The Role of Capital Markets in Funding MSMEs in Latin America and the Caribbean

Facilitating access for MSMEs to capital markets, for example through the issuance of mini-bonds, is a key objective of policymakers and regulations in Latin America and the Caribbean. However, there is no systematic evidence regarding the development of these markets in the region, nor of the obstacles to their growth. This document reports on the results of eight case studies and a large survey of regulators and market participants in the region. Some key conclusions emerge. First, these instruments must be specifically tailored to MSMEs, providing more flexibility than those offered to larger companies. This study finds that governments can play a fundamental role in achieving this as well as in increasing trust in new forms of MSME funding through capital markets. Incentives, such as guarantees or tax incentives, can be offered to facilitate faster adoption. The study also finds that regulation must be tailored and proportional to the nature of smaller firms, or they may quickly become discouraged and disengaged, causing the markets to fail. Also, governments that invest more in the financial education of MSMEs achieve better outcomes. On the industry side, capital markets whose exchanges support investors in the screening and risk assessment of issuers and build a strong credit culture are more successful. Finally, the study finds that having a healthy relationship among regulators, exchanges, and fintechs increases opportunities for MSMEs and accelerates the development of technologies that can support faster and more effective deployment of funds through capital markets.