"Money is the Oxygen for Entrepreneurship"

Photo: i_am_zews/Shutterstock.com

A welder in Colombia, a baker in Kenya and a carpenter in the Philippines – people use their skills in different ways to support their communities with goods and services, satisfying basic needs and creating room for growth. One man’s or woman’s talent can quickly develop into a lifeline for others: “Entrepreneurship”, it has been said, “knows no borders”. 

Access to finance, however, unfortunately does. Micro-sized enterprises, which can have fewer than 10 employees, have very different financing needs than a company many times their size. They may borrow smaller amounts, but servicing microenterprises takes no less groundwork, risk appetite and regulatory clarity. 

Micro, small and medium-sized enterprises (MSMEs) are by far the most frequent form of businesses in developing countries. In Peru, for example, they account for 98 percent of all private enterprises, contributing 42 percent of GDP and accounting for 60 percent of employment. The International Finance Corporation (IFC), the private sector arm of the World Bank, estimates the total of MSMEs in developing countries to be more than 165 million. 

The demand for financing is huge. According to IFC, 65 million MSMEs have unmet needs of US$5.2 trillion. In different terms, that amount is 1.4 times the present amount of global lending to small businesses. 

The financing gap varies from region to region: East Asia and the Pacific region have a greater need to catch up than Europe and Central Asia, for example. Worldwide, significantly more than half of all registered MSMEs, along with informal enterprises, do not have access to traditional forms of credit. 

Microfinance offers a pathway into credit access for MSMEs by providing lending types usually not offered by traditional banking such as smaller, short-term loans that sometimes do not offer collateral or are group-based. 

Banking the “unbanked” started as a charitable effort. Muhammad Yunus is considered the father of microfinance. In the 1970s, a drought in Bangladesh and its devastating aftermath prompted the economist to think of ways to lift his country out of poverty. A US$27 pilot loan to a group of 42 families led him to later found Grameen Bank, the world’s premier microfinance institution. In 2006, Yunus won the Nobel Peace Prize for his efforts. 

“In 1974, I found it difficult to teach elegant theories of economics in the university classroom in the backdrop of a terrible famine in Bangladesh,” Yunus said in his Nobel Prize acceptance speech. “Suddenly, I felt the emptiness of those theories in the face of crushing hunger and poverty.” 

The Grameen model showed that microcredit can yield more than merely micro results. Recognizing the work that the “Banker of the Poor” had sparked, the United Nations designated 2005 as the International Year of Microcredit. The OPEC Fund strongly supported and quickly adopted the concept of microfinancing. Over the years numerous loans to microfinance institutions for on-lending to local clients were provided. The OPEC Fund also entered into a long-term engagement when it signed a US$20 million investment in the Microfinance Enhancement Facility (see below) in 2009 and committed a further US$20 million in 2014. Launched in the aftermath of the global financial crisis the facility provided much-needed liquidity and affordable credit at a crucial time for the world economy. 

Tareq Alnassar, OPEC Fund, Assistant Director-General, Private Sector and Trade Finance Operations, says: “This engagement demonstrates how we can act counter-cyclical in direct response to our partners’ urgent needs. The facility was also a great example of international cooperation as we joined forces with IFC and Germany’s Kreditanstalt fuer Wiederaufbau as well as the Austrian development bank OeEB and its Swedish peer SIDA. It shows that also in microfinance the saying is true: ‘The whole is greater than the sum of its parts.’” 

The World Bank’s Global Findex Database 2021 report presented several clear cases of microfinance’s impact. “In Chile, low-income women who were members of microfinance institutions and received free savings accounts were able to reduce their reliance on debt and improve their ability to make ends meet during an economic emergency,” according to the report. But, just as offering microfinancing services can lead to benefits, taking them away removes that positive impact. In India, a reduction in microfinance options was associated with “significant decreases in wages, income and consumption.” 

Narrowing credit gaps for the unbanked is one of the aims of Sustainable Development Goal (SDG) 9.3, which seeks to increase the access of small enterprises to financial services. In addition, SDG targets 8.3 and 8.10 aim to boost formal employment and broaden general financial services, respectively. 

In some areas, entrepreneurs are faced with only two options: predatory lenders – who charge high interest rates, or traditional banks that often do not cater to small businesses with their relatively small loan volumes. 

However, small businesses drive the global economy. Most countries’ GDPs rely heavily on the MSME sector. By not offering small businesses the chance to grow, or at least sustain themselves, a lack of financial access amounts to tying a lead weight on a country’s general growth. 

Besides, microfinance doesn’t just encompass microcredit, but also savings accounts and insurance. Broadening financial inclusion isn’t just another box to check to ensure all the SDGs are achieved. Providing access to credit is an enabler to achieving many other goals: For instance, supporting agricultural enterprises also strengthens food security. 

For all its potential, microfinance does have its limitations. First, there is the matter of regulation. Many places do not have strong legal protections for borrowers, leaving them vulnerable to aggressive collection tactics or shady institutions taking advantage of a lack of financial literacy. 

As many microfinance institutions are not part of large, established banks, they often find it difficult to attract credit from international development finance institutions, whose loan sizes often do not fit. 

The World Bank’s Findex report pointed out several instances in Uganda, Ghana, Mexico and Peru where customers were not always provided with consistent product information or account costs, or told about the most affordable options. 

There is also microfinance institutions’ limited capacity to fulfil businesses demand for loans. MSMEs often need larger credit volumes, but also supporting services such as insurance, savings accounts or knowledge-transfer, for instance in the field of financial literacy. 

Still the success of the Grameen model shows what is possible, especially in ensuring financial inclusion among rural and women-owned MSMEs. As Mohammad Yunus said: “Money is the oxygen for entrepreneurship”. 

The Microfinance Enhancement Facility 

The Microfinance Enhancement Facility was initiated in 2009 to support economic development and prosperity globally through the provision of short and medium-term financing to financial institutions which support microfinance and micro-enterprises. The Fund observes principles of sustainability and additionality, combining development and market orientations. Since inception, the Fund has invested US$2.7 billion in 63 countries, financing 300 institutions with 838 loans.