In all likelihood, the last three months have seen us take a major step back in our efforts to reach the Sustainable Development Goals. Even before Covid, many emerging economies struggled to provide jobs, healthcare, education, sanitation and many other essential services. And with public spending and aid budgets likely to be cut, progress on a range of development indicators threatens to be undone.
So what is the solution to restart developing economies after a crisis and restore local tax revenue? Often, the answer is to create jobs via small businesses, as they are particularly important in developing economies, accounting for 70-95% of new jobs.
However, small businesses in the developing world have always struggled to access credit, with a USD 5-8 trillion annual credit gap for micro, small and medium enterprises (MSMEs). Unfortunately many large, corporate banks will be even less inclined to deal with MSMEs that have had to close up entirely for 2-3 months.
This is where microfinance institutions (MFIs) and SME banks will be crucial. We have discussed elsewhere how these institutions are vital in building resilience prior to a major social or economic shock, and how they help to finance loans for small healthcare institutions, or the leasing of medical equipment.
However, with MFIs and SME banks often the only source of credit for small businesses (not to mention other services like bank accounts, leasing or insurance), their importance in helping developing economies to recover will be critical. Many have already been engaging closely with existing clients to restructure loans and provide new financing solutions, offering a lifeline to many businesses. Meanwhile the investors supporting those organizations have grouped together to provide relief to MFIs and SME banks, helping to protect nascent financial sectors.
Indeed, the role of investors will be crucial in supporting the longer-term recovery of MSMEs. And with the rapidly growing market for investment products that support financial inclusion and SME finance in the developing world, such products are increasingly relevant, helping to finance a grassroots recovery from the pandemic in countries where government support and the role of conventional banks is very limited. At a moment when the world has never felt more united in a common cause, we can thus make a difference where it is needed most.
Paul Hailey is Head of Impact at responsAbility Investments and the author of various publications and articles. Previous roles at the company include Senior Research Analyst for the financial sector. He has an MBA from École des Hautes Études Commerciales de Paris (HEC Paris), where he is also a lecturer, and a B.A. (Hons) from Pembroke College, University of Cambridge.