Argentinean Financial System and the Credit Market for SMEs


The present chapter is a brief review of the key concepts to be considered in the analysis of the Case Studies. It is structured in four sub-sections. First, it reviews the multiple criteria around the world to define SMEs, then, it explores the literature on the economic importance of these companies. Finally, it covers the key variables that impact on SME lending, namely: a microeconomic approach based on the financial institutions’ structure and the key barriers that arise from the macroeconomic environment.

What are Small and Medium Enterprises?

To begin with, it is clearly important to shed light on what an SME is, to advance further in this study. According to the International Finance Corporation (2009), SMEs are those registered companies with less than 250 employees. However, this definition is not absolute, and it changes from country to country. For example, Egypt defines SMEs as those companies with employees between 5 to 50; Vietnam, between 10 to 300 or the United States as those with less than 500 employees (Dalberg, 2011; Natarajan and Wyrick, 2011).  The European Union’s own definition considers an SME as a company with up to 250 employees and a maximum annual turnover of 50 million euros.

Table 1: European Union Thresholds of Micro, Small and Medium Enterprises

Due to the multiplicity of definitions and approaches to differentiate the size of the companies, Gibson and Van der Vaart (2008) proposed an international approach to define SMEs:

“An SME is a formal enterprise with annual turnover, in U.S. dollar terms, of between 10 and 1000 times the mean per capita gross national income, at purchasing power parity, of the country in which it operates” (Gibson and Van der Vaart, 2008, p. 18).

From all the above mentioned, we observe that there are several interpretations of the concept of SME. The lack of homogenization in their definition is not exempt of limitations, as it restricts the possibility to perform cross-country analysis due to the data collection, based on an ad-hoc basis by countries (Pinar Ardic, Mylenko and Saltane, 2011). This situation led the 2004 OECD conference on SMEs to make two important policy recommendations: to develop a common definition for SMEs and to develop a better international statistical comparability for these companies. We clearly observe that from the very issue of their own definition, SMEs are faced with limitations. This topic will be analysed in detail later on. For the purpose of this dissertation, it abides by the European Union definition, otherwise, it will be clearly stated.

The Role of SMEs and its Importance in the Economic Environment

The importance of SMEs and its key role in economic development is widely acknowledged by scholars, international organizations and governments around the world. As recognized by Tambunan (2008; cited in Pandiya, 2012) SMEs have been the main source of jobs generation and output growth, in both developed and developing countries. Moreover, studies such as Beck, Demirgüç-Kunt and Levine (2005) find a robust, positive relationship between the magnitude of the SMEs sector and economic growth. Noteworthy is the dynamics that SMEs might have in developing countries, as they have a key role as a potential engine of income distribution, poverty alleviation, employment opportunities and export growth (Pandiya, 2012).

The contribution of SMEs to an economy’s performance has been assessed by several authors, reviewing the importance of the role that SMEs play in the economies and in the firm’s linkages, as investing transnational corporations prefer environments with sound local suppliers for their production systems (Fida, 2008). These scholars have studied developed economies like Japan (Shujiro and Kawai, 1998) and the United States (Audretsch, 2000). Whilst others focused on developing countries such as Liedholm and Mead (1999) with research on Africa and Latin America or Berry and Mazumbar (1991) in East Asian countries.

There are examples of high performing economies such as Hong Kong or Taiwan that are strongly based on SMEs; or the Latin American example of the 1960-1980’s Colombian manufacturing net that provided a strong dynamism to the economy due to the participation of these companies (Cortes, Berry and Ishaq, 1987). Moreover, as Berry (2002) acknowledges, successful economies like the East Asian countries share the characteristic of a dynamic and broad participation of SMEs in the economic activity. This was achieved by successfully integrating SMEs to the export process, whether by a combination of direct exports by the companies (e.g. Taiwan case) or by subcontracting with bigger firms: Japan, and in Korea since the 1970’s.

SMEs are, in general, more labour intensive than large enterprises, and have a lower cost of capital associated with jobs generation. Hence, they play a critical role when ensuring income stability, economic growth and employment (Schmitz, 1995; Liedholm and Mead, 1987). Moreover, SMEs make an important contribution in transitioning from primary economies to industrial ones by expanding the productive capacity and absorbing productive resources at all levels in an economy, whilst contributing to building more flexible economies by interlinking with large companies (Kongolo, 2010).

The importance of SMEs in the economic environment and its enhancement can drive on a path to accelerate the achievement of broader socioeconomic goals such as poverty alleviation (Cook and Nixson, 2000). Consequently, the focus of multilateral organizations and states on enhancing SMEs. As it is recognized the role of these companies in supporting economic development, advocates work for strategies and policies to foster SMEs, to establish better conditions for all (Kongolo, 2010).

This position held by SMEs advocates is supported on three key arguments: first, SMEs promote entrepreneurship and competition. Therefore, they provide benefits on economic efficiency, innovation and productivity. Secondly, there is the view that SMEs have higher productivity than bigger firms but are conditioned by the financial markets and other institutional failures. Finally, it is considered that SMEs’ growth boosts employment creation because of their labour-intensive characteristic (Beck, Demirgüç-Kunt and Levine, 2005).

