SMEs and the Global Finance Gap: Why small and medium enterprises struggle — and what policy can fix it

Small and medium enterprises (SMEs and MSMEs) are the backbone of economies worldwide — accounting for the vast majority of firms, most jobs, and much of GDP. Yet globally they face a persistent finance gap: billions of dollars of viable credit demand that never gets met. This blog explains how large the gap is, why it exists, what it costs economies and communities, and — most important — practical policy solutions that governments, regulators and development partners can implement now.

1. Quick snapshot (the scale)

In emerging and developing economies, the MSME finance gap is measured in the trillions: recent estimates put the formal MSME finance gap at about $5.7 trillion, rising to roughly $8 trillion if informal firms are included.
Other estimates find that ~40% of formal MSMEs in developing countries cannot get credit, producing an unmet financing need equivalent to several percent of GDP (estimates vary by region and methodology; one synthesis places the unmet need at roughly $5–5.7 trillion).
The finance gap has grown in recent years even while overall bank credit expanded — indicating supply-side frictions and structural issues that block SMEs from benefiting.

(These headline numbers are the most load-bearing facts in this blog — see the cited IFC and World Bank resources above.)

2. Why SMEs struggle to get financing — the core reasons

SME finance problems are complex and overlapping. I group them into demand-side, supply-side, and systemic/institutional causes.

A. Information & scale problems (the fundamental market failure)

SMEs are heterogeneous, small and often opaque. Lenders face high per-borrower costs to assess creditworthiness — the economics often don’t work for small ticket loans. Banks therefore prefer larger, standardized clients. This “fixed-cost of underwriting” problem is the single most-cited structural reason.

B. Collateral and legal weaknesses

Many SMEs lack land or formal fixed assets commonly required as collateral. Weak or incomplete collateral registries and hard-to-enforce creditor rights make secured lending riskier and more expensive.

C. Poor credit information and reporting

In many countries credit bureaus and registries are incomplete or exclude small firms and informal actors. Without reliable borrowing records, lenders rely on blunt signals or decline lending.

D. Short, uncertain cash flows and payment delays

SMEs often sell to larger firms or public buyers and face delayed payments; irregular cash flows increase default risk and shrink lenders’ willingness to offer working capital. Research shows late payments materially worsen SME financing conditions.

E. High perceived risk & regulatory pressure on banks

Since the credit tickets are small but risk and monitoring costs are high, banks price SME loans conservatively or avoid certain sectors. New regulatory regimes (e.g., higher capital charges for risky lending) can unintentionally reduce SME credit availability. Recent policy debates in several advanced economies show this dynamic.

F. Informality and gender/location gaps

Many micro and small firms operate informally (no tax returns, no registration), which keeps them outside formal finance. Female-owned firms, rural enterprises, and certain sectors (creative, services) face systemic discrimination or lack of tailored products.

G. Market failures in non-bank finance and limited fintech scale

Fintechs and alternative lenders are innovating but remain small relative to the total SME financing need, and often concentrate in higher-income markets. Where they operate, they help — but regulatory fragmentation and capital constraints limit scale.

3. The consequences — why this gap matters

Slower growth and job creation. SMEs create most jobs; undercapitalized SMEs cannot expand, hire, or invest in productivity. (SMEs are ~90% of firms and supply ~70% of employment in many countries.)
Inequality and exclusion. Women-led, rural and informal firms are disproportionately shut out.
Fragility to shocks. During crises (COVID-19, energy/commodity shocks) SMEs are more likely to fail without access to emergency credit, amplifying recessions.

4. Policy solutions — practical, evidence-informed actions

No single policy solves the SME finance gap. Effective approaches combine market incentives, infrastructure, targeted public interventions, and regulatory clarity. Below are actionable policy levers — from foundational fixes to more innovative programs.

A. Strengthen the underlying finance infrastructure (foundational)

Build/expand credit registries & credit bureaus that include small firms and alternative data (utilities, tax, e-invoicing). Better data reduces information costs for lenders.
Modernize collateral frameworks and registries (including movable collateral registries) and speed up enforcement and insolvency processes so lenders can take and recover collateral efficiently.

