The US$5.2 Trillion MSME Finance Gap

The International Finance Corporation (World Bank Group) has published its latest assessment of the shortfalls and opportunities in financing micro, small and medium enterprises in emerging markets. According to this assessment the potential demand for MSME Finance is US$8.9 Trillion compared to the current credit supply of US$3.7 Trillion. This leaves a finance gap of US$5.2 Trillion. The report can be downloaded by clicking on this link.

Micro, Small and Medium Enterprises (MSMEs) represent a significant part of the world economy, and are one of the strongest drivers of economic development, innovation and employment. Access to finance is frequently identified as a critical barrier to growth for MSMEs.

Creating opportunities for MSMEs in emerging markets is a key way to advance economic development and reduce poverty. In this regard, it is also one of the major priorities of the World Bank Group and other development institutions around the globe. In recognition of the need to quantify the extent of the MSME finance gap, the International Finance Corporation (IFC) partnered with McKinsey & Company in 2010 to produce an estimate of the gap.

As the first study of its kind, the aim was to produce approximate figures that could, at an aggregate level, highlight this critical issue and the scale of the challenge. However, the assumption and methodology of the study raised concerns about its use at a more granular level. For example, cross-country comparisons, crucial for strategic policy decisions by international organizations and others, were not possible. In response, a collaboration between various units at the IFC and the World Bank’s research unit developed an innovative methodology that reassesses the gap and significantly moves this analytical work forward. The team has estimated the systemic finance gap by utilizing more data from both the demand and supply sides.

As a result, it has produced more accurate, actionable country-level estimates of the gap. In the developing economies studied, the potential demand for MSME finance is estimated at US $ 8.9 trillion, compared to the current credit supply of $3.7 trillion. The finance gap from formal MSMEs in these developing countries is valued at $5.2 trillion, which is equivalent to 19 percent of the gross domestic product (GDP) of countries covered in this analysis.

This in turn amounts to 1.4 times the current level of MSME lending in these countries. In addition, there is an estimated $2.9 trillion potential demand for finance from informal enterprises in developing countries. which is equivalent to 10 percent of the GDP in these countries. This research estimates that there are 65 million formal micro, small and medium enterprises that are credit constrained, representing 40 percent of all enterprises in the 128 reviewed countries.

Ostensibly, in comparison to the previous IFC estimate of the MSME finance gap, the level of the overall gap is larger. However, the increase in the estimate of the gap is primarily driven by changes in the methodology. It should not be necessarily interpreted as an increase in the gap, but rather as a more accurate re-calculation of the gap. Also, this robust methodology has the added benefit of being easier to update in future years. Thus, for the first time, the evolution of the gap will be captured, and the dynamic changes to the gap can be more accurately assessed.

Data availability is the main hindrance to providing more granular estimates of the gap than can be provided here. Even with the currently proposed methodology, the lack of data imposed the need to make stronger assumptions than would be necessary if data availability was not an issue. As access to financing for MSMEs continues to be an issue of critical importance, there is an ongoing need to improve data collection efforts for MSME financing in developing countries.