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SMEs drive developing countries’ economies

Business
File Pic: World bank

Small and Medium Enterprises (SMEs) play a major role in most economies, particularly in developing countries.

SMEs account for the majority of businesses worldwide and are important contributors to job creation and global economic development. They represent about 90% of businesses and more than 50% of employment worldwide.

Formal SMEs contribute up to 40% of national income (GDP) in emerging economies. These numbers are significantly higher when informal SMEs are included. 

According to our estimates, 600 million jobs will be needed by 2030 to absorb the growing global workforce, which makes SME development a high priority for many governments around the world. In emerging markets, most formal jobs are generated by SMEs, which create seven out of 10 jobs.

However, access to finance is a key constraint to SME growth, it is the second most cited obstacle facing SMEs to grow their businesses in emerging markets and developing countries.

SMEs are less likely to be able to obtain bank loans than large firms; instead, they rely on internal funds, or cash from friends and family, to launch and initially run their enterprises.

The International Finance Corporation estimates that 65 million firms, or 40% of formal micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion every year, which is equivalent to 1,4 times the current level of the global MSME lending.

East Asia And Pacific accounts for the largest share (46%) of the total global finance gap and is followed by Latin America and the Caribbean (23%) and Europe and Central Asia (15%). The gap volume varies considerably region to region.

Latin America and the Caribbean and the Middle East and North Africa regions, in particular, have the highest proportion of the finance gap compared to potential demand, measured at 87% and 88%, respectively.

About half of formal SMEs don’t have access to formal credit. The financing gap is even larger when micro and informal enterprises are taken into account.

What World Bank does

A key area of the World Bank Group’s work is to improve SMEs’ access to finance and find innovative solutions to unlock sources of capital.

Our approach is holistic, combining advisory and lending services to clients to increase the contribution that SMEs can make to the economy including underserved segments such as women owned SMEs.

Advisory and Policy Support for SME finance mainly includes diagnostics, implementation support, global advocacy and knowledge sharing of good practice. For example we provide:

Financial sector assessments to determine areas of improvement in regulatory and policy aspects enabling increased responsible SME access to finance.

Implementation support of initiatives such as development of enabling environment, design and set up of credit guarantee schemes.

Improving credit infrastructure (credit reporting systems, secured transactions and collateral registries, and insolvency regimes) which can lead to greater SME access to finance.

Introducing innovation in SME finance such as e-lending platforms, use of alternative data for credit decisioning, e-invoicing, e-factoring and supply chain financing.

Policy work, analytical work, and other Advisory Services can also be provided in support of SME finance activities.

Advocacy for SME finance at global level through participating and supporting G20 Global Partnership for financial inclusion, financial stability board, International Credit Committee for Credit Reporting on SME Finance related issues.

Knowledge management tools and flagship publications on good practice, successful models and policy frameworks.

Lending operations:

SME lines of credit provide dedicated bank financing – frequently for longer tenors than are generally available in the market – to support SMEs for investment, growth, export, and diversification.

Partial Credit Guarantee Schemes (PCGs) – the design of PCGs is crucial to SMEs’ success, and support can be provided to design and capitalise such facilities.

Early Stage Innovation Finance provides equity and debt/quasi-debt to start up or high growth firms which may otherwise not be able to access bank financing. 

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