SME Credit Gap

Definition

The SME Credit Gap denotes the fact that access to financing remains one of the most significant constraints to the survival, growth, and productivity of micro, small, and medium enterprises (SMEs).

The SME credit gap has proven to be an enduring structural feature across both developing and developed markets, even in countries that have enacted a variety of policy measures to support SMEs and enhance financial inclusion more broadly.

In the world’s developing markets, about half of the estimated 400 million SMEs,1 or 180 to 220 million SMEs, still have unmet credit needs totaling US$2.1 to US$2.6 trillion. The credit gap results from both demand and supply side problems.

Demand Side Factors

Many SMEs are reluctant to seek or cannot access credit due to:

• the reams of financial documentation and Collateral requirements for obtaining a loan;
• high costs and interest rates
• and multi-week decision timeframes.

Supply Side Factors

• Many banks consider SMEs to be high-risk clients, as well as high-cost clients to acquire, underwrite, and serve.
• Revenues per client are lower relative to larger non-SME corporate clients.
• SME information is often opaque, missing any of:
  • Credit History
  • Business Plan
  • Financial Capacity
  • management capabilities
  • Collateral
• limited SME coverage by credit reporting service providers
• weak contract or Bankruptcy laws and judiciaries, and
• high SME informality in developing markets.