B. Correct market failures with targeted public instruments

Credit guarantee schemes (CGS): public guarantees reduce lender risk and can successfully scale lending to SMEs if well-designed (transparent pricing, limited moral hazard, strong risk-sharing). CGS work best when combined with lender capacity building and performance monitoring.
Subsidized lines for on-lending via microfinance banks and local banks for very small firms in rural areas — but design for sunset clauses to avoid long-term market distortion.

C. Encourage relevant product & delivery innovations

Promote digital onboarding, e-invoicing and supply-chain finance: digital invoicing and e-payments create verifiable transaction histories that lenders can use as collateral or cashflow evidence. IFC and other agencies highlight supply-chain finance and digital banking as high-impact channels.
Support fintech scale-up: adopt risk-based regulation that protects consumers while allowing innovative models (platform lending, alternative scoring) to grow — and encourage partnerships between banks and fintechs.

D. Improve bank incentives and reduce compliance frictions

Proportionate AML/CFT (anti-money-laundering/combating financing of terrorism) rules: apply risk-based approaches so low-value SME accounts aren’t automatically excluded (“debanked”) for minor compliance burdens. Recent policy reviews in advanced economies flag debanking as a real problem for SMEs; regulators should balance financial integrity and financial inclusion.
Regulatory sandboxes & tiered licensing for SME-lending fintechs to accelerate safe experimentation.

E. Build SME capacity (demand-side support)

Business development services (BDS): training in bookkeeping, digital payments, financial statements and loan application readiness increases approval rates and reduces default risk.
Promote aggregation models: support platforms, cooperatives or buyer-group financing that aggregate many small firms into a single, bankable counterparty (reduces per-borrower cost).

F. Use public procurement and invoice finance to create demand

Governments can create predictable demand (and faster payment terms) in procurement to reduce late payments that strangle SME cash flows. Faster public payments and enforceable payment terms unlock working capital and improve bankability.

G. Gender- and location-sensitive measures

Design products with alternative collateral, smaller ticket sizes, flexible repayment and combined technical assistance for women entrepreneurs and rural SMEs.

5. Examples & evidence of what works

Credit registries + collateral reforms: Countries that improved registries and movable collateral systems saw measurable increases in SME lending (World Bank cross-country work).
Digital lending + e-invoicing: IFC and partners’ recent handbooks show that digital underwriting and e-invoicing dramatically reduce underwriting time and expand viable ticket sizes for banks and fintechs.
Careful guarantees and blended finance: Where guarantees are targeted, time-limited and paired with capacity building, they spur sustainable private lending rather than crowding it out. (See IFC and World Bank program evaluations.)

6. A simple policy roadmap for governments (practical checklist)

Short term (0–12 months)

Launch a review of credit bureau coverage and define a roadmap to include MSMEs and alternative data.
Issue fast-pay rules for public procurement and require maximum invoice payment timelines.
Create a regulatory working group (banks + fintechs + regulators) to identify AML/CFT proportionality measures for low-risk SME accounts.

Medium term (1–3 years)

Build/upgrade collateral registries (movable property).
Pilot targeted credit guarantee windows for specific sectors (agri-SMEs, women entrepreneurs) with strong M&E.
Support digital onboarding pilots and public e-invoicing rollout.

Longer term (3+ years)

Strengthen insolvency and creditor rights where necessary.
Scale successful fintech-bank partnerships and transition subsidies to market-driven pricing.
Monitor market outcomes and sunset temporary public supports as private finance scales.

7. Conclusion

The SME finance gap is large, persistent and policy-solvable — but only if actions are coordinated. Foundations (data, collateral, insolvency), smarter regulation (risk-based supervision and proportional AML/CFT), targeted public instruments (well-designed guarantees and blended finance), and digital transformation (e-invoicing, supply-chain finance, fintech partnerships) together create an environment where banks can profitably and prudently lend to smaller firms.

SMEs are not just small versions of large firms — they need tailored financial infrastructure, products and market incentives. Policymakers who treat SME finance as a core economic priority will unlock growth, jobs and resilience in the coming decade.

SMEs and the Global Finance Gap: Why small and medium enterprises struggle — and what policy can fix it.