The MSME businesses are one of the prime drivers of economic
development, innovation and employment for any developing nation. It
is very essential for the policymakers to pay close attention to the
growth and development of the businesses that come under the
purview of this sector. It has been noted recently that the MSME
financing gaps in the developing countries is widening at a paid pace.
The main factor for this issue is the global recessionary environment
that every industry is currently facing.
The stimulus provided by the central Governments during the phase of
the pandemic is slowly showing its true colors. It is very well established
fact that MSMEs need to have a sound financial backing in order to
function smoothly as they are direct competitors to mega brands that
have access to huge amount of capital at any point of time. These mega
businesses are also able to afford huge sums of loans from centralized
financial institutions at a very nominal rate of interest whereas the
MSMEs have to bear the brunt of inefficiencies caused due to lack of
capital at their disposal.
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. The
private and public sector can better address this matter if they have
better insights about the magnitude and nature of the finance gap.
Hence, sizing MSME finance gap is crucial for the governors, financiers
and other private sector players to target high potential growth areas
and hence more efficiently support MSME sector development.
Once the growth is stalled in the MSME sector it is often very difficult to
bring back the original momentum that is required to push these
businesses to new heights. It becomes a parable of confused
participants trying to find their way out of the mess that they have
never confronted before. At times of such emergency periods, the
policymakers must have the right set of financial tools to adequately
deal with issues of the MSMEs at the ground level.
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According a study that was recently published, 131 million or 41% of
formal MSMEs in developing countries have unmet financing needs.
MSME finance gap in developing countries is estimated to be
approximately $5 trillion – 1.3 times the current level of MSME lending.
Women-owned businesses comprise 23% of MSMEs and account for
32% of the MSME finance gap. It can be ascertained from the above
data that a lot of working is yet to be done for the welfare of the
MSMEs by Government bodies.
MSME financing gap in India :
MSME owners generally face difficulties in accessing finance at
affordable rates. One of the reasons can be the high risk involved
because of which financial institutions hesitate in extending them
loans. Moreover, factors such as opaqueness of the firm, improper
accounting and unawareness regarding several policy schemes restricts
an organization from availing financial support. Moreover, the financial
needs of several enterprises are growing day by day, more and more
enterprises are qualifying for formal credit and the formal sources are
not able to meet this demand efficiently. This leads to the creation of a
financial gap.
The issue of credit gap is very concerning with respect to the
performance of MSME financing gaps in India. Involuntary exclusion
occurs when the prices, terms and conditions of formal financial
services are unfavorable to small borrowers. On the other hand, small
firms might voluntarily exclude themselves from formal financial
services due to their own financial illiteracy. It is observed that despite
of the increased efforts and initiatives for MSME financing the
addressable Credit Gap stands at INR 25.8 trillion which formal
Financial Institutions can viably Finance in the near future. Moreover,
84% of the credit supply to the sector is financed from informal sources
and formal sources only cater to INR 10.9 trillion of the total MSME
Debt Demand.
SME financing gap in Africa :
The International Finance Corporation (IFC) recently estimated that
SME financing gaps in Africa for small and medium enterprises (SMEs)
stands at $331bn. Micro, small and medium enterprises (MSMEs) form
the backbone of most African economies and investment in this sector
will significantly enhance job creation and wealth development.
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The informal sector contributes 38% of sub-Saharan Africa GDP yet 51%
of the continent’s 44m formal MSMEs lack the finance necessary to
grow. The true scale of the shortfall is almost certainly even greater
given the lack of data.
MSME financing in India :
The overall picture of MSME financing gaps in India is currently at a better
position. The Ministry of MSME has introduced many valuable schemes
for the development of the sector. Many of the MSMEs in the country
are availing the schemes that have been set up in order to meet their
financial requirements. It is a primary driving factor for MSMEs to be
able to produce high quality goods that helps in the progress of the
sector.
The MSME financing gaps report shows that 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 MSME enterprises that are credit constrained, representing 40%
of all enterprises in the 128 reviewed countries.
Thus it can be said that MSME capital requirements can be efficiently
met if they make good use of MSME schemes and thus impact the
MSME growth rate tremendously.