How to Scale Support for Small Businesses?

The big gap in terms of enterprise support is around risk mitigation products and services. Financial institutions have quite a broad coverage and, potentially, they could be able to provide a variety of financial services for micro and small enterprises but they don’t do it because of the perception or risks and therefore the cost of working with small enterprises in the rural areas. Being able to correctly assess the risk of the agriculture activity for smallholders, mitigate these risks (e.g. climatic events) through appropriate programme interventions and insurance products would greatly facilitate the linkage between rural entrepreneurs and Formal Financial Institutions.

Another important gap is the limited availability of customized financial products for specific crops. Each crop has specific needs in terms of investment in inputs or equipment, risk assessment and seasonality. In many cases suitable financial services for the specific situation are not available and development agencies should work with financial institutions to make research and design products that work for both the provider and the customer. CARE in Peru worked with the local financial institutions to design credit products for irrigation systems for small cocoa producers.

  • As an investor, CDC focuses on the constraint of access to finance, but we are well aware that access to finance is only part of the story. SMEs need a good investment climate (including helpful regulation on business registration and tax simplification); good people with the right skills, including management, finance and technical competences; access to markets, including connections to larger firms, advice to improve product standards in quality and sustainability; and access to finance, including working capital, trade finance, loans, equity and a healthy financial infrastructure. Oh, and they also need reliable and affordable electricity, water, telecoms ...

Welcome to the conversation, Christian.

Hi Zahid. This is Safiye Ozuygun from Citi Microfinance. I am the Business Director

what other value chain actors are being neglected?

robert and I are largely agreeing, only he types faster! on enterprise support/BDS, we have few appropriate products and services for SMEs because SMEs need real time, interactive support at key moments, and most standard training type offering don't work, no matter what they cost. what we are seeing in the developed world is this effort moving onto smartphones, and we need to push in this direction in emerging markets

Welcome, Safiye. Some interesting points being made about the supply of SME finance. Any thoughts?

A friend of mine has been trying to start a Fund for entrepreneurs in Benin. We have issues with the high taxation of inflows and outflows due to existing bank laws and govt regs. So most of the money is filtered off before it gets to the entrepreneur for him to put to productive use.

I believe Gianluca is speaking about the larger companies that buy from and/or sell to the smaller companies

The biggest constraints on the banks side for expanding SME portfolio is the fact that as a result of the regulatory changes after the financial crisis Basel II and III, banks are required to decrease their portfolio with high risk weightings such as SME loans as these are usually non investment grade portfolio. Banks are required to carry higher regulatory capital against such portfolios. This resulted in higher cost for banks and hence unwilling to extend loans to such segments.There is also lack of transparent information and credit history on SME side which makes it even more difficult and costly for banks to engage in this customer segment. However, there is hope in the horizon in the form of alternative means of funding which I can expand later

Hi Zahid, good question.
Being a small business in a developing nation is very tough. The context is changing all the time, clients are not stable and competition is fierce.
From our experience small business struggle to reach medium size basically because the type of activities they choose generate a very quick growth rate in the first years but then they find that everyone is selling or providing very simmilar products/services. The Small SMEs that manage to transition to medium size are the ones that understand that they need to diffirentiate themselves to be able to grow and reach a more stable stage. Of course, differentiations means additional risk in an already risky environment.
On finance, I think small SMEs do not really understand which product they need and get too focused in getting access ot finance when it may be that access to markets or advisory is more relevant. Many times there is capital available but small SMEs do not understand the value of the offering or get access to it but do not use it in the most productive manner.

look, most SMEs are not exporting, their business is in local currency, so my recommendation would be to try to mobilize funding locally for such funds. it can't all have exited Benin...

Another massive issue for women entrepreneurs is that they don't have the same access to collateral as men in many countries because of unequal property laws.

we have tried to work with financial institutions to set up dedicated adapted financing for women to tackle this issue. not so easy though. its needs major reforms to tackle this fundamentally.

absolutely, but as noted above, if the only collateral recognized are fixed assets, like land and houses, then few SMEs, run by women or men, have what it takes...and this is inappropriate collateral for most SME borrowing, with movable asset based financing far more appropriate, but very, very little understood by emerging market banks, and (more damaging) by emerging market regulators.

and an even bigger problem in many countries is that women cannot sign contracts without husband/father/brother co-signing...

We are investing outside funds from our networks, not trying to scrape up local funds, and many of the products will be much more profitable in countries outside Benin. We can provide both funds and management guidance. Of course there will be internal turnover of Benin funds, but banking reform is needed.

there was a very disturbing world bank finding that most of the "womens microcredit" in Pakistan through their sponsored programs actually was going to men's businesses, due to factors noted above.

Ok, let me put the second question out there...

Q2: Where are the innovations happening in relation to SME support, especially around financing, what are we learning about what works, and how can we move towards solutions at scale?

and the women were left on the hook for repayment, though they didn't get the funds.