SME Finance Working
Group (SMEFWG)

Inclusion for MSME is equally as important as individual with an emphasis on access to credit. Despite of its importance, MSME development is still hampered by a relatively constrained access to finance, which inhibits growth and job creation in the sector. MSME finance gap in emerging economies is estimated at approximately $5 trillion – 1.3 times the current level of MSME lending. These numbers even more staggering at about $8 trillion if MSMEs in the informal sector were also included. Awareness of the impact of MSMEs on economic development has been steadily increasing since microfinance institutions (MFIs) and economic development agencies have focused on these enterprises’ potential contribution to economic and social stability.  MSMEs require different forms of financing based on their stage of development. Loans are mainly used for business expansion, financing of working capital, extension of the product range, purchase of fixed assets or to reach out to new markets, both local and international. Most common challenges that impede to MSME access to finance include no or lack of collateral, insufficient credit history and MSMEs are very vulnerable for any shock of normal condition.  It is important for MSME to improve their credit worthiness and necessary for the government to broaden the range of financing instruments available to MSMEs.

Microenterprises differ very much from small and medium enterprises. They often behave like individual clients in their financing requirements and are served by microfinance institutions or informal lending networks. Most microenterprises are active in the informal market and do not register their activities with a tax office. Collecting data about microenterprises can therefore be very difficult. SMEs, on the other hand, require a variety of financial services, including working capital and fixed asset loans that are often larger and with more flexible terms. They are more likely to be licensed and registered with the local tax authorities. Therefore, ministries collect and share data on SMEs and are better able to track their growth and impact on the economy.

SME the “Missing-Middle”

While microenterprises have apparently more secured alternative funding sources (e.g. family and friends, suppliers or microfinance institutions), SMEs are often perceived to be too big for MFIs, which cannot deliver adequate product solutions; too risky for larger financial institutions such as banks; and too financially needy for family or friends to lend to them. Worldwide, access to finance is one of the most prominent obstacles that SMEs face, particularly in low-income countries. The IFC reports that between 45 and 55 percent of SMEs in developing economies do not have access to loans.

Different demand and supply sides measures have been implemented globally ranging from legal and regulatory framework, enabling credit infrastructure, access to finance policy, market efficiency and new elements that change the financing landscape for MSMEs which include alternative finance and FinTech. In addition, regulators and policy makers also focus on cross-cutting priority topics such as informal sector, women and youth MSMEs and inclusive green finance, among others.

AFI members underscored the barriers that the MSMEs encounter in accessing and using formal financial services, which include among others, lack of capacity to start business, lack of collateral to access funding, financial education, and inadequate use of technology. In addition, lack of clear supportive policies for harnessing women and youth MSMEs access to finance has also been a critical challenge for achieving the goal inclusive finance for growth. In response,   various measures have been introduced to support MSMEs with both demand-side and supply-side initiatives, including legislation, regulation, infrastructure, capacity building and education. To address this policy challenges, the AFI established the SME Finance Working Group (SMEFWG) to share members’ insights and experience in promoting support for SME development also in-depth discussion on SME finance fundamental and emerging topics.

Women businesses account for 28 percent of businesses and 32 percent of the MSME finance gap, the latter of which the 2017 MSME Finance GAP estimated at USD1.7 trillion. Across all regions, women entrepreneurs have lower access to finance than their male counterparts, due to structural or other barriers impeding women access to formal financial services, as well as inadequate knowledge of women financial services. Thus restrict the optimum potential of women MSMEs in contributing to the country’s economy.

From the demand-side, women- MSMEs face various business and social challenges (e.g. nature, size, culture, socio-demographic and geography) as well as financial inclusion challenges (e.g. access, usage, affordability, awareness, financial literacy, social norms and safety). Hence, deliberate policy intervention to address these barriers will harness the economic potential of women to start and run MSMEs and expand existing MSMEs access to finance.

SMEF targets, 10 in total so far, are more focused and direct, with the network leveraging on the lessons of previous targets and progress updates.

Primary thematic area		2013	2014	2015	2016	2017	2018	2019	2020
SMEF Maya Declaration commitments by AFI members	Maya Declaration targets	6	10	11	48	55	55	64	65
	Completed	4	6	6	20	23	23	30	33
	In progress	2	4	5	28	32	34	34	32
	Completion rate	67%	60%	55%	42%	42%	38.2%	47%	51%

• Exchange knowledge and establish a common understanding of policies that promote tangible access, usage and quality of financial services for MSMEs
• Identify policy frameworks learned from different regions and different actors both from demand and supply-side involved in spurring the viability and financial inclusion of MSMEs, with a specific but not exclusive focus on financial sector policies.

Policy Model for MSME Finance

Policy Model is to guide members through a set of principles on key elements to be considered in developing or reviewing their MSME finance policies. The principles are derived from the compilation of best practices from the AFI network, complemented by insights from other international stakeholders in MSME development.

• Planned deliverable: MSME Finance Policy Model.

MSME Data Subgroup:

In 2015, the joint subgroup published a guideline note on the Guideline Note 16: SME Financial Inclusion Indicators Base Set. The Guideline note guides members to use Indicators Base Set to measure Access, Usage and Quality of financial services for MSMEs in different member countries. Although, the Base Set is limited set of indicators, but it is sufficient to provide reasonably comprehensive view indicating the state of financial inclusion for MSMEs in member countries. The optimum usage of the Indicators Base Set is with AFI Core Set of Financial Inclusion Indicators for an overall assessment of country financial inclusion.   

