SMEs: The Missing Middle

SMEs: The Missing Middle

Small and Medium-sized Enterprises (SMEs), typically employing between 10 and 250 workers, form the backbone of modern economies and can be crucial engines of development through their role as efficient producers, innovators and employers. Generally, these businesses operate in areas with high concentrations of poverty and may employ those living in poverty or provide needed products and services, assisting in raising the standard of living. Many economists believe that economic development is advanced through the proliferation of SMEs because such proliferation increases employment opportunities in developing economies.  In much of the developing world, though, SMEs are under-represented, stifled by regulatory climates and poor access to inputs, in particular financial capital.

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Over the past 30 years, micro-enterprises have received the bulk of the attention and capital.  Nevertheless, SMEs cannot be neglected as they represent an important part of true economic growth.  Lending to SMEs has a substantial impact, creating real, sustainable jobs for the bottom of the pyramid, have improved economies of scale allowing them to compete more effectively, and providing owners with opportunities to build assets and wealth, beyond income augmentation and smoothing.

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But the type of support inherent to microfinance lending is generally ill-adapted to serving their slightly larger, and arguably more dynamic, cousins, the SMEs. New options are emerging for meeting SMEs’ financial needs, including commercial banks moving “down-market,” micro-credit institutions moving “up,” and creative application of venture capital investing ideas.

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Traditional microfinance models have helped provide basic financial services to hundreds of millions.  But in order to help build dynamic competitive economies in developing countries, the time has come to pay greater attention to the potential of small and medium-sized commercial firms to promote economic growth.  Although SMEs differ from micro-enterprises, investments in both types of entities provide similar and complementary poverty reduction and economic development opportunities.

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Creation Investments is active in evaluating and pursuing investments in the SME Lending space as a means of achieving superior financial and social returns on investment.

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