World Bank SME Finance: Development news, research, data

Formal MSME Finance Gap in Developing Countries

What We Do

A key area of the World Bank Group’s work is to improve SMEs’ access to finance and find innovative solutions to unlock sources of capital.

Our approach is holistic, combining advisory and lending services to clients to increase the contribution that SMEs can make to the economy including underserved segments such as women owned SMEs.

Advisory and Policy Support for SME finance mainly includes diagnostics, implementation support, global advocacy and knowledge sharing of good practice. For example we provide;

Financial sector assessments to determine areas of improvement in regulatory and policy aspects enabling increased responsible SME access to finance

Implementation support of initiatives such as development of enabling environment, design and set up of credit guarantee schemes

Improving credit infrastructure (credit reporting systems, secured transactions and collateral registries, and insolvency regimes) which can lead to greater SME access to finance.

Introducing innovation in SME finance such as e-lending platforms, use of alternative data for credit decisioning, e-invoicing, e-factoring and supply chain financing.

Policy work, analytical work, and other Advisory Services can also be provided in support of SME finance activities.

Advocacy for SME finance at global level through participating and supporting G20 Global Partnership for Financial Inclusion, Financial Stability Board, International Credit Committee for Credit Reporting on SME Finance related issues.

Knowledge management tools and flagship publications on good practice, successful models and policy frameworks

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 Our 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. 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 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 institutions’ (MFIs) upscaling operation, helping Ethiopia’s leading MFIs introduce larger, individual-liability loan products tailored to women entrepreneurs. WEDP loans are complemented through 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 credit guarantee scheme (CGS), issuance of SME Finance Policy, and strengthening capacity of the regulator and sector. The project supported the issuance of Bangladesh’s maiden SME Finance Policy: 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, $2.8 billion financing gap prevails in the MSME sector, where 60% of women SME’s financing needs are unmet, and lack of access to collateral is one of the key hindrances. Bangladesh lacked a single policy with 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 enhance SME financing.

Leasing

In Ethiopia and Guinea, the World Bank Group is supporting the local governments in creating an enabling framework which 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, microleasing 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 We 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.

The importance of financial management in business

Managing money is at the root of all major decisions in business. As such, good financial management transcends sector, industry and business type, making it one of the most-important responsibilities of business leaders and directors.

Activities across every area of a business – from SMEs to global corporations – have an impact on financial performance. Financial performance, in turn, has an impact on financial sustainability, which has an impact on a company’s current and future success. In order for a business to thrive, its finances – and its financial management – must be closely evaluated and controlled by senior management.

What is financial management?

Financial management is the specialised process of managing money in order to achieve business goals. Undertaken by senior management – typically chief financial officers (CFOs) or vice-presidents of finance, among others – it involves planning, directing, monitoring and controlling organisational funds in order to make effective financial decisions. In essence, it seeks to apply management principles to the financial structure of a business.

While ensuring a business is both successful and profitable are the main aims of financial management, it also seeks to:

support compliance and regulation adherence

maximise profits, stakeholder returns and overall company value

track liquidity and cash flow

provide economic stability

enable up-to-date financial reporting and supplies financial information and data to inform KPIs

develop financial scenarios to support forecasting

uphold risk management efforts

While many organisations have in-house financial teams and managers, many also enlist the help of financial institutions and other professionals to assist them with financial management.

Main types of financial management

All types of financial decision-making have the potential to affect a company’s assets, liabilities, revenue generation, and profit margins. Ultimately, they can impact capital structure and how well a business performs on a broader scale. As such, financial planning must focus on both the short-term and long-term objectives of a business.

Critical decisions must be made in order to support financial wellbeing, including:

identifying resources

establishing procedures

acquiring assets

raising funds

managing day-to-day capital

expenditure and allocation management

To achieve these ends, financial management is divided into three main categories of financial decision-making: investment decisions; financing decisions; and dividend decisions.