However, it is important to mention the sceptical views on the matter, as it influences the policy making process and might derive in limitations to be faced by SMEs, especially when referring to subsidising policies for these companies. Authors such as Pack and Westphal (1986) or Pagano and Schivardi (2003) highlight the strength of large companies, as these can exploit economies of scale and endure higher costs of Research and Development (R&D) with the subsequent positive impact on productivity.

What is more, research suggests that SMEs are neither better at creating jobs or more labour intensive than large enterprises (Little, Mazumdar and Page, 1987). In addition, Kumar, Rajan and Zingales (1999) find that under-developed institutions affect most firms, and are not an intrinsic characteristic of growth constraint for SMEs solely. In their research, the latter, also question the grounds of considering firm size as an exogenous determinant of economic growth. Therefore, availability of natural resources, policies, access to technology and institutional quality are critical to determining a country’s industrial composition and firm size (Kumar, Rajan and Zingales, 1999).

Moreover, the degree of openness to international trade might play an important role in defining the optimal firm size in a given economy (Caves, Porter and Spence, 1980). Finally, when analysed from the business environment perspective, the role of SMEs is questioned. The focus is made on the importance of low entry and exit barriers, reliable property rights and contract enforcement to build a suitable business environment that promotes competition and trade, despite the company’s size (Beck, Demirgüç-Kunt and Levine, 2005).

Regardless of the side scholars take on the matter, empirical evidence suggests that firm size is closely related to country characteristics. Moreover, Beck, Maksimovic and Demirgüç-Kunt (2003) find that countries that are more financially developed tend to have larger companies. Suggesting that financial development helps to avoid the financial constraints that companies face, thus allowing them to grow.

Financial Institutions Structures and its Relationship with Lending to SMEs

As mentioned earlier, the availability of financing alternatives for SMEs is a topic of considerable importance for scholars, policy makers and businessmen around the world. Moreover, the level of development of a country’s financial system has a positive correlation with economic growth (Stallings and Studart, 2006; King and Levine, 1993). This system can be split into two major components: financial institutions structure, defined as the market composition and configuration of the various types of lenders, as well as the competition among them. The second component is the lending infrastructure, or the rules and conditions established, mainly by the regulatory agencies that impact on the companies’ abilities to lend (Berger and Udell, 2006).

In this system, financial institutions use two broad types of lending: transaction technologies and relationship lending. The latter is based mainly on “soft” qualitative information, collected throughout time within the relationship between the lender and the SME. It is mainly gathered by the direct contact between the credit officer and the company owner. This information is often in the dominion of the lender’s officer and might not be easily observed and verified by others, or communicated within the financial institution. Whilst transaction technology lending is mainly based on quantitative data such as audited financial ratios, credit scores and information gathered from previous factoring activities with the SME or tax declarations (Berger and Udell, 2006).

The composition of the credit market plays an important role for accessing to credit. The different types of institutions such as publicly funded or privately owned; small or large; national companies or international capital pose different challenges to the SMEs that search for external capital.

I. Public and Private Institutions

In general, public institutions are larger than private ones and, commonly they operate with government subsidies with a special mandate to provide additional credit to entrepreneurs and SMEs in general or in specific regions, industries or sectors. However, as they are mainly publicly funded this might cause a lack of business discipline; weak borrowers monitoring and restraint in the collection procedures. Also, as Sapienza (2004) further notes, this funding sources might be used for political purposes instead of commercial ends.

Therefore, a significant amount of funding might be diverted to unprofitable or unreliable projects. Additionally, in economies with strong public lending entities, they might cause a crowding-out effect as private companies cannot compete with subsidized credits or relatively loose credit cultures derived from the business practices of the former (Berger and Udell, 2006). Other scholars suggest that credit is reduced for SMEs in countries with a large share of publicly-owned banks as nonperforming credits rates are usually high as lending practices lacks rigour (Hanson, 2004).

II. Size of the Institutions

The magnitude of the financial institution can affect the availability of credit for SMEs for several reasons: type of information used to assess the borrower; big financial entities usually have a comparative advantage and economies of scale in using transaction technologies based on hard information. Whilst, being unable to properly use the soft data needed for relationship lending as it is increasingly difficult to quantify and transmit it within the large institution (Stein, 2002). While small institutions, as they generally have a flatter management structure; and less separation between the owners and the executives, can take advantage of the relationship lending, and therefore being able to provide credit to profitable, yet informationally obscure SMEs (Berger and Udell, 2002).

Moreover, research shows that large institutions tend to lend to bigger, older and financially secure SMEs (Haynes, Ou and Berney, 1999). Besides, Carter, McNulty and Verbrugge (2004) find that large financial institutions earn lower yields on credits to SMEs as they charge lower interest rates. This might be the result of the decision-making process as large institutions base their credit decisions on sound financial ratios and financial statements than on relationships (Cole, Goldberg and White, 2004).

On the contrary, as Berger and Udell (2006) highlight, small financial institutions are prone to use soft data and credit scoring mainly focused on assets of the company and in many cases from the SMEs owner, who becomes the personal guarantor. These credits involve higher processing and monitoring costs and produce higher interest rates. Moreover, the proximity between the small lender and the SME is causal of a higher availability of credit. As research suggests, a bigger market share by small lending institutions is related to more SME lending (Berger, Hasan and Klapper, 2004).

