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Small and Medium-Sized Enterprises

'World SME Forum': A global platform to support SME development, bridging Turkey B20 and China B20

Tunc Uyanik's picture
This post was originally published on January 22, 2016 by the World SME Forum.

With this week's kickoff of the 2016 China “Business 20” (B20) proceedings in Beijing, this is an opportune time to reflect on some of the key accomplishments of the 2015 Turkey B20. As many readers of this blog know, the B20 is the premier dialogue platform of the business community with the G20 policymakers representing the most important economies of the world, and it is influential in identifying and supporting policies that are crucial for overall economic development. I believe that taking stock of the past enables us to learn from both successes and failures, and helps sustain the momentum on what worked and generated the desired impact.

Looking back at my involvement as Chair of the B20 Steering Committee, what strikes me as a major achievement is the amplification of the voice of small and medium enterprises (SMEs). I believe that, if we want our economies to have healthy and inclusive growths, this must remain as a key priority for the upcoming B20 in China.

Participants in the Turkish G20/B20 process shared the assessment that SMEs’ potential was not being fully realized. SMEs account for about two-thirds of all private-sector jobs globally and about 80 percent of net job growth. They are the engine for equitable growth and poverty alleviation. And they are the backbone of the middle class and of social stability. Yet they suffer disproportionately from limited access to markets, finance, talent, skills and innovation. In addition, regulations also often put them at a disadvantage. Until recently, SMEs had lacked an organization that would champion their cause.

With these major issues in mind, and with strong deliberations of the B20 Leadership and support from the G20 Finance Ministers, last year TOBB and the ICC officially founded the World SME Forum (WSF), with the mission to help improve the overall growth and impact of SMEs globally, by effectively tackling the key challenges they face. WSF aims to provide SMEs with effective representation and to advance the recognition of the role of SMEs in the global economy by partnering with international financial institutions (IFIs) and development agencies. WSF has membership from associations and chambers working in the SME space from all over the world.

WSF is ready to represent SME interests with regional and global bodies, and to advocate for better rules and regulations among standard-setters.

As I am on my way to Beijing, I cannot help but think that this is indeed a major achievement, which will give the SME development agenda a much better chance at succeeding. WSF can be a “bridge” across B20 presidencies, so that we can ensure continuity in the crucial SME agenda. WSF can help avoid any loss of momentum on the implementation of the recommendations we develop during each cycle.

Even better, after B20 China officially decided to continue the SME Development Taskforce, which was started for the first time by B20 Turkey, they invited WSF to be a Business Network Partner for the Taskforce. WSF will therefore be coordinating the network and will help drive the ideas that emerge from the Taskforce discussions into implementation.

Weekly wire: The global forum

Roxanne Bauer's picture
World of NewsThese are some of the views and reports relevant to our readers that caught our attention this week.
 

Fourth most deadly year on record for journalists
Committee to Protect Journalists
In 2015, 71 journalists were killed in direct relation to their work, making it the fourth deadliest year since the Committee to Protect Journalists began keeping records in 1992, the organization said today.  Thirty of the journalists killed, or 42 percent, died at the hands of extremist groups such as Islamic State. Those killings came as more than half of the 199 journalists imprisoned in 2015 were jailed on anti-state charges, showing how the press is caught between perpetrators of terrorism and governments purporting to fight terrorists.  CPJ reported in December that 69 journalists were killed around the world from January 1 through December 23, 2015.

What next for poor countries fighting to trade in an unfair world?
Guardian
The setting was a lakeside in Geneva and the cast was as international as it gets, but the Doha round of world trade talks was scripted straight out of EastEnders, the UK’s long-running television soap opera: an endless recycling of worn-out story lines, interminable plots, and theatrical moments of hope punctured by comically predictable tragic outcomes. In case you missed the episode last week, the main character was bumped off in the corridors of a Nairobi conference centre by European and American trade diplomats. Launched in 2001 and intended to deliver a bold new world trade order, the Doha talks have stumbled from one deadlock to another. Last weekend, the World Trade Organisation’s 164 members ended their ministerial meeting in Nairobi with a communique that “declined to reaffirm” the Doha round – trade-speak for a death certificate.

Thinking like a small business owner

Michael J. Goldberg's picture


Ecuadorian bread by Vilseskogen, CC Flickr 

The World Bank helps to design dozens of projects that assess and address the difficulties of reaching small business owners with services, which include anything from credit and technical assistance, to exports markets, value chains, technology and more.

A deeper understanding of the challenges, opportunities and risks small business owners face might help Bank staff and other development specialists to do an even better job.

For example, meet Reina, a baker in Quito, Ecuador. Reina operates a business with four workers, two ovens, and a range of sweet and salty breads popular with the neighbors. Her small shop has electricity most of the day and a reliable water connection most of the year.  The display windows are filled with freshly baked rolls that hide the ovens, the small warehouse for raw materials and the occasional chaos that arises during busy weekends and holidays.

How did she get here? Reina worked for another baker for five years, learning the trade. She took a two-day course on business management from an institute on the other side of town. Then Reina took out a loan from an informal group of friends, who lend periodically to each other for business and home needs, to buy her first oven. Reina offered part-time jobs to a few relatives and a friend and trained them in the basics. And Panadería Estrella (the Star Bakery) was born. It is a story repeated thousands of times in emerging markets. This is how the shadowy informal sector creates work… and wealth.

With her investment on the line, Reina makes a number of decisions every day which can determine the bottom line of the bakery. As we go decision by decision, you will understand what she does and what she needs more easily. One decision leads to another and another.
 

Job preservation or job creation: can’t we have it both ways?

Simon Bell's picture
Using SME lines of credit and other SME support operations for long-term development or a quick term countercyclical fix?
 
