Micro-loans may be trendy, but enterprises that employ more than one will grow economies
May 7, 2013 Editor 0
Direct micro-lending is all the rage, but while it has many advantages for the poor, not everyone needs to be an entrepreneur. Most people just want a job.
Small and medium enterprises, companies that employ five to 500 people, are crucial for development because they create economic value more efficiently than tiny enterprises. Rather than focusing mostly on microenterprises, donors and investors should turn their attention towards SMEs as a sustainable poverty alleviation source.
In the developing world, there’s an important gap between microenterprises and SMEs: between the very small and the merely small.
Andreas Widmer, president of The Carpenter’s Fund, says the developing world is chronically short of SMEs.
In the West, 95 percent of companies are small and medium enterprises (SMEs), and they employ 75 percent of the workforce … If you look at that same distribution in emerging markets, in poor countries, you see that there are a lot of very small companies and a few very large companies and nobody in the middle,” Widmer said. “Yet we know that that middle is what carries the economy — that is how you grow an economy and create a middle class.
In order to grow this “missing middle,” we need to understand what barriers SMEs face and how they differentiate from microfinance clients in terms of loans.
Many SME clients are former microfinance clients who outgrow microfinance but struggle to obtain financial services specific to their needs. Small, short-term loans and inflexible repayment schedules often characterize microfinance institutions. But these features are not a good fit for SME business activities, which would struggle with a lack of grace periods for fixed asset investments and a fleeting 12-month repayment period. Also, the larger investment that a SME would need would require a higher risk profile attached to the borrower than a microfinance institution would typically lend to.
Yet many SMEs are either too small or lack collateral and credit histories to obtain loans from traditional banks in developing countries. This places them in a divide between the increasing amount of microfinance available for microentrepreneurs and the market for more commercial business financing.
Many in the West see microfinance as a cure-all solution to poverty. But because microenterprises are not primary generators of employment, job creation on the macro scale is not being addressed. Instead, donors and those in the development sector should be more concerned about supporting SMEs through both investments and technical assistance to help financial intermediaries outreach to the SME sector.
Research suggests that for every dollar put into an SME through a loan or through an investment we create 12 dollars in the local economy,” says Andreas Widmer. “That equation, even if it is half of that, is so good, that we should focus on how to get these small and medium sized companies to grow.
Hear more about the problem of the “missing middle” on a video clip from a November 2012 Poverty Cure DVD series:Small and medium enterprises are key to growing an economy. Photo Credit: World Bank Photo Collection (flickr).
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