III. International and Local Financial Institutions

The source of capital for the lending institutions shares some characteristics with the ones above mentioned. As locally-owned institutions might have advantages in relationship lending, whilst international entities are generally part of large corporations. Therefore, the above-discussed characteristics apply as well. In addition to this, international companies face the difficulties posed by diverse economic, regulatory, cultural and language barriers where they operate, adding an extra layer to the complex relationship with the SMEs (Buch, 2003).

Nevertheless, in developing nations, international institutions might have an advantage when using transaction technologies as they can use state-of-the-art information processing technologies for assessing credit requirements (Berger, Hasan and Klapper, 2004). Additionally, research conducted by DeYoung and Nolle (1996) shows that international institutions tend to have a wholesale orientation and in some cases, specialize in lending to other multinational corporations. What is more, in developing countries, foreign banks seem to be more efficient and profiTable than local institutions (Martinez Peria and Mody, 2004).  Research also suggests that international banks are related to better credit access for SMEs (Berger, Hasan and Klapper, 2004).

Barriers to Access Financial Resources by SMEs

The importance of SMEs for employment and production is well documented. At the same time, a significant proportion of SME research highlights the fact that these companies bear higher barriers to accessing financing resources than larger firms, limiting their possibilities of growth and development (Beck, Demirgüç-Kunt, and Martínez Pería, 2008). As an example, Beck (2007) informs that while 30% of large enterprises finance new investment by bank credits, only 12% of SMEs uses this resource. Moreover, scholars agree that the higher barriers are defined by transaction costs, the effects of information asymmetries and default risk, collateral and an emerging approach on personal characteristics as another barrier, especially for micro and small enterprises (IFC, 2009; Scholtens, 1999; Curran and Blackburn, 1999).

I. Transaction Costs

Transaction costs exist at several levels: at the contracting, client relationship, institutional and at the financial system level. From the financial institution perspective, transaction costs comprise their offices, computer systems, legal services and many other items that are independent of the number of clients or the transactions with them. The costs related to the financial system are those that arise from regulatory measures and from participating in the clearing and settlements systems, which are, again, independent of the clients or transactions (Beck, 2007).

At the client level, transaction costs include keeping the relationship through time and with different products such as credit lines, savings, deposits and current accounts. This relationship implies costs that are partially independent of the quantity and sum of the transactions with them. Finally, there are transaction costs directly related to credit operations. As Beck and De la Torre (2007) notes these arise from the activities of assessment, processing and monitoring credit transactions, with the characteristic that these costs are inversely related to the amount of the loan.

For companies looking for expanding, high transaction costs and the attached higher lending costs, might increase the probability of default, as the expected cash flows from the new projects are put under extra pressure. Moreover, as Williamson (1987) recognizes, the awareness of this possible outcome by financial institutions might cause a credit rationing at lower interest rates than the market equilibrium to avoid underperforming credits. Therefore, these transaction costs have a double effect on access to financing: they not just increase the cost for entering a contract, but they also might limit access for some borrowers.

II. Default Risk and the Impact of Information Asymmetries

This constraint has two variants: it can be a systemic risk or company-specific. As the first one is beyond the scope of this dissertation, we will concentrate on the latter. Default risk for SMEs is closely related to asymmetric information between the financial institution and the company searching for credit. As Berger and Udell (2002) mentioned, SMEs usually have a characteristic of opaqueness information-wise. Therefore, it is likely that the lender might be able to gather sound information from the company and its projects but attached to high costs and complications.

This can derive into two risks to SME lending: moral hazard, or the incapacity of the financial institution to effectively enforce the contract ex-post, and adverse selection or the difficulty of selecting good credit risks (lending) ex-ante. It is obvious that these risks can be compensated with an increase of the interest rate. However, this situation would again increase the risk of moral hazard and adverse selection as borrowers might undertake these credits for riskier projects (Beck, 2007). Moreover, as Stiglitz and Weiss (1981) explain, the impracticability to use interest rates for borrowers’ scrutiny tempts financial institutions to use barriers such as warrants, collateral or demand audited information by a third party, with its usual higher costs associated. Ultimately, it impacts on credit rationing instead of allowing for a significant rise in the interest rate.

III. Collateral, and the Diffuse Line Between Owner and SME

The aforementioned barriers play a role restricting access to finance from a systemic point of view. Collateral is a result of the presence of asymmetric information and the underlying risks of moral hazard and adverse selection. Chan and Kanatas (1985, cited in Voordeckers and Steijvers, 2006) mention that the credit risk is hedged by using collateral, and the latter, might play a role on borrowers’ self-excluding.

Moreover, looking at Table 2, collateral might also play a role as a disciplinary measure for borrower behaviour by securing a debt limit for the SME, reducing the risk of future high levels of indebtedness whilst at the same time reducing the costs of the credit (Mann, 1997). However, the levels of collateral required, limit the possibility to access these resources and induce to a demand-side rationing of credit.

Table 2: Financing Sources and Collateral Requirements

This situation fosters an excessive reliance on collateral rather than analysing SMEs capacity by financial institutions. Moreover, as SMEs rely more on relationship lending due to the opaqueness of their information, the “implicit value” of personal commitments for borrower’s behaviour discipline is higher than collateral (Mann, 1997). Chan and Kanatas (1985, cited in Voordeckers and Steijvers, 2006) also maintain that business and personal collateral are treated in a similar way.

