Since more than 50% of small and medium-sized businesses (SMEs) worldwide lack adequate access to credit, the international community is proposing reforms that will help countries strengthen their financial infrastructure and make it easier for SMEs to borrow funds needed to operate and expand.
Small and Medium-Sized Enterprises
Mobile Banking, Movable Collateral Registries, Can Boost Female Financial InclusionEmpowering women, creating opportunities for all, and tapping everyone’s talents—these aren’t just preconditions to achieving every other vital development goal. They’re essential to building prosperous, resilient economies and meeting the fast-growing challenges of the 21st century.
Maasai women make, sell and display their bead work in Kajiado, Kenya. 2010. Photo: © Georgina Goodwin/World Bank
Kenya’s financial sector has expanded rapidly over the last decade and lending to businesses—including small and medium size-enterprises has played a big part. As the Kenyan economy is enjoying a period of relatively high growth, the financial sector’s ongoing ability to channel credit affordably and efficiently to SMEs will be needed to underpin inclusive and sustained economic development.
To better understand the SME finance landscape in Kenya, a World Bank-FSD Kenya team embarked on a study with the Central Bank of Kenya to explore the supply-side of SME finance. In addition to quantifying the extent of banks’ involvement with SMEs, the study shows the exposure of different types of banks to the SME market, the portfolio of services most used by SMEs, and the quality of assets. Our report also discusses the regulatory framework for SME finance, the drivers and obstacles of banks’ involvement with SMEs, and their specific business models.
From IFC photo collection. Reuters/Thomas Mukoya
There has been a lot of discussion around the topic of SMEs and job creation. While SMEs can foster innovation, help diversify an economy, spread economic activity beyond the main urban hubs, give opportunities to women and youth and much more, their role in creating jobs – in the current economic environment – is key.
Interesting work by the Kauffman Foundation (see graph below) shows than virtually all new net job creation in the U.S. economy has been generated by firms that are less than five years-old and which, almost by definition, are more than likely to be small. Although there is a huge amount of job churn in this class of enterprise (which are new and therefore probably small), the “net” impact is powerful. A small subset of these firms are “gazelles” – or very fast growing enterprises – which grow from 5 to 500 employees in a five-year period, generating impressive results.
Dignity factory workers producing shirts for overseas clients, in Accra, Ghana. Photo © Dominic Chavez/World Bank.
Everyone needs financial services – the poor, the middle class, and the wealthy. But if you are poor, access to quality finance is harder to come by, and much more expensive. Unfortunately, the same is still true for small businesses around the world.
Compared to large companies, small and medium-sized enterprises (SMEs) face severe credit constraints. Two-hundred million businesses globally are unable to get the credit they need, both for working capital and for investments. The estimated global credit gap exceeds $2 trillion. These credit constraints are most acute in low-income countries, where nearly half of small businesses cite lack of access to finance as a major barrier to growth.
This SME finance gap is often described as the “Missing Middle”: microfinance institutions provide capital for microenterprises with fewer than five employees and commercial banks or private equity firms serve large corporations and multinationals. Small and medium-sized companies, usually defined as companies with up to 250 employees, are stuck in the middle. This is an enormous problem, because the vast majority of all firms world-wide are SMEs – up to 95%, according to some definitions.
The urgent challenge of generating jobs and incomes – as the world’s working-age population is poised to soar – will require making the most of all the job-creating energies of the private sector and the strategy-setting skill of the public sector. Today in Ankara, Turkey, the World Bank Group renewed its commitment to strengthen the global economy’s most promising and inclusive source of job creation: small and medium-sized enterprises (SMEs).
At a signing ceremony at the B20 conference of global business leaders – coinciding with the G20 forum of government leaders from the world’s largest economies – the Bank Group joined in a partnership with a new organization promoted by the B20: the World SME Forum (WSF), which is to become the global platform to coordinate practical assistance and policy support for SMEs.
Based in İstanbul, WSF has been founded through a partnership between the Union of Chambers and Commodity Exchanges of Turkey (TOBB), the International Chamber of Commerce (ICC), and ICC’s World Chambers Federation.
World Bank Group President Jim Yong Kim – in Ankara, Turkey, on September 4, 2015 – signs a Memorandum of Understanding to confirm the Bank Group's partnership with the World SME Forum. Also signing the document, along with President Kim, is Rifat Hisarciklioglu, the Chairman of B20 Turkey and the President of TOBB (the Union of Chambers and Commodity Exchanges of Turkey).
SMEs are a vital engine of innovation and entrepreneurship, and the success of the SME sector is central to every country’s prospects for job creation and economic growth. Providing support for SMEs is a fundamental priority for the World Bank Group, as we pursue our global goals of eradicating extreme poverty by the year 2030 and boosting shared prosperity.
SMEs are crucial to every economy: They provide as much as two-thirds of all employment, according to a recent survey of 104 countries – and, in the 85 countries that showed positive net job creation, the smallest-size enterprises accounted for more than half of total net new jobs.
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Small and medium-sized enterprises (SMEs) play a major role in most economies, particularly in developing countries. However, more than 50 percent of SMEs lack access to finance. Without it, many SMEs languish and stagnate. Credit markets for SMEs often don’t work.
A common form of intervention to improve access to finance for SMEs is a public credit guarantee scheme (CGS).
Credit guarantee schemes provide third-party credit risk mitigation to lenders by absorbing a portion of the losses on the loans made to SMEs in case of default, in return for a fee. CGS are popular partly because they combine a subsidy element with market-based arrangements for credit allocation. This allows less room for distortions in credit markets, unlike more direct forms of intervention, such as state-owned banks.
Credit guarantee schemes are present in more than half of developing countries. Their numbers are growing.
