The Challenge And The Response

 

Small and growing businesses sustain and build developing economies worldwide, making them a major source of wealth, income generation and job creation, particularly for those in most need. Together with medium-sized enterprises, small enterprises account for over 60% of GDP and over 70% of total employment in low-income countries.1 However, these entrepreneurs need access to financial services in order to grow their businesses and accumulate savings and assets. Similarly, poor households require access to savings, loans, insurance and remittance services in order to improve their economic resilience and life opportunities.


A 2011 study by McKinsey (commissioned by the G-20 nations) reflects the significant need for increased access to financial services in emerging markets. It notes that a 500% and 150% increase in the supply of finance to small and medium enterprises is required to meet the demand in Sub Saharan Africa and South Asia, respectively. Additionally, according to the United Nations, only 5% of low-income households around the world have access to financial services, with most of such access provided by the informal sector rather than the formal banking system. Nearly three billion people around the world lack access to basic financial services, including some 103 million out of the 110 million poorest people in China, and some 900 million of the 1.1 billion people in India. Out of a population of almost 744 million, only 30 million people have access to financial services in sub-Saharan Africa. Less than 6% of people in the United Republic of Tanzania have access to a bank account and the number of loans per 1,000 people in Uganda is six.


These studies imply that a significant underserved low- to middle- income population exists and lacks access to financial services to accumulate their savings and build their businesses.


CapitalPlus Exchange believes that capital and financial services geared towards small and growing businesses offered by microfinance institutions, downscaling commercial banks and niche market players will remain limited without interventions that spark significant change as banks have not demonstrated a commitment to this segment. Exchange works to build the capacity of these institutions to increase their profitability, reach and impact.

Small Business Lending 


Small and medium size enterprises (SMEs) in developing economies are a major source of non-farm income and employment. Collectively, small businesses have more employees, produce more goods and create jobs at a faster pace than larger companies. Together with medium-sized enterprises, they account for over 60% of gross domestic product (GDP) and over 70% of total employment in low-income countries. A recent study corroborated these findings by the G-20 and others, noting that a survey of 28,000 SMEs in Africa and Latin America suggested that small businesses contributed to aggregate employment growth of nearly 17% a year – at least double the GDP growth in most countries studied.2

 

Despite their prevalence and contribution to job growth and poverty reduction, the growth of small businesses is significantly constrained due to lack of access to capital and financial services. In the World Bank’s “World Business Environment Survey” of more than 10,000 firms in 80 countries, small businesses worldwide on average named financing constraints as the second most severe obstacle to their growth, while large firms on average placed finance only fourth.3 A study by Small Enterprise Assistance Funds one of the few of its kind, calculated that for every dollar of support a small or medium enterprise receives, the impact is 12 times that amount within the local community. Serving small businesses can be profitable, but financial institutions (FIs) often lack the knowledge and capacity to meet this need.

Microfinance

Microfinance services include the provision of loans, savings, insurance and other financial services to the poor. Financial services needed by the poor households and entrepreneurs are remarkably similar to those needed by their richer counterparts, and include: working capital loans, consumer credit, savings, pensions, insurance, and money transfer services. This diverse range of financial instruments enables these households to expand their businesses, build assets, and smooth consumption, thereby strengthening their economic resilience.

 
Microfinance institutions worldwide are committed to providing financial services to low-income populations in an effort to alleviate and/or reduce poverty. Providers of financial services to the poor include: donor-supported, non-profit non-government organizations (NGOs); cooperatives; community-based development institutions like self-help groups and credit unions; commercial and state banks; insurance and credit card companies; wire services; and post offices. These institutions are financed through either their own savings operations or through loans, investments and grants from donor agencies, and commercial and private investors.


1Microfinance Information Exchange, Inc., ‘Benchmarking SME Practices’, MicroBanking Bulletin Issue 15 Autumn 2007.
2“Small Firm Growth in Developing Countries.” Simeon Nichter and Lara Goldmark, World Development, Vol. 37, No. 9, 2009, Elsevier Ltd.
3“The Firms Speak: What the World Business Environment Survey Tells Us about Constraints on Private Sector Development.” Geeta Batra, Daniel Kauffmann and Andrew H. W. Stone.

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