Research suggests that the composition of an SME influences the use of personal commitments for access to credit. Building upon agency models, Voordeckers and Steijvers (2006) predict that agency costs arise with fragmentary ownership, a scenario infrequent in family enterprises. Ang (1992, cited in Voordeckers and Steijvers, 2006) highlights that family firms, by not having a diversified portfolio are motivated to ensure the long-term viability of the company. This is seen by creditors as an alignment of the interests of them and the SMEs owners, and therefore it induces a reduction in the perceived risk and cash-flow volatility.

IV. Ethnicity, Gender and Education

SMEs owners or managers might be faced with barriers that arise from their personal characteristics such as gender, ethnic group or level of education. Studies suggest that minority groups are inclined to informal sources of financing due to the barriers they face in the formal financial system (Curran and Blackburn, 1993), other scholars found evidence of different levels of financial access for men and women (Carter and Peter, 1998). Notably, for small enterprises, the latter found it easier to access credit than men. Finally, research suggests that the number of entrepreneurs with higher levels of education is correlated to better access to finance (Irwin and Scott, 2010).

The Role of the State on Promoting SMEs Financial Access for Fostering Growth

The recognition of market failures such as information asymmetries, lack of coordination on collective action, and lobby groups with their own agenda pose a challenge for governments on the role they face for constructing inclusive financial systems (Beck and De la Torre, 2007). Moreover, countries with more institutional development usually report considerably lower financing barriers than those faced by firms in environments with less developed institutions (Beck, 2007). Additionally, Kumar, Rajan and Zingales (1999) identify the positive relationship between firm size and levels of financial and institutional development, being larger in countries with superior property rights.

A particular difficulty faced by SMEs is meeting their financial needs in order to pursue their growth plans and opportunities. Across the globe and especially in the developing world, these needs have become a top priority because of SMEs impact on poverty alleviation and employment. Governments have identified this situation as a market failure and, therefore, have proceeded in two main ways: countries such as Brazil, Chile and Mexico rely on partnerships between the public and private sector, where the former would build markets for those companies that face the biggest barriers (Stallings and Studart, 2006).

These countries, through their government agents, provide credit lines for working capital and investment alongside with guarantees and technical assistance. An interesting example is Chile’s FOGAPE programme, a partnership between a public agency specialised on fostering productive activities (CORFO) and a state-owned bank (BancoEstado). This programme is set to compensate the transaction costs for private banks willing to enter the SME market. The second approach is to provide direct loans by state-owned banks, such as the case of the Industrial Bank of Korea, with a mandate to destine over 85% of its US$ 35 Billion loan book to SMEs (Stallings and Studart, 2006).

Long-term institutional strengthening to secure property rights underlies any viable package of state reform to enhance private entrepreneurship. Nevertheless, Djankov, McLiesh and Shleifer (2007) suggest that prioritizing some institutional reforms according to its context might impact in the short and medium term. They provide evidence that in high-income economies enhancing creditors rights is more important than the development of information infrastructures, named as paramount in low-income countries.

A variety of measures and state interventions are needed to promote SMEs’ growth. However, some measures are widely used, and they have proven useless or distortionary. Honohan (2004) mentions examples such as interest ceilings that fail to properly protect the borrowers from abusive conditions, as financial institutions compensate the lower interest rates with other charges and fees. Therefore, he suggests an approach where the state promotes transparency, formalization, and enforces the responsibility of the financial institutions; whilst at the same time provides relief lines to the over-indebted.

Scholars refer to the wide body of evidence that suggests that credit supply via state-owned institutions has proven unsuccessful (Levy-Yeyati and Micco, 2007), Moreover, the extent of direct government actions in improving credit is more limited than believed. Among other reasons, it does impact the political usage of lending rather than the economic criteria to perform contracts (Beck, Demirgüç-Kunt and Honohan, 2009; Cole, 2004). Due to the discredit of state lending programmes, there has been an increasing attention on partial credit guarantee schemes as a direct intervention mechanism. As an example of the latter, Chile has developed a scheme where the intermediary banks bid for a percentage of the guarantee to ultimately adjust the premium charged based on the claims record of the intermediaries. This resulted in a reduction of loan losses and a higher amount of credit for the beneficiaries (Cowan, Brexler and Yañez, 2008).


This dissertation has been developed as a case study on the financing alternatives and conditions that SMEs have for achieving growth in Argentina and Chile. The present chapter outlines the approach towards the investigation by discussing the research methodology. More specifically, this chapter includes the research, objectives, design and limitations faced in the study.

Research Questions

The goal of this study is to explore the impact of financing options on promoting growth in Argentinean and Chilean SMEs, by attempting to answer the following question: Do the available financing options promote growth in SMEs in Argentina and Chile? To achieve this, the subsequent questions must be addressed.

  1. What are the possible formal alternatives of financing that SMEs can use in the selected countries?
  2. What are the barriers that SMEs have for accessing these financial resources?
  3. What is the financing structure for each of the financing options?
  4. What is the use of the available financing options in each country?

Aim of the Dissertation

Substantial research has been made regarding the barriers that SMEs endure for growth, and a common topic arises: access to financing sources. Scholars such as Beck and Demirgüç-Kunt (2006) have provided evidence on the difficulties that SMEs must overcome when accessing financing options and the restraints it causes on growth opportunities. Others, focusing on Latin America, studied the determinants of credit constraints for SMEs (Morini Marrero and Solari, 2015). Nevertheless, no previous study comparatively analyses the available financing sources that SMEs have for long term investment purposes of sustaining growth in Argentina and Chile’s companies.

