This book on micro, small, and medium enterprise (MSME) finance is intended primarily for government policy makers. It presents a policy framework whereby governments can support increased access by MSME to financial services based on empirical evidence and practices. MSME complain that lack of access to finance constrains their growth and competitiveness. Indeed, financial sector policies often work against the ability of commercial financial institutions to serve MSME, albeit often unintentionally. In many countries, lack of competition in the banking sector limits pressure on banks to reach out to MSME client segments. High risk and high transaction costs-real or perceived-associated with bank lending to MSME likewise constrain access. Often, supervisory and capital adequacy requirements penalize banks for lending to enterprises that lack traditional collateral. Attempts by governments to address these constraints and offset the inequalities in financial sector policy generally have not achieved the desired results. This book lays out a market-based policy framework for governments that focuses on delivery of financial services to MSME on commercial terms. The framework guides governments in focusing scarce resources on developing an inclusive financial sector policy; building sound financial institutions; and investing in a supportive information infrastructure...

This paper analyzes data from a randomized experiment on mean returns to capital in Sri Lankan micro-enterprises. The findings show greater returns among men than among women; indeed, returns were not different from zero for women. The authors explore different explanations for the lower returns among female owners, and find no evidence that the gender gap is explained by differences in ability, risk aversion, or entrepreneurial attitudes. Differential access to unpaid family labor and social constraints limiting sales to local areas are not important. However, there is evidence that women invested grants differently from men. A smaller share of the smaller grants remained in the female-owned enterprises, and men were more likely to spend the grant on working capital and women on equipment. The gender gap is largest when male-dominated sectors are compared with female-dominated sectors, although female returns are lower than male returns even for females working in the same industries as men. The authors examine the heterogeneity of returns to determine whether any group of businesses owned by women benefit from easing capital constraints. The results suggest there is a large group of high-return male owners and a smaller group of poor...

Small and Medium Enterprises (SMEs) play a major role in economic development, particularly in emerging countries, but access to finance remains a key constraint to SME. In the light of the new understanding of the SME finance challenges that this report synthesizes, the Financial Inclusion Experts Group (FIEG) makes key recommendations for the G-20 leaders, in order to achieve a global scale-up of SME access to financial services in the developing world. The G-20 FIEG SME Finance Sub-Group executed a global SME Finance stocktaking exercise with various SME finance models to establish best practices in SME Finance.The report concludes that, given the fragmented SME finance data space, the G-20 has a unique opportunity to lead the collaborative effort on improving the availability and quality of SME finance data globally. This can be achieved through encouraging and coordinating the data collection efforts at regional, national, and global levels conducted by a multitude of sources including national governments/agencies and international organizations and effectively addressing the data collection challenges along the way to ensure continuity of these efforts moving forward.

The objective of this report is to present an assessment of the current legal, regulatory, and supervisory framework in Albania for microfinance, as well as an assessment of institutions rendering microfinance services (MFIs), including the Savings and Credit Associations (SCAs) and credit unions (CUs), to identify future development priorities. Economic conditions have improved in Albania in recent years, but a significant percentage of the population is still considered below the poverty level. The report lists future development priorities for the SCAs and MFIs, emphasizing poverty reduction through microfinancing. Several MFIs, and one CU, expressed some desire to borrow from the World Bank. The report finds this promising, as long as it does not crowd out commercial sources that serve to integrate MFIs, CUs, and SCAs into the larger financial sector. The growth of SCAs might be enhanced by further consolidation of smaller SCAs into larger SCAs. Mergers based on joint objectives and bounds can expand the geographical coverage and clientele base...

The ongoing global economic turmoil is seriously impeding client countries access to capital markets, with relatively little regard for the fundamentals of the countries involved. Growing risk aversion among investors has triggered a flight-to-quality that is affecting all but the safest assets (AAA-rated). Small, open, and developing economies in Europe and Central Asia, including FYR Macedonia, are being exceptionally hurt. Despite its history of prudent macroeconomic policies and progress on structural reforms, FYR Macedonia s access to capital markets has been virtually closed or available only on very unfavorable terms. Policy-Based Guarantees (PBG) help well-performing clients with a track record of macro stability and structural reforms mitigate market access risks while advancing a country s development policy dialogue. PBGs also have the added benefit of catalyzing private capital flows by alleviating critical risks. The PBG extended by the World Bank to FYR Macedonia ensured the country s access to markets in a virtually closed market environment and at highly competitive terms.