Investment decisions focus on making the most-prudent investments in different assets in order to deliver the highest-possible returns for investors. Leaders must factor rate of return, project cash flow and investment criteria into any decision making. Decisions can be short-term or long-term, and require finance professionals to assess investment opportunities to identify the best options:

Long-term investment decisions (also known as capital budgeting decisions): these are concerned with the management of fixed capital. As they are often large investment amounts, concerning periods of anything from one year to upwards of 10 years, they are difficult and costly to reverse, and so require thorough evaluation. These investments directly affect a company’s earning capacity, valuation and profitability, as they affect the size of assets, competitiveness, and scale of operations. Examples of long-term investment decisions include: introducing a new product line; opening a new factory, warehouse, office or shop; taking over an existing firm; and investing in machinery and plant equipment.

Short-term investment decisions (also known as working capital decisions): these are concerned with the daily activities and operations of a business. Effective decisions must be made in this area as they help to ensure healthy working capital, and they affect short-term profits and liquidity. Short-term investment decisions relate to aspects such as inventory management, management of cash, and receivables.

Whether short-term or long-term, investment processes must include formulating investment objectives, ascertaining risk profiles, and monitoring investment performance.

Financing decisions involve identifying the best ways in which to raise finance from both short-term and long-term financial sources. Alongside calculating the financial risks associated with any options and the cost of capital, these decisions take into account what amount of funding will be raised from borrowed funds and shareholder funds. Leaders must weigh up factors such as: cost – generally selecting the cheapest financial sources; risk; floatation costs; cash flow positions; fixed operating costs; control considerations; and state of capital markets.

Dividend decisions relate to balancing the distribution of profit shares – the dividends – among shareholders, with the amount of profit retained in the business to support future growth. Deciding how to apportion this money is influenced by a number of factors, such as: earnings and earning stability; dividend stability; growth opportunities; cash flow positions; shareholder preference; taxation policy; stock market response; access to financial markets; and legal and contractual constraints.

Pursuing a career in financial management

As there are different routes into careers in financial management, there are different entry requirements.

An honours degree in accountancy, finance, business, economics, management, mathematics or statistics can be helpful – as well as offering exemptions from some professional examinations – however graduates of all disciplines are welcome. While relevant postgraduate courses can be useful, such as an MSc Financial Management, they aren’t essential. Many individuals pursue professional qualifications and accreditation – either full-time or part-time – through institutions such as the Institute of Financial Accountants (IFA) or the Association of Chartered Certified Accountants (ACCA). Professional accountancy training must be completed – and is offered by some employers – in order to progress to management positions.

To be a financial manager, there are a number of key skills that are required, including numeracy and technical skills, problem-solving ability and initiative, an analytical approach, and good commercial awareness, among others. Relevant work experience placements are a great way to gain industry insight, an awareness of financial management roles, and competitive advantage in the job market.

There are also plenty of related careers within financial services and corporate finance, such as management accounting, financial consultancy and financial analysis.

Boost the financial wellbeing and prospects of your organisation

Keen to take the next step in your career? Ready for more advanced, strategic and cross-cultural roles? Gain the expertise to underpin effective financial decision-making of all types – and use your skills for business success – with the University of Sunderland’s online International MBA programme.

Our flexible programme prepares you to make an impact in fast-changing, technology-driven, global business environments. You’ll become adept at identifying opportunities, navigating change and guiding businesses in all manner of scenarios. Through flexible, online modules, you’ll explore operations management, financial accounting, international marketing, global trade and strategy, leadership, organisational behaviour and much more.

Meaning, Importance, Types & Sources

Finance is the heart and soul of any enterprise. It plays a vital role right from the establishment of a business to play an important role in driving its growth. Today, business finance has come a long way from traditional methods of financing. Let us understand more about this topic:

Meaning of Business Finance

Funds and credit are required for the smooth functioning of a business. Finance is the building block of any business. Therefore, a business can have plenty of financial necessities such as raw materials, goods, assets, etc.

What is Business Finance?

Business finance refers to funds availed by business owners to meet their needs that may include commencing a business, obtaining top-up funds to finance business operations, obtaining finance to purchase capital assets for the business, or to deal with a sudden cash crunch faced by the business. Prominent loan providers have your back and provide finance to cater to the needs of your business.

What is the Importance of Obtaining Business Finance?

