How and why we finance SMEs

British International Investment (BII) sees opportunities for impact in firms of all sizes. Sole-traders, microenterprises, small, medium, and large firms are all sometimes unable to find the financing they need, to the detriment of society. The growth of firms is at the heart of development. Countries escape poverty as people move out of informal employment into wage-paying jobs at larger and more productive firms. There is a striking absence of large firms in many of the countries where BII invests.

The lack of suitable finance is a well-known constraint on the growth of small and medium enterprises. The answer seems obvious: increase supply. But the persistence of this problem over time and across countries tells us that it is not so easily solved.

This paper tells the story of BII’s efforts to close the SME financing gap, tries to explain why the gap exists, and examines what the evidence has to say about the development impact of improving access to finance for SMEs. We have drawn from a review of the impact of small and medium-sized enterprises, “Why SMEs matter?” that BII commissioned from the International Growth Centre.

Banks are a big part of our story. In the past, in less developed financial sectors, our priority was often simply to strengthen and grow banks. As banks mature, our support can become more targeted, helping them shoulder the risks of SME lending and expand into more impactful areas, such as green lending.

Bank lending practices are evolving, often in response to opportunities created by digital technologies and new sources of information about borrowers. The arrival of new digital lenders, offering borrowers quick decisions without asking for collateral, has shaken up the market. We often support these new entrants via fund managers who specialise in financial technologies.

But digital credit typically serves the smaller end of the SME spectrum. Larger SMEs sometimes want larger loans, on flexible terms that are better suited to financing investments for growth. To meet that need, we often turn to SME financing specialists with more hands-on business models. The latest milestone in our SME financing journey is Growth Investment Partners, a business that BII has founded in Ghana to provide patient and flexible risk-bearing finance to larger SMEs, based on careful assessments of the borrower’s growth prospects. It is a model we hope to replicate elsewhere.

There is no single answer to the problem of SME financing. Our approach is to support continued innovation and diversity in the financial sector. The needs of SMEs are varied, and the solutions must be varied too. We want to keep learning, and we hope you will learn something from our journey so far.

This article was originally published by BII.