For any kind of business activity, we need finance. Hence, it is worthwhile to say that finance is the lifeblood of every business, and Small and Medium Enterprises (SMEs) are of no exception. An entrepreneur needs finance to start a new venture or expand the existing business or to survive and cope with the unpredictable market scenario, which is a well-known fact world over. Recognizing the importance of finance, the United Nations had designated year 2005 as the international year of microcredit aiming at building inclusive financial systems. In 2009, G-20 also committed to supporting spread of novel modes of financial service delivery and scaling of different models of SME financing. Over the period, multilateral institutions as well as national governments have put in place various support mechanisms adopting financial inclusion as a core policy objective to meet out the financial needs of SMEs. But the question arises: how many of them are really being reached out through this support mechanism?
The growth of SMEs, particularly in emerging economies, is largely constrained owing to lack of access to financial products and services. While there has been proliferation of micro finance institutions to serve the smallest of the enterprises, banks and other development financial institutions focus more on larger enterprises and enterprises in the organized sector. And SMEs fall between these two market segments where a finance gap prevails that is better known as missing middle.
The IFC report titled “Scaling-Up SME Access to Financial Services in the Developing World” – the G20 stocktaking report – reveals that there are an estimated 420 to 510 million MSMEs worldwide, of which 80-95 percent are in emerging markets (informal sector). As per World Bank Enterprise Surveys (2006-09), the financial barrier that holds back the growth of SMEs in low-income, middle-income and high-income countries are above 40%, 30% and between 10-20%, respectively. The global financial crisis has further inhibited SMEs’ access to finance. Lowering profitability owing to negative impact of this crisis on the SMEs activity has become detrimental for SMEs’ credit worthiness.
SMEs lack credit worthiness mainly for two reasons: firstly, they don’t have any asset for collateral and secondly, they don’t maintain the financial records and transactions of their businesses. Because of these two reasons, banks doubt the repayment ability by the SMEs and, hence, feel reluctant to approve their loan applications. In addition, the loan requirements of these small enterprises are far too less than that of comparatively bigger enterprises. This is another reason why banks choose to play safe and lend to bigger players instead of small enterprises. Moreover, the cost of maintaining account is same in case of small and big businesses. So the bank managers dealing with the lending process prefer one big business rather than lending to 10 small enterprises.
As the global gap in access and use of financial services & products by SMEs still remains a challenge, there is an urgent need to review the various existing parameters of SME finance from different perspective with a fresh look at this changed world economic scenario and come out with specific suggestions/ recommendations that would facilitate hassle-free access of finance by SMEs. SMEs will get access to effective finance only when SME lending is part of a larger financing system that comprises different types and tenors of lending, SME-focused policymaker, SME-focused bank, reliable credit guarantee mechanism, provisions for venture capital firms, angel investors, crowd-funding and much more. In other words, the financial system’s architecture as a whole has to change much more than individual initiatives and institutions.
Finance as one of the major challenges for SMEs’ growth and expansion is a high priority topic on ISSME’s agenda. We, therefore, do the following activities:
- Undertake empirical studies to find out real issues preventing access to finance by SMEs;
- Organize specific events by bringing together SMEs and financial institutions at one platform for effective discussions and to come up with best solutions facilitating access to finance;
- Disseminate information on alternative modes of finance and globally emerging best practices on financial inclusion; and
- Team up with various financial institutions and groups worldwide to mitigate SMEs’ financial problem.