In Liberia in 2010, Queen Máxima met a woman who started her business by borrowing less than USD 100 from a microfinance institution to buy a single container of palm oil. She now exports to the United States and employs 13 people. However, she is only able to obtain a loan of up to USD 12,000, the maximum allowed by microfinance institutions. While she has USD 4,000 in savings, a good history of loan repayments, and a warehouse full of palm oil, she does not own land which is necessary for collateral for a larger loan from a commercial bank, which would help her further expand her business to exports. This gap between microfinance and SME finance is commonly encountered by entrepreneurs in emerging markets.
In China, lack of collateral was identified as of the main barriers to SME financing, and in turn SME development. Supported by the IFC, China introduced an improved legal and institutional framework and a modern security interest registry that allows firms to use their moveable assets as collateral. Commercial loans using movable assets grew by 21% per year from 2008-2010, and four of the five largest banks reported that compound annual growth rate of loans rose dramatically, from an average of 2% in 2006 to 25% in 2008. Similar programs have had comparable results in other countries.
The Rwanda Development Board is a one-stop shop for entrepreneurs, requiring just two procedures to start a business. This has reduced the amount of time needed to start a business from 20 days to only three. As a result, new business registration has boomed. Between May 2008 and August 2011, more than 17,000 companies registered, compared to 5,505 from 2003 until May 2008. Twenty-six business regulation reforms since 2005 have helped to rank Rwanda third-highest in Doing Business indicators in sub-Saharan Africa. Being formally registered also makes it easier for most SMEs to gain access to formal finance.
More Information
- IFC, IFC Secured Transactions Advisory Project in China, (2013).