MICROFINANCE PAPER WRAP-UP: “Financing Small Enterprises: What Role for Microfinance Institutions?”; by Jasmina Glisovic and Meritxell Martinez; published by CGAP

By Jasmina Glisovic and Meritxell Martinez, published by CGAP (Consultative Group to Assist the Poor), July 2012, 12 pages, available at: http://www.cgap.org/gm/document-1.9.58676/FN81.pdf

This CGAP Focus Note examines how microfinance institutions (MFIs) serve small enterprises. The authors first give an overview of the financial needs of small enterprises, then analyze the role of MFIs in serving them and conclude with possibilities for improvement. The authors base their findings on a 2011 survey of approximately 300 MFIs in 69 countries; interviews with other networks of MFIs; and a review of recent studies on small businesses, economic growth and job creation. The small enterprises considered for this paper have the following characteristics: 5 to 20 employees; family ownership; and having fixed assets, fixed place of business, simple financial recordkeeping system and a small capital base. These enterprises are larger than those historically referred to as microenterprises and served by MFIs.

While recognizing the scarce number of market studies available in the arena and the risks of generalizing their results, the authors note several patterns regarding the needs of small business. They determine the basic needs when the business is launched, such as short-term loans and basic savings accounts, which evolve as the business grows to long-term debt, current accounts, transfers and payments. In addition to these, the authors cite the following nonfinancial barriers to success: the lack of electricity, inappropriate regulations, taxes and corruption. Seventy-eight percent of the MFIs surveyed reported serving small enterprise as part of their strategy, while 70 percent expect to increase their small-business portfolio.

The authors also cite the challenges MFIs face in expanding their customer base to including serving small business: 51 percent of the institutions surveyed reported an inadequacy of risk assessment methods; less than 50 percent offered products like overdraft, transfers or payment services; 59 percent have no specialized staff nor a dedicated department to serve small enterprises; and 44 percent do not monitor the small business portfolio separately from the microfinance portfolio. Nevertheless, the authors point out the advantages MFIs bring to the small business market, from the close relationship they have with their customers to faster lending procedures and less collateral.

The paper concludes that a better understanding is required of the unique needs of small enterprises when tailoring MFIs’ services and products as are a client-centered approach, specialized staff and appropriate technologies.

By Mihaela Grindeanu, Research Associate

About CGAP (Consultative Group to Assist the Poor): CGAP is a US-based nonprofit policy and research center dedicated to providing financial access to poor people worldwide. CGAP is supported by approximately 30 development agencies and private foundations. Its mission is to provide market intelligence, to promote standards and to offer advisory services to governments, microfinance providers, donors and investors. CGAP reports taking in USD 20.9 million in total revenue for fiscal year 2010.

Sources and Resources:

MicroCapital.org story, February 23, 2012: “MICROFINANCE PAPER WRAP-UP: The Debate on Outreach & Impact: What do We Know and How do We Know It, by David S. Gibbons, Published by Global Microcredit Summit”, https://www.microcapital.org/microfinance-paper-wrap-up-the-debate-on-outreach-impact-what-do-we-know-and-how-do-we-know-it-by-david-s-gibbons-published-by-global-microcredit-summit/

MicroCapital.org story, February 9, 2012: “MICROFINANCE PAPER WRAP-UP: Global Microscope on the Microfinance Business Environment 2011”, https://www.microcapital.org/microfinance-paper-wrap-up-global-microscope-on-the-microfinance-business-environment-2011/

MicroCapital Universe Profile: CGAP (Consultative Group to Assist the Poor), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=CGAP+%28Consultative+Group+to+Assist+the+Poor%29

Browse the MicroCapital Universe and add your entry to the wiki at: https://www.microcapital.org/microfinanceuniverse/

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