Interventions in MSME financing

One of the main constraints to MSME growth has been accessing finance. It has been found that MSMEs face numerous obstacles in borrowing funds because they are small, less diversified, and have weaker financial structures.238 This is implied by evidence of payment delays on receivables, declining liquidity, and an increase in MSME insolvencies and bankruptcies. In addition, MSMEs find it difficult to provide high-quality collateral at all times. They also experience difficulties in ensuring transparency concerning their creditworthiness. Some studies show that MSMEs are more likely to face more credit constraints than larger firms. They also rely more heavily on trade credit and informal sources of credit.

Many governments use direct and indirect public interventions to promote MSME financing. Direct interventions made by governments are typically in the form of grants, subsidies and tax breaks and are often delivered through dedicated governmental agencies. Some governments also provide financing assistance via commercial or state-owned banks and non-financial institutions, including cooperatives and governmental agencies. This assistance can be in the form of soft loans, interest subsidies and ceilings, credit guarantees and credit insurance, seed capital, venture capital, loan quotas, loan waivers and the promotion of promissory notes.239

The rationale for government intervention is to address deficiencies and market failures in the MSME financing space. Well-designed government interventions can improve financial regulatory frameworks and financial infrastructure. It is also necessary when there is a lack of financial resources for particular groups (e.g., start-ups with little collateral and credit history and women entrepreneurs) that the markets cannot quickly solve. As discussed above, interventions are also warranted during periods of instability and crisis, where private agents have an actual or potential collapse of financial intermediation.240

Resources

239RAM Consultancy and Services (2005). “SME access to financing: Addressing the supply side of SME financing”, REPSF Project No. 04/003 Final Main Report. Bangalore, India

240 IFC (2010). Scaling-Up SME Access to Financial Services in the Developing World. International Financial Corporation, World Bank Group, Washington, D.C.