Small and medium-size enterprises, especially in developing countries, are a dominant part of the GDP of a nation, and employ a large part of the population. SMEs provide flexibility to the economic structure of a country, and often respond to market needs faster than larger enterprises can. From a developmental perspective, the SME sector is widely recognized as essential to economic growth and poverty alleviation.
Despite the growth and development potential of the SME sector, however, much of this market remains untapped by financial intermediaries. In fact, a recent World Business Environment Survey conducted with 4000 firms in 54 countries showed that SMEs cited inadequate access to finance as their primary constraint. There are several reasons:
- Financial institutions—especially in developing countries—lack reliable information about SMEs;
- Transaction costs of funding SMEs given the smaller value per deal, are too high;
- Lenders are uneasy about the risks involved, or fail to see quality in small portfolios;
- Sometimes SMEs do not have adequate collateral.
Given these constraints, in a traditional relationship lending or corporate lending environment, the SME sector has not been profitable to financial institutions.
The advent of new technologies has changed the competitive landscape, and offers an opportunity to: reduce transaction costs; improve credit risk management capabilities; increase volume of investment in SMEs; introduce a range of additional financial services (for example, payroll processing, receivables management, and supply chain distribution); and access broader markets. By shifting strategy from "relationship" lending to a "mass-customized" approach, financial institutions can capitalize on these technologies and make profitable inroads into the SME sector.
The five key operative components required to develop a strategy for SME finance:
(1) conducting market research;
(2) developing products and services;
(3) strengthening delivery channels;
(4) improving information infrastructure;
(5) addressing policy and strategic challenges.
Once these kind of focused activity could be carried on then there would be lot of enthusiasm on SME ventures too.