MSME Financing in the LAC Region - Trends and Challenges post COVID-19

The success of micro, small and medium-sized enterprises (MSMEs) has critical economic and social importance in Latin America as they comprise 95% of all businesses and 60% of the working population. Access to finance for MSMEs has always been an issue and the pandemic has exacerbated these challenges. To deal with the MSME credit deterioration, the Capstone team was tasked with providing concrete recommendations for decision-makers in Bolivia and El Salvador to develop effective policy responses. The team obtained information from a range of academic sources and informational interviews with Banking Executives in the region.

The report consisted of four parts. Chapter I is an assessment of the key challenges of providing MSME credit before and after COVID-19. Chapter II provides an overview of the government policies adopted during the pandemic crisis. Chapter III presents the banking sector's response to the crisis. Lastly, Chapter IV details the specific recommendations for Bolivia and El Salvador to address issues described in Chapter I. The report identified five major categories of problems that severely constrain access to credit for MSMEs, 1) suboptimal credit underwriting process, 2) lack of systemic innovation and competition, 3) Covid-19 credit deterioration, 4) low financial literacy, and 5) high informality. Each issue has a complex web of associated causes and effects that drive poor credit conditions.  Lastly, the report provides comprehensive recommendations to address these problems. Individually and collectively, these recommendations can improve the availability and cost of credit for MSMEs.