Therefore, the aim of this dissertation is to review and evaluate the financing sources that are available for SMEs, and the barriers that companies face when accessing these financial options for promoting their growth plans. To achieve this, the researched financing sources will be addressed by answering the questions previously indicated.


The following objectives were drawn to facilitate and properly frame the research and analysis, these are related to the above-stated questions.

  1. To compare the possible, and viable, alternatives of financing that a Small and Medium Enterprise has as an option when looking for sources for invest with growth purposes.
  2. To investigate the barriers that SMEs face to access the available financing resources in the selected countries.
  3. To find out the financing structure for each of the financing options discussed above.
  4. To evaluate the average cost of capital of each alternative in the selected countries.
  5. To study the use that SMEs make from the available financing options.

Research Design

The selection of the case study methodology is due to the characteristics of both, the topic and the method itself. A case study systematizes one or several experiences or processes. It considers the critical moments, actors and context to explore its causes, and to critically understand why the experiences or processes behave in a certain way, providing with insights on the aspects that deserve attention in the future (Luna and Rodríguez Bu, 2011).

Authors such as Stoeker (1991) and Rouse and Daellenbach (1999) question the use of case studies as a strategy for scientific research, as they acknowledge that the case study method presents issues on its validity and robustness due to the use of a qualitative approach rather than a quantitative one. However, it is to be considered that, in the case study methodology, data can be obtained from a wide variety of sources, both quantitative and qualitative (Chetty, 1996 cited in Martínez Carazo, 2006), therefore providing a nurtured base to work with.

It is important to highlight that a quantitative approach is a very useful methodology for hypothesis testing derived from theories. Hence, the need for an established theory as the intrinsic scientific method is deductive. Meanwhile, the qualitative methodology consists of establishing the grounds for the development of a new body of theory (Martínez Carazo, 2006). Therefore, the present dissertation is framed in what can be called a “Heuristic or Discovery Phase”; a stage concerned in observing, describing, reflecting and inducing a hypothesis on what might be the problem and the answer or explanation to it (Sarabia, 1999).

As mentioned earlier, the purpose of this paper is to explore or review the impact that financing options have on promoting growth in SMEs in Argentina and Chile, and the barriers that they face when trying to access these sources of financing. The topic itself provides the opportunity to be framed into a case study. As Martínez Carazo (2006) explains, this is a good method to identify and describe the different factors that influence the studied issue, when trying to link them with the theoretical framework and the reality, object of study.

To summarize, and according to Yin (1989), the methodology of the case study is appropriate for topics considered relatively new. As the empiric research has some distinctive features: it examines a contemporary phenomenon in its real environment; the line between this phenomenon and its environment are not clearly visible; it uses multiple sources of data and can be studied as single or multiple cases. Moreover, it allows to explore deeply and get a comprehensive knowledge on each phenomenon, permitting the emergence of new topics. Case studies play an important role as they settle the basis for new and further research and hypothesis testing (Chetty, 1996). Consequently, the choice of the case study methodology matches the objectives of the research, above stated.

The Case Studies

Generalizing an outcome from the methodology of a case study is not about a “statistical generalization” from a sample to a universe. It is an “analytic generalization” (Yin, 1989). The multiple case studies, such as the present, reinforce these analytical generalizations by providing evidence on two or more cases (Martínez Carazo, 2006). Therefore, the use of two very related, but divergent, countries as the case studies to be evaluated: Argentina and Chile.

Since their very origins both countries were related, both being regions of the Spanish empire in South America; until the XIX century, when due to shared efforts of their countrymen, they declared independence and continued their relationship with a new, republican, form of government. Since then, significant changes occurred in both economies that made them develop in different ways, not only economically, but also regarding their institutions. Figure 1, exposes the evolution of GDP per capita in both countries; clearly showing the 70’s as the decade where the divergence started, an analysis in line with that of Cáceres and Sandoval (1999) on economic growth and divergence in Latin America.

Figure 1: GDP per Capita Evolution in 1990’s International GK$

Source: Maddison Project Database

To date, Argentina is categorized as Upper-middle-income country and Chile, the only OECD economy from South America, a High-income country. Furthermore, the latter, ranking 57 in the Doing Business Ranking (2017); is characterized for its liberal economic system, its strong institutions and its emphasis on competitiveness (Goldberg and Palladini, 2008).

Whilst, Argentina, a well-known study case in economics due to its constant variations both in growth and wealth, with a political system that has played a paramount role in the economic output; with questionable institutions and a high fiscal pressure, ranked in the 116th position in the “2017 Doing Business Ranking”. This two case studies, with different realities, share nonetheless a common feature that makes them very interesting regarding the topic of this dissertation: both are tied in the 82nd position in the Doing Business Ranking (2017) when referring to access to credit by companies. Therefore, the relevance of studying the conditions and alternatives that SMEs face when accessing to credit for investment purposes.


The present paper has used the following sources in the research: Statistical data from the official statistics institutes from each country, other sources of statistical data: private organizations, NGOs and scholars’ research. The research is based on secondary sources with a special emphasis on prior academic research. The alternative financing sources are investigated and analysed extracting both quantitative and qualitative data from the sources itself: Banking institutions and state bodies.

