Small and medium-sized enterprises form the backbone of the economy in many developing countries. However, they often lack the capital and know-how necessary to grow and create jobs.

Small and medium-sized enterprises (SME) play a decisive role for the economy in developing countries; according to the World Bank, they are responsible for around 50 percent of jobs. At the same time, their access to capital is often restricted by certain circumstances. While many initiatives for micro-enterprises exist and commercial banks cater to large companies, SMEs get left behind as the "missing middle". With regard to the size of their financing problem, the World Bank even refers to a "billion-dollar gap".

Why is there a "missing middle"?

Why does this funding gap exist? It is not just caused by a lack of capital. Many banks in developing countries have a hard time raising long-term capital on the financial markets. One of their largest problems is the information deficit: Because small- and medium-sized enterprises are often not required to produce balance sheets, and their profits and turnover are therefore hard to verify, banks find themselves unable to verify enterprises' credit ratings. The grant of loans is frequently frustrated by SMEs' lack of sufficient collateral.

To support SMEs in addressing and solving their financing problems, development banks often resort to various instruments. Only very few provide loans directly to SMEs; more often, funds are lent indirectly via a local bank. Such local banks have close contact with these companies and speak their language. Success has also been achieved with private equity funds, which provide equity capital to SMEs, thus helping them to grow and create jobs.

Know-how transfer works

It is important for development banks not only to provide capital to local banks and funds, but also to offer capacity building, consulting and training, build up financial know-how, develop the skills of local bankers, improve risk assessments of SMEs and help banks to develop products which are tailored to SMEs.

OeEB also places great focus on improving access to capital for SMEs in developing countries. It combines financing, which benefits SMEs, with training measures. In this way, valuable know-how can be built up, which helps small companies to grow and contributes to job creation, thus improving living conditions for people in developing countries.

Relevant 2017

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Read more about the topic SME Financing in our magazine Relevant (in German).