Micro, small and medium enterprises (MSMEs) face many obstacles in developing countries, including cumbersome startup procedures, difficulties in accessing electricity, land, finance, and skilled labor, and political instability and corruption. But among all these issues, access to finance remains by far the most cited obstacle experienced by firms trying to formalize, grow, and increase productivity.
Despite the immense challenges they face, MSMEs are vital to developing economies. Small and medium enterprises (SMEs) are the sources of more than half of formal employment opportunities worldwide - an even larger share in developing economies. Two out of every three full-time jobs in developing economies are provided by SMEs. The informal sector in developing economies, which consists mostly of MSMEs, provides jobs to more than half of the labor force and estimated to be at least 35% of GDP.
Figure 1: Number of MSMEs by segment and formality
The IFC report Closing the Credit Gap for Formal and Informal Micro, Small, and Medium Enterprises estimates a financing gap of $2.1-2.6 trillion for MSMEs in developing economies, which is about one-third of the current outstanding MSME credit. More than 200 million formal and informal MSMEs in developing economies are estimated to be either unserved—do not have a loan or overdraft and need one—or underserved—have a loan or overdraft, but still find access to finance as a constraint. More than 90 percent of these unserved and underserved enterprises are formal microenterprises or informal MSMEs.
Figure 2: Total Credit Gap Across Regions for Formal and Informal MSMEs
What can be done to close the credit gap for formal and informal MSMEs?
Both the public and private sectors have a role to play. On the public sector side, improvements in financial infrastructure remove or reduce information asymmetries in credit markets, enable movable collateral, and strengthen creditor rights, making it less costly and more efficient for financial institutions to serve MSMEs. The private sector, through a variety of financial institutions and even real sector (such as those in manufacturing, agriculture, construction, etc.) companies, can provide solutions to better serve the SME sector, especially in competitive markets where different sized institutions are allowed to be licensed to provide financial services.
At the global level, the Global Partnership for Financial Inclusion (GFPI) has undertaken various studies to raise awareness and to improve access to finance by the SME sector including data availability and quality. This line of work identified innovative models for SME finance, established the SME Finance Forum to facilitate policy debate and knowledge sharing, and channeled extra capital to the sector via the Global SME Finance Initiative.
Addressing the needs of the informal sector is also important. Formalization should be a priority from a public policy and private sector perspective as it leads to higher tax revenues, better quality jobs, access to new markets, suppliers and clients, more reliable supply chains, and higher rates of productivity. Formal firms also have better access to credit, especially in countries where a tax ID or a registration certificate is needed to open a bank account. However, the raison d'être of informal enterprises varies: some firms are born to take advantage of a business opportunity while others are born out of necessity. It is critical to first segment the informal sector and then use that information to design differentiated interventions based on the capacity and the willingness of the firms to formalize.
And finally, what doesn’t get measured doesn’t get fixed. While there has been progress on data availability and quality on formal and informal MSMEs recently, there is still a lack of consistent and high quality data on a global scale. The IFC Enterprise Finance Gap Database, publicly available now on the SME Finance Forum web site along with data visualization tools, is only a first step in this direction. Greater efforts are needed to improve statistical capacity at the national and global level regarding data on MSMEs.
IFC Access to Finance Advisory released a report on 16 October 2013 on access to finance by formal and informal MSMEs, along with a database of 177 economies that contains information on the size of the MSME sector, and credit and deposit needs of MSMEs. The IFC Enterprise Finance Gap Database is publicly available on the SME Finance Forum website at financegap.smefinanceforum.org. The site contains various data visualization tools in addition to the raw data, and a factsheet that summarizes the data.