Updated: Jun 5, 2020
Micro, small, and medium-sized enterprises (SMEs) are the backbone of our economy. In Latin America SMEs account for over 99.5% of all businesses and are the key drivers of economic growth and social inclusiveness in the region (OECD/CAF 2019). Despite this, SMEs are severely underfinanced, especially in developing countries where the financing gap is estimated to be around $5 trillion (“MSME Finance Gap” 2020 ). Over 40% of formal SMEs in the developing world have unmet financing needs, and that is not even taking into account the informal sector, which makes up over 50% of the Latin American economy.
SMEs and the SDGs
According to an analysis conducted by the International Trade Center (ITC), financing SMEs has a positive impact on 60% of the 169 individual targets outlined across the 17 Sustainable Development Goals (SDGs) (ITC 2019). Closing the financing gap by $1 trillion, or one-fifth of the current gap, could help developing countries increase by 15 to 20 percentage points in their scores for SDG #8, Decent Work and Economic Growth, and SDG #9, Economic Growth and Industry Innovation and Infrastructure (ITC 2019). In addition, due to the interconnected nature of the SDGs, this would have a significant positive ripple effect across all other goals.
Micro, small, and medium-sized enterprises (SMEs) are the backbone of our economy. In Latin America SMEs account for over 99.5% of all businesses, and are the key drivers of economic growth and social inclusiveness in the region (OECD/CAF 2019). Despite this, SMEs are severely underfinanced, especially in developing countries where the financing gap is estimated to be around $5 trillion (“MSME Finance Gap” 2020 ). Over 40% of formal SMEs in the developing world have unmet financing needs, and that is not even taking into account the informal sector, which makes up over 50% of the Latin American economy. e phenomenon, SMEs in Latin America experience a particularly significant productivity gap as they account for only one-fourth of the region's total productivity (OECD/CAF 25). For instance, in Argentina and Peru, 78% and 45% of SMEs, respectively, struggle to grow due to financial constraints (Abumohor 2020).
Closing the gap
A multidimensional approach is required to close this financing gap. As a first step, it is important to get SMEs investor-ready through capacity building initiatives. SMEs need to produce attractive business plans which ensure product quality through the adherence to standards and demonstrate transparency and traceability in their supply chains (ITC 2019). By gaining the necessary knowledge and skills, SMEs will be able to assess and mitigate potential risks perceived by investors.
Second, we need to foster the facilitation of investments. The market has regularly failed to match foreign investors with SMEs. Due to a lack of available information, actors seeking to invest in SMEs have had a hard time identifying the right investment opportunities, and even when identifying them, it has been challenging to screen pre-selected investments in order to decide whether the expected gains justify the risk (ITC 2019). Facilitators such as accelerators, online crowdfunding platforms, investment promotion agencies, and local financial institutions, play a critical role in bridging the financing gap.
Last but not least, trust is a two-way street, and in order to close the financing gap we need to foster trust. Fintech startups and other more risk-tolerant investors have encountered a significant challenge when trying to build trust with SME owners in Latin America. This has largely resulted due to the lack of transparency in pricing information by local banks, which generates fear in regulation and contributes to the growth of the informal economy. Investors need to provide transparency in pricing and interest rates, in order to create long-term relationships with SMEs (Abumohor, 2020).
Hecho X Nosotros as a Changemaker
At Hecho X Nosotros (HxN) we want to help close the financing gap by empowering SME owners through capacity-building efforts. Over the past 10 years we have managed to impact the lives of 7,500+ artisans and producers in the Patagonia and Andean regions. Natural camelids’ fibers from South America have an enormous potential to improve the quality of life of hundreds of thousands of rural producers and to contribute to the development of an industry that capitalizes on our cultural patrimony and natural riches. Our organization is looking to bring a systematic change in the fashion industry by helping artisans realize their potential to produce high-quality products that are aligned with sustainable development and fulfill a circular model.
Author: Micaela Vega
Editors: Hailey Matarese and Alondra Magana
Abumohor, Andres. “How Fintechs Can Build Trust with SMEs in Latin America.” Crowdfund Insider, 30 Mar. 2020, www.crowdfundinsider.com/2020/03/159239-how-fintechs-can-build-trust-with-smes-in-latin-america/.
International Trade Centre (2019). SME Competitiveness Outlook 2019: Big Money for Small Business – Financing the Sustainable Development Goals. ITC, Geneva.
“MSME Finance Gap.” SME Finance Forum, International Finance Corporation, www.smefinanceforum.org/data-sites/msme-finance-gap.
OECD/CAF (2019), Latin America and the Caribbean 2019: Policies for Competitive SMEs in the Pacific Alliance and Participating South American countries, SME Policy Index, OECD Publishing, Paris, https://doi.org/10.1787/d9e1e5f0-en.