Counting SMEs and Their Demand for Financing
How difficult can it be to count how many micro, small, and medium enterprises (MSMEs) there are in the world, and to estimate what their demand for financing really is? (Let’s make it a bit easier by limiting the scope of the question to their appetite for financing – no need to bother trying to think about the broader range of services – payments, forex, savings and investments, advisory services – also used by MSMEs on a daily basis throughout the world).
It turns out that it’s considerably easier to formulate the question than it is to find an answer. But in the context of the work IFC had been mandated to undertake by the G20 leaders after the Pittsburgh summit in September 2009, some kind of response to the question seemed to be required…..after all, we all know that there are huge numbers of MSMEs around the world whose needs are not being met, right? And if the G20 leaders were going to make support for the MSME sector into one of their key objectives, we’d better make sure that they were not heading off on a wild goose chase, wasting their time.
So – where to start? IFC commissioned McKinsey & Company to look into this question and a joint report was delivered in June 2010. The work focused on trying to understand the broad potential in the global MSME segment by looking both at the scale of the universe and its demand for financing. The findings at least seemed to confirm what we all intuitively felt:
- There are certainly lots of enterprises in this segment – between 375 and 450 million MSMEs globally
- A majority of these enterprises operate informally – over 55 of MSMEs are in the informal sector
- Large numbers of enterprises are in the micro and very small segment, and the proportion of enterprises in the ‘SME’ segment is pretty small – say around 10% of the total
- The extent of the credit gap amounts roughly (what’s a trillion dollars amongst friends?) to between USD2.5 and 3.5 trillion. (If we exclude the high income OECD markets, the figure falls to somewhere in the range USD1.5 – 2.5 trillion)
- The credit gap in emerging markets lies between USD1.5 and 2.5 trillion
- Around 90% of MSMEs in emerging markets are classified as unserved or underserved; close to half of the same MSMEs also have no deposit account, and their un-intermediated cash balances are calculated to be close to USD500 billion.
And yet the findings raise almost as many (if not more) questions than they really answer, since what emerged was the fact that countries around the world are consistent in their inconsistency of definitions of the MSME segment – shall we count the number of employees? annual turnover? asset size? some combination of the above? And let’s not even talk about the difficulties involved in assessing the size and contribution of the informal sector.
Given the importance that MSME finance and broader financial inclusion have taken on at the G20 level, it has become pretty clear as a result of this initial research that a considerable amount of further work needs to be done. One of the key first steps has been to create a dedicated group to focus on the question of data gathering and measuring. This group has a broad remit to work on ‘the improvement of data gathering methodologies, harmonization of definitions and co-ordination of data availability and quality,’ and the expectation is that these efforts will ensure ‘…compatibility, transparency, consistency and cost efficiency, minimise mis-interpretation of published statistics and contribute to informed policy design.’
In an attempt to ensure that the fruits of all these labors are disseminated broadly, the SME Finance G20 sub-group is establishing the Global SME Finance Forum, an online platform for the sharing and promotion of best practices across different institutions and countries. One of its objectives will be to address what the Global Partnership for Financial Inclusion (‘GPFI’) report to the G20 leaders at this year’s Cannes summit called the ‘void of missing data’ (well said!), but in doing so, it will also catalyze a ‘movement of consensus amongst stakeholders on good practices and performance standards that will advance the SME finance industry.’
So what does all this mean for those at the coalface – the commercial banks and non-bank financial institutions (NBFIs)–who continually confront us with questions about how to define the SME segment? My own feeling is that the work being undertaken in the context of G20 support is at a much higher level and is much more intended for a policy making audience than it is for the financiers. This said, there will undoubtedly be positive trickle down effects. The initiatives will serve, for example, to further ramp up the profile of the SME segment and its needs, and this will encourage more financial sector players to spend the time and attention needed to understand the SME client. At the end of the day, I don’t think there is a problem if different banks have different ideas about what a SME client actually looks like; what’s more important is that banks take the time to think in a more focused way about the SME segment they have chosen, and align their products, delivery channels, people and processes to better serve it.
We all knew deep down that the demand was there and the initial work has given us some better understanding of the actual scale of this demand and, by extension, the nature of the challenge that faces us all.