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What’s Happening in the Missing Middle?

LESSONS from Financing SMEs

Small and medium enterprises (SMEs) are the economic backbone of virtually every economy in the world. SMEs represent more than 95 percent of registered firms worldwide, account for more than 50 percent of jobs, and contribute more than 35 percent of Gross Domestic Product (GDP) in many emerging markets.

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Moreover, the contribution of SMEs to GDP actually increases as economies develop – with SMEs in the developed world contributing well over 50 percent of GDP. SMEs generate most of the new jobs that are created; they help diversify a country’s economic base; they promote innovation; they help deliver goods and services to the bottom of the social pyramid, and they can be a powerful force for integrating women and youth into the economic mainstream.

And appropriate financial allocation decisions – that allow productive SMEs to expand and become large firms, distressed but productive SMEs to restructure, and unproductive SMEs to exit so that their resources are reallocated to growing firms – are critical to generating economy-wide benefits.

Yet despite these economic, social, and political benefits, these enterprises remain significantly underserved by financial institutions. In investment-climate surveys around the globe, the difficulty of obtaining financing is usually one of the top three constraints on doing business that is identified by SMEs – and, in several regions, access to finance is the single most important constraint.

This finding is supported by research that has calculated that the credit gap that formal SMEs confront is about $1 trillion. When informal SMEs are taken into account, that gap widens even further, to around $2.6 trillion.