The financial programmes and credit lines to be analysed are those that were fully operational and had national coverage by July 31st, 2017 by private and public institutions. Additionally, it is to be recalled that the financial sources studied are those destined to medium-to-long-term investment in capital goods such as machinery and infrastructure. It does not consider credit lines for Working Capital, or other short-term funding such as short-term credit lines, factoring or commercial credit, among others.

The analysis is conducted following a qualitative approach. However, to comply with the objectives derived from the research questions, specific financial methodologies, such as Discounted Cash Flows, Internal Return Rate (IRR) and Adjusted Cost of Debt will be used to analyse the different sources and their expected financial structure.

Limitation Considerations

There are potential limitations that need to be considered in the current study. First, there is a legal and ethical limitation as most of the SMEs in the study are not public companies. Therefore, all the information that might come from non-official sources cannot be disclosed. This is intrinsically related to the second limitation, which is the reliance on the quality and depth of the data provided by public institutions and business chambers.

The third limitation is associated with the case study of Argentina: The country suffered from statistical manipulation until 2016. Hence, some statistical sources, especially those from public sources might differ from other sources to be analysed and the scope and width of the data may be limited as well. Finally, the fourth limitation is endogenous, the parameters established for the present dissertation do not allow to develop in depth each of the conditions, limitations or alternatives that SMEs have for investment purposes. Therefore, it will focus only on the key issues that impact on SME financing.


This section is focused on the first case study, Argentina. It provides background into the nation’s current situation, then it explores their own definition of SMEs to then review the country’s current private and public alternatives to investment financing. Finally, it reviews the use that companies make of these resources.

Country Overview

The Argentine Republic, located in South America, is the second-biggest country in Latin America by size (8th in the world), third in economic importance in the region and a member of the G20 alongside Brazil and Mexico. With a GDP of US$ 545.866 billion (current prices) and a population over 43 million people, the country has a GDP per capita of US$ 12.449 (World Bank, 2017) which defines it as an upper-middle-income economy.

The southern country was among the top 10 economies in the world at the beginning of the 20th century. However, as Della Paolera and Taylor (2003, cited in Campos and Karnasos, 2008) explain: “Argentina’s ratio to OECD income fell to 84 percent in 1950, 65 percent in 1973, and a mere 43 percent in 1987 (…) Argentina is therefore unique”.  As this dissertation does not attempt to conduct a historical review of the causes of the Argentine economic evolution, it will briefly cover the last period of its history, which signalled major changes in the government and society.

At the end of the government of Carlos S. Menem (1989 to 1999) an administration characterised for its neoliberalist approach, a depression period started and ignited the economic crisis of 2001. Argentina ended its Dollar-Peso parity, leading to a massive devaluation and plunge of the economic activity. A loss of over 23.68% of GDP between 1999 and 2002; the sharp increase in unemployment (18.4% of labour force); extreme poverty peaking at 24.7% of the population (Rossignolo, 2016), and the default of its public debt.

The consecutive administrations that governed the country, established policies to enhance social security nets and various programmes to combat this major crisis. This was accomplished by increasing the scope and quantity of programmes and subsidies for the different actors in the economy. Public expenditure, at all governmental levels, increased from 26% of GDP in 2004 to 45% in 2013 (Rossignolo, 2016). The crisis affected the SME sector dearly, and the administration intervened with relief programmes, competitiveness assistance and credit lines to support this important pillar of the economy.

As it was discussed in prior sections, access to financing is one of the key constraints that companies face for development. As mentioned, the country faced the default of its public debt, which ended after 15 years in 2016, limiting the possibilities to access international financing at accessible terms both for the state and for private institutions. This situation added an incentive for the state to introduce several financing alternatives, both state-financed and in communion with the private financial sector. The following sections explore the country definition of SME, the market structure of the country, the private funding alternatives that are available for SMEs and those offered by public institutions to support long-term investment for these companies to finally review the use of the aforementioned sources by Argentine SMEs.

What is considered an SME in Argentina?

In the theoretical framework, there were mentioned the difficulties and approaches to define what an SME is. These complications are not avoided by Argentina, as a homogenous definition of SMEs has not been achieved. Moreover, from the source itself, the National Law Nº 24.467/1995 known as the “SME statute”, in its second article states: “The implementing authority is called upon to define the characteristics of the companies to be considered as SMEs, considering the peculiarities of each region of the country and the various sectors of the economy in which they operate”.

Following jurisprudence, aimed to clarify the methodology for defining this typology of enterprises. The National Law Nº 25.300/2000, considering the regional and sectoral differences, determined the parameters to measure SMEs: number of employees, annual turnover and value of assets used in the productive activity. In addition, it ruled that companies which complied with those requisites but owned by other companies that did not fulfil these benchmarks were not considered SMEs, and therefore could not use the benefits legislated for this type of enterprises.

Regardless of these bodies of legislation, in 2001, when SEPyME (i.e. Secretary of Entrepreneurship and SMEs) regulated the law through the Resolution Nº 24/2001, adopted the following criteria to define SMEs in article Nº 1: “There will be considered Micro, Small and Medium Enterprises those whose total annual sales expressed in Pesos ($) do not exceed the values established in the Table below”, See Table 3. The law in the following articles clarifies that the amounts are net of VAT and other taxes, and an average of the sales for the last three fiscal years is calculated to analyse if they can be considered SMEs. This methodology is currently used to define SMEs, and the values are periodically adjusted due to inflationary reasons.

