Addressing the SME Finance Problem

Abstract

Although SMEs provide employment to a large share of the labor force in developed and developing countries, they receive limited external funding compared to large firms and face a financing gap. This problem is not specific to developing countries; SMEs in developed countries also suffer from a similar shortfall in financing. According to the World Bank Enterprise Survey, SMEs are less likely to have a formal bank loan or other lines of credit compared to large firms. The International Finance Corporation (IFC) estimates that in aggregate across developing regions, the credit gap to formal SMEs ranged from $900 to $1,100 billion in 2011.1 These values represented between 26 and 32 percent of total credit to formal SMEs. This policy brief explores two questions. Why are SMEs more financially constrained than large firms? What are some feasible and innovative solutions to help SMEs obtain better access to finance? Understanding the SME finance problem is critical because difficulties in obtaining finance can hamper the ability of established smaller firms to invest and grow and of new firms to launch operations, hindering overall growth in economic activity and employment.

Keywords: Capital Flows, Capital Markets and Capital Flows, Financial Sector and Social Assistance, Financial Structures, Legal Reform, Legislation, Regulatory Regimes, Judicial System Reform, Legal Products, Common Property Resource Development, Social Policy, Access to Finance, Economic Growth