Can the Private Sector Really Replace the Export-Import Bank? Beware of the Missing Middle
By Amadou Sy
U.S. small and medium enterprises (SMEs) will probably face more challenges to obtain financing for their exports abroad if the U.S. Congress does not reauthorize the charter of the Export-Import Bank (Ex-Im Bank). The argument for not renewing the 80-year old export credit agency’s (ECA) charter in September centers on its support for large U.S. companies to the detriment of SMEs, in some kind of crony capitalism. According to this reasoning, the private sector should be able to pick up the tab after Ex-Im Bank ceases to exist. This outcome seems to make perfect economic sense. After all, why should the government support the private sector (even if Ex-Im Bank makes money in the process)?
One problem with this argument is that when it comes to helping U.S. SMEs export their products abroad, there may actually be a role for the government to work with the private sector. This is because SMEs typically face problems obtaining financing from commercial banks for export purposes.
A recent survey of seven ECAs by the Berne Union (see Mancuso and David, Berne Union Yearbook 2014, page 78-80), the international association of export credit agencies, highlights the challenges that SMEs are facing and how ECAs are trying to address them. For the purpose of the survey SMEs are defined as companies with less than $69.4 million (€50 million) in revenues and/or 250 employees. The results of the survey indicate that most ECAs are being asked to support SMEs and have started to develop tailored products. The top challenge that SMEs face in accessing foreign markets is obtaining financing, either for their buyers or to support their own growth. Others include (i) understanding market opportunities and conditions; (ii) navigating the complexity of market regulation, taxation and legal issues; (iii) supporting the willingness to take risks going abroad; and (iv) grasping the cost of doing business, including double taxation and trade agreements.
The Berne Union held a meeting in March this year specifically to discuss solutions to the challenges of supporting SMEs. Interestingly, the 40 specialists who participated in the meeting agreed that “banks remain necessary to provide working capital and export finance. But it is exactly these banks that over the last few years have become more reserved in providing that financing.” As it happens, during the recent financial crises, ECAs actually increased their business when banks were pulling out of trade finance.
Reasons for the timid involvement of banks include new banking regulations such as Basel III and Know Your Customer requirements. But, perhaps a better explanation is that the relatively high transaction costs and costs of risk banks incur when financing small transactions are why banks are less involved in the business of helping SMEs export their products and services abroad. In less economically advanced countries, the dearth of SME finance is called the “missing middle” problem because, unlike SMEs, very small firms can get microfinance loans and large firms have access to bank loans.
It is therefore unlikely that the “missing middle” problem will be solved by the private sector alone. Rather, solutions will probably involve schemes where ECAs like the Ex-Im-Bank will work together with commercial banks. For instance, at the same Berne Union meeting in March, experts identified a number of solutions which include insurance, financing and guarantee solutions tailored to the SME segment. It is true that not all ECAs are state-sponsored, but private ECAs such as AIG and Zurich Global Corporate in North America (whose CEO is the president of the Berne Union) are not commercial banks but private insurers. If private banks are unable to do the same job alone, then it is likely that the public sector will have to remain a partner. At a time when new exporting countries (think China) are stepping up their game and ECAs are working to cater more to SMEs, it would be wise to renew the Ex-Im Bank’s charter to support SMEs.