Rethinking MSE Finance with Innovation and Inclusion

Tailored Financing Solutions are Needed for Diverse MSEs

MSEs are not a monolith—they vary widely in size, structure, and financial needs. 

To better capture this diversity, CGAP uses the term "nano enterprises" to describe the smallest, often informal businesses run by individuals with minimal or irregular income, such as street vendors or barbers, typically without paid workers. These differ from "micro-enterprises," which are slightly larger businesses with regular employees and more stable revenue. In low-income countries, nano enterprises alone account for over 50 percent of employment. They are vital for sustaining livelihoods but remain highly vulnerable to economic shocks and face even more acute challenges in accessing credit.

MSEs have diverse financial needs, even when considering size alone. However, when gender is factored in, this complexity only deepens. Women-led enterprises, particularly nano and micro businesses (WNMEs), are a diverse group—varying in growth potential, education, and access to networks— yet across this diversity, they experience consistently greater vulnerability and face unique challenges that require more than just inclusive intent—they demand gender-responsive financial solutions tailored to their realities.

CGAP's research suggests that in addition to the well-known and documented gender-based challenges faced by WNMEs, future approaches to address WNME needs must consider the following: 

1. Heterogeneity of WNMEs in size, business type, and risk profile, highlighting the need for robust segmentation to design targeted solutions.
2. Limited Start-Up capital has been identified as the most significant constraint for WNME, restricting opportunities, pushing them into low-margin sectors, and often sending them into a vicious cycle that limits their growth and resilience.
3. Semi-formal and informal lending sources (such as VSLAs, SHGs, and Chamas) serve as critical financial lifelines yet are challenged by their own structural limitations.
4. Credit is not enough and often not desired, and a significant proportion of WNMEs do not seek credit; instead, they look for broader non-financial support to grow their businesses.
5. A widening digital divide disproportionately impacts less-educated, more vulnerable women, further exacerbating their financial exclusion.
    

Addressing the needs of WNMEs requires a targeted and adaptive approach. Recognizing a growth mindset as a key differentiator enables more tailored interventions—both financial and non-financial—based on where the enterprise falls along the growth spectrum, from livelihood-focused businesses to those transitioning into or actively pursuing growth.

A one-size-fits-all approach to interventions is ineffective; each segment requires targeted support that aligns with its specific needs, challenges, and aspirations. To increase the likelihood of progressing to the next stage while minimizing the risk of regression, it is essential to carefully calibrate the right combination of financial and non-financial interventions, the types of providers involved, and the delivery models, whether they are high-tech or high touch.

The development community should focus on two main goals: maximizing the growth potential of Women and Minority-Owned Enterprises (WNMEs) that aim to scale and minimizing the risk of regression that could jeopardize the resilience and stability of all enterprises—especially during times of economic, environmental, or personal crises. While some WNMEs will advance along the growth spectrum, many will choose to remain at the livelihood stage, prioritizing stability overgrowth.

Tech can Transform MSE Finance, but Human Touch will Drive Inclusion

Digital transformation is revolutionizing finance with new business models that boost MSE finance, especially for underserved segments. Innovations such as digital data trails, reduced need for physical branches, and APIs enable providers to scale quickly, as well as the possibility of bundling financial and non-financial services. Together, these advances deliver significantly improved offerings for MSEs.

Fintech companies stand at the vanguard of innovation, pioneering new technologies, approaches, and business models that provide a glimpse into the future of MSE finance.

CGAP highlights four categories of inclusive fintech business models that show great promise in addressing the MSE finance gap. The first three categories—digital banking, marketplace lending, and data-driven lending—are pure financial service providers. The fourth, embedded finance, integrates financial services into non-financial platforms, such as e-commerce. 

The first three categories—digital banking, marketplace lending, and data-driven lending—are pure financial service providers. The fourth, embedded finance, integrates financial services into non-financial platforms, such as e-commerce. 

Key Insights From Selected Fintech Pilot Partners  

Traditional microfinance institutions have been rapidly adopting some of the same innovations pioneered by fintech companies and continue to play a crucial role in providing financial services to MSEs.

In contrast to the widespread notion of leapfrogging through digitization, where technology overhauls an institution, CGAP finds that digitization is a process of building value-generating use cases, and as such, it is often incremental. It does not necessitate a bold investment in technology but a bold vision, focus, consistency, and agility. Successful digitization also requires a solid business intelligence capability. Successful digitization opens up new opportunities for MFIs to grow their portfolios, expand their product offerings, strengthen risk management, and streamline operations. 

Check out CGAP's MFI Digitization page 

 Inclusive solutions need advancement in technology blended with human touch, to address unique business needs.

A purely digital approach to MSE lending is unlikely to close the gap among the most excluded MSEs, primarily women-led micro and nano-enterprises. CGAP research shows that WNMEs rely heavily on informal and semi-formal credit sources—such as friends, family, and Village Savings and Loan Associations (VSLAs)—over formal financial institutions, highlighting the important role these analog providers have historically played in meeting their needs. 

CGAP research reveals a stark digital divide in MSE finance. While some businesses benefit from digital tools, many—especially rural, nano, informal, and women-led enterprises—are held back by low literacy, poor infrastructure, high costs, and trust barriers. Digital transformation alone cannot close this gap.

To reach excluded MSEs, a human touch is essential. Many fintechs adopt a "feet on the street" model, meeting customers where they are to build trust, explain products, and support adoption. Hybrid approaches that blend tech with personalized engagement offer the most effective path to inclusion.

Key Priorities for Closing the MSE Finance Gap

Many MSEs struggle—or fail—not necessarily for lack of potential but because the systems around them weren’t designed with their realities in mind. Reaching them means rethinking finance at the frontlines. To truly reach them, we must rethink how finance works at the front—starting with four key shifts: