Access to Finance For Micro, Small, and Medium Enterprises in Developing Economies

Micro, Small and Medium Enterprises (MSME) are crucial drivers of the global economy; they make up at least 90% of all businesses and half of all jobs globally. Further, MSMEs contribute up to 40% of GDP in emerging economies. Since the pandemic began, however, many MSMEs have paused operations as mandated by government rules for non-essential enterprises. This widespread shutdown of economic activity has contributed to four out of every five workers experiencing some form of unemployment, according to estimates from the International Labour Organization. To minimize the risk of this disruption becoming permanent, policy-makers must address the barriers faced by MSMEs including the lack of access to finance.

More than 40% of MSMEs cannot meet all their financing needs from the formal sector. According to the World Bank, these enterprises “…are less likely to be able to obtain bank loans than large firms; instead, they rely on internal funds, or cash from friends and family, to launch and initially run their enterprises.” The MSME Finance Gap dataset, developed by the SME Finance Forum at IFC and released in 2017, sheds light on the nature of this financing shortfall. The following analysis is based on a dashboard built by Keshif using this dataset¹.

This high level overview using a Keshif dashboard shows the trends in total finance gaps globally, as well as aggregated by region, income group, fragile/conflict-affected countries (FCS), and across countries grouped by relative finance gaps using the latest available MSME Finance Gap dataset.

The Global Financial Shortfall

The global financial shortfall for MSMEs, derived by quantifying the difference between existing supply from formal financial institutions and an estimated demand from MSMEs, is approximately $4.8 trillion.

The largest total gap, in absolute dollar terms, is observed in East Asia Pacific at $2.2 trillion. In contrast, Middle East and North Africa has the smallest gap at $186 billion.

Total finance gap amount, in $, across six global regions.

Absolute versus Relative Finance Gap

However, when viewed relative to the existing supply of finance available to MSMEs, the position of each region in the bar chart is reversed.

Relative finance gap across six global regions, computed as the ratio of the total gap to total supply. Global average of 2.9 is a simple average across the six regions.

The relative gap is indicative of the magnitude of the hurdle each country faces in expanding access to finance to all MSMEs and is therefore more useful, for comparative purposes, than the absolute finance gap.

Point locations show the relationship between finance gap in absolute numbers and relative numbers (normalized by current volume). In addition, larger point sizes demonstrate larger economies by GDP, and darker colors mean that the ratio of the finance gap over GDP is larger.

China is an example of a country with a high absolute gap but low relative gap. It has the highest absolute gap of all countries surveyed, $1.8 trillion, but one of the lowest relative gaps, 0.76x. The Central African Republic has a much smaller absolute gap — only $243 million — but it is nearly eight times greater than the available supply of finance available to MSMEs in the country. Theoretically, a mom-and-pop store in CAR experiencing a pandemic induced slowdown of revenue would have a harder time tapping credit in the already constrained access to finance environment than would a store in China. Increased funding to MSMEs, as a policy response, could be more impactful in CAR than in China whose MSMEs might require other remedies such as tax holidays or wage subsidies.

Grouping Countries by Relative Finance Gap

The percentile distribution chart, seen at the bottom of the figure below, provides evidence of a split between countries of different income levels. High-income countries (orange) have a lower median relative gap (black bar) than all countries while the median for poorer countries (purple and light green) surpasses the global median. This is not surprising given that there are no high-income countries with a relative gap higher than 4x and fewer low-income countries with a relative gap lower than 4x.

This chart shows the distribution of the relative finance gap across four income groups. The small chart below the axis shows the median and percentile distributions, also revealing that high income (orange) countries have significantly lower relative gap compared to low-income countries (light green).

Number of MSMEs per Relative Finance Gap

The histogram provides a useful way to group countries by their relative gaps and rank them by how many MSMEs operate in those countries. The countries with the second and third lowest relative gaps, between 0.5x and 4x, together account for 75% — or 240 million — of all MSMEs.

There are more than 300 million MSMEs globally. This chart shows distribution of the total number of MSMEs per countries grouped by different relative finance gaps ranges.

Drilling down further, most of these MSMEs are in the East Asia Pacific and South Asia regions.

This dashboard snapshot highlights countries with 0.5–2x (orange) and 2-4x (green) relative finance gap groups.

Conducting the same analysis on the remaining groups and ordering them by total number of MSMEs: the 16x group accounts for more than 40 million MSMEs of which the vast majority are in one country, Nigeria. The 4x -16x group accounts for nearly 18 million MSMEs spread across Latin America, Sub-Saharan Africa, and South Asia. And countries with a relative gap of up to 0.5x have only 9 million MSMEs which are spread across the three regions of East Asia Pacific, Europe and Central Asia, and Latin America.

Perhaps unsurprisingly, the 16x and above category is largely composed of Fragile and Conflict-Affected States (FCS), as classified by the World Bank. Malawi and Egypt are the only non-FCS states with high relative finance gaps.

There are 10 countries where the MSME finance gap is over 16 times the current supply.

Focusing on the FCS countries, it is useful to plot each country’s relative gap against MSMEs per million. Potentially, a different donor strategy could be developed for each quadrant. Countries in the top left corner have more MSMEs and face a relatively smaller barrier to full access to finance; these countries may absorb funding more easily. Unfortunately, this is limited to two countries, Vietnam and Kenya. Far more FCS countries lie on the right side indicating a need to prioritize upstream work in the legal and financial infrastructure.

Relative gap vs Number of MSMEs (per million) in 25 Fragile and Conflict-Affected States.

Countries around the world are aiming for a response to the pandemic that strikes a balance between “lives versus livelihoods”. As the driving force of livelihoods, ensuring the survival of MSMEs is key to achieving this balance. The policy response towards MSMEs requires careful attention be paid to the disbursal of funding. Countries with a low relative finance gap require a more nuanced policy response; their needs might be better met with policies such as tax holidays that continue even after the pandemic has subsided. Countries with higher relative gaps would benefit from greater funding and longer-term upstream engagement. Combined with more recent data, the MSME Finance Gap Survey can help policymakers develop or refine interventions for maximum impact.

¹The original dataset covered 132 developing economies per World Bank lending criteria. This analysis further refines that list to exclude countries that are missing a value for Current Supply (of funding available to MSMEs) or Potential Demand: Lithuania, Philippines, Eritrea, Papua New Guinea, West Bank, Zimbabwe, Mauritania. Additionally, each country was assigned an FCS status of Yes or No following World Bank classification.

This analysis is written by Sabahat Iqbal, a technical expert at Keshif.