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.
Small and Medium Sized Entities
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:
- 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)
- As a tool of countercyclical economic policy.
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).
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.
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.
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.
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.”
New developments and curiosities from a changing global media landscape: People, Spaces, Deliberation brings trends and events to your attention that illustrate that tomorrow's media environment will look very different from today's, and will have little resemblance to yesterday's.
The increasing penetration of mobile services and mobile internet is opening up opportunities for innovation, especially in emerging markets. This can be seen in the health sector, financial services, and many other fields, where ICT start-ups and small and medium enterprise (SMEs) are working with mobile services to create business and jobs. The World Bank reports that "9 out of 10 jobs in developing economies" come from the private sector, and that "The main thrust of that comes from micro-, small-, and medium-sized enterprises, especially in technology sectors—a recent study argues that 3 jobs are created in a community for every new high-tech job."
The following graph shows the distribution of ICT start-ups and SMEs in relation to the number of mobile subscribers. In developed countries, technology firms and internet providers have been at the forefront of innovation, but in emerging markets mobile operators are increasingly leading the way.
(Photo by Chico Ferreira, available under a Creative Commons license - CC-BY-2.0)
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