MSME is a term which covers a very wide range of businesses—from micro, the first ‘M’, to medium, the second ‘M’, with S(mall) in the middle. They share two things in common in developing markets:

  • The first is the essential role they play in terms of local employment (up to 45%) and contribution to both Gross Domestic Product and Gross National Product. (“D” is location of production; “N” is ownership. MSMEs can account for up to two-thirds of GDP/GNP in some of the emerging countries.) Strong MSMEs mean a growing economy and more jobs.
  • The second is a dearth of readily available and affordable financing. In some areas, almost two-thirds of all such enterprises lack sufficient capital and access to finance, according to an IFC-McKinsey report.

The middle is always easy to overlook. Multinationals and established businesses seeking to enter emerging markets have no difficulty obtaining favourable loans, tax holidays, and beneficial foreign-exchange agreements. Most readers of this blog are also well aware of the micro-credit and funding options available to capable low-income individuals who hope to establish tiny enterprises and the success stories that require more capital to expand and diversify. This takes them into the MSME domain, which is also referred to as the missing-middle because financial products and delivery channels have not evolved for this segment.

MSMEs with less impressive balance sheets still need capital to survive. These are not an unlucky few; they comprise an estimated 365-445 million units (considering the informal enterprises, the numbers increase substantially to 900-950 million), and up to 60% of local businesses in Southeast Asia and Sub-Saharan Africa. The total unmet need for small-business credit in the formal and informal, emerging market sectors ranges from $2.1-2.5 trillion, according to a recent McKinsey report, “Two trillion and counting”.

This is a lot of money, in fact approximately the same amount the UN estimates global natural disasters have cost governments, banks, insurance companies, and individuals since 2000. The reason governments and insurance/re-insurance providers in particular might want to note the correlation is that less developed countries are invariably the most vulnerable to drought, famine, floods, earthquakes, and other disasters that will only increase with climate change.

Successful small businesses help ravaged landscapes recover more quickly and effectively. And in the aftermath of the global financial crisis, which many of the weaker emerging markets are still struggling with, the role of small businesses becomes even more important to the local economy and job creation. If two-thirds of MSMEs are already strapped for cash, however, reconstruction in both scenarios will take a lot longer and the poorest segments of the population will suffer even more.

Both banks and MFIs are coming to understand that strong MSMEs are in fact essential to economic growth and stability. Nevertheless, the key question that remains for both is, what’s necessary and how difficult is it for banks to downscale and MFIs to upscale to serve MSME segments?

Issues they must both address are:

  • MFIs have traditionally served the low-income customers under the group-lending model. This model fails to address the credit needs of MSMEs.
  • Microfinance institutions have also had their fair share of bad publicity and problems with individual loans in recent years. Trust may be an issue for some MSME clients. (For in-depth analysis on this topic, please see MicroSave's research papers and related materials).
  • Banks, in turn, rely on collateral for their lending model. Most perceive MSMEs with no/low attachable assets as too high a credit risk.
  • To change, and to support MSMEs, banks will need new credit assessment and risk methodologies, new training for their staff, new marketing, and better “last mile” connections and availability for remote MSME customers.

Neither banks nor MFIs are known for their nimble ability to adapt and change. It will take time for MFIs to expand both their credit assessment and their credit offerings to better fit small enterprises. Banks will need to rethink how loans to micro and small businesses can work without hard collateral guarantees and in remote areas their branches do not usually serve.

The rewards will still outweigh the risks in most cases. Financial inclusion does not just mean more individuals with more active bank accounts. It means a flourishing economy with formal banking and loan services for even the very poor and the very small business enterprise.


  1. Beyond the stereotype attitude to MSMEs in, i believe analysts, policy makers and executioners and the banks tend to unduly overlook the role or impact of socio-economic factors that include cultural practices in individual societies. The idea that one size fits all for all MSMEs need a total rethink. There is need for a conscientious efforts at domestication of principles and actions.

    • Dear Safiya,
      I agree to your thoughts. We have seen that the most successful models for MSME financing across the world have been the one that have duly recognised the need for customisation at the local level. Best practices may be brought in but would certainly require contextualisation to meet the needs of MSME sector, a sector that has been ignored despite all the hullaballoo.


  2. Dealing with MSMEs is quite interesting. My experience so far reveals that a lot is needed in terms of capacity building for these group of business people. Most of them do not keep proper record of their businesses hence it is difficult to assess their financial networth. This means that greater commitment on the part of MFIs is necessary to educate and teach them financial record. Typically , most MSMEs plough back their daily earnings directly to purchase without any bank record,detail sales/purchases record as well as their expenses record as well. For MSMEs to be attractive the keeping. MFIs must make a deliberate attempt to build capacity in those they deal with as they provide financial services to them. Even at individual levels, MFIs must train their customers on simple income & expenditure accounts elementarily analyzed in their language and educate them on its implications. The issue of collateral is a big negative factor however the use of social secutity if backed up with quality monitoring tools and process will achieve the set goals on the part of the beneficiary(MSMEs) and the financiers(MFIS).

