Recent World Bank investment climate surveys find that the top two constraints for small and medium enterprises (SMEs) in Africa are access to finance and access to energy. Given that SMEs contribute disproportionately to boosting job creation, GDP, and exports, addressing these two constraints is critical to promoting economic development on the continent.
A new project combining skills across the World Bank Group and IFC is taking advantage of disruptive advances in the energy and finance sectors to address these longstanding challenges for SMEs.
Current access to electricity remains woefully low and is a major impediment to economic growth. More than half of Africa’s population isn’t connected to the energy grid and has no access to reliable power. At the same time, fewer than 50% of adults have an account with a formal financial institution.
In recent years, however, two important developments have made it possible to begin addressing these challenges:
Off-grid energy solutions—notably solar power—have fallen dramatically in price with new business models working to scale them
New digital-based financing mechanisms, such as crowdfunding, cryptocurrencies, peer-to-peer lending, psychometric testing, big data, and blockchain have emerged as tools for under-served finance markets.
3-1-0 Three minutes to complete the online loan application, one second for approval and with zero human touch for SME loans. This is the marketing slogan used by Ant Financial, one of China’s largest online lenders with more than 400 million active users.
Digital finance is a cost-effective route to financial inclusion for many unbanked and underserved consumers in emerging markets. But digital finance is also still developing and maturing, with many open questions on the impact it will have. One of the most important of these is whether digital finance will ultimately help consumers to make better financial decisions over time.
October 31 is World Savings Day, a day which emphasizes the importance of savings to economic development, and provides a good occasion to look at how fintech may help solve the challenge of savings.
The World Bank has been supporting India for several years in the area of MSME finance, which is one of the most widely recognized impediments to SMEs, particularly for start-up enterprises. Through the $500 million MSME Growth Innovation and Inclusive Finance Project, the World Bank supports MSMEs in the service and manufacturing sectors as well as start-up financing for early stage entrepreneurs. The start-up support under this project ($150 million) is for early stage debt funding (venture debt) which isn’t well evolved. (Unlike India’s market for early stage equity which is considered to already be reasonably well developed.)
As part of this project, the World Bank and the Small Industries Development Bank of India (SIDBI), recently held a workshop in Mumbai to allow market participants to learn from one another, and particularly about Malaysia’s successful support for innovative start-up SMEs. The workshop’s participants included banks, venture capital companies, entrepreneurs, fintech companies, seed funders and representatives from the Malaysian Innovation Agency (Agensi Inovasi Malaysia – AIM).
Against the backdrop of low oil and gas prices and fiscal consolidation, economic diversification and private sector development is a top policy priority for the countries of the Gulf Cooperation Council (GCC).
Supporting small- and medium-sized enterprises (SMEs) is central to this agenda.
Inadequate access to finance, especially bank lending, is constraining SMEs in GCC countries. Only 11% of SMEs have access to credit and some 40% of SMEs cite a lack of financial access as a major constraint.
Bank competition in the GCC is among the lowest in the world. Strict entry requirements, restrictions on bank activities, relatively weak credit information systems, and a lack of competition from foreign banks and nonbank financial institutions all contribute to weak competition in the banking sector.
How to identify and support fast-growing firms that can take off, create jobs, and yield significant value in a short period of time is one of our biggest dilemmas in nurturing private sector development in emerging markets.
The Sustainable Development Goals (#8) include the need for decent jobs as an important developmental priority, and small and medium size enterprises (SMEs) are expected to create most jobs required to absorb the growing global workforce.
But many young firms will fail; by some accounts more than half of new firms won’t make it to their second birthday.
However, despite the high rate of firm failure, research from the US and evidence from India, Morocco, Lebanon, Canada and Europe shows that it’s largely young firms that create the bulk of net new jobs (net jobs are jobs created minus jobs lost) and lasting employment opportunities.
In addition, even when a firm survives beyond the first two years of operation, there are no assurances it will become a fast-growing firm -- a gazelle.
