Unlocking SME Potential: How Effective Finance Policies Can Boost Growth in Emerging Markets

Small and medium enterprises (SMEs) are key to economic growth, particularly in emerging markets, but they face significant barriers to finance. A World Bank report, Boosting SME Finance for Growth: The Case for More Effective Support Policies, outlines strategic solutions, including leveraging fintech, supporting asset-based financing, and creating tailored interventions for vulnerable SME segments. The report provides a roadmap for governments to close the SME financing gap, promote sustainable growth, and boost economic resilience.

Small and medium enterprises (SMEs) are the lifeblood of economies across the globe, particularly in emerging markets and developing economies (EMDEs). These businesses employ millions and drive economic growth. However, their growth potential remains hindered by one critical issue—limited access to finance. A recent report titled Boosting SME Finance for Growth: The Case for More Effective Support Policies by the World Bank delves into this issue, providing a roadmap for governments to develop more effective policies and improve financing opportunities for SMEs.

The SME Financing Gap: A Persistent Challenge

According to the report, despite various government interventions such as credit-reporting systems, lines of credit (LoCs), and partial credit guarantee (PCG) schemes, the financing gap for SMEs remains significantly large—amounting to 19% of GDP in many EMDEs. This gap is especially problematic in low and middle-income countries where smaller businesses struggle to secure the funding necessary for expansion and innovation. High credit risk, lack of suitable collateral, and higher transaction costs make it difficult for financial institutions to lend to SMEs, further widening the gap.

In the face of these challenges, governments in EMDEs have attempted various solutions over the years, but the financing gap persists. This is where the World Bank’s report provides crucial insights into how these efforts can be restructured to bring about meaningful change.

Emerging Solutions for SME Financing

The report underscores the evolving landscape of SME financing, spotlighting financial technology (fintech) as a significant player. Fintech solutions, such as digital lending platforms and asset-based financing, offer new hope for SMEs in underserved areas. These technologies are breaking traditional barriers by offering alternative credit scoring systems and reducing transaction costs. Some fintech lenders have successfully reached SMEs that traditional banks found too risky. However, fintech solutions alone are not enough to address the deep-rooted challenges faced by SMEs.

The report also highlights the need for governments to create an enabling environment for asset-based financing. Expanding the use of movable assets as collateral, such as receivables and equipment, could provide SMEs with access to much-needed funds while minimizing their reliance on immovable property. In countries where alternative financing has grown, such as Brazil and India, governments have enacted policies that support these new financing channels.

Sector-Specific Solutions: Tailored Support for Vulnerable SMEs

Not all SMEs are created equal. Certain groups—such as women-led businesses, agricultural SMEs (agri-SMEs), and businesses in fragile or conflict-affected regions—face unique challenges. These segments require tailored financial interventions. For example, women-led SMEs often face additional hurdles in accessing finance due to structural gender biases in the financial sector. The World Bank report suggests that governments must integrate a gender lens into their financial policies, ensuring equal access to credit and support for women entrepreneurs.

Climate change is another factor that complicates financing for SMEs, particularly those involved in agriculture. Many agri-SMEs lack the resources to invest in climate change mitigation or adaptation. Here, concessional financing—subsidized loans that help these businesses access capital—may be needed. Governments are urged to create solutions that not only meet the unique needs of these businesses but also foster sustainable practices that contribute to global climate goals.

A Strategic Roadmap for Governments

At the heart of the report’s recommendations is a strategic roadmap for governments to improve SME financing. This roadmap consists of several key actions, including enhancing the availability of credit information for SMEs, enabling asset-based financing, developing equity markets, and promoting competition among financial providers. Governments must also focus on fostering private capital mobilization and use concessional financing only when necessary.

Another crucial recommendation is the need for proper governance and coordination in public interventions. Fragmented policies across various government agencies can lead to inefficiencies. Governments are encouraged to streamline efforts and create comprehensive, evidence-based financial interventions that address the unique needs of SMEs.

Boosting Growth Through Effective Financing

The financing gap for SMEs in emerging markets remains a major obstacle to growth and development. However, by implementing the right policies and leveraging innovative solutions such as fintech and asset-based financing, governments can help close this gap. Tailored interventions for women-led, climate-affected, and agri-SMEs will further ensure that no business is left behind.

The report, Boosting SME Finance for Growth: The Case for More Effective Support Policies, provides a clear roadmap for governments to enhance their support for SMEs and drive growth, productivity, and job creation. With the right tools and strategies, SMEs can access the financing they need to thrive in today’s competitive global market.