Risk rating agency created for Colombian SMEs

To facilitate access by small and medium-sized enterprises (SMEs) to the financial system on conditions in accord with their real risk and true potential, the Andean Development Corporation (CAF) and Visión - the business and economic consulting entity of La Sabana University - created a risk rating agency for SMEs, which was officially launched today in Bogotá.

CAF representative in Colombia Freddy Rojas Parra said that the Corporation’s participation in the initiative forms part of an integrated program for SMEs which the multilateral financial institution is promoting in all the Andean region. "We are interested in the SMEs because of their importance for job creation, their progressive integration into the export market, and their contribution to the competitiveness of the countries of the region," Rojas Parra said.

The Andean Development Corporation (CAF) and Visión signed a one-year agreement for the development of a business risk and productivity index for SMEs, and the execution of continuous improvement program in areas where weaknesses and defects are detected in the evaluation. The first stage of this project was successfully concluded with the design and start-up of the evaluation methodology.

Through a non-reimbursable technical cooperation agreement for US$100,000, CAF is supporting the design, setting up and execution of the pilot stage of the project, in which 100 SMEs with export potential will be evaluated.

Juan Leonardo Correa Jaramillo, former president of the National Guarantee Fund, was appointed executive director of the rating agency, which will provide services in the cities of Bogotá, Medellín, Barranquilla, Cali and Bucaramanga.

Not a credit-reporting agency

As Christian Briker Orjuela, executive director of Vision – a consulting firm that has advised over 1,500 SMEs – explained, it is hoped that the rating agency will solve one of the main difficulties faced by SMEs: lack of access to sources of financing due to the high risk associated with the sector. This factor often causes high interest rates and inadequate maturities for loans, while the information that the SMEs supply to the financial sector often lacks reliability and credibility.

To overcome these weaknesses, the risk rating agency will apply its own methodology to make a comprehensive diagnosis of the real state and potential of the SME. The evaluation takes into account the credit risk and an analysis of the sector risk, as well as a quantitative and qualitative evaluation of the situation of the enterprise.

The results are expressed in a risk and productivity index, which is supplied to the business owner. This information, along with the supporting documents, is confidential, and the business owners themselves decide when to share it with their financial intermediary.

Executive Director Juan Leonardo Correa Jaramillo said the idea is not to create a credit-reporting agency but a bridge to help generate confidence and credibility between the SMEs and the financial sector. The rating agency will not limits its activity to diagnosis, but will also offer advice to interested business owners on how to improve their risk profile.