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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robert and I are largely agreeing, only he types faster!  on enterprise support/BDS, we have few appropriate products and services for SMEs because SMEs need real time, interactive support at key moments, and most standard training type offering don't work, no matter what they cost.  what we are seeing in the developed world is this effort moving onto smartphones, and we need to push in this direction in emerging markets

Welcome, Safiye.  Some interesting points being made about the supply of SME finance.  Any thoughts?

A friend of mine has been trying to start a Fund for entrepreneurs in Benin.  We have issues with the high taxation of inflows and outflows due to existing bank laws and govt regs.  So most of the money is filtered off before it gets to the entrepreneur for him to put to productive use.

I believe Gianluca is speaking about the larger companies that buy from and/or sell to the smaller companies

The biggest constraints on the banks side for expanding SME portfolio is the fact that as a result of the regulatory changes after the financial crisis Basel II and III, banks are required to decrease their portfolio with high risk weightings such as SME loans as these are usually non investment grade portfolio. Banks are required to carry higher regulatory capital against such portfolios. This resulted in higher cost for banks and hence unwilling to extend loans to such segments.There is also lack of transparent information and credit history on SME side which makes it even more difficult and costly for banks to engage in this customer segment. However, there is hope in the horizon in the form of alternative means of funding which I can expand later

Hi Zahid, good question.
Being a small business in a developing nation is very tough. The context is changing all the time, clients are not stable and competition is fierce.
From our experience small business struggle to reach medium size basically because the type of activities they choose generate a very quick growth rate in the first years but then they find that everyone is selling or providing very simmilar products/services. The Small SMEs that manage to transition to medium size are the ones that understand that they need to diffirentiate themselves to be able to grow and reach a more stable stage. Of course, differentiations means additional risk in an already risky environment.
On finance, I think small SMEs do not really understand which product they need and get too focused in getting access ot finance when it may be that access to markets or advisory is more relevant. Many times there is capital available but small SMEs do not understand the value of the offering or get access to it but do not use it in the most productive manner.

look, most SMEs are not exporting, their business is in local currency, so my recommendation would be to try to mobilize funding locally for such funds.  it can't all have exited Benin...

Another massive issue for women entrepreneurs is that they don't have the same access to collateral as men in many countries because of unequal property laws.

we have tried to work with financial institutions to set up dedicated adapted financing for women to tackle this issue. not so easy though. its needs major reforms to tackle this fundamentally.

absolutely, but as noted above, if the only collateral recognized are fixed assets, like land and houses, then few SMEs, run by women or men, have what it takes...and this is inappropriate collateral for most SME borrowing, with movable asset based financing far more appropriate, but very, very little understood by emerging market banks, and (more damaging) by emerging market regulators.

and an even bigger problem in many countries is that women cannot sign contracts without husband/father/brother co-signing...

We are investing outside funds from our networks, not trying to scrape up local funds, and many of the products will be much more profitable in countries outside Benin.  We can provide both funds and management guidance. Of course there will be internal turnover of Benin funds, but banking reform is needed.  

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