MSME support

Though it can be tempting for governments to stimulate enterprise through artificial incentives and backing for individual businesses, the key to establishing a strong Micro Small and Medium Enterprises (MSME) sector is to create the enabling environment for businesses to grow. That means focusing on regulatory and infrastructure aspects and encouraging and incentivising market-based providers to provide relevant financial and non-financial services.

In terms of financial services, the priority is often reducing the risks and costs of providing loans to small businesses - which requires an understanding the causes of high risk and high cost, rather than the symptoms.

One common challenge is security for loans, as in many countries, land is the only accepted collateral. However, given the lack of clarity around land ownership, requiring applicants to produce titles and documentation is costly and time consuming, and as a result, actual lending may be a small fraction of the potential demand. If machinery could be used as collateral, many more applicants would become eligible - reducing the overall cost of provision, and through diversification, reducing the risk, as proved the case in.

Defining suitable non-financial services is no simple task - and the smaller the business, the more difficult it becomes to establish sustainable providers. Microenterprises can rarely afford to pay for such assistance, and often the relevance and value-add to them of advice on tax or HR is minimal. Instead, the most valuable input can often come from their customers, particularly where these are sizable national or international players. For example, the benefits to rural agricultural suppliers of getting advice from the processing company that is most likely to buy their produce are considerable: what crops do the end customers want? Are there farming methods or inputs (seeds, fertilisers, etc) that are proven to deliver best results? Can transportation, sorting and grading be arranged on a timely and cost-effective basis?

In case of natural resource-based industries, governments can introduce local content rules that international investors must follow: these then become an incentive for investors to strengthen local suppliers and ensure that the global business also enhances local economic opportunities. OPM has helped define such rules, striking the important balance between expectations of the Government and local communities and the needs and incentives of the private enterprise.