SMEs play a major role in job creation but face significant financing constraints. They provide over 50% of formal jobs in emerging markets and create the majority of new jobs, especially in low-income countries. However, SMEs experience a large financing gap estimated at $1 trillion. Improving access to finance for SMEs through measures like credit reporting, collateral registries, and innovative financing structures can significantly boost employment and economic growth. The SME Finance Forum was created as a global knowledge sharing platform to disseminate best practices in SME financing.

1. The Challenge and Opportunity
of SME Finance
Matthew Gamser, Head, SME Finance Forum

2. 2
SMEs and Jobs
Employment Shares across countries
by Size and Age*
• 50% of all formal jobs in emerging markets are in
Small firms and SMEs overall provide 2/3 of jobs
• Older SMEs (>10 years) provide almost ¼ of jobs
• The importance of SMEs for jobs is greater in low
income states (LICs)
• SMEs create 86% of new formal jobs in EMs, a
number that rises to 95% in low income countries
• While creating the most new jobs, SMEs also
have high turnover so their net contribution to
job creation is lower – how much is not known
• Small and young firms create a disproportionate
number of new jobs, especially in LICs
• It is estimated that about 10-16% of firms are
high-growth SMEs and may be responsible for up
to 38% of new jobs.
• Another 60% of jobs are in the informal sector
which is mostly micro but has some small firms
that could grow if constraints were lifted
Share of
Formal Jobs
Creation of
Formal
Jobs
Informal
Jobs
*Source: Small vs. Young Firms Across the World: Contribution to Employment, Job Creation and Growth, World Bank Policy
Research Working Paper #5631, April 2011 by M. Ayyagari, A. Demirguc-Kunt and V. Maksimovic; Based on WBG Enterprise 2

3. Access to Finance is a Major Constraint for SMEs
Challenges faced by HGSMEs in
emerging economies
Challenges faced by formal
SMEs in emerging economies

4. Formal SME credit gap remains as large as ever at
~ $ 1 Trillion
SMEs – Vast, largely untapped market

5. …managed well, SME Banking can be
very profitable…
Key observations
• ROE can be very attractive (up to 25-35%)
• Margin compression inevitable but can be negated
by establishing a “total wallet” P&L
• Key profit drivers are typically deposits and
transaction banking, representing between 50-60%
of total SME business profitability
• Need to take a 5-year view of product profitability
“We want to double in 3 years. Returns are the best in the Group.
Risk-returns are now twice as high as all our consumer banking
businesses”
Global Product Head, SME Banking Standard Chartered Sept.2010
Faster Revenue Growth………..
Higher RoA’s………..
5

6. There are 29-35M formal and 101-124M informal MSMEs with at least one female owners
in developing world, representing 32-39% of total MSMEs
SOURCE: McKinsey-IFC MSME database; Enterprise Survey; ILO, Human Development Report; team analysis
Number of formal and informal MSMEs with 1+ female
owners
Millions
Proportion of MSMEs with 1+ female owners
Percent
130-15929-35
Middle East &
North Africa
1-2
Total
(ex-high income)
1
South Asia
5-64
Central Asia &
Eastern Europe
7-8
4-5
3
Sub-Saharan Africa
10-133-4 7-9
Latin America 24-296-7 18-22
East Asia
84-10214-17 69-85
32-39
13-16
11-14
37-45
25-30
38-46
40-48
32-39
3-4
5-6
31-38
26-32
48-59
45-56
Formal Informal
101-124
1
1
Women Owned MSMEs – a neglected segment

7. • Provides source of market differentiation in competitive SME markets
• Establishes reputation as an innovator
• Entry and differentiation in specific sectors where concentration e.g. retail , mobile,
youth, health
• Creates strong community-based advocacy and enhances corporate social responsibility
Advantages of the Women Entrepreneurs Market
• Female customers have a higher propensity to save both as business and personal
customers
• Deposits from female customers typically grow at higher rate and stay with the Bank
longer
• Net funding surplus as a segment
Information
Services
• Once main banker status achieved, higher cross-sell ratio’s (between 1 and 2 times)
• Higher footings obtained per relationship and higher fee generation
• Respond well to relationship management-based models and willing to pay for it
• Demonstrate stronger retention rates in many clients
• Take the business relationship, high likelihood that will take majority of family wallet
• High advocacy creates strong conversion rates for husband business and personal FS
• Up to 85% of family financial decisions made by the women globally
Market Share
Growth
• Female customers have lower risk tolerance as both business and personal customers
• Women-led businesses outperform those led by men, including start-ups
• Stronger business plans can create higher acceptance rates and reduced processing costs
• Default rates are either the same or better than male counterparts depending upon
market
Information
ServicesHigher Cross-Sell
and Loyalty
Strong Savings
Propensity
Positive Risk
Behavior
Information
Services
Linkage to Family
Wallet
Description
* - Source: IFC Analysis