    Bimpe Ogunleye

    • Dear Bimpe,
      Thanks for your comments. I agree to your points. In our experience also, a key non-financial barrier that limits the growth and sustainability of MSMEs is the lack of adequate business and management skills. Poor credit and financial literacy often reflects in inadequate accounting and financial management functions at MSMEs. Lack of reliable information about financial management at MSMEs make them less attractive to financiers and add to the notion that SMEs are generally risky to finance. Further, lack of financial literacy limits the MSMEs’ capacity to evaluate different financing options. Even if the MSMEs establish linkages with formal institutions, they struggle to cope with their system. Also, formal institutions struggle with first time borrowers as they do not understand the basics of banking (and may be accounting). Researches have shown that understanding of the financing options and wise use of it has profound impact on the profitability. IFC’s financial inclusion experts group opine that trainings to MSMEs on financial literacy, financial statements and business plans significantly catalyses their growth and increases chances of survival. Also, they have observed that the MSMEs who have undergone skills enhancement programme have stronger horizontal and vertical linkages thus resulting in an improved access to markets. With such an impact on SMEs, there is a demonstrated need for strong literacy programmes that enhance the accounting and financial management skills of SMEs. we have seen that only finance can not help MSMEs grow and succeed.

      On your second point, indeed there is an imminent need of innovation around collaterals, land and property titles would not work if the banks and MFIs would want to rapidly scale-up expanding financing to MSMEs.


  3. Access to finance has always been, and will always be an issue with MSMEs, the reasons and factors are well documented and there is vast literature and empirical evidence to confirm this. There has also been a lot of talk on what should be done to make MSMEs more bankable but out of all the effort, there is very little evidence to show that such interventions are reaping the desired outcome. Very little has been done to address the supply side of finance, apart from talking of what needs to be done. Serious intervention has to be at technical assistance level, to enable the different financial institutions build capacity and the flexibility required in designing products and methodologies for the sector. I am currently on one such project and the results on the ground are amazing, thus my conviction that this should not be only at company level, but also with the central banks and the government departments at policy level.

    • Dear Oswell,
      Indeed rightly said, the role of policy makers, development finance institutions, government, industry bodies and such other stakeholders is important to create a conducive environment that promotes banks and MFIs to finance MSMEs. We also recently experienced in a wide sector survey that the MFIs that have tried doing MSME finance on their own face a lot of challenges due to complexities of the financing and hence seek technical assistance around market research, product design, processes and systems formulation, staff training and pilot/rollout.


  4. Even in today’s globalization nature of business practices, the role of MSME within the context of local business servicing requirements is still very peculiar for the most part.
    Each geographical area is different in terms of what are critically needed for the survival of MSMEs besides the presence of those basic public infrastructures (road, communications, energy, governmental policies,etc). The banks are for the most part not always interested in chasing and protecting the interests of this sector. Because it’s too much hassles for too little returns for their stakes in the adventures to warrant the anticipated actions by the MSME stakeholders.
    Let me give one example. In Nigeria, there is a policy with the banks through government mandate that certain percentage of their pre-tax profit be set aside for direct investment into budding or existing MSMEs in form of EQUITY instead of LOAN for a specified number of years before such stake is withdrawn or sold to the business owner. Well, the first aspect was complied with. They set aside quite a substantial amount that runs into several billions of Naira since the inception of this program in about ten years ago. However, the second leg of the mandate is yet to take off as originally expected. Up till now, only very little portion of this set-aside fund has been deployed to the targeted sector…MSMEs. And the banks main excuse among others are, WE CAN NOT FIND QUALIFIED ENTERPRISES FOR THE FUND DEPLOYMENT. And even the few that have secured some funding so far from the scheme were later discovered to be floated and owned by the Bank Executives. Corruption! Corruption!! Corruption!!!

    In order for these MSMEs to survive and achieve the envisioning going-concern status, the roles of the financial institutions are very critical. They need to show genuine interests in the deployment of both technical assistance and project financing implementation. Otherwise, the whole effort would amount to a vicious cycle of hopelessness, just like a dog chasing its own tail.

    Johnson Ayan Kolawole

    • Dear Johnson,
      Thanks for your comments on the blog and bringing in practical perspectives from Nigeria. I agree to you that the financial institutions will have to take initiatives to really look into the business potential of the MSME sector and develop products to meet their needs. We are now seeing although slow but very encouraging response to the sector from new-age MFIs, banks and non-banking finance companies considering the saturating retail and mass markets. We are engaged with several of such institutions and we find that they see the potential of the MSME sector as an intrinsic and compelling reason to get into the market. I concur to your point that there has to be a fundamental shift in the way banks and the other financial institutions reach out to MSMEs and I do think that we will see innovations in delivery of financial services to this sector.

      Anup Singh


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