Micro, Small, and Medium Enterprise (MSME) Finance

Challenge

MSMEs are, collectively, the largest employers in many low-income countries, yet their viability can be threatened by a lack of access to such risk-management tools as savings, insurance and credit. Their growth is often stifled by restricted access to credit, equity and payments services.

Access to financial services can therefore boost job creation, raise income, reduce vulnerability and increase investments in human capital. MSMEs account for a significant share of employment and GDP around the world, but, when they have limited access to finance, the economy suffers a series of negative consequences: Economic and social opportunities are restricted, enterprise creation and growth are restrained, households and enterprises are more vulnerable to threats, and payments are costlier and less safe.

A World Bank Enterprise Survey found that the smaller firms are less likely to have access to capital – a factor that constrains their ability to grow and become more productive. They are also more likely to rely on informal sources of capital – a factor that is often negatively associated with growth and firm performance. Access to finance is disproportionately difficult for smaller firms in the least developed countries (LDCs), with 41 percent of SMEs in LDCs reporting access to finance as a major constraint to their growth and development, by comparison to 30 percent in middle-income countries (MICs) and only 15 percent in high-income countries (HICs).

Solution 

The World Bank has a wide range of available instruments to help meet the challenge of MSME finance.

• Data and Analysis: Enterprise Surveys have been conducted in 135 countries and are the principal global source of data on enterprise performance and constraints. The World Bank also works at the country level to assess policy and regulatory barriers to MSME finance, and to survey financial-service providers. 
• Financing and Risk-sharing: The World Bank has an active lending portfolio of US$3.2 billion supporting MSME Finance. Support for risk-sharing facilities, including partial credit guarantees, also helps unlock the financial resources of banks and other financial institutions.
• Technical Assistance and Capacity-Building: The Bank provides advisory support, training and other services to help governments and regulators support MSME finance, and to help financial institutions expand access to finance. The Bank also develops guidance, principles and toolkits for governments, regulators and the private sector.

An important World Bank-led mechanism to accelerate financial inclusion through enabling country commitments is the new Financial Inclusion Support Framework (FISF), which was launched in 2013.  The World Bank has committed to help at least 10 IDA countries reach their financial inclusion targets, including through the FISF, and plans to expand this support to at least a further 10 IDA/IBRD countries.  Comprehensive packages of assistance through the FISF will cover any of the following areas: payments, financial infrastructure, financial consumer protection, financial literacy, microfinance, SME finance and agricultural finance. The IFC’s SME Finance Forum, CGAP’s leading-edge knowledge agenda, and the Financial Inclusion Support Framework, are highly complementary and strongly leverage the World Bank Group’s country-level financing, advisory services, and policy dialogue to help under-served women.

Results

Lending

Current lending tools include:

• Development Policy Loans (DPLs), based on a series of policy, regulatory and institutional actions/reforms agreed with the Government
• Investment loans, with credit lines for MSME and low income individual lending by financial institutions, and/or support to credit guarantees (risk-sharing) to encourage financial institutions to lend more of their own resources to MSMEs and low income individuals

For example, in China, the World Bank supported enhancing access to finance for underserved micro and small enterprises with US$100 Million in IBRD financing, including both lending and technical assistance. Before the project began, about 20,000 micro and small loans were disbursed to MSE clients in 40 branches per year, but by the project’s completion in the end of 2010, more than 60,000 loans were issued in a year — tripling the supply of credit to small businesses. Over three years, US$2.3 billion in MSME loans were distributed through recipient Chinese financial institutions.

In Turkey, a World Bank project to expand the export capacity of small companies through US$1.7 billion in Export Finance Intermediation Loans (EFILs), resulted in participating firms introducing new products and increasing exports, sales, and employment significantly more than non-participating firms. Participating firms grew more quickly than non-participating firms in terms of exports (10.4 percent versus 0), sales (11.7 percent versus 6.2 percent) and employment (8.9 percent versus 2.5 percent).

The Nigeria MSME Project supported the establishment of commercial microfinance industry in Nigeria through a competitive performance grants scheme. US$5.7 million in World Bank assistance resulted in four successful microfinance institutions mobilizing over US$30 million in equity.

The Afghanistan Microfinance Poverty Reduction Project catalyzed the development of the microfinance sector in Afghanistan, and provided significant capacity-building and financing since 2003 through a microfinance apex institution, MISFA (Microfinance Investment Support Facility for Afghanistan). A total of US$184 million in World Bank lending support has been critical for the sector’s development, including through extremely challenging periods.  Today MISFA supports over 148,000 microfinance clients and 82,000 borrowers.

Technical Assistance

The World Bank has technical assistance projects in more than 100 countries, including technical assistance and advice for reforms, institutions and capacity-building, systems development, analytical reports and data, and knowledge sharing. The Bank has also been working with governments to design and implement national financial inclusion strategies. Governments are increasingly seeking assistance in innovative areas including Government-to-Person (G2P) payments and financial consumer protection. Technical assistance has largely been funded by the Responsible Financial Inclusion and Financial Infrastructure trust fund and the Financial Literacy and Consumer Protection trust fund, along with FIRST, a World Bank-managed, donor-funded initiative that supports low- and middle-income countries in their efforts to strengthen their financial sectors.

In the Middle East and North Africa, for example, the World Bank and IFC have worked together to start an MSME Finance Facility that provides comprehensive support and financing to expand financial services for MSMEs. The World Bank also works with LICs and MICs to strengthen financial consumer protection and raise financial capability, which help ensure that MSMEs benefit fully from financial services.

