2019 was a record year for our investment team focusing on Debt Financing for financial institutions in Latin America. Enrique Hurtado, Regional Director Latin America, explains why SME finance is crucial for the region’s development and how access to finance will serve to strengthen the missing middle.
Your team looks back on the best business year ever. What were the highlights?
2019 was indeed a very dynamic year. We invested in 25 partners in 10 Central and South American countries and actively contributed to sourcing the loans for the USD 175 m Micro- and SME finance securitization responsAbility closed in July 2019, where OPIC, Alecta and Calvert Impact Capital were key investors. But there is more: We disbursed 60% more funds than in 2018 and no less than one third of these investments were with new partners.
“We disbursed 60% more funds than in 2018 and no less than one third of these investments were with new partners.”
Enrique Hurtado, Regional Director, Latin America, is in charge of responsAbility’s Lima office with a total of 17 investment professionals. He also heads responsAbility private debt financing activities in the region. Enrique has a master’s degree in Economics from Tilburg University and over 15 years experience in development investments, microfinance, risk management and banking supervision.
Where did this growth come from?
We have been seeing a strong increase in private debt financing to financial institutions serving SMEs. The reason behind this is the growing financing gap for this segment: In a regional environment of low economic growth and increased political risk observed in several countries, traditional banks have shown a preference to maintain larger liquidity buffers and focus their lending on large corporates rather than SMEs.
Do you foresee this growth trend in SME finance to continue?
I do. Non-bank financial institutions are grasping the market opportunity to serve the SME sector through direct loans, factoring or leasing. This is how SMEs can access working capital without offering collateral (factoring) or get equipment without the need for ownership (leasing).
“Non-bank financial institutions are grasping the market opportunity to serve the SME sector through direct loans, factoring or leasing.”
Many financial institutions are improving their SMEs segmentation to better understand these clients’ financial needs and further innovate their product portfolio to develop adequate products. Product diversification is also a key driver for many financial institutions. In parallel, several countries have improved their factoring and leasing regulation in recent years to enhance financial access and reduce informality.
Is microfinance still relevant in Latin America?
Absolutely! The microfinance sector remains relevant in financial inclusion across many countries in the region. And microfinance institutions will remain relevant also in future, especially if they can figure out how to streamline their infrastructure and partner with fintechs, while keeping their base of pyramid (BOP) footprints. What has changed for financing partners like responsAbility is that, from a funding perspective, many microfinance institutions today have access to deposits and local capital markets, a clear difference from ten years ago.
Where do you see the biggest financing need to achieve inclusive growth in Latin America today?
Recent research points out that two ‘missing middles’ hold Latin America back when compared with other regions: a robust cohort of midsize companies and a solid middle class with growing spending power. Both middles will need to be filled if Latin America is to have a new chance of generating sustainable growth that benefits the broad base of the population. In this regard, one of the priorities should be to establish a competitive business environment that reduces the cost of entry, improves access to finance, and cuts red tape, enabling small and middle-tier firms to thrive.
Latin America’s missing middle: Rebooting inclusive growth points out that Latin America, once the world’s most prosperous emerging region, is on the verge of being overtaken by other regions. The report examines two “missing middles” holding the region back: a robust cohort of midsize companies and a solid middle class with growing spending power. The two are connected: expanding the pool of modern, competitive firms can create better paying jobs, and lift middle-class demand needed for new investment.