How can we make sure loans provided through partner banks reach small businesses? How do we effectively meet their needs? How to ensure a sufficient level of transparency and control without imposing an overburdening level of bureaucracy? These were among the questions discussed bringing together the views from evaluators and policy makers experts from leading international financial institutions meeting on 29 March at the EIB.

The Evaluation Cooperation Group (“ECG”) facilitates exchange of experience and best practice for the independent evaluators of international financing institutions. Meeting on 28-30 March at the EIB headquarters in Luxembourg - as EIB is the chairing institution for 2012 – the group discussed ‘Support for SMEs’ in a dedicated workshop open to the public on 29 March.

For the EIB ensuring access to credit, including microcredit, for small businesses is a top priority. 95% of companies in the European Union are SMEs, accounting for 80% of new jobs created in the past five years. In 2011 alone, the EIB Group (EIB and EIF) provided a record support for small businesses with financing at EUR 13bn.

Driving growth

“SMEs are an important driver for growth in Europe and especially in the Central and Eastern European countries,” Unicredit’s Fabio Mucci underlined. He further pointed out that in many Central and Eastern European countries, access to funding is perceived by smaller businesses as a major constraint. While the picture remains heterogeneous throughout the region, Mucci explained that Unicredit’s approach sought to provide tailor-made support to SMEs to better cater for specific needs.

Presenting the results of a survey that covered 20.000 companies in 20 EU countries, Eurostat’s Manfred Schmiemann showed that most small businesses preferred to build on existing relationships with their house bank. As expected, the general economic outlook turned out to be the most important factor limiting business growth.

Proving that it makes sense to support SMEs is a key challenge, M. Ruurd J. Brouwer from FMO, the Dutch development agency, explained. Citing a recent study from the European network on debt and development, Eurodad, he concluded that it was almost impossible to track if bilateral and international lenders’ money reached SMEs. He argued that financiers should seek to add value by providing technical assistance to make sure funds have a better impact on the ground.

Cushion for employment

The EIB’s chief economist, Debora Revoltella, stressed that during the crisis SMEs played an important role in providing a “cushion for employment”.

Throughout the discussion it became clear that there is an increased need to better understand outcomes. Much work is still to be done to better trace funding and pin-down the key constraints. Continuously keeping track of loan effectiveness is imperative, such as through research, surveys or improved ex-post evaluation. Understanding how financial intermediaries pass funding benefits on to SMEs, explained Bastiaan de Laat, evaluation expert at the EIB, has become an essential topic in EIB’s evaluations of SME lending.

Rachel Meghir, Director of the Ex Post Evaluation Department, Council of Europe Development Bank, highlighted that skills and competences – both on the side of the intermediary and the beneficiary – played a crucial role in determining the overall effectiveness of SME lending. This was echoed by Marvin Taylor-Dormond Director of the Independent Evaluation Group (the World Bank), who cited successful results where financing had been combined with capacity building of the intermediary.

Measuring impact remains a challenge

Measuring the direct impact of SME lending on economic growth, as well as in terms of the outcome for society, remains the key challenge. This was particularly underlined by Chris Olson from the European Bank for Reconstruction and Development Evaluation Department.

Measuring the impact is precisely what a recent study, commissioned by the EIB and backed by six leading development finance experts, has tried to do. The report prepared by Dalberg Global Development Advisors, a strategic advisory firm that works to raise living standards in developing countries and address global challenges, highlights the continued challenge of filling the funding gap facing SMEs in many developing countries.

It concludes that international finance institutions, such as the EIB, can make a significant contribution to improving access to finance by providing capital and technical assistance to local intermediary banks. It further recognises the role of stimulating small business lending by effective and cost-efficient cooperation with local partner banks, applying strict lending standards and using expertise from similar situations in other markets.

In fact, intermediary banks working with the EIB SME lending programmes are obliged to pass on a financial benefit to the beneficiary SMEs and add an equivalent amount of lending from their own funds. The EIB is committed to ensuring that these benefits reach eligible SMEs in a transparent manner.

The report also highlights the restricted role of small business in developing countries even where many micro enterprises and large companies exist. It calls for efforts to increase the numbers of small and medium sized enterprises to act as stimulus for economic growth.

The Dalberg report was launched on 27 March by the Aspen Network of Development Entrepreneurs in London and is available from the EIB's website: http://www.eib.org/attachments/dalberg_sme-briefing-paper.pdf.