The SME credit gap has proven to be an enduring structural feature across both developing and developed markets, even in countries that have en-acted a variety of policy measures to support SMEs and enhance financial inclusion more broadly. In the world’s developing markets, about half of the estimated 400 million SMEs, or 180 to 220 million SMEs, still have unmet credit needs totaling US$2.1 to US$2.6 trillion.
The credit gap results from both demand and supply side problems. Many SMEs are reluctant to seek or cannot access credit due to: the reams of financial documentation and collateral requirements for obtaining a loan; high costs and interest rates; and multi-week decision timeframes.
Many banks consider SMEs to be high-risk clients, as well as high-cost clients to acquire, underwrite, and serve. Revenues per client are lower relative to larger non-SME corporate clients. SME information is also often opaque. Therefore, many banks limit most of their lending to the largest of the small firms. In the wake of the global financial crisis, increased cap-ital and liquidity requirements, new regulations including those posed by Basel III, and shrinking returns on equity have made banks’ SME lending challenges even more daunting. Compounding these challenges are the limited SME coverage by credit reporting service providers, weak contract or bankruptcy laws and judiciaries, and high SME informality in develop-ing markets.