I recently attended an interesting presentation about a truly impressive credit guarantee agency, the Korean Credit Guarantee Agency (KODIT), established 40 years ago with $44 billion in outstanding guarantees and 220,000 SMEs guaranteed annually. A truly impressive institution which has opened up bank lending to more and more SMEs, which otherwise would have gone unfunded and unserved.  As one of the larger Partial Credit Guarantee (PCG) schemes in the world, the Koreans have clearly achieved remarkable results at an impressive scale.
 
The one thing that struck me most, however, was the slide reproduced below. KODIT explicitly uses a guarantee instrument on SME loans as a tool of countercyclical policy. So, when the economy enters a down turn, guarantees are more liberally applied to ensure that SMEs don’t go out of business and adversely impact the generally negative economic scenario. “Job Preservation” becomes more important than “Job Creation.” With 99% of registered firms in Korea being SMEs, and with 87% of Korean employment coming from SMEs,supporting this sector in a down turn is clearly very important.

 

Korea is not unique.  During the early days of the Great Recession in 2008, the Small Business Administration of the United States of America increased SME guarantees in the face of an economic down turn.  Since the summer of 2015, the Chinese government has begun to offer subsidized loans to SMEs to counteract the effects of the Chinese slow down. Countries such as Turkey, Ecuador, Nigeria, Kazakhstan, Myanmar and Egypt are increasingly seeking World Bank support for SME lines of credit, SME guarantee programs, and other forms of SME support. Supporting SMEs is clearly a well-recognized and frequently applied tool of economic policy.
 
Yet our own World Bank guidelines stipulate that SME-support interventions are meant to help achieve longer-term developmental goals – broadening and deepening financial markets so that financial systems can ultimately take on these types of lending without the need for outside intervention. In fact, a 2014 IEG Report on “The Big Business of Small Enterprise” criticized the World Bank, the International Finance Corporation, and MIGA for undertaking SME I, followed by SME II, followed by SME III, followed by SME IV, with no visible increase in the capacity of the underlying financial sector to sustain such lending on its own account, very little lengthening of the tenors of SME lending, and seemingly very little increase in the commercial banking sector’s comfort levels in dealing with a clientele which all too frequently is perceived by private lenders as being unduly risky.
 
It would actually seem, however, that SME Lines of Credit and other forms of SME support, are undertaken for several reasons but within two broad categorizations:
 
Category 1:
  • To help catalyze the market in the development of longer term financing instruments (an output, not an outcome)
  • Support employment generation (which is a prime motivation in the current global environment) or other “SME-related” objectives (such as diversification, innovation, geographic dispersion of economic activities, value chain inclusion, women’s employment, youth employment, etc)
 Category 2:
  • As a tool of countercyclical economic policy.
My strong belief is that many of the SME support operations that the World Bank is being asked to operationalize are related to putting a countercyclical policy in place in the face of an economic down turn.  Most of these governments have not “suddenly found religion” with respect to wishing to promote longer term maturities in their SME lending markets or seeking to promote greater private sector bank risk taking with growing SME portfolios.  They clearly want to have operational interventions in place as soon as possible because they face immediate economic problems.
 
It would appear that SME support mechanisms can be a  legitimate tool of countercyclical economic policy in an economic down turn. However, because speed is generally a prime pre-requisite in such an environment, these types of operations will not necessarily promote the pre-conditions for longer term market development for SME funding, an enhanced appetite for banks to lend to SMEs, or even increased support for “employment-generating” SMEs that may well be the desired target …………. and consequently, the criticism that we are not having a real lasting developmental impact.
 
Maybe the time has come start thinking about SME lending in two distinct ways: 
  • As a tool of countercyclical economic policy (much like fiscal support through a DPL, but directed at the private sector)  and
  • As a more developmental instrument (catalyzing longer term lending markets, developing instruments more attuned to “employment generating” SMEs, supporting a more robust financial infrastructure – including payments system and PCG support schemes, etc).  
Until we come to better grips with these two distinct – and equally important impacts – of SME support operations, we will continue to undervalue the short- to medium-term value of countercyclical SME lending, despite its widespread global use and its potentially hugely important economic impact.
 
 

Are my bananas green because of market distortions or wrong policies?

Michael J. Goldberg's picture



Green bananas. Saturday morning I head to the market to buy bananas, but I find only green ones at the stand. There is no large banana importer to complain to, no government bureaucrat to sympathize with my need for ripe bananas, and certainly no banana grower to chat with. I have to make an economically rational decision (buy them green, buy them later, or don’t buy at all) and move on to the apples, where the cycle repeats. This is a market imperfection that I understand and have to live with (although it drives me bananas).

But what about when we wear another hat, that of the Bank financial sector project designer? We are used to generating investment projects that fit different market situations, regulatory systems, and political realities. Under tight time constraints, we do what an economist might do – assume there is a market imperfection and brainstorm on the most appropriate effective solution. But a true economist would want evidence of the market imperfection from statistics, recent assessments, etc.
  
So what is a financial sector specialist to do?  The first step is to understand which of the many imperfections represents the binding constraint – the one that blocks government and private sector counterparts from taking the first steps to correct a problem. This is where the economists come in.  

SMEs finance leapfrogs through fintech innovations

Gloria M. Grandolini's picture



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.

Both Feet Forward: Putting a Gender Lens on Finance and Markets

Caren Grown's picture

Mobile Banking, Movable Collateral Registries, Can Boost Female Financial Inclusion

Empowering 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.
 

SMEs are good business for Kenya’s growing banking sector

Gunhild Berg's picture


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. 

Dancing with angels, racing with gazelles and dreaming of unicorns

Simon Bell's picture


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.

Five steps to closing the $2 trillion credit gap

Peer Stein's picture

Dignity factory workers producing shirts for overseas clients, in Accra, Ghana
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.


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