8. SMEs Remain a Challenge to Financial Institutions
1. Poor
Customer
Knowledge
6. Poor business
enablers
5. Lack of
collateral
or capital
4. Lack of
credit
data
3. Low
profitability
2. SME
skills and
literacy
Common weak models in
EM countries today:
• SME treated as corporate
for medium SME and/or
retail clients for small SME
• 100% secured lending
driven with
undifferentiated products
of service levels
• Limited product program
approaches and a lack of
cost-effective methods to
address segment
• Emphasis upon lending,
not SME Banking
• No accommodation for
gender concerns
SME
Finance
Challenges

9. Banks need to build capacity to address these challenges
Poor
Customer
Knowledge
Poor business
enablers
Lack of
collateral
or capital
Lack of
credit
data
Low
profitability
SME
skills and
literacy
• Government initiatives
(e.g. procurement)
• Financial infrastructure
• Credit guarantees
• Unsecured/
partially secured
• Loan guarantees
• Value chain
financing
• Credit scoring
• Psychometric testing
• Operating account track
record
• Early warning indicators
• Value based sales and service
coverage models
• Retail-style products
• Automated and reengineered
processes
• Low cost channels (e.g internet,
call centre)
• Retail and business linkages
• Educate SME through non-
financial advisory provision
(e.g. SME toolkit)
• Provision of training,
information & networking
• Granular definition of SME supported by
market research
• Segmentation: Specific value propositions to
target specific sub-segments of SME (e.g.
women)
• Greater focus upon customer management
IFC Internal Analysis, 2011
SME
Finance
Challenges

10. Impact of improved credit reporting on
financial inclusion
Source: Love & Mylenko (2003)

11. Full information-sharing increases access to credit
¨Out of every 100,000
loan applications 11,400
are lost if assessment
is based on negative
info only¨
% increase in lending volumes
73.7
83.2
Negative information
only
Negative and positive
information
Source: Barron and Staten (2000). Note: Figure shows the simulated acceptance rate assuming a default rate of 4% overall

12. Investment Unlocked Through Moveable Collateral Projects
Dwarfs IFC Direct Investment in China and Ghana

13. Importance of Financial Infrastructure for SMEs

14. The New Disruptors

15. SME Financing Needs Vary by Stage of Development

16. HGSMEs Need Innovative Financing Structures
Banks are not incentivized to seek out and back high-growth SMEs. Yet these high-growth
firms have not yet reached the scale to access capital markets.
Private equity (PE) is incentivized to seek out high-growth SMEs, but reaches only a small
fraction of them due to high transaction costs and information asymmetries.

17. • Investments by PE funds in SMEs produced a growth rate of 18% or almost twice the rate of
job growth in non-SMEs (9.7%).
• Among IFC PE funds there is a strong positive correlation between fund returns and job
creation.
Small Companies Had Faster Job Growth Rates Fund Returns and Job Creation
are Positively Correlated
Source: IFC Jobs Study (2013).
Investment in high-growth SMEs has led to jobs
and higher returns

18. Crowdfunding – the ultimate disruptor?

19. SME FINANCE – TWO MODELS
and

20. Initiated by the G20 countries/managed by IFC
Unique global effort in knowledge sharing on SME
finance and best practice/case studies
Website for news, events, publications, tools
LinkedIn: 2100+ members and 450+ active
discussions
Women’s Finance Hub
IFC Enterprise Finance Gap data (and more)
Networking and peer learning: global and regional
events
The SME FINANCE FORUM

21. mgamser@ifc.org
On the Web at www.smefinanceforum.org and
www.womensfinancehub.org
LinkedIn Group: SME Finance Forum
Twitter: @SMEFinanceForum
HOW TO CONTACT US