Big Futures for the Smallest Firms: Finance That Works for Nano, Micro and Small Enterprises
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Highlights
- Micro and Small Enterprises (MSEs) represent nearly 500 million businesses worldwide and are the backbone of employment in emerging markets and developing economies. However, they face a $5 trillion financing gap, limiting their ability to grow, create jobs, and contribute to economic resilience. Bridging this gap is essential for inclusive economic development.
- This research examines the different segments within MSEs, with a strong emphasis on nano enterprises and women-led businesses. It explores how their credit trajectories differ, the unique barriers they face in accessing finance, and how tailored financial solutions can better serve their needs.
- The findings are based on CGAP’s multi-year research under the MSE Finance project, drawing from field studies, interviews, partnerships with fintechs and financial institutions, pilot projects, and a community of practice. The research synthesizes insights from various research publications, providing key findings and a proposed future approach to improving financial inclusion for MSEs.
Executive Summary
From bustling open-air markets across Africa to family-run businesses in Asia and Latin America, micro and small enterprises (MSEs) help sustain livelihoods and foster inclusive growth. They are the backbone of economies worldwide, particularly in emerging markets and developing economies (EMDEs), accounting for nearly all businesses and most employment opportunities.
Despite their economic importance, they remain consistently underserved by financial institutions due to systemic credit barriers, limited digital access, and policies that often prioritize larger businesses.
As a result, MSEs face a persistent financing gap estimated at nearly $5 trillion (Dalberg 2019). Many remain excluded from formal financial systems, particularly nano enterprises and women-led businesses, which struggle with barriers such as limited credit histories, collateral requirements, and digital exclusion.
As the financial sector undergoes rapid technological transformation, digital innovations—such as fintech lending models and alternative credit scoring—hold immense potential to bridge the finance gap. Yet, technology alone is not a panacea. Many of the most excluded MSEs, particularly women-led nano enterprises, continue to rely on informal financial sources and lack the digital footprints required for purely algorithmic lending decisions or purely digital customer interfaces. This underscores the importance of hybrid approaches that blend digital capabilities with human-centric financial services.
This report examines the challenges and opportunities of expanding MSE finance, focusing on nano and micro enterprises, women-led businesses, and the evolving role of technology in fostering their inclusion. Drawing on CGAP’s research, it sheds light on both the promise and the limitations of digital innovation.
The paper concludes with recommendations for stakeholders across the MSE finance ecosystem, but especially for donors and investors, who can help usher in the next generation of inclusive MSE finance ecosystems by focusing on the following four strategic priorities:
- Develop a deeper understanding of MSE heterogeneity to enable tailored solutions. Invest in research and data-driven segmentation that reflects MSE diversity by size, sector, gender, and informality. This targeted approach allows financial service providers (FSPs) and other stakeholders to design solutions and remove barriers that address specific needs and structural constraints.
- Support the adoption of hybrid business models. Encourage digital finance solutions combined with human touchpoints to build trust and support uptake among underserved MSEs—particularly women-led and nano enterprises. This approach ensures inclusive, scalable services that cater to the most excluded businesses.
- Incorporate informal, semi-formal, and community-based FSPs into the digitization journey. Facilitate these providers’ transition to digital platforms through investment, training, and partnerships with formal institutions. This will enable them to maintain strong community relationships, scale effectively, and better serve excluded MSE segments.
- Expand risk-tolerant capital to support early-stage fintechs and responsible market development. Provide targeted debt and equity to help inclusive fintechs innovate and reach underserved MSEs. Strengthen consumer protection, promote enabling regulations, and invest in digital infrastructure to ensure responsible growth of the inclusive finance ecosystem.