We're in a world where SMEs ( Small and Medium enterprises) businesses are making waves. With this, most of these SMEs are creating job opportunities around the world and this makes them major role players in most economies, most especially in developing and underdeveloped countries. Statistics have shown that SMEs account for major businesses around the globe, this alone makes them major players in job creation and global economic development. 

According To Quickloan Arena. SMEs represent about 90% of businesses and more than 50% of the employment ratio worldwide.

If you look at this you'll get to realize that considering SMEs and giving them the top priority is very important if development must take place and be sustained.

About 600 million jobs will be created before 2030, and this is a great development that will increase the global workforce.

When we use a place like Nigeria as an example, you'll realize that in every 10 jobs created, 7 of them are from SMEs.

With research, it was discovered that the major obstacle and setback in SMEs is access to funding to grow existing businesses in emerging markets and developing countries.


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Understanding SME Finance And World Bank Funding ( How World Bank is Helping Create Funding)

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Why SMEs Need Adequate Funding

Banks are one of the financial institutions that hardly give out loans to SMEs due to the risk involved. To avoid losing money to funding SMEs through loans. This is why you see most SMEs relying on internal funds, seed capital, crowdfunding, and even cash from family and friends to launch their business or enterprise.

According To IFC ( International Finance Corporation) about 65 million firms or 40% of formal micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of the global MSME lending. In east Asia and the pacific accounts have the largest share of about 46% of the total finance gap and followed by Latin America and the Caribbean (23%) and Europe and Central Asia (15%).

When you look at this gap, you'll get to realize that the gap volume is varied base on the region. This is why you see Latin America and the Caribbean, and the Middle East and North Africa regions, in particular, having one of the highest proportions of the finance gap when compared to the potential demand. About half of formal SMEs don’t have access to formal credit. The financing gap is even larger when micro and informal enterprises are taken into account.


How Does The World Bank Assist SME Finance

The world bank group is known for its massive support towards the financing of SMEs' innovative ideas that can bring about problem-solving in society at large.

According to the world bank, it is combining advisory and lending solutions in order to increase the contribution of SMEs to the economy, including underserved segments such as women-owned SMEs.

World Bank ensures it assists SMEs through the role of advisory and policy support through finance that includes diagnostics, implementation support, global advocacy, and knowledge sharing of good practice.

For Example:

  • World bank ensures it makes a financial assessment in other to determine the areas that needed improvement in regulatory and policy aspects enabling increased responsible SME access to finance.
  • They ensure they implement different supports for initiatives that will develop and create an enabling environment, and design and set up credit guarantee schemes.
  • Worlds bank also ensures that it improves credit infrastructure ((credit reporting systems, secured transactions and collateral registries, and insolvency regimes) which can lead to greater SME access to finance.

Lending Operations:

SME Lines of Credit provide dedicated bank financing – frequently for longer tenors than are generally available in the market – to support SMEs for investment, growth, export, and diversification.

Partial Credit Guarantee Schemes (PCGs) – the design of PCGs is crucial to SMEs’ success, and support can be provided to design and capitalize such facilities.

Early Stage Innovation Finance provides equity and debt/quasi-debt to start-up or high-growth firms which may otherwise not be able to access bank financing.

Results of World Bank Work

Early-Stage SME Finance

In Lebanon, the Innovative Small and Medium Enterprises (iSME) project is a $30 million investment lending operation providing equity co-investments in innovative young firms in addition to a grant funding window for seed-stage firms. 

As of August 2019, iSME’s co-investment fund has invested $10.23 million across 22 investments and has been able to leverage $25.47 million in co-financing, demonstrating its ability to crowd in private sector financing and expand the market for early stage equity finance in Lebanon. 

To date, 60 out of 174 grantees had leveraged the iSME funding to raise a total of $13.1 million from various funding sources, a leverage ratio of 5.3 times. Overall, stakeholders’ consultations suggest that the iSME project could play an even larger role in the future financing of the Venture Capital (VC) sector by supporting existing VCs and emerging players, including increasing attention on a fund of funds approach, which could also cover growth funds (later stage and private equity).

In India, our MSME Growth, Innovation and Inclusive Finance Project improved access to finance for MSMEs in three vital but underserved segments: early stage/startups, services, and manufacturing. 

A credit line of $500 million, provided to the Small Industry Development Bank of India (SIDBI), was designed to provide an affordable longer-term source of funding for underserved MSMEs. Technical assistance of about $3.7 million complemented the lending component and focused on capacity building of SIDBI and the participating financial institutions (PFIs).

In addition to directly financing MSMEs, disbursing a total of $265 million in loans, the project pushed the frontiers of MSME financing through the development of innovative lending methods that reduced turnaround time, reached more underserved MSMEs, and crowded in more private sector financing. It also reached new clients, women-owned MSMEs, and MSMEs in low-income states.

The project supported SIDBI to scale-up of the Fund of Funds for Startups, which aims to indirectly disburse $1.5 billion to startups by 2025. SIDBI’s “contactless lending” platform, a digital MSME lending aggregator and matchmaking platform, has crowded in $1.9 billion of private sector financing for MSMEs, making it the largest online lender in India.

Lines of Credit

In Jordan, two World Bank Group’s lines of credit aim to increase access to finance for MSMEs and ultimately contribute to job creation. The $70 million line of credit encouraged the growth and expansion of new and existing enterprises, increasing outreach to MSMEs, 58% of which were located outside of Amman and 73% were managed by women. 