Table 3: Classification of SMEs by the Argentinean Government: Annual Sales. Expressed in current AR$ and in US$*

For simplicity, banks define SMEs in Argentina as those with an annual turnover between US$ 300.000 and US$ 5.000.000 for small companies, and medium-sized are those with annual sales between the latter value and US$ 30 million (De la Torre, Martínez Pería and Schmuckler, 2008).

Argentinean Financial System and the Credit Market for SMEs

The formal financial system in Argentina is comprised of 78 institutions, both public and private. As seen in Table 4, the former account for 32% of the total lending, whilst the latter, highly concentrated on ten institutions maintain a market share of 52.40%. Leaving the last 15.60% of the credit market to the remaining 55, smaller, financial companies. The credit market in the country is highly focused on providing credit for individuals, from over 30 million loans contracts signed by December 2016 only 4.15% were performed with the private sector (BCRA, 2017).

Table 4: Composition of the Argentinean Financial System

The Argentinian history, characterized by decades of economic volatility and a deficient protection of private savings impacted on the availability of credit (Bebczuk, 2010). Figure 2 shows the evolution of domestic credit to the private sector. Over the last 15 years, domestic credit contracted to an average 12.71% of GDP, a value that is about a third of the Latin American average and a tenth of the OECD countries.

As Bleger (2006) notices, the situation is even worse if we consider that approximately 50% of the private credit is for consumption. Moreover, if an SME is considered as a company with a total debt of 5 million pesos (US$ 1,6 million in 2006), they would account for almost 99% of the total borrowing companies. However, it would only represent 25% of the total commercial credit.

Furthermore, considering the registered SMEs, around 23% has access to credit, but if informal enterprises are accounted for, this participation drops to a 9.4% (Blejer, 2006). By 2014 credit to SMEs represented about 3.8% of GDP with a pre-eminence of short term lending such as factoring and discounting documents, accounting for 99.92% of total credit (UNDA, 2015).

Figure 2: Domestic Credit to Private Sector by Banks (% of GDP) Argentina

There are several causes that might help to explain the low level of credit to SMEs. Namely, the low levels of deposits in the Argentinean system, with 24.44% of GDP[1] in 2016, which provides a structural limit for the credit market. Other macroeconomic limitation faced by the financial system can be observed in Figure 3, and it is explained by the impact of inflation on the real interest rate.

Furthermore, after the crisis of 2001-2002, and with the implementation of state regulations that were aimed to promote access to credit, the private sector lending real interest rate dropped to significant negative levels and have remained there due to the impact of state financed competition and regulations. This caused a financial system with a portfolio invested 42% in loans, 22.2% in liquidity and 22.07% in public and private debt obligations, with the remaining 13.73% accounting for capital goods, settlement credits and miscellaneous (BCRA, 2017).

Figure 3: Inflation Rate, Real Interest Rate and Private Sector Lending Rate for 1995-2017, Argentina

Additionally, De la Torre, Martínez Pería and Schmuckler (2008) find that banks limit credit expansion because of the characteristic informality of the SMEs, the lack of quality information and the associated high costs that are required to produce trustworthy data to assess and score their credit needs, alongside with the usual lack of guarantees to secure the contracts. Also, they mention the perception that financial institutions have on the legal and institutional framework, as it is considered deficient. Therefore, lenders focus their credit operations in the short term, even restructuring o renegotiating the debt and asking for personal guarantees to avoid dealing with the judiciary system (De la Torre, Martínez Pería and Schmuckler, 2008).

Private Sources of External Financing

Most financial institutions focus their lending portfolio on short-term alternatives for the SME market. Banks main lending activities for these companies take the form of current account advances (or overdraft authorizations) factoring and document discounting; also, most loans are focused on Working Capital (UNDA, 2015; De la Torre, Martínez Pería and Schmuckler, 2008).

Nevertheless, SMEs trying to access financing sources have several credit lines available. But to be able to apply to them they must overcome a further barrier: documentation requirements. According to the Communication A 4975/2009 from the Central Bank, “the client’s file must contain all the elements that make it possible to make correct evaluations about the assets, income and expenses flow, business profitability or the project to be financed”. Likewise, the client must present proof of complying with all his taxes (Bebczuk, 2010). This is not a minor issue as the total tax rate as percentage of profits for companies in Argentina was 106% for 2016, from a prior average of 114.59% for the last ten years (World Bank, 2017) which might impact on self-exclusion decisions by SMEs as it is a common feature to be in arrears with the Treasury.

The available financing alternatives from the private sector can be separated into two types: regular commercial loans and those comprised under the programme “Financing line for production and financial inclusion” which is a normative from the Central Bank that both public and private banks must destine at least 75% of the 18% of their private deposits to grant credits at capped rates for Micro and SMEs. The banks in Argentina that offer long-term credits outside this programme, grant them with the following characteristics: Mortgage backed loans with up to twenty years period of repayment with French loan system[2]. An average interest rate of 9%[3] over the variation of UVA[4], without considering other costs such as administrative expenses, insurance and miscellaneous. These extra expenses range from 2.60% up to 4.18% in the analysed sample.

The objective of UVA is to maintain a real yield over the credit or deposit. Therefore, an SME would face an initial nominal financial cost for a credit in these conditions around 35.25% if the credit was taken on June 2017 or up to 48.99% if the credit was performed the same month in 2016. The underdevelopment of other long-term financing alternatives by the private sector might be explained by the conditions offered in the credit lines under the above-mentioned Central Bank programme.

