June 27, 2022

Why MSME Financing is Critical for a Robust Post-COVID Recovery

By Leela Vosko

A Force in the Global Economy

Micro, small and medium enterprises account for roughly 90% of business entities worldwide and generate more than half of all global employment.1 In frontier and emerging markets, MSMEs drive an estimated 40% of GDP and account for 70% of employment.2 All of these numbers expand dramatically if we also consider informal MSMEs.

According to the SME Finance Forum, 131 million (41%) of formal MSMEs in developing countries have unmet financing needs,3 leading to unmet growth potential and unfilled aspirations. Furthermore, the MSME financing gap in developing countries is estimated to be approximately $4.8 trillion–1.3 times the current level of MSME lending4–with women constituting one-third of this total. Despite their importance to aggregate economic growth and prosperity, MSMEs often struggle to access capital from banks that cater to the upper middle- and upper class in their respective countries. Even during COVID, many government policy responses to the pandemic failed to truly account for MSMEs—particularly informal ones—with those that relied on services and tourism sectors hit particularly hard.

Creating Opportunities

By lending to credit-worthy MSMEs, MicroVest’s portfolio of responsible microfinance and SME financial institutions supports job creation, gender equality, economic growth, and dynamism across many underserved communities. When microfinance and SME financial institutions follow rigorous underwriting standards and enable underserved MSMEs to access capital for productive initiatives, these financial institutions are creating opportunity at the local level.

With capital on fair and transparent terms, these MSMEs are unleashed to do what they do best: to pursue growth opportunities with a positive return on capital, take advantage of opportunities to supply new goods and services to customers, and support local economic growth via new job creation. Moreover, this growth has more than just a positive financial impact for microfinance and SME financial institutions and their investors, as industries become more productive and employees gain valuable skills, as well as an opportunity to pull themselves and their families out of poverty.

Responsible microfinance and SME financial institutions have proven their value to MSMEs and underserved communities by lending across business and economic cycles.

We at MicroVest, view them as a critical component of emerging markets’ financial infrastructure. For example, as COVID hit, many of MicroVest’s portfolio companies showed resiliency despite short-term liquidity pressures. Many worked proactively to customize new financing terms that would allow their MSME borrowers to weather economic shutdowns. This gave many MSME founders the impetus to innovate their business models and invest in digital infrastructure. In some cases, this has enabled them to move online and find new customers who will stay engaged long after COVID fades.

Collaborating to Keep Capital Flowing

Getting through the pandemic also required the microfinance investment industry to come together. Even as many of us and our portfolio companies changed processes to adapt to working under pandemic norms, asset managers across the microfinance sector worked together to collectively extend liquidity support to their portfolio of microfinance and SME financial institutions, which allowed them to provide extensions of principal repayments to creditworthy borrowers who may have found themselves with temporary cashflow challenges.

As more countries gain access to COVID vaccines and travel, and as global trade reopens, helping our portfolio companies successfully navigate COVID allowed MicroVest to focus on our long-term vision, which is helping to scale sound financial institutions that operate with integrity and advance financial inclusion with each and every loan. In doing so, we ensure that underserved MSMEs can become more productive enterprises and rebuild through the pandemic, stronger.

Making Entrepreneurship Possible

Operating in the new normal is now taking shape and the work of our industry is far from finished. While the numbers about the size of the financial access gap may seem daunting, this creates opportunities for MicroVest and our investors to continue to provide financing to address the growing demands of MSMEs worldwide. Furthermore, because our portfolio of microfinance and SME financial institutions will continue to play foundational roles in the economies of their communities and remain good credit risks regardless of global macroeconomic forces, we expect our asset class to continue to demonstrate low to negative correlation with broader market indices.

On this day when we pause to acknowledge the role that MSMEs play in their economies and communities, MicroVest will continue to support the institutions that make entrepreneurship possible across many markets worldwide. There is no better time to reaffirm our commitment to these entrepreneurs as they will continue to depend on responsible microfinance and SME financial institutions for the capital to grow their businesses post-COVID.

1The World Bank; www.worldbank.org/en/topic/smefinance
2International Labor Organization; https://www.ilo.org/infostories/en-GB/Stories/Employment/SMEs#power-of-small
3SME Finance Forum; https://www.smefinanceforum.org/data-sites/msme-finance-gap
4IFC, MSME Finance Gap 2017, updated in 2018/19

DISCLOSURE INFORMATION

The information contained here has been provided by MicroVest Capital Management LLC (“MicroVest”) and no representation or warranty, expressed or implied is made by MicroVest as to the accuracy or completeness of the information contained herein. Specific portfolio or pipeline companies discussed are for educational purposes only and do not represent all of the portfolio holdings and it should not be assumed that investments in the portfolio or pipeline company identified and discussed were or will be profitable. The companies profiled were selected based on their unique uses of technology in the context of social impact, with no reference to amount of profits or losses, realized or unrealized. This document is for informational purposes only and is neither an offer to sell nor a solicitation of an offer to purchase an interest in any MicroVest product (the “Funds”), and nothing herein should be construed as such. Any such offer or solicitation will be made only by means of delivery of a definitive private offering memorandum which contains a description of the significant risks involved in such an investment. Prospective investors should request a copy of the relevant Memorandum and review all offering materials carefully prior to making an investment. Any investment in a MicroVest product is speculative, involves a high degree of risk and is illiquid. An investor could lose all, a significant portion or some amount of its investment. You should not construe the contents of the enclosed materials as legal, tax, investment or other advice. To invest with MicroVest, one must be a qualified purchaser and an accredited investor. The investments may be deemed to be highly speculative investments and are not intended as a complete investment program. They are designed only for sophisticated persons who can bear the economic risk of the loss of their entire investment in the Funds and who have a limited need for liquidity in their investment. There can be no assurance that the Funds will achieve their investment objectives.

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