$5.7 Trillion SME financing gap threatens global recovery: Global SME Ministerial - Trade Treasury Payments

Capital isn’t just money. It’s an opportunity. It’s the difference between an idea that changes the world and one that dies in a garage. However, many businesses, especially small and medium-sized enterprises (SMEs), suffocate from capital drought that threatens not only their growth but also stalls global economic recovery. 

According to the Global SME Ministerial White Paper on access to finance for small businesses, despite having viable business models, small businesses often struggle to access the capital they need to grow, innovate, or even survive. The White Paper is based on independent research from the International Trade Centre’s (ITC) research, publicly available information, and good practices shared by participating governments. The International Trade Centre is a joint agency of the United Nations and the World Trade Organisation that supports small businesses in internationalising their operations. 

Globally, SMEs account for approximately 90% of businesses, providing over half of employment opportunities, and contributing roughly 40% of global GDP. Despite their economic contribution, SMEs face challenges in obtaining finance, which surpass other challenges they face, such as corruption, political instability, and taxation. As per ITC, the funding gap is a threat to economic mobility and opportunity worldwide.

In emerging and developing economies, the SME financing gap was estimated at 19% of GDP in 2020, equivalent to US$5.7 trillion. This deficit forces numerous small businesses to rely on suboptimal financial resources, including internal funds or informal sources. Between 2015 and 2019 alone, the overall SME finance gap in these economies increased by over US$1.1 trillion, highlighting the challenge.

SMEs need to look beyond traditional banking for affordability

Traditional financial institutions perceive SMEs as high-risk, high-processing cost clients with low returns on investment. This perception translates into less favourable lending terms for smaller enterprises, including higher fees and interest rates. Processing costs for SME loans often equal those for large company loans, creating unfavourable cost-to-revenue ratios that discourage financial institutions from serving smaller firms.

The scale of exclusion is staggering. While much attention focuses on large corporate finance, the ITC data reveals that financing obstacles affect 57% of micro businesses and 43% of small businesses, compared to only 16% of large enterprises. This financial inequality leads to broader economic disparities and limits growth precisely where it could create the most jobs.

Nearly 70% of SMEs do not access funds from financial institutions, while an additional 15% remain underfinanced. International Trade Centre data confirms this trend, showing that less than 40% of SMEs apply for loans. Among those requiring financing but not submitting applications, high interest rates constitute the primary deterrent.

Amidst this, supply chain finance solutions have proven particularly effective in numerous countries. Mexico’s public development bank, NAFIN, pioneered a reverse factoring platform enabling small suppliers to receive early payment on invoices issued to large buyers. This innovative program leverages the creditworthiness of large buyers to benefit smaller businesses in the supply chain. By 2018, the initiative had included nearly 500 large buyers and more than 20,000 SMEs, with early payments exceeding $10 billion.

India has implemented a similar approach through its Trade Receivables Discounting System, introduced by the Reserve Bank of India in 2014. This electronic platform facilitates financing of trade receivables through multiple financiers and disburses approximately $5 billion in 2023 alone.

Venture capital represents another promising option for SMEs. Jordan’s Innovative Startups and SMEs Fund, launched in 2018 with $98 million in capital, has invested in 17 venture funds, supported 140 startups, created approximately 2,300 jobs, and attracted $165 million in private co-investment.

Digital technology is proving to be a real game-changer. In China, Ant Financial’s MYbank uses AI and e-commerce data to provide fully digital microloans, approving requests within seconds and reaching more than 50 million small borrowers with non-performing loan rates at approximately 1%.

Financial literacy is a prerequisite to bridge the knowledge gap

Here’s a truth that’s often overlooked: many small business owners simply don’t know how to speak the language of finance. For instance, in French-speaking Africa, approximately 80% of business leaders reported requiring training in key areas such as management or accounting. Companies whose loan applications were rejected expressed greater need for management and business training than those whose applications received approval. The notion is simple: how can you convince a bank to trust you with money if you can’t produce a proper financial statement?

However, many countries are already battling this gap with financial training. Ethiopia’s Entrepreneurship Development Program conducted a six-day workshop, followed by tailored business development services that helped over 3,300 entrepreneurs improve their bookkeeping and create bankable business plans. 

Another example is the “Get to Know Your Numbers” telenovela, produced by the Bank of Zambia and the German Savings Bank Foundation, which taught financial best practices through national television. This translated to multiple positive outcomes, such as a hike in entrepreneurs keeping financial records from 69% to 97%, separating business and personal finances from 33% to 67%, and holding bank accounts from 70% to 87%. Zambia also has another use case of a public-private partnership launching the “Executive Diploma in SME Relationship Management”. This was Africa’s first accredited training program specifically for bankers working with small businesses. 

This is not limited to entrepreneurs; bankers also need training to address the needs of small businesses. Bangladesh’s central bank took this need into their hands and has been organising nationwide training-of-trainers programs for bank staff and established SME Help Desks in every branch. Similarly, between 2019 and 2022 in Ghana, 318 entrepreneurs benefited from rigorous workshops, coaching, and prototype grants, resulting in the creation of over 1,900 jobs. 

Rules that help, not hinder

Regulations can make or break small business financing; if poorly designed, they become invisible walls blocking progress.

For example, banks typically require collateral in the form of immovable property as security. However, in developing countries, SMEs often rely on personal guarantees, limited savings, and movable assets, such as equipment and inventory, which make up 78% of business capital. Without modern registries for these assets, most of what small businesses own simply doesn’t count.

Proportional, inclusive, and efficient financial regulation serves as a key lever for expanding SME finance in such cases. Countries like the Philippines are embracing proportional regulation, with requirements tailored to the size and risk profile of financial institutions. This approach helps rural banks and microfinance institutions expand services to remote areas where small businesses are concentrated.

Another key factor is efficient insolvency processes, which encourage SME lending by protecting creditor rights. India’s 2016 Insolvency and Bankruptcy Code transformed a system where creditors recovered only 26% of claims over four years to one where they got 43% in much less time. This gives banks greater confidence to lend to businesses, including smaller firms, knowing debt can be resolved more predictably. India also launched its Account Aggregator system in 2021, enabling firms to share financial data with lenders across multiple platforms through a consent-based mechanism.

Regulatory sandboxes are proving valuable too. In Kenya, the Capital Markets Authority utilised insights from testing a crowdfunding platform to develop guidelines that are effective. Colombia’s financial regulator launched InnovaSFC, providing a pathway for fintechs to receive temporary licenses while regulations catch up to innovation.

The path forward

The financing puzzle for small businesses isn’t about finding a single perfect solution, as it is not a one-size-fits-all approach. Countries need to reflect on their unique economic and social context and concentrate their focus on three key actions: affordability, financial skills, and regulatory framework to drive meaningful progress toward financial inclusion for SMEs. By implementing these interventions, ITC predicts that equity and debt financing options can become more accessible to small businesses, unlocking productivity gains of up to 86% in middle-income countries alone. 

If strategic implementation of these actions is done correctly, it can help individual businesses and transform entire economies. Because when small businesses thrive, they create jobs, hopes, innovation, and futures, which is worth investing in.