Enhancing smE financing in acp countries - ACP Business Climate

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The sme financing gap: causes
Mapping the SME Financing Gap in ACP countries is a complex
process. The following summary is concentrated on the socalled
“Missing Middle”, as defined in Chapter III above, i.e.
enterprises which present handicaps that are much stronger
than those faced by larger enterprises in the appropriate
ACP context. Empirical research shows that SMEs are more
constrained by financing and other institutional obstacles than
large enterprises, exacerbated by weaknesses in the financial
systems of many developing countries. Enterprise surveys
conducted by the World Bank in over 120 countries show
that smaller SMEs face more severe financing constraints than
larger firms, especially in lower-income environments.
This analysis covers the question of why there are significant
numbers of SMEs that could use funding productively if it was
available to them, and why is it not available.
The main constraints are weak SME capacity and low bank
motivation. The constraints are not prioritised, since they are
uneven according to specific ACP regions. Low bank motivation
is a major problem in many ACP countries, including in Sub-
Saharan Africa, but less so in some Caribbean countries. On the
other hand, SME capacity shortcomings are a major constraint
in all ACP regions, and probably more so where banks have
began penetrating the SME sector 30 . In Africa, small businesses
can rarely meet the conditions set by financial institutions
which see SMEs as too risky because of a lack of information
about their ability to repay loans and the limited guarantees
they can offer.
4.1 SME constraints (demand side)
It is incorrect to say that SME demand for finance is low. But
SMEs face a major challenge in their limited ability to articulate
their needs, to present bankable financing requests and
thereafter to satisfy the monitoring requirements of financiers.
From a review of authoritative surveys, and as demonstrated
by the Country Visits, the main constraints faced by SMEs
encompass:
• Limited collateral capacity (including land/property
titling difficulties and a lack of regulatory recognition of
equipment and machinery as collateral 31 );
• Lack of transparency and deficient accounting. Low levels
of financial literacy clearly prevent SMEs from reaching
financing sources;
• Weak management and limited training support;
• Lack of information/knowledge about available finance
and channels;
• Difficulty in presenting bankable dossiers;
• Difficult business conditions, including cumbersome
official procedures - as repeatedly highlighted by the
“Doing Business” reviews of the World Bank. SMEs mostly
lack the capacity of larger enterprises to navigate the
complexities of regulatory and bureaucratic procedures.
Facilitating the registration of enterprises usually results in
larger numbers of formal SMEs;
• Limited own capital resources; unavailability of seed
money;
• The level and arbitrariness of taxation are considered a
core obstacle to SME formalisation 32 ;
• High cost of inputs in selected countries affecting
competitiveness (according to a McKinsey/IFC study 33 ,
the factor that SMEs most frequently perceive to be a
major obstacle is electricity, with 52% of SMEs viewing it
as a significant obstacle - this obstacle was also reputedly
raised by participants at the 15 July 2011 ACP High-Level
Meeting);
• Weak entrepreneurship culture and education, and in
some countries mainly a “survival” culture;
• Small local markets and undeveloped regional integration,
coupled with numerous difficulties associated with crossborder
trade;
• Lack of support for exporting SMEs in product certification
and safety standards;
• Small manufacturers and agricultural producers cannot
access markets and are in need of clusters to access
markets;
• SMEs are often estranged from larger projects, while
in reality they could constitute small feeder industries
(examples of this constraint are found in several sectors
such as the infrastructure and tourism sectors);
High interest rates 34 applied by banks may constitute a
constraint up to a point, but this constraint is subordinated to
the sheer difficulty of accessing finance for the above reasons.
Like several of the broader constraints quoted above (e.g.,
infrastructure and market sizes), this largely affects larger
enterprises that have access to finance.
4.2 Constraints of banks and financial
intermediaries (supply side)
For the purposes of this Section, the supply side does not
encompass State development banks and international and
regional development finance institutions. The following
observations apply only to commercial financing sources.
30 E.g. SME-side constraints are quoted far more often in the Dominican Republic where many SMEs have already been reached than in Togo, where even the most reliable SMEs still have no credit
access (Annex 1 – Appendices)
31 A well-functioning collateral regime entails a wide range of allowable collaterals, especially movable collaterals, as analysed in: G-20 Financial Inclusion Expert Group’s (FIEG) SME Finance Sub-Group
http://www.biia.com/wp-content/uploads/2011/03/Scaling-up-SME-Access-to-Financial-Services-in-the-Developing-World1.pdf. This finding is confirmed by the country visit in an even more
advanced ACP economy as the Dominican Republic (DR). In the DR, banks face regulatory constraints in SME lending, as the banking prudential authority does not allow them to take machinery
as recognized collateral.
32 IFC- Designing a tax system for SMEs 2007:
33 http://www.ifc.org/ifcext/gfm.nsf/AttachmentsByTitle/G20SMEFinanceStocktaking/$FILE/G20_Stocktaking_Report.pdf
34 As against inflation. See Appendices to Annex 1.
Enhancing SME financing in ACP countries
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