Although estimates vary widely, the share of gazelles -- fast-growing firms that generate a lot of value-added and jobs -- is thought to be only between 4% to 6% of all SMEs, and, possibly, even less in many emerging countries.
All this makes creating favorable conditions for entrepreneurship a priority.
Easing business entry -- the time and cost involved in establishing a new enterprise -- is extremely important. As the annual Doing Business report shows, many countries have made a lot of progress on this indicator over the past decade.
But business exit is an equally critical piece of the puzzle.
South Korea today has the fourth largest economy in Asia, is a member of the OECD’s “Rich Club,” and is part of the G20. Despite sharp economic shocks emanating from the Asian financial crisis in the late 1990s, the global financial crisis in 2008, and the more recent slowdown in the Chinese economy – Korea has bounced back and continues to grow.
So it’s hard to imagine that some 70 years ago, Korea’s future looked very bleak – and akin to many of the excruciatingly difficult post-conflict environments that we face today.
To briefly summarize Korea’s post-World War II history: a 1947 report on Korea commissioned by U.S. President Truman concluded, “South Korea, [as] basically an agricultural area, does not have the overall economic resources to sustain its economy without external assistance …. Prospects for developing sizeable exports are slight ….. The establishment of a self-sustaining economy in South Korea is not feasible.” Then the Korean War compounded these problems – resulting in massive damage to both the north and the south – with destroyed infrastructure, a loss of skilled workers, a million South Koreans killed, and as much as one-quarter of the country’s population refugees.
We have many lessons to learn from Korea – particularly as our institution, the World Bank, increasingly focuses on post-conflict and fragile environments.
Although South Korea is known for its large scale “Chaebols,” which have dominated much of its political and economic life – less well known is the considerable support that the government has provided to small and medium scale enterprises (SMEs). As in most countries, Korean SMEs play a pivotal role in the national economy, accounting for 99% of all enterprises (3 million SMEs), over 80% of all employees (10.8 million employees), and almost 48% of total national production.
In many countries Government is the biggest procurer of goods and services, which makes them an attractive client for small and medium scale enterprises (SMEs) seeking to get a leg up in business.
Recognizing the important role that the public sector plays as a purchaser of goods and services, as well as the critical role SMEs have for the economy, Governments frequently use Public Procurement to incentivize, support and otherwise sustain local SMEs.
Also, as in many of our client countries, where the vast majority of SMEs are informal, the lure of a significant Government contract can serve as a strong motivator to register and formalize – bringing these companies in from the shadows.
But there is also a significant downside in many countries. Cash-strapped governments frequently don't pay their bills on time and, in some countries, payment delays of 12 months or even two years are not uncommon. Such delays can seriously compromise the position of a small scale enterprise which – with limited access to formal bank financing – relies critically on cash flow from its clients to sustain its business. A six month delay in receiving payment on a contract can easily put a small firm out of business.
I recently attended an SME Conference in Jordan around SME Finance and Employment – extremely important issues in a troubled region. All participants agree that much more needs to be done to address the lack of jobs in the region and to increase financial access at all levels, to individuals, households and small and medium scale enterprises (SMEs).
Only 4% of unbanked adults in the Middle East say that they don’t have an account because they don't need one. In other words, it is clear there is widespread unmet demand for financial services.
A person living in the Middle East is less likely to have a bank account than is a low-income person living in Africa or South Asia, and significantly less likely than a person living in Latin America, Eastern Europe or East Asia from comparable middle income country or region. This poses a dilemma – why?
As a global community, we’ve made great strides toward achieving the World Bank Group’s goal of universal financial inclusion by 2020. According to the Global Findex, 700 million people gained access to formal financial services between 2011 and 2014. This is equivalent to nearly the entire population of Europe. But the latest numbers from the Global Findex also revealed a startling fact: The gender gap in financial inclusion remains stubbornly intact, with women in emerging economies 20% less likely to have a bank account than men and 17% less likely to have borrowed formally.
