SMEs are companies with financial needs that are too large for microfinance but too small for corporate banking models to properly serve. They are a substantial and economically significant sector in almost every country on the planet. SMEs account for over 50% of national output in high-income and several middle-income nations.

The SME banking industry is in upheaval. It has evolved from a market thought too difficult to serve to a strategic objective for banks worldwide. The “missing middle,” which refers to the gap in financial services available to SMEs, is closing. SME banking appears to be increasing quickest in emerging markets (low- and middle-income countries), where the gap is the greatest. Emerging market banks are increasingly formulating strategies and establishing SME divisions.

SME: Economic Importance

The SME sector is vital to national economies since it contributes significantly to employment and GDP, and its growth is tied to an economy’s formalization.

  • They account for more than 95 per cent of all registered businesses worldwide.
  • They account for more than half of all jobs worldwide.
  • In high-income countries, account for 50% of GDP and employ more than 60% of the workforce.

This figure is lower in low-income nations, mainly where the informal sector is large, but it is still important.

The contribution of the SME sector to GDP also indicates its economic relevance.

  • As of 2018, India had 51 million SMEs, accounting for 37% of non-agricultural GDP and employing 40% of the workforce. SMEs contribute significantly to the nation’s GDP.

SME Banking Opportunity & Trouble with SME Lending

Historically, banks saw the SME sector as hazardous, expensive, and difficult to serve.

  • Banks usually refuse to lend money to businesses with less than $2 million in revenue.
  • Banks see SME loans as high-risk businesses with a difficult customer base.
  • SMEs must spend more than 24 hours on loan origination documentation after approaching many banks, and they must wait weeks or months for the loan to be granted.
  • Many banks continue to use a paper-intensive, laborious, and time-consuming procedure. Maintaining Excel sheets alone may result in data loss if not integrated with systematized loan origination and other processes

However, accumulating evidence suggests that banks are finding efficient solutions to difficulties A recent survey of 91 banks in 45 developed and developing nations — Bank Financing for SMEs Around the World — discovered that these banks saw the SME sector as a significant market with strong prospects.

SME Banking: Challenges Encountered

The most often mentioned obstacles to SME banking include

  • Regulatory barriers can directly increase the difficulty to charge market rates or recovering non-performing loans making the supply side less profitable, while on the demand side, they might impact SMEs’ willingness or ability to borrow.
  • Weak legal frameworks can dissuade banks from helping SMEs. A prime example is ineffective contract enforcement. If flaws in the legal and judicial systems make contract enforcement difficult, the transaction cost of lending rises, making it less appealing to banks. SMEs that lack adequate and enforceable rights to their own assets may be unable to secure sufficient collateral to qualify for a bank loan, on the demand side.
  • The third type of problem in the operating environment is macroeconomic variables. These factors include overall insecurity, high-interest rates (i.e., the high cost of capital to lend), and exchange rate risk.

Government Policies for SME Finance

Governments have implemented a number of policies to assist SMEs in obtaining financing.

  1. Reforming existing legal/regulatory barriers: Reforms that enhance SME access to finance may entail identifying and removing legal and regulatory barriers like those discussed above. In one country, this could mean simplifying accounting procedures or formalizing processes for SMEs. In another jurisdiction, it could imply lowering capital requirements for SME portfolios, possibly by making exceptions to international standards established for large loans.
  2. Governments may take efforts to broaden the SME finance market, as well as to encourage SME access to credit by providing public goods and services aimed at incomplete markets and market failures. This can be useful, especially in nations where access to transparent information is challenging. On the demand side, governments may offer SMEs financial statement preparation training. Governments can strive to establish or support the country’s credit information infrastructure, such as credit bureaus and collateral registries, on the supply side.
  3. Intervening directly in the market to kick start or incentivize financing to SMEs—most governments appear to act in some way. Direct lending through government-owned institutions and directed credit programmes, in which the government contributes money to banks, particularly for lending to SMEs, are examples of such initiatives.


  • As of August 2019, Lebanon’s SME’s (Innovative Small and Medium Enterprises) co-investment fund had invested $10.23 million across 22 enterprises, leveraging $25.47 million in co-financing.
  • In India, a digital MSME loan aggregator and matchmaking platform have gathered $1.9 billion in private sector finance for MSMEs, making it the country’s largest online lender.
  • Two World Bank Group lines of credit in Jordan aim to boost MSMEs’ access to finance and, as a result, contribute to job development. Through nine collaborating banks, $45.2 million has been on-loaned to 3,345 MSMEs.
  • The Development Finance Project is working to establish the Development Bank of Nigeria (DBN) in Nigeria. As of May 2019, the Development Bank of Nigeria’s credit line to PFIs for on-lending to MSMEs had disbursed US$243.7 million, reaching over 50,000 end-borrowers, 70% of whom were women, via 7 banks and 10 microfinance banks.


SMEs started off as a risky outlet on the investment table, but they have come a long way and proven to be a financially uplifting business model on the contrary. Business plans fail every now and then. That’s how it is supposed to be, but this one looks like it has a long way to go on the path to success.


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