The line of credit directed 22% of total funds to start-ups. The project financed 8,149 MSMEs, creating 7,682 jobs, of which 79% employed youth and 42% hired women. The additional financing of $50 Million is progressing well towards achieving its intended objective. $45.2 million has been on-lent to 3,345 MSMEs through nine participating banks. 

The project is especially benefiting women, who represent 77% of project beneficiaries, and youth (48% of project beneficiaries), and increasing geographical outreach, as 65% of MSMEs are in Governorates outside of Amman.

In Nigeria, the Development Finance Project supports the establishment of the Development Bank of Nigeria (DBN), a wholesale development finance institution that will provide long-term financing and partial credit guarantees to eligible financial intermediaries for on-lending to MSMEs. 

The project also includes technical assistance to DBN and participating commercial banks in support of downscaling their operations to the underserved MSME segment. 

As of May 2019, the Development Bank of Nigeria credit line to PFIs for on-lending to MSMEs has disbursed US$243.7 million, reaching nearly 50,000 end-borrowers, of which 70% were women, through 7 banks and 10 microfinance banks.

Partial Credit Guarantees

In Morocco, the MSME Development project aimed to improve access to finance for MSMEs by supporting the provision of credit guarantees by enabling the provider of partial credit guarantees in the Moroccan financial system to scale up its existing MSME guarantee products and introduce a new guarantee product geared towards the very small enterprises (VSEs). 

As a result of the project, the number and volume of MSME loans are estimated to have increased by 88% and 18%, respectively, since the end of 2011. The cumulative volume of loans backed by the guarantees during the life of the project is estimated at $3.28 billion. 

With significantly increased lending supported by guarantees, PFIs were able to continue building their knowledge of MSME customers, refining their systems to serve them more effectively and efficiently. Owing to guarantees, many first-time borrowers were able to generate credit history, which made it easier for them to obtain loans in the future.

Supporting Women-Owned SMEs

In Ethiopia, the Women Entrepreneurship Development Project (WEDP) is an IDA operation providing loans and business training for growth-oriented women entrepreneurs in Ethiopia. 

After identifying a persistent ‘missing middle’ financing gap for women entrepreneurs in Ethiopia, WEDP launched as a microfinance institution (MFIs) upscaling operation, helping Ethiopia’s leading MFIs introduce larger, individual-liability loan products tailored to women entrepreneurs. WEDP loans are complemented through the provision of innovative, mindset-oriented business training to women entrepreneurs.

As of October 2019, more than 14,000 women entrepreneurs took loans and over 20,000 participated in business training provided by WEDP.  66% of WEDP clients were first-time borrowers. 

As a result of the project, participating MFIs increased the average loan size by 870% to $11,500, reduced the collateral requirements from an average of 200% of the value of the loan to 125%, and started disbursing $30.2 million of their own funds as WEDP loans. 

The average WEDP loan has resulted in an increase of over 40% in annual profits and nearly 56% in net employment for Ethiopian women entrepreneurs.


In Bangladesh, the Access to Finance for Women SMEs Project aims to create an enabling environment to expand access to finance to women SMEs (WSME) by supporting the establishment of a credit guarantee scheme (CGS), issuance of SME Finance Policy, and strengthening the capacity of the regulator and sector. 

The project supported the issuance of Bangladesh’s maiden SME Finance Policy: a stepping stone for boosting SME financing. Bangladesh’s first comprehensive SME Finance Policy was launched in September 2019 through concerted efforts in high-level upstream work, enhancement of the regulator’s capacity, and formulation of key recommendations with a sharper gender lens.

In Bangladesh, a $2.8 billion financing gap prevails in the MSME sector, where 60% of women SMEs’ financing needs are unmet, and lack of access to collateral is one of the key hindrances. Bangladesh lacked a single policy with a systemic plan to enhance SME finance. 

With nearly 10 million SMEs contributing to 23% of the GDP, 80% of jobs in the industries sector, and 25% of the total labor force, the SME Finance Policy will play a pivotal role in enhancing SME financing.

Leasing

In Ethiopia and Guinea, the World Bank Group is supporting the local governments in creating an enabling framework that is conducive to launching and growing leasing operations, as well as attracting investors, to increase access to finance for SMEs. 

It is doing so by working at the macro, mezzo, and micro levels, supporting the governments with legal and regulatory reforms, and working with industry players to create technical partnerships and increase market awareness and capacity. 

In Ethiopia, the project generated a $200 million credit facility supporting 7 leasing intuitions and introducing 4 new leasing products into the market: hire purchase, finance lease, microlensing, and agrileasing. 

As of June 2019, 7,186 MSMEs have accessed finance valued at over $147 million. The project in Guinea supported the adoption of the national leasing law and the accompanying prudential guidelines for leasing, which in turn, have helped 3 companies to launch leasing operations. 

To date, these institutions have supported 31 SMEs through the disbursement of leases valued at $25 million.

Who World Bank Work With

Leveraging our expert knowledge, we work globally with public stakeholders and private sector intermediaries in partnership with other multilateral and bilateral development organizations to support SME Finance development in emerging markets and developing countries.


Conclusion

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ARTICLE SOURCES: Small and Medium Enterprises (SMEs) Finance (World Bank)

ARTICLE SOURCES: Quick Laon Arena