This paper studies interactions between access to finance, product innovation, and labor supply in a two-period overlapping generations model with an endogenous skill distribution and credit market frictions. In the model lack of access to finance (induced by high monitoring costs) has an adverse effect on innovation activity not only directly but also indirectly, because too few individuals may choose to invest in skills. If monitoring costs fall with the number of successful projects, multiple equilibria may emerge, one of which, a middle-income trap, characterized by low wages in the design sector, a low share of the labor force engaged in innovation activity, and low growth. A sufficiently ambitious policy aimed at alleviating constraints on access to finance by innovators may allow a country to move away from such a trap by promoting the production of ideas and improving incentives to invest in skills.

This paper discusses the constraints for private equity financing of small and medium enterprises in developing economies. In addition to capital, private equity investors bring knowledge and expertise to the companies in which they invest. Through active participation on the board of directors or in partnership with management, private equity investors equip companies with critical improvements in governance, financial accounting, access to markets, technology, and other drivers of business success. Although private equity investors could help to create, deepen, and expand growth of small and medium enterprises in developing economies, the vast majority of private equity in such markets targets larger or more established enterprises. Technical assistance, when partnered with private equity, can unlock more investor commitments and considerably enhance the ability of small and medium enterprises in emerging markets to raise private equity capital. Technical assistance provides funding that allows private equity funds to extend their reach to smaller companies. Technical assistance can mitigate some level of risk and increase the probability of successful investments by funding targeted operational improvements of investee companies. Dedicated technical assistance facilities financed by third parties...

The first part of the study provides contextual background to the financing gaps and associated barriers, which restrict access to finance for HI start-ups. These barriers are driven by both supply and demand sides of the financing equation. Supply side barriers include: high transaction costs associated with financing; high levels of credit risk associated with HI start-ups; high collateral required by financial institutions; non-conducive legal and regulatory environments for investment in HI start-ups; lack of start-up expertise and dedicated resources by financiers; and finance products that are not tailored to HI start-ups needs and circumstances. Demand side barriers include: reliance by HI start-ups on informal financing sources; lack of awareness on the process to apply for funding from formal financing sources; low levels of financial literacy by HI start-ups; and the fear of losing control by involving external investors. This section also contains a broad overview of the country frameworks governing the start-up sector...

Small and medium enterprises (SMEs) play a major role in economic development, particularly in emerging countries. Access to finance remains a key constraint to SME development in emerging economies. Closing the credit gap for formal SMEs will be less daunting than for informal SMEs. The SME finance gap is the result of a mismatch between the needs of the small firms and the supply of financial services, which typically are easier for larger firms to access. Deficiencies in the enabling environment and residual market failures have motivated government interventions to foster SME access to financing. The stocktaking exercise confirms the rise in various parts of the world of specific business models aimed at providing financial services to SMEs in a cost-effective manner. Effective SME financing models can be implemented in different country and market environments, but greater outreach is achieved in the most developed environments for the financial sector. Although SME banking and microfinance models are successfully being rolled out in an increasing number of countries and regions...

The Middle East and North Africa (MENA) region is at one of the most critical turning points in its modern history. The Arab spring was driven by the desire for economic opportunity and justice in the face of poverty and unemployment. The development of strong economies that enable both women and men to enhance their livelihoods is crucial for the future of the region. The growth and success of women-owned businesses is one of the most profound changes in the business world today. There is no doubt that women are an emerging market force. However, many businesswomen are not accessing commercial credit, an essential driver of business success. Lack of access to finance and financial services is repeatedly identified as the major constraint for women business owners. This report 'ready for growth: solutions to increase access to finance for women-owned business in the Middle East and North Africa', is designed to shed a light on those barriers. It is the result of a unique International Finance Corporation (IFC) partnership with vital voices and the Middle East and North Africa Businesswomen's Network (MENA BWN). Its purpose is to fill a critical gap in our knowledge of what women-owned businesses need in terms of financial products and services. Building on our knowledge of how commercial banks currently reach the women's market...

