Archive for: SME

Small and medium enterprises (SMEs) are again at the center of attention – and this is excellent news because in many countries these businesses are the backbone of the economy and they employ large numbers of people. I applaud the G-20 initiative, and more specifically the work of CGAP, to shed light on the topic of access to finance for SMEs. Read the rest of this page »

I’m sensing an upsurge of interest in small and medium (as distinct from micro) enterprise.  There’s talk of a “missing middle”—the underserved hole between conventional finance for big-business fat cats and microfinance for tiny low-income entrepreneurs.  The list of reasons to support SME starts with the well-documented role of such enterprises in job creation, and goes on from there.  Certain folks over at the World Bank and elsewhere are asking whether development funders ought to organize some sort of consultative group, á la CGAP, for SME.  I don’t have a view on that question, but I do have some observations and impressions.

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Can we peer into the soul of an entrepreneur to predict business success/risk in lending? A group of researchers based at the Entrepreneurial Finance Lab at Harvard University is convinced that the probability of willful default by borrowers can be predicted with psychometrics (psycho-metrics literally means measuring the soul).

So instead of screening new borrowers based on collateral–as banks do–or on social reputation–as microcredit traditionally does–Fina Bank in East Africa is to begin screening based on psychometric testing. Applicants for small business finance in Kenya, Uganda, and Rwanda will be screened for entrepreneurial potential or future earning potential based on criteria developed by the Harvard researchers.

Psychometric testing has long been used in recruitment. The Harvard researchers have adapted four key characteristics of psychometric tests–intelligence, personality, cognition, and ethics–that have been linked to entrepreneurial success and show promise for financial institutions to reduce risk. They’ve tested it on a small sample in South Africa, and now they are applying the technique through partners around the world to the “missing middle” of financial services – small traders and business owners (SME, not micro).

What say you? Is personality the best test of business success?

There’s been some on-line argument lately in the list-serves about the relative development merits of microcredit and small/medium enterprise (SME) credit. Some have complained that all the resources devoted to microfinance have starved SME finance of the support it deserves.

I know something about microfinance but much less about SME finance, and certainly am not qualified to opine on which does more for poor people. But I’d like to point out one factor that may help explain why microfinance gets so much more airtime than SME finance with most donors.  I’m speaking on the basis of impressions, not hard data, and would welcome correction from anyone who has more of the latter to add to the discussion. Read the rest of this page »

At a meeting last month, the Russian Government Committee on SME development discussed its concern about the decrease in bank lending to SMEs in the second half of 2008. This decrease in lending (and indeed in demand for loans) was apparently in response to the unfolding economic crisis, compounded by an increase in interest rates and stricter—and often unjustified—requirements of banks to their SME clients. Read the rest of this page »

Hopes that the developing world would sidestep the worst effects of the global credit crunch are fading, as it becomes apparent that the transmission of problems from the sub-prime niche to broader credit markets to whole financial systems is now leading to the real economy. The IMF adjusted its month-old economic growth forecasts for developing countries downward.

Governments around the world over have serious stimulus measures on the drawing board to cushion their economies and citizens from the worst effects of recession in the North. Keeping domestic credit flowing is typically a central component. Will these policy prescriptions include support for microfinance? And if they do, is this something to be applauded or criticized?

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