Micro, small, and medium enterprises (MSMEs) are the backbone of economies worldwide, playing a vital role in job creation, innovation, and economic growth. Yet they face persistent challenges in accessing vital financial services – the SME finance gap stands at $5.7 trillion – a number that swells to $8 trillion when informal enterprises are included.

This shortfall is driven by a combination of structural, institutional, and informational barriers:

• On the demand side, MSMEs often lack adequate collateral, have poor or non-existent financial records, and operate informally.
• On the supply side, financial institutions tend to be risk-averse, constrained by weak credit infrastructure, and deterred by high costs associated with serving small, dispersed businesses. Additionally, limited credit histories and regulatory gaps inhibit MSMEs’ access to formal financing.

However, the narrative is beginning to shift…

When AFI’s SME Finance Working Group met recently in the Seychelles, discussions revealed a strong consensus: digital public infrastructure (DPI) and credit enablers play a critical role in reducing the MSME credit gap and enabling inclusive access to finance.

Leveraging digital public infrastructure

Components of DPI—such as digital IDs, digital payments, and interoperable data exchange systems—are increasingly helping to improve MSME access to finance. By making it easier to collect and verify business data, reduce processing errors, and promote more accurate and timely financial reporting, this in turn improves the ability of financial service providers to assess credit risk and design suitable products.

As digital interactions become safer and more efficient thanks to emerging technologies like machine learning, facial recognition, and AI-driven credit scoring, this will drive usage. Tools such as digital cash registers, which automatically sync transactions with point-of-sale systems, are simplifying the digital transition for small businesses.

For digital adoption to be truly inclusive, we will need expanded affordable internet access and smartphone availability. If that can be delivered, DPI can create a robust, safe, and inclusive financial ecosystem that stimulates economic activity and supports financial health at the grassroots level.

Unlocking the Potential of Credit Enablers

Beyond digital tools, credit enablers are vital in enhancing MSMEs’ financial visibility and creditworthiness. These mechanisms—such as movable collateral registries, credit guarantee schemes, and risk-sharing facilities—allow lenders to extend financing to businesses with limited traditional assets.

Examples include:

• Agricultural finance initiatives, including value chain financing and a strengthened credit risk database
• Digital and bankable enterprise programs, aimed at formalizing and digitizing MSMEs
• Credit surety funds that reduce the risk of lending to unbanked or underserved MSMEs

Many existing enablers remain underutilized, meaning we need more awareness campaigns, capacity-building, and stronger collaboration between regulators and financial institutions in order to realize their full potential.

The Role of Microfinance and Levelling the Playing Field

As formal banking channels remain limited in many markets, microfinance institutions (MFIs) play an essential role in facilitating MSME access to finance. For example, in Nepal, MFIs have supported financial inclusion through microloans, savings, insurance, and even entrepreneurship training—especially for women-led MSMEs.

To strengthen the sector, we need to:

• Create a level regulatory playing field for banks, MFIs, and non-bank financial institutions
• Expand MFIs’ customer reach and encourage innovative business models
• Improve human resource capacity and financial literacy at the community level.

Conclusion

Bridging the MSME finance gap requires a dual approach: leveraging digital public infrastructure to build inclusive, efficient financial ecosystems, and optimizing credit enablers to expand the range of viable financing options.

In doing so, we can drive inclusive and sustainable growth across the MSME sector creating enabling environments for small businesses to not only survive—but thrive.