The large role micro, small and medium-sized enterprises play in the world

As the global economy struggles to emerge from the hardships of a lengthy pandemic and ongoing conflict, hopes for recovery will rest largely on the resilience of micro, small-and-medium-sized enterprises (MSMEs). Fast-growing SMEs in particular are the biggest job creators – they tend to use more labor-intensive processes compared to larger enterprises, which encourages employment and can lead to more equitable income distribution.

On today’s World MSME Day, we celebrate the resilience of MSMEs around the world who are playing critical roles in the economies of their countries, despite the many current and systemic obstacles and challenges in their path, particularly for women and youth-led MSMEs.

MSMEs represent about 90% of businesses and over 50% of employment worldwide, with formal MSMEs contributing up to 40% of GDP in emerging countries. In sub-Saharan Africa, more than 95% of firms are MSMEs. In fragile economies, domestic MSMEs can play a major role as they may be more adept at navigating local challenges and informal networks, allowing them to maintain much-needed employment, products, and services compared to foreign firms which may be less willing or able to navigate challenging conditions or remain in countries when risks arise.

Despite their significance, MSMEs are routinely underserved by inadequate or weak government policies, enabling environments, and a lack of finance – especially equity, short-term working capital, and more patient capital – which limits market entry, long-term investment, expansion, and innovation. There is a shortage of capital providers able to support MSMEs. Most capital is allocated through international private equity and bank lending which favors large, mature firms that characteristically have a lower pace of growth and low job-intensity.

Women and youth-owned MSMEs are even more overlooked. Women business owners have less access to capital than their male counterparts and women-led and gender-lens MSME investment vehicles are uncommon. About 80% of women-owned businesses with credit needs are either unserved or underserved which translates into a massive $1.7 trillion financing gap. Loan approval rates for women entrepreneurs are 15-20% lower than those for men, partly attributable to systemic bias and misperceptions within institutions that have yet to adopt a gender lens approach to financing.

The financial sector, especially in emerging economies, is more or less ‘gender blind’ in its design and approach; the market is primarily approached through economic and risk lenses. Unique challenges that women entrepreneurs face in starting, operating, and growing their SMEs, and minor adjustments that may be made to accommodate them, are often not a priority for the financial sector, primarily because neither the regulators – nor the shareholders demand a gender lens. Yet this gendered gap in access to financial and other resources needs to be addressed to grow MSMEs that can create dignified and fulfilling work opportunities for women and youth in emerging economies.

MEDA’s programming and local partnerships are built to address the systemic barriers to financing, business services, and investment and enterprise ecosystems, in order to spur inclusive enterprise growth and dignified work for women and youth.

Studies have identified that partnerships between commercial lenders/investors and NGOs can overcome information and profit disincentives and offer effective ways to meet expected returns on lending to clients are perceived as risky, such as youth and women entrepreneurs. Use of impact investment vehicles and guarantee mechanisms can be critical to enabling partnerships that increase capital flows to these underserved segments. In investment, for example, we are increasingly focused on championing an MSME investment ecosystem that challenges biases that contributes to low tolerance for risk and exclusion of certain types of business, especially those led by women. Our approach strengthens the gender, diversity, equity in which MSMEs operate.

Our M-SAWA project is a prime example of this innovative approach. Created in 2015, its goal is to boost Kenya’s economic productivity and increase job creation by improving the business, environmental, and gender performance of small and medium sized enterprises and small entrepreneurs (SEs) in the agriculture, construction, and extractives sectors. M-SAWA targets 20 counties experiencing poverty along Kenya’s two major economic growth corridors. So far, its working to benefit 250 MSMEs and 20,000 SEs, including six women-led lead firms. Its goal is to reach 27,800 women and provide business development services to 149 women-led MSMEs.

MEDA knows that strengthening the capacities of MSMEs is key to ensuring that communities can lift themselves out of poverty. To this end, our goal is to create decent work for 500,000 women by 2030, youth, and men. By strengthening the MSME sector in the countries in which we operate, we can support MSME resilience against economic shocks and the impacts of climate change and facilitate a level playing field for women and youth-led MSMEs and entrepreneurs to start and grow sustainable businesses and decent jobs for the coming decade.

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