Developing countries invest about $1 billion annually to train millions of aspiring and existing entrepreneurs. While significant, this investment doesn’t fully address the shortage of expertise needed to better support micro, small, and medium enterprises (MSMEs) or to design programs to improve their access to finance, markets, and technology.
So, what is limiting MSMEs from growing into larger firms and integrating into the broader economy?
One issue is financial: MSMEs in developing countries face a $5.7 trillion funding gap. Another is the lack of a tailored approach for the diverse needs of MSME segments, each with unique capabilities and economic roles. For example, strategies for small family-run businesses should differ from those for start-ups or high-growth ventures led by risk-tolerant entrepreneurs. Dealing with these hurdles could unlock significant potential for economic growth and job creation.
The focus should be on enhancing the job-generating potential of growing businesses, while recognizing the role of all MSMEs in sustaining livelihoods and providing essential goods and services.
Need for differentiated strategies
Recent advances in data analytics and impact measurement are providing clearer insights into what approaches work best. The International Finance Corporation (IFC), the World Bank Group’s private sector arm, aligns with this strategy by focusing on access to finance, markets, and technology.
Access to finance: We support disadvantaged MSMEs in sectors across agriculture, manufacturing, and services through investment via financial institutions and platforms for scale and efficiency. Our approach is evolving from liquidity financing to risk-sharing products to enable greater MSME lending. We also offer advisory services, including early-stage market and project preparation, and leverage blended finance, which helps crowd in private investors, to maximize impact.
Access to markets: Our approach aims to connect as many MSMEs as possible to customers, suppliers, and value chains, including firms that provide services to MSMEs. This will help achieve scale and bridge the significant financial gap faced by MSMEs.
Access to technology: We invest in high-potential start-ups and early-stage MSMEs directly and through private equity and venture capital funds, with about 20 percent of our portfolio in equity and plans to grow. Our focus includes fintech, payment platforms, digital infrastructure, and digitalization of businesses through investments and advisory services.
IFC’s new MSME Finance Platform exemplifies this differentiated approach. Rather than simply increasing lending volumes, the $4 billion platform combines direct financing with risk-sharing tools such as the “catalytic first loss guarantee” to mobilize an additional $4 billion. It targets specific MSME segments through specialized products, including local currency financing and support for women-owned enterprises and climate-focused businesses. Local currency solutions are essential to protect small businesses from exchange rate volatility.
Future directions for MSME support
Looking forward, three areas merit particular attention:
Addressing working capital shortages: Support measures to address this problem, as nearly 80 percent of MSME assets eligible for short-term financing go unfunded. One potential solution would be to use revolving funds to “permanently finance” MSME working capital needs.
Leveraging technology-driven innovations: Emphasize fintech to enhance asset-based lending, embedded finance, and alternative credit scoring, tailored lending products, and credit market infrastructure.
Improving data and impact measurement: Strengthen data collection and impact tracking to boost program efficiency, support learning, and monitor quantity and quality of jobs being created—or lost. More impact evaluations, especially on market-level effects, can help refine strategies and improve outcomes.
The goal is clear: To drive MSME growth, job creation, and economic development in emerging markets, we must adopt a holistic approach that includes closing funding gaps, tailoring support, leveraging technology, and improving data collection and interpretation. MSME Day serves as a reminder of both the vital role these enterprises play in global economic development and the urgent need for continued innovation in how we support them.
Source : World Bank