The Niger Financial Sector Technical Assistance project backed by IDA has served as an institutional-development and enabling-environment operation. It has disbursed US$3.8 million to strengthen the microfinance sector by providing technical assistance to the Ministry of Finance, the Microfinance Regulatory Agency and microfinance providers. Over a four year period, the number of microfinance clients nationwide increased by 223 percent, with the proportion of loans to women increasing from 41 percent to 57 percent.

In addition, through the SME Finance Initiative framework, which provides advisory support and financing to banks targeting SMEs in under-served markets, the IFC launched the Global SME Finance Facility, a global platform that blends donor funding with funding from international development institutions to expand lending to small businesses in emerging markets, and the SME Finance Forum, an online hub for data, research and best practices.

Guidelines, Good Practices, and Toolkits: Guidelines, good practices and toolkits help inform financial inclusion policymaking and evaluations. Recent World Bank MSME guidelines include Global Survey on Consumer Protection and Financial Literacy - Results Brief, the Impact Evaluation Framework: SME Finance, and Good Practices for Financial Consumer Protection. In 2011, the World Bank and IFC produced the SME Finance Policy Guide for the G20 Global Partnership for Financial Inclusion (GPFI), which serves as a guide and reference point for governments and regulators. In conjunction with the 2013 G20 Russian Presidency and The Organisation for Economic Co-operation and Development (OECD), the World Bank will develop a toolkit for designing policies and measuring impact for financial capability.

Bank Group Contributions

Lending

The World Bank’s support for MSME finance takes many different forms and reaches a wide variety of end users. The Bank provides large lines of credit through the formal financial sector to SMEs in Turkey, for example, and it supports small-scale loans to women in rural India through community development projects. The Bank’s MSME finance portfolio currently includes US$3.5 billion in active lending (including US$1.26 billion in IDA funding), with 79 lending projects in 47 countries.

Partners

The World Bank works globally with standard-setting bodies to develop guidelines, standards and good practices, and with the G20 to develop guidance for regulators and policymakers and to catalyze new actions in support of MSME Finance.  The World Bank (along with IFC, CGAP and AFI) is an implementing partner for the G20 Global Partnership for Financial Inclusion (GPFI).

At both the country and regional levels, the World Bank works closely with a range of partners on financial inclusion, including: the Alliance for Financial Inclusion (AFI), financial sector development trusts, UNCDF, the OECD, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), United States Agency for International Development (USAID), Australian Agency for International Development (AusAID), Switzerland’s State Secretariat for Economic Affairs (SECO), the Bill & Melinda Gates Foundation, and regional development banks. 

Moving Forward

The Bank plans to continue to be a leading global development partner for MSME finance through its provision of data and analysis, financing and risk-sharing, policy advice and technical assistance. The Financial Inclusion and Infrastructure Global Practice is providing technical guidance and resources to strengthen the design and effectiveness of projects and to incorporate lessons learned from country experience and new research insights. The Bank is also expanding its support for trade and supply-chain finance, which is the primary source of financing for many firm that are not yet well-serviced by financial institutions. 

The Bank is working with IFC, through joint initiatives such as the MENA MSME Facility, to ensure that a comprehensive and tailored package of support – incorporating the range of instruments, know-how and expertise of both partners – can be provided at the country level. The FISF will enable the Bank to work jointly and more systematically with IFC, CGAP and partner development agencies (including donors and regional development banks).

The WBG has been working on expanding donor commitment and is at an advanced stage of discussion with a key donor for a new program that aims to scale branchless banking/agent-based models and deliver improvements in payments systems, recognizing that technology has the potential to transform the delivery of financial services to poor people.

Beneficiaries

The Woman Entrepreneur’s Package has been offered by Garanti Bank in Turkey since 2006, with the objective of meeting small- and medium- businesswomen’s communication networking, training, and financial needs, and thus help grow their businesses. The package includes: a support loan (term up to 60 months, grace period, and a special rate); supplementary banking products (overdraft account, point of sale (POS) terminal, business credit card, insurance coverage, and automatic payment orders); and networking and training support, including Women Entrepreneur meetings organized by Garanti and the Women Entrepreneurs’ Association  and Turkey’s Women Entrepreneur of the Year Contest, along with a free training program known as “Basic Entrepreneurship.” Results from the package reflect that US$157 million in loans have been granted to 8,400 women, and about 1,600 participants have attended the Woman Entrepreneur Meetings to share expertise, business ideas, and experiences. More than 3,000 applications have been submitted to Turkey’s Woman Entrepreneur of the Year contest in the three years since the program was launched.

Mexico has transformed the lending scenario for SMEs through the creation of a nationwide movable collateral registry in October 2010. With the new registry, the number of loans to businesses quadrupled to about 23,000 in 2011. These loans have generated more than US$70 billion in financing to businesses, with SMEs accounting for more than 90 percent of those receiving those loans. The reform has also led to an estimated saving for borrowers of US$ 1.3 billion in registration fees. About half of the loans granted have gone to agribusinesses and farmers.

In China, IFC works closely with Bank of Deyang to help extend its services to SMEs and support women-owned businesses in areas affected by the 2008 earthquake. In 2009, IFC approved a US$31 million equity investment to the bank. IFC has also provided gender sensitivity training to Bank of Deyang’s managers, and is helping make the business case for the women-owned SME market. As a result, the bank launched a microloan program for women, which has disbursed US$2 million to 322 women entrepreneurs, creating more than 1,000 jobs. The bank also opened the first branch exclusively dedicated to women, aiming to reach 4,300 women-owned SMEs and US$458 million in loans by June 2013. Bank of Deyang became the first Chinese bank to join the Global Banking Alliance for Women.