For the private sector, the conditions stated in this regulation means that the credits that they must offer to SMEs are subject to the following characteristics, the maximum interest rate is 17% since November 2016, and of 1% if the credit is structured with UVA’s; the minimum term of credit shall be 36 months and the loan must be denominated in Argentinean pesos, collateral requirements are flexible, according to the lender’s requirements (BCRA, 2017). These credit conditions imply that, on average, banks are offering credit lines with an APR of 19.27% with a French loan and 60-month term of credit. In addition, the usual collateral is mortgage-based and the credit covers on average up to 75% of the financial needs.

Public Sources of External Financing

Contrary to the private sector, the state provides several sources for long-term financing to SMEs and support lines such as direct credit lines, guarantees and interest rates subsidies. Public banks have in their portfolios the same long-term credits as those offered under the “Financing line for production and financial inclusion” programme.

However, there are some differences in some of the conditions with those offered by private banks. Banco Nación, the biggest bank in the country, offers a loan term of up to ten years and an APR[5] of 20.39% with a maximum credit amount of AR$ 10 Million (approximately US$ 550.000) and up to 100% of the investment requirement. The second national bank, specialized on productive activities, BICE (Investment and Foreign Trade Bank) offers two national credit lines for SMEs as shown in Table 5.

Table 5: BICE Credit Lines to SMEs

The second package of financing alternatives that SMEs have nationwide are those provided by the Ministry of Production through FONAPyME (National Fund for SME Development) namely: for micro enterprises; for agro-industry projects; to improve energy efficiency and for strategic production, Table 6 shows the different characteristics of each programme.

Table 6: Credit Lines Offered by FONAPyME Expressed in Argentinean Pesos and US$

Finally, the state provides two extra tools to facilitate SMEs access to credit that is worth mentioning: A public-funded credit guarantee scheme, through Garantizar SGR (Mutual Guarantee Company) which acts as a collateral provider for the financial system, guaranteeing up to AR$ 3 million to SMEs (approximately US$ 167.000), but at the same time asks for collateral as part of its requirements for guaranteeing the credits. And an interest rate subsidization scheme to ameliorate the credit conditions for borrowers. This programme reduces 4% for those SMEs that are accepted in this system. In addition to this reduction, a further 2% cut is applied if the credit line is in the above-mentioned programme of financial inclusion (Ministry of Production, 2017).

Use of Long-Term Financing by SMEs in Argentina

In previous sections, there were mentioned the low level of credit available to the private sector by banks (see Figure 2) and other conditionals or barriers to credit availability, that limit access to credit for SMEs in Argentina. Research on the scope and depth of use of these programmes and credit lines shows that in the case of interest rate subsidies, 57% of business men are unaware of this regime, 40% knows it but did not use and only 3% used it. Also, banks claim that they appeal to the interest rate subsidies only to improve the conditions for their current customers, not to broaden their client base (Bebczuk, 2010). Moreover, regarding the lines offered by FONAPyME, these values are 44%, 54% and 1% respectively (Observatorio Pyme, 2007). Recall that the programme budgets for the latter are insignificant to the size of the economy (Table 6).

Regarding bank credit for SMEs, evidence suggests that 26% of industrial SMEs had to stop projects because of lacking bank financing. Moreover, research indicates that if they had proper access to financial resources, 55% of SMEs would be able to grow through investment (Observatorio Pyme, 2014). Figure 4 explores this situation by economic activity.

Figure 4: Potential investment and lost growth: Industrial SMEs (investing and not investing)[6] but having investment projects stopped by lack of bank financing

The level of access to financing by Argentinean SMEs, as it can be observed, is low (Bebczuk, 2010). Data from the WBG Enterprise Surveys (2017) show that 82.9% of firms need a loan, whilst only 13.9% use banks to finance investments. Moreover, 43.5% of companies identify access to finance as a major constraint for growth. Data also shows that financial institutions ask for collateral of 181.3% of the loan amount according to WBG Enterprise Surveys (2017). This requirement added to the regulations regarding the compliance of the tax obligations prior to applying for a credit might help to explain why only 37% of companies requested a loan and only 15% of the total requests were denied (Observatorio Pyme, 2014). This may support the idea that the banking regulations and requirements might drive to the self-exclusion of the SMEs from the credit market.

[1] Author’s own calculations based on data from the “Financial Entities Report, December 2016” by Argentine Republic Central Bank.

[2] The French loan is an amortization system characterized for being calculated to produce equal amounts for every instalment, with an increasing amortization of capital and a decreasing payment of interests.

[3] Author’s own calculations based on the credit conditions offered by the 10 biggest private banks.

[4] UVA: Unit of Purchase Value, which is equivalent to 0.01% of the average construction cost of 1 m². The UVA value is daily update based on the variation of the reference stabilization coefficient, based on the Consumer Price Index.

[5] The APR or Annual Percentage Rate is the total annual cost for borrowing, and it includes the interest rate and any fees or additional costs that are associated with the loan, without considering the incrementality of compounding (Investopedia:

[6] “Investing SMEs” are those that periodically use a percentage of their annual turnover to finance new capital or infrastructure. “Non-Investing SMEs” are those who do not do so on a periodical basis (Observatorio Pyme, 2014).


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