Brazil has some of the highest effective interest rates in the world. Lowering the 20% reserve requirement (the compulsory deposits which banks must hold) can unleash billions of new funding and push rates down.
Last week the new head of Brazil's small business agency Sebrae, Guilherme Afif Domingos (pictured above), called for the Central Bank to release part of the reserve requirement - for banks to use this lend to small firms.
Doing so could inject some 40 billion reals ($10.6bn) into the economy, estimates Domingos, who was the country's small business minister (until his position along with those of seven other ministers was axed last month as part of austerity measures).
Banks are obligated to keep part of deposits made by account holders at the Central Bank, reducing the amount that can be lent out, which pushes up the cost of credit.
Freeing up some of the money could help oil the wheels of the crisis-hit Brazil economy, which is set to contract 3% this year and by at least 1% next year.
Domingos has described small firms as the "oxygen" keeping the economy running during the country's crisis, and are still creating jobs (see this earlier post).
Yet Brazil has some of the highest interest rates in the world (currently at 14.25). The interest rate levied by banks on loans or overdrafts can come in at 4% per month - a rate which Domingos recently described as "pornographic".
With the high cost of bank loans (cited by over half of small firms as the leading barrier to accessing bank finance), most small businesses depend on their suppliers for finance.
Others are doing it
Part of the problem is that Brazil has one of the largest reserve requirements for banks in the world. Only a few other countries match or exceed it's requirements (Lebanon is at 30%, South Africa's a mere 2.5%). Relaxing the requirements may help.
China recently lowered it's reserve requirement for banks to 18.5% to free up lending to SMEs and the Egyptian central bank has waived its 14% reserve requirement on loans to SMEs, for an amount equal to the SME lending of each bank.
In a 2011 paper Carlos Montoro and Ramon Moreno point out that following the Lehman bankruptcy, Brazil reduced its effective reserve requirements ratios by a respective 10 percentage points (freeing up 70 billion reals), which saw lending rates rise significantly.
No longer popular
But the two point out that many central banks no longer rely strongly on reserve requirements as they impose significant costs - banks must deposit a portion of their assets with the central bank, which usually offers a lower yield than other investments.
"Such requirements therefore act as a tax on the financial sector, putting depository institutions at a competitive disadvantage to other financial institutions. One result is a larger spread between lending and deposit rates, which increases the cost of credit and tends to reduce the level of financial intermediation."
Many central banks rely instead on open market operations (such as repos) to influence the money supply. In addition capital requirements constrain bank from getting into debt (which govern the ratio of equity to debt).
Old dragon of inflation
Domingos has stressed that releasing some of the reserve requirement did not risk fuelling inflation, as the funds would be used for investment and not for consumption purposes.
But central bank officials have not reacted. Domingos told media last week after a conference on access to finance that when he presented the proposal to the Central Bank earlier this year there was a "resounding" silence, which he added continued till today.
With Brazil's old dragon of inflation nearing 10% this year - well above the government's 6.5% ceiling - the hawks at the central bank may not wish to throw caution to the wind.
Inflation remains a key concern for Brazil, which was only able to tame it in 1994. The voice of small business must shout louder. But Domingo's experience suggests he will step to the challenge.
Timm is a South African who writes on small business. He lived in São Paulo, Brazil in 2014. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a