Governments have become interested in CGSs in the aftermath of the global financial crisis and amid the international community’s emphasis on SMEs as an engine for growth and job creation in developing countries. However, to be effective, CGSs need to be designed and implemented in a financially sustainable manner.
With this in mind, the World Bank Group and the FIRST Initiative convened a task force to design, implement and evaluate public credit guarantee schemes for SMEs.
Women entrepreneurs in Ethiopia are disadvantaged from the start. They have less access to the finance, networks, and education which help their male counterparts advance. They face regular discrimination and harassment from society--sometimes even from their own families and communities. The challenges a woman entrepreneur in Ethiopia faces in growing her business are overwhelming.
Traditionally innovation and entrepreneurship are seen as drivers of jobs and competitiveness, however we think it can also be an important driver of inclusiveness and social development.
We see how private actors are driving social development – the example of the Development Marketplace and its spin-off Social Enterprise Innovations program demonstrate the potential for scaling inclusive businesses, grassroots innovations and social entrepreneurship to solve development challenges like sanitation, clean water, early childhood nutrition, health-care services, and many more. We have examples in our portfolio of how social enterprises are delivering low cost TB treatments in poor communities, delivering clean water to urban and rural poor, and offering education opportunities to girls.
Jump-starting job growth is difficult enough when a country’s investment climate is supportive, when its government has clear goals and competent capabilities, and when its business leaders can make far-sighted plans. When an economy is riven by the chaos of war, or when it is newly emerging from a severe social trauma, channeling capital toward private-sector job creation is even harder.
Amid this year’s FCV Forum at the World Bank Group – focusing on economies gripped by fragility, conflict and violence (FCV) – a seminar combining Financial Sector and Private Sector priorities heard a sobering picture from expert practitioners who have been on the front lines of promoting job growth in economies that are in turmoil. Moderated by John Speakman, the Lead PSD Specialist in the Bank Group’s practice on Trade and Competitiveness – who is the author of a new book on small-scale entrepreneurs in FCV situations – a panel explored the daunting challenges of promoting private-sector growth when countries are in turmoil.
Would-be job creators confront an enormously complex task in FCV situations. Yet the panelists agreed that there is reason for hope – even in the most tumultuous FCV conditions – if financing can be targeted toward promising startup companies, and especially toward potential “gazelle” firms that can energize new sectors of the economy.
“Ultimately, it’s all about money: Poor people are poor because they don’t have money,” said Hugh Scott of KPMG, whothe Africa Enterprise Challenge Fund (AECF). “It’s the delivery channel – the financing mechanism – that’s making the difference” in the 23 African countries where the ACF has offered grants and interest-free loans to about 800 private-sector firms, producing a net development impact of about $66 billion.
The difficult business environment and increased risk profile in FCV countries means that traditional lenders (primarily banks) are all the more hesitant to lend, said Scott – making such vehicles as “challenge funds,” which focus on promising small and startup firms, even more important. As co-founder of invest2innovate (and current World Bank Group consultant) Sadaf Lakhani noted, the “ecosystem problem” for Small and Medium-sized Enterprises (SMEs) and startups is all the more complex when countries face “a political economy of war.” As she had observed during her work with invest2innovate -- a nonprofit angel investing and accelerator organization -- such frequent FCV afflictions as corruption, patronage, fragmented markets and capital flight make it even more difficult for managers and lenders to identify, evaluate and accelerate startups.
Bank financing, in fact, is not always a ready source of funds for startup ventures, as noted by Simon Bell, the Global Lead on SME Finance at the Bank Group. Banks weigh the historical profit-and-loss performance of would-be borrowers – yet the entrepreneurs who are behind the “small sub-set of firms,” like the so-called “gazelles,” that are destined to create jobs quickly have little or no financial track record. Startups are thus often viewed warily by risk-averse bankers. Drawing on his long experience in the MENA region, Bell underscored that a priority in FCV states is ensuring that there is “a continuum of financial institutions and services” – like early-stage financing, private equity, venture capital and angel financing – that can provide critically important financing at various stages of a dynamic company’s growth.
To help give a boost to startups and young firms, the International Finance Corporation has created several financing mechanisms that are having a positive impact on job growth. The SME Ventures Program, created in 2008 with a $100 million allocation from IFC, has aimed to reach businesses in the poorest of the poor countries, often in FCV situations, said its Program Manager, Tracy Washington. Having financed about 60 SMEs, and having already supported the creation of about 1,000 direct jobs and many more indirect jobs, the SME Ventures Program has had a positive “demonstration effect,” inspiring new entrants to serve the marketplace once they have witnessed IFC’s strong performance. In addition, IFC's Global SME Finance Facility, described by Senior Investment Officer Florence Boupda, has provided investment capital and advisory services to 27 financial institutions in 18 countries since 2007 – including 17 projects in seven FCV countries.
The challenge for the future, agreed Boupda and Washington, will be to find additional ways to combine Bank Group interventions in ways that continue to choose companies with the greatest potential and that maximize the impact of Bank Group support. Their insights were underscored by Bell, who emphasized that “globally, employment is our issue” – and who asserted that “there are points of light all around” in this “very exciting” area, as various arms of the Bank Group focus on “the employment imperative.”
Finding ways “to apply the most innovative solutions to the most challenging situations,” especially in FCV and other traumatized countries, remains the grand challenge for international financial institutions, concluded Michael Botzung, IFC’s manager for fragile and conflict-affected countries in Sub-Saharan Africa. Yet the determination of the energetic practitioners on the SME financing panel reminded the FCV Forum audience why there is cause for hope – and why, in Speakman’s words, the intensive WBG-wide efforts to promote job creation in the toughest FCV situations is “one of the things that makes us proud to be with the World Bank Group.”