Improving access to finance for SMES : opportunities through credit reporting, secured lending, and insolvency practices

Small and medium enterprises (SMEs) account for over 90 percent of firms worldwide. A joint IFC and McKinsey study in 2010 estimated the total number of formal and informal micro, small and medium enterprises globally at 420-510 million, with most firms, 365-445 million, located in developing economies. SMEs play a critical role in the global economy. They are the most significant contributors to employment and generate most of jobs in developing economies. SMEs are also a substantial contributor to overall value added in these economies. Recognizing the importance of SMEs, the World Bank Group’s SME finance portfolio includes almost $4.8 billion in active lending, with 61 lending projects in 47 economies worldwide as of January 2018. Nevertheless, SMEs face greater financing obstacles than larger firms, they enjoy less access to external finance and face higher transactions costs and higher risk premiums. Almost 70 percent of SMEs do not use external financing from financial institutions, and another 15 percent are underfinanced. The total credit required to finance these SMEs fully is over $2 trillion, equivalent to 14 percent of total developing economy GDP. Cross-country studies show that the probability of being credit constrained decreases as firm size increases and that SMEs in the least-developed regions like Sub-Saharan Africa, East Asia and the Pacific and South Asia are more likely to encounter significant financing obstacles.8 Not surprisingly, access to finance has been identified as one of the most critical constraints to firm growth. On the other hand, availability of external finance is positively associated with indicators of entrepreneurship such as the number of startups and firm dynamism and innovation.