SMEs play a critical role in the global economy. They are the most significant contributors to employment and generate the majority of jobs in developing economies. SMEs are also a substantial contributor to overall value added in these economies. Recognizing the importance of SMEs, the World Bank Group’s SME finance portfolio includes almost $4.8 billion in active lending, with 61 lending projects in 47 economies worldwide as of January 2018.
Nevertheless, SMEs face greater financing obstacles than larger firms—they enjoy less access to external finance and face higher transactions costs and higher risk premiums. Almost 70% of SMEs do not use external financing from financial institutions, and another 15% are underfinanced. The total credit required to finance these SMEs fully is over $2 trillion, equivalent to 14% of total developing economy GDP.
Cross-country studies show that the probability of being credit constrained decreases as firm size increases and that SMEs in the least-developed regions like Sub-Saharan Africa, East Asia and the Pacific and South Asia are more likely to encounter significant financing obstacles. Not surprisingly, access to finance has been identified as one of the most critical constraints to firm growth. On the other hand, availability of external finance is positively associated with indicators of entrepreneurship such as the number of startups and firm dynamism and innovation.