The Government of Moldova is seeking to change the country's development paradigm and build an export-oriented economy characterized by investment, innovation, and competitiveness, following a decade of 'jobless growth'. This report focuses on improvements that will be needed to move Moldova to the next stage of development as envisioned in the Moldova 2020 strategy; however, reforms over the past decade also deserve acknowledgment. Improving the business environment is an especially important task, given Moldova's low levels of natural resources and small internal market. This study aims to identify the most pressing problems in the business environment that are adversely affecting Moldovan companies' productivity and competitiveness, and to present recommendations that would help remove these obstacles. The analysis is based on a review of existing reports; interviews with government officials, private sector associations, a sample of businesses, and some subject matter experts; as well as original research on access to finance. This study has identified that the following aspects of doing business are the most problematic: customs administration; tax administration; business regulation...

This report takes stock of enterprise sector performance in the Europe and Central Asia (ECA) region and its key drivers: access to finance, infrastructure, and labor. It is the second of two complementary reports that examine selected trends emerging from the Business Environment and Enterprise Performance Survey (BEEPS) data that are of immediate policy relevance to ECA countries. Both reports draw primarily on information from data collected prior to the crisis. This report also uses data on employment and access to finance collected during the crisis in a subset of ECA countries. The global financial crisis has had enormous consequences for firms' access to finance, the availability of qualified workers, and the ability of governments to provide (and of private sector to obtain) reliable infrastructure services. The extent and impact of these constraints is yet to be determined but their presence at a time of economic growth suggests they may re-emerge during the post-crisis economic recovery. The BEEPS captures information on a number of aspects of the business environment. This report highlights the elements of firm finance...

In less-developed economies such as Bangladesh, the farm sector is the major source of employment and income, while the rural nonfarm sector provides as an additional source of income. But the rural nonfarm sector increasingly plays an important role in fostering the development of the rural economy. A significant share of this sector is made up of microenterprise activities, which requires investment and access to adequate funds. This paper investigates the role access to finance plays in promoting the efficiency and growth of microenterprise activities. The findings suggest that households engaged in microenterprise activities, in addition to farm and other nonfarm activities, are much better off (in terms of income, expenditure and poverty) than those not engaged in such activities. Fewer than 10 percent of the enterprises have access to institutional finance (formal banks or microcredit), although the rate of return on microenterprise investments is more than sufficient (36 percent per year) to repay institutional loans. The research suggests that credit constraints may reduce the enterprises' profit margin by as much as 13.6 percent per year. As the returns to microenterprise investment are found to be high...

Heavily indebted low-income countries benefited from significant debt relief over the past decade. Under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI), assistance of about $117 billion in nominal terms had been committed to 35 HIPC as of end-April 2009. This debt relief represents about half of the 2007 Gross Domestic Product (GDP) of these countries, whose debt burden is expected to drop by more than 80 percent once full debt relief is granted. As a result of relief already provided, debt-service payments have plummeted and expenditures on pro-poor growth programs increased. The book is divided into four parts. Part one examines the design of debt-relief initiatives and provides evidence of its effect on education, health, and economic growth. Part two describes the risks and opportunities developing countries face following debt relief. It identifies how they can safeguard debt sustainability; describes the role of sovereign risk for private sector access to capital; and draws lessons from the experience of market-access countries on the links between sovereign debt and development. Part three examines the concept and various policy proposals of dealing with 'odious' debt. Part four looks at debt management...

Despite positive, relatively broad-based and stable growth record in recent years and immense untapped potential in agriculture, mining and services, Zambia's poverty rates have not declined significantly and remain high. Income growth is limited by coordination failures such as poor access to domestic and international markets, inputs, extension services and information. High indirect costs - most of which attributable to infrastructure service-related inputs into production including energy, transport, telecom, water, but also insurance, marketing and professional service - undermine Zambia's competitiveness limit job creation and therefore serve as a major constraint to pro-poor growth. Continued real appreciation is another serious threat to the competitiveness of export-oriented and import-competing sectors and to job creation. For Zambia to stay competitive and sustain the growth momentum it will be critical to improve productivity - including the productivity of its labor force, and to lower indirect production costs related to basic services. Carefully crafted monetary and fiscal policies will also be critical in responding to the real appreciation pressures. Improving the quality and access to secondary and tertiary education is essential if the poor are to benefit from future growth of the non-farm economy. Weak governance and in particular poor government effectiveness...

