 1999. “What Determines Firm of credit constrained firms is lower in LAC and so is the Size?” NBER Working Paper 7208. National Bureau of Economic Research, Cambridge, MA. share of firms that are required to pledge collateral when Kuntchev, V., R. Ramalho, J. Rodríguez-Meza, and J. Yang. 2012. “What getting loans. On the use of deposit services the region have we learned from the Enterprise Surveys regarding access to also fares relatively well compared to the rest of the finance by SMEs?” Mimeo. World Bank, Washington D.C. world. These numbers seem to indicate that the region weathered the effects of the global financial crisis that started in 2008 relatively well compared to the rest of the developing world. However, there are a few signs of an increase in financial exclusion in selected countries: of the 14 countries with data available for 2006 and 2010, five of them show an increase in the share of firms fully credit constrained and in the share of firms not using deposit services.6 Endnotes 1 Lead authors: Rita Ramalho, Jorge Rodríguez Meza and Judy Yang with the collaboration of the LAC report team. 2 For a more detailed discussion of the construction of the metric of credit constraints, see Kuntchev, Ramalho, Rodríguez, and Yang, 2012. 3 This group includes recipients of credit from financial institutions who may have been rationed in the size of the loan they received. They are part of the “Maybe Credit Constrained” category described in Kuntchev, Ramalho, Rodríguez, and Yang, 2012. 4 This is found to be significant after accounting for other potential explanations, such as firm size, age, foreign ownership and the overall growth in the economy. This was the case in 2006 for the 14 countries surveyed that year, and in 2010 for the whole region. 5 Data was not collected for most Eastern European and Central Asian countries. 6 Argentina, Honduras, Guatemala, Panama, and Peru. Enterprise Surveys provide the world’s most comprehensive firm-level business environment data in developing economies. An Enterprise Survey is a firm-level survey of a representative sample of an economy’s private sector. The surveys cover a broad range of business environment topics including access to finance, competition, corruption, crime, gender, infrastructure, innovation, labor, performance measures, and trade. The World Bank has collected this data from face-to- face interviews with top managers and business owners in over 130,000 companies in more than 135 economies. Firm-level data and summary indicators are available on the website. www.enterprisesurveys.org 6 obtaining finance