Micro, Small and Medium Sized Enterprises (MSMEs) are key drivers of job creation, economic diversification and innovation, especially in developing countries whose economies are frequently based on natural resources.  Despite their critical role, MSMEs face a broad range of constraints that smother their potential.    These include poor hard and soft infrastructure, unhelpful environments, as well as a lack of skills, experienced mentors and easily accessible markets. Of primary importance, however, is that access to finance for MSMEs is severely restricted in many developing countries.  The total unmet need for credit by all formal and informal MSMEs in emerging markets today is significant – in the range of $2.1 trillion to $2.5 trillion, according to the IFC and McKinsey.

One area for focus is building the capacity of local financial institutions to provide finance for SMEs.  CDC, the UK’s development finance institution (DFI), whose mission is building businesses in Africa and Asia and creating jobs, works with over 200 financial institutions in 30+ countries to make SME finance more easily available.  In Uganda, CDC is this year celebrating the 50th anniversary of DFCU, which it co-founded with the Government of Uganda in 1964. DFCU has grown to become one of the country’s largest banks and a leading provider of finance to small businesses.

To coincide with this anniversary, Business Fights Poverty in partnership with CDC is leading a discussion on how best to help small businesses to grow.

Key questions for the discussion include:

  • What are the biggest constraints currently facing small businesses, particularly in relation to accessing finance, and where are the most significant gaps in terms of the provision of enterprise support? 
  • Where are the innovations happening in relation to SME support, especially around financing,  what are we learning about what works, and how can we move towards solutions at scale?
  • In which areas can public-private collaboration provide the greatest value for small businesses, and where should investments focus?
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I am Christian Spano, group Manager for Socio-economic development (Anglo American) based in London.
Very excited with this opportunity!

Welcome, Robert.

1)      Most banks still do not finance SMEs and if they do provide short term financing only. They require significant collateral which SMEs usually don’t have due to collateral registration problems that are particularly common in Africa.  SMEs also lack clear identities and credit histories which banks like to see to establish a clear credit profile of their customers. Credit bureaus are coming up more and more but this also takes time. 2) banks do not offer products, tenors and prices that match the needs of SMEs. Specialised financing houses such as leasing companies and factoring agencies do address this but are not yet mainstream. 3) SMEs often tend to stay in the informal sector to avoid licensing and taxation issues but this also hinders their access to a range a services, including finance 4) SMEs face a range of different ‘environmental’ constraints that differ from country to country, but include issues such as lack of suitable business premises, lack of electricity, lack of other infrastructural aspects (roads, water, telecom, etc.), difficulties with licensing businesses, red tape, high taxation of formal businesses and corruption. 5) General economic environment; in African countries often inflation is high and currencies depreciate, resulting in rapid price increases. The instability of currencies also leads to high interest rates, making the price of financing very high if not unaffordable. SMEs need stability and predictability to operate well.  4) SMEs also often lack internal managerial capacity and financial skills which prevents financial planning and reduces the chances of obtaining finance.

Enterprise support or Business Development Services are often available, but the difficulty for SMEs is the information gap that exists; it is often difficult to establish which service is good and if it provides value for money. Governments have mostly failed in providing such services and their role should probably be that of a facilitator and not provider, given that civil servants are not entrepreneurs and do not usually understand what businesses need. Assisting in the certification or accreditation of good proven BDS services can be a good method to reduce market inefficiencies. Voucher schemes set-up with Government support have been used in various countries, with differing success. Other enterprise services such as information on business opportunities and markets, and services to provide quality standards and product certificates to promote exportation of local products are also very essential and are often not accessible to SMEs. Export promotion agencies hat actively support local SME product providers can also be very useful.  

Thank you, Zahid.  Robert and I work in the Financial Sector Development department.  One of my roles is to support the Africa SME Program to identify and appraise investments in smaller African FIs.  We look at these smaller FIs as key providers of SME finance. 

The biggest constraints facing small business vary substantially depending on the context and on other factors like the socio-economic status or gender of the entrepreneur. So, tis sort of assessment always requires a careful analysis of the specific business and also of all the different dimensions of market systems. When considering access to formal financial services, the lack of collaterals, limited information and capacity to access the available services,  and informality are among the biggest constraints.

From our experience in Latin America, most of the enterprise development programmes run by NGOs focus on microcredit directly for the entrepreneur and other solutions for value chain finance through other value chain actors tend to be neglected.

Thanks Alex.  There are around 100 people online - I invite anyone to have a go answering Alex's tough question!

an easy question...not!  but let me be provocative.  the biggest constraints to me are (1) few institutions capable of financing SMEs, (2) many inappropriate and not enough appropriate financial products on offer, maybe due in large part to capability gaps, and (3) often unsupportive enabling environments for SME finance, likely to get worse with Basel II/III implementation if it follows similar path to europe.

The big gap in terms of enterprise support is around risk mitigation products and services. Financial institutions have quite a broad coverage and, potentially, they could be able to provide a variety of financial services for micro and small enterprises but they don’t do it because of the perception or risks and therefore the cost of working with small enterprises in the rural areas. Being able to correctly assess the risk of the agriculture activity for smallholders, mitigate these risks (e.g. climatic events) through appropriate programme interventions and insurance products would greatly facilitate the linkage between rural entrepreneurs and Formal Financial Institutions.

Another important gap is the limited availability of customized financial products for specific crops. Each crop has specific needs in terms of investment in inputs or equipment, risk assessment and seasonality. In many cases suitable financial services for the specific situation are not available and development agencies should work with financial institutions to make research and design products that work for both the provider and the customer. CARE in Peru worked with the local financial institutions to design credit products for irrigation systems for small cocoa producers.

  • As an investor, CDC focuses on the constraint of access to finance, but we are well aware that access to finance is only part of the story. SMEs need a good investment climate (including helpful regulation on business registration and tax simplification); good people with the right skills, including management, finance and technical competences; access to markets, including connections to larger firms, advice to improve product standards in quality and sustainability; and access to finance, including working capital, trade finance, loans, equity and a healthy financial infrastructure.  Oh, and they also need reliable and affordable electricity, water, telecoms ...

Welcome to the conversation, Christian.

Hi Zahid. This is Safiye Ozuygun from Citi Microfinance. I am the Business Director

what other value chain actors are being neglected?

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