The importance of finance cannot be sufficiently stressed. A couple of advantages of obtaining finance can be described as follows:

Business finance can help entrepreneurs purchase land, capital assets and other assets without much difficulty and can focus solely on commencing the operations of the business.

With access to finance, purchasing land and machinery, upgrading to the latest software and technology is easier, allowing you to walk towards ensuring the highest standards of quality in your industry.

Access to finance can help you deal with contingencies better without disrupting the operations of the company.

What are the Documents Required to Apply for Business Finance?

Loan providers insist on a few basic documents to evaluate your eligibility for a business loan. The business loan documents required include a copy of your KYC documents, a copy of your address proof, latest bank statements, proof of income and documents to prove the existence of your business. If the loan amount you seek is higher, you may also have to pledge collateral such as property or financial assets, and documents pertaining to these will also be required. Log into the website of your loan provider or get in touch with a customer care representative to obtain a complete list of the documents required to process your application.

Confused about how much money you are eligible to borrow for your business? A business loan EMI calculator can help you calculate the approximate amount you can borrow while ensuring that EMIs payable do not eat into the operating expenses of the business. If you do decide to opt for a business loan, make sure that you repay the instalments on time to make sure that you continue to maintain an excellent credit score in the long run.

What are the Types of Business Finance?

The major types of business finance are outlined below. You can evaluate each type and assess the suitability for your business:

Equity Finance

In this type of finance, the investors are the owners of the company to the extent of their investment. Equity finance could consist of finance brought into the business by shareholders or owners. Typically, an investor contributes a large sum of money towards the business in exchange for share in the business. When the business starts generating profits, investors earn the benefits depending on the number of shares they own.

In this type of finance, the investors are the owners of the company to the extent of their investment. Equity finance could consist of finance brought into the business by shareholders or owners. Typically, an investor contributes a large sum of money towards the business in exchange for share in the business. When the business starts generating profits, investors earn the benefits depending on the number of shares they own. Debt Finance

Debt finance is what its name suggests. It is money that is borrowed from a lender and has to be repaid at a predetermined rate of interest over time.

Must Read: 10 Types of Business Loans in India

What are the Sources of Business Finance for an Entrepreneur?

Obtaining finance can be intimidating for entrepreneurs. It is a decision that should be taken with caution because it is bound to leave a deep impact on the finances of your business. In such a situation, exploring various sources of financing is extremely worthwhile. Finance can be classified based on various parameters and it is completely up to the entrepreneur to choose the right mix of finance for his business.

The various sources of funds can be classified into two main categories:

External Funding

Through Debt:

Entrepreneurs can rely on borrowings in the form of loans from lending institutions to cater to the unique requirements of their business. Loan providers offer quick approval of loans of up to Rs. 50 lakh to ensure that you can make the best use of the opportunities that come your way. However, the catch is that business loans are usually only given to existing businesses who have achieved a certain level in terms of annual turnover and profits, and have a stable income for at least a period of 2 years. Depending on the lender’s policy and the type of loan, other eligibility criteria may also apply.

Entrepreneurs can rely on borrowings in the form of loans from lending institutions to cater to the unique requirements of their business. Loan providers offer quick approval of loans of up to Rs. 50 lakh to ensure that you can make the best use of the opportunities that come your way. However, the catch is that business loans are usually only given to existing businesses who have achieved a certain level in terms of annual turnover and profits, and have a stable income for at least a period of 2 years. Depending on the lender’s policy and the type of loan, other eligibility criteria may also apply. Through Equity:

Entrepreneurs can pitch their business idea / project to investors to request for funding. If their pitch is accepted, then investors give them the capital they need in exchange for a share in the business. The investors may also then appoint a management team to oversee the use of funds and business operations. This type of funding is especially suitable for startups or small businesses which are looking towards expansion.

Internal Funding

Internal funds are generated by the owners of the enterprise in form of preference shares, equity shares etc. It helps owners retain their control over the company in form of shares and therefore drive the major decisions relating to the company. It also helps them avoid taking on debt. However, this type of funding is possible only if the owner / promoter has sufficient funds to avoid approaching lenders or investors.