SME Finance Policy Guide

G-20 SME FINANCE POLICY GUIDE
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CHAPTER B
Access To Finance For SMEs in
Least Developed Countries (LDCs)
SMEs play a key role in economic development and
make an important contribution to employment and
GDP. 4 Financial access is critical for SMEs’ growth and
development. In their early stages of development,
SMEs rely on internal sources of funding, including
the owner’s savings, retained earnings, or funding
through the sale of assets. As firms starts expanding,
external sources become more important and their
availability can determine the firms’ growth possibilities.
External finance is positively and significantly
associated with productivity. Conversely, financing
from internal funds and other informal sources is
often negatively associated with growth and firm
performance. 5
However, access to finance remains a key constraint to
SME development, especially in emerging economies.
Access to finance is disproportionately difficult for
SMEs in LDCs, with 41 percent of SMEs in LDCs reporting
access to finance as a major constraint to their
growth and development, as compared with 30 percent
in middle-income countries, and only 15 percent
in high-income countries. 6 Access to finance through
bank loans not only decreases with the level of country
income, but also tends to be more concentrated among
large borrowers. Other common sources of finance for
SMEs, such as leasing and factoring, are not yet well
developed in LDCs. Annex I presents a statistical overview
of access to finance for SMEs in LDCs.
LDCs stand to gain significantly from policy guides
that support improved access to finance for SMEs. An
impact evaluation by Banerjee, Abhijit, and Duflo in
India in 2008, suggests that credit constraints for
Indian SMEs were a leading reason for the productivity
and investment gap between the United States and
India. There is evidence that, in developing economies,
SMEs could contribute more to economic development
than they currently do. SMEs tend to be
smaller in developing countries, suggesting greater
constraints to growth, including financial constraints.
Recent World Bank research 7 using a database for 99
developing countries, found that small firms are
important contributors to total employment and job
creation, but that small firms also have lower productivity
growth than large firms. In other words, while
SMEs employ a large number of people and create
more jobs, their contribution to productivity and
growth is less clear. The authors concluded that growth
and increases in productivity require a policy focus on
the potential obstacles, which include constrained
access to finance and encompass growth capital.
However, LDCs can face a more severe set of challenges
in providing enabling policy and legal frameworks
for SME finance, relative to middle- and
high-income countries that may have stronger institutional
capacity and higher levels of access to finance.
Financial infrastructure, such as credit information
systems, payment systems, and secured transactions
and insolvency frameworks, are generally weaker and
less developed. LDCs may therefore need to prioritize,
adapt, and sequence the Policy Guide components
outlined in this paper.
4 Ayyagari, Beck and Demirgüç-Kunt (2007)
5 Beck, Thorsten, Asli Demirgüç-Kunt, and Ross Levine. 2005
6 World Bank Enterprise Surveys. Numbers by income group are simple averages of all countries with data available that fall into the group.
7 Ayyagari, Demirguc-Kunt, Maksimovic (2011)