Access to financing is now widely acknowledged as a path to meaningful economic inclusion and reduction in poverty. Policy efforts to increase access to finance in Pakistan have taken time to bear fruit, but now access is indeed expanding quickly in certain financial sectors (microfinance, remittances), albeit from a very low base. Nevertheless, policy measures cannot single-handedly increase financial access; financial institutions' willingness to expand access in Pakistan has been stinted by slow technologic advances, weak legal foundations, and unsuitable financial processes and products. Poor socioeconomic conditions, gender bias, and low levels of basic education and financial literacy remain barriers, but perhaps the single strongest driver of low demand for financial access has been income. The primary purpose of this study is to measure and describe the state of financial service provision to underserved segments of the market in Pakistan, particularly those with low incomes and small enterprises, and to identify ways to improve investment and create inclusive markets that meet the needs of underserved people and enterprises.

Why should countries buy expensive catastrophe insurance? Abstracting from risk aversion or hedging motives, this paper shows that catastrophe insurance may have a catalytic role on external finance. Such effect is particularly strong in those middle-income countries that face financial constraints when hit by a shock or in its anticipation. Insurance makes defaults less appealing, relaxes countries' borrowing constraint, increases their creditworthiness, and enhances their access to capital markets. Catastrophe lending facilities providing "cheap" reconstruction funds in the aftermath of a natural disaster weaken but do not eliminate the demand for insurance.

This report shows that some investors still perceive Aceh as a risky place to do business, despite being relatively peaceful for almost four years. Security incidents, relatively common in post-conflict environments, deter businesses and individuals from investing in Aceh, robbing the economy of necessary capital and innovation. Other consequences of the conflict, including forms of illegal taxation, also hurt investment. The Government of Aceh is aware that until businesses and people change their perceptions of security in Aceh and feel confident that they can reap the full benefits of their investments, little investment will be forthcoming. As a result, growth in the province will be limited and efforts to reduce poverty less effective. There are other problems affecting Aceh's economy. These include the business environment, access to capital and the quality of infrastructure. This report seeks to show how these different factors affect investment and growth, and provides recommendations on how the Government might prioritize and sequence policy changes to improve the investment climate.

Context Overview With Parliament’s election of former Prime Minister Thein Sein as president in January 2011, Burma has reached a critical crossroads: the country’s tumultuous political and economic history is facing new opportunities through the introduction of new economic and social reforms. President Thein Sein’s government has instituted a series of reforms targeting governance and political economy, public finance and structural transformation. Problem Summary Currently available information ranks Burma as the poorest country in South East Asia. Nearly 85% of poverty incidence is concentrated in rural areas. Two key factors contribute to rural poverty: 1- labor is unskilled and subject to casual wages and 2- lack of assets and particularly land (54% of the agricultural population is landless). High human concentration, low financial returns and low access to resources/capital in the rural sector help explain continued and deepening rural poverty concentration. The low asset ownership among rural and poor households restricts their ability to access credit and financial capital. Current credit services in Burma do not effectively target products or access for the rural poor. Policy Question What strategies should the Myanmar Development Resource Institute (MDRI)/ International Growth Centre (IGC) partnership recommend to reduce rural poverty and increase access to financial capital in rural Myanmar? Data and Methodology My focus is to evaluate some alternative rural poverty programs that have been implemented in other countries and analyze their relevance to Burma’s rural poverty needs. Of particular interest to analysts is a comparison of programs designed to increase access to capital. My analysis evaluates and compares three alternative interventions designed to increase access to capital: rural microfinance...

Women’s access to financial resources is popularly hailed and strongly evidenced to be a development tool that champions women’s economic empowerment. Globally, does economic empowerment through women’s access to formal financial resources translate to women’s political empowerment in established political institutions? To what extent do women’s use of formal financial resources (defined as use of financial and savings accounts, credit cards, and the taking of loans from financial institution) correlate with women’s political representation in national parliaments? The purpose of this thesis is to utilize cross-national data to investigate this question by examining the extent to which women’s access to formal financial services is correlated with increased women’s representation in national parliaments. This thesis will utilize data from the World Bank’s “Gender Statistics and Indicators” database from 195 countries around the world to test the existence, direction, and strength of any potential relationship, controlling for important confounding variables. (World Bank, 2013) Statistically significant relationships that emerge will then be analyzed in the context of other scholarly works to draw conclusions, discuss policy implications...