To further compliment this document and progress the theme of SME Finance data indicators, the joint subgroup is convening again in 2020 to identify the data collection process and update the list of indicators and melding the higher-level socioeconomic data that is typical in most countries. Comprehensive MSME data collection is needed to produce informed and strategic decision for MSME development policy and improve access to finance, particularly for women MSMEs. The purpose of this is to utilize existing data commonly collected (on demographic, social, and financial inclusion) and suggest enhancements to include MSME-specific indicators for members to better establish a baseline of MSME ecosystem in their country.

• Planned deliverable: Framework for MSME Data Collection: A Guide for Gender Inclusive Finance and Case Study: Morocco Data Collection Process and MSME Definition

MSME Green Financing Subgroup (jointly with IGFWG)

To manage the effects of climate change, while MSMEs can be victims of climate change, they can also contribute to the problem and as such, can play an important role in lowering global emissions of greenhouse gases (GHGs) in the long run. Currently the subgroup is developing a special report on Green Credit Risk Guarantee which falls under the ambit of Protection Framework to facilitate financing to individuals and MSMEs. This Special Report covers the challenges of inclusive green lending, opportunities for using credit risk guarantees and scope and approach of guideline for green credit risk guarantee.

• Planned Deliverable: Special Report: Inclusive Green Finance Policies for MSMEs: Green Credit Guarantee

MSME Alternative Finance Subgroup:

Develop alternative finance policies for MSMEs to facilitate the significant credit gap by utilising on the existing NBFIs financial products such as leasing and factoring. Also, leverage on FinTech and digitalization focusing on online financing platform like crowdfunding and peer-to-peer (p2P) and alternative credit scoring for better credit assessment.

• Completed: Survey Report on Alternative Financing for MSMEs, a Case Study on Leasing from Belarus, and Guideline note and Survey Report on Leveraging FinTech for MSME Financing.
• Planned Deliverable: Alternative Credit Scoring for MSMEs (special focus on Women MSMEs)

Onboarding of the Informal Sector Subgroup (jointly with FISPLG):

Informal sector or shadow economy includes all economic activities hidden from official authorities for monetary, regulatory, and institutional reasons. Informal economy is closely associated with displacement of workers into insecure forms of labour market, transition of entrepreneurship and illegal or tax-evading activity. It has a negative impact on the development of sustainable enterprises, fair competition and national revenues, and to some extent it can dampen productivity and undermine a nation’s financial health. One of the strongest obstacles to designing sound policies to address decent work deficits in the informal economy is the lack of research studies linking the pattern of growth and the informal economy. In order to address the challenge of the transition to formality, individual countries, along with the social partners, would need to design an integrated set of policies and programmes.

• Completed: Guideline Note and Toolkit on Onboarding the Informal Sector.

Gender Inclusive Finance Subgroup:

Women MSMEs represent approximately 35 percent (8 million to 10 million) of MSMEs in developing and emerging markets. Despite improvement in financial inclusion globally, a gender gap of seven percentage points is unchanged since 2011 (65% of women have an account compared with 72% of men – Global Findex Database 2017). The value loss for the global economy is significative, with a credit gap estimated at $320 billion for women entrepreneurs. On one hand, women MSMEs face various business and social challenges (nature and size, culture, socio-demographic, geography) as well as financial inclusion challenges (access, usage, affordability, awareness, financial literacy, social norms, safety). On the other hand, economic opportunities arise from women MSMEs.

• Completed: Policy Framework on Women-Led MSME Financing, Risk Sharing Facilities for Women-led MSMEs

Planned Deliverable: Policy Catalogue on Women-Led MSME Financing, Credit Guarantee Scheme for Women –led MSME (GIF) and

Other planned deliverables outside subgroup:
1. Agricultural Financing in Uganda: A Response to COVID-19 2. Credit Guarantee Scheme: Tool to Facilitate MSME Financing during and Post C-19 (selected Africa countries) 3. Digital Financial Services for Women-led MSMEs in Latin America

2021

• Alternative Financing in the Republic of Belarus: Leveraging on Leasing for MSME Financing
• A Policy Framework for Women-led MSME Access to Finance
• Risk Sharing Facilities: Mobilizing Finance for Women-led MSMEs
• Bringing the Informal Sector Onboard (Toolkit)
• Guideline Note – Bringing the Informal Sector Onboard

2020

• SME Finance Responses to COVID-19 in AFI Member Countries
• Inclusive Green Finance Policies for MSMEs
• Financial Education for the MSMEs: Identifying MSME Educational Needs
• Scoping and Assessment Report – MSME Access to Finance Ecosystem in Africa
• Survey Report on Alternative Financing for MSMEs

2019

• Guideline Note 36:SME Finance Guideline Note
• Case Study: Gender, Women’s Economic Empowerment and Financial Inclusion in Zimbabwe

2018

• Case Study:Agricultural Finance Intervention in the Kingdom of Eswatini
• Case Study: Agricultural Finance Intervention in Ghana

2017

• Case Study:: Meeting the financial needs of the agriculture sector through prudentially regulated SACCOs in Kenya
• Survey Report: Defining Small and Medium Enterprises in the AFI Network
• Survey Report on SME Finance Policies for Micro, Small and Medium Enterprises (MSMEs) Owned by Women and Women Entrepreneurs
• Case Study:Expanding Women’s Financial Inclusion in Bangladesh through MSME Financial Policies

2016

• Guideline Note 23: The Role of Financial Regulators in Promoting Access to Financing more MSMEs: Lessons from the AFI Network

2015

• Guideline Note 16: SME Financial Inclusion Indicators Base Set

2014

• Enhancing SME Access to Finance (Joint Paper with GPFI)