With the belief in future economic success, credit, issued by financial institutions is commonly known as the backbone of economic developments. A financially sound system may be characterized by a sustainable balance of supply and demand for financing. In reality, this service is provided unequally across markets, adding to the imbalance of power between large and small corporates and putting a burden on entrepreneurship and innovation.
The global financing gap is an estimation by the SME Finance Forum as the difference in financing supply available and potential local demand. Effectively it measures the need for external funds for the corporate sector which can potentially be addressed by financial institutions. The estimation assumes that the restricted firms have the same willingness to borrow money and would exhibit that willingness akin to their counterparts in developed countries if they were given the opportunity.
The first well-known estimate of a global financing gap was given by the IFC and McKinsey in 2010. Back then, the circulating number was $2 trillion per annum. With more statistically sound data, the current global finance gap for MSMEs has been reassessed to amount to a staggering $5.2 trillion per year. For reference, $5 trillion is roughly the sum provided by global governments in Covid-19 relief packages by June 2020, according to the IMF. In other words, the money being pushed into the global economy as a result of the pandemic, equivalents the yearly need of more than 60 million SMEs, mostly in developing markets.
Without sufficient access or alternatives, SMEs may be forced into detrimental credit conditions. The global average interest rate spread between small enterprises and large corporates hovers between 2 and 2.5 percentage points. Additionally, further surcharges are expected to apply especially for MSMEs causing the interest spread to rise. Since 2010, it showed a slight decrease from 2.48% to 2.18%. In emerging and developing markets, most foremost Latin America and Eastern Europe, the overall interest rate level is significantly higher. As is its spread between small and large corporates. This discrepancy in financing costs is vicious; SME’s are adversely more affected by high financing costs than larger enterprises; they already operate under more uncertainty, higher stress and have lower liquidity reserves to balance economic downturns.
Alternative finance has been gaining more and more momentum throughout the years. Its role is becoming even more crucial especially now that the traditional financial systems are failing to provide the services they were designed to. In this post, we look at the global financing gap, the disadvantageous credit conditions for Micro, Small, and Medium-sized Enterprises (MSMEs), and the implications for alternative lending markets.
With the belief in future economic success, credit, issued by financial institutions is commonly known as the backbone of economic developments.
A financially sound system may be characterized by a sustainable balance of supply and demand for financing. In reality, this service is provided unequally across markets, adding to the imbalance of power between large and small corporates and putting a burden on entrepreneurship and innovation.
The global financing gap is an estimation by the SME Finance Forum as the difference in financing supply available and potential local demand. Effectively it measures the need for external funds for the corporate sector which can potentially be addressed by financial institutions. The estimation assumes that the restricted firms have the same willingness to borrow money and would exhibit that willingness akin to their counterparts in developed countries if they were given the opportunity.
The first well-known estimate of a global financing gap was given by the IFC and McKinsey in 2010. Back then, the circulating number was $2 trillion per annum. With more statistically sound data, the current global finance gap for MSMEs has been reassessed to amount to a staggering $5.2 trillion per year. For reference, $5 trillion is roughly the sum provided by global governments in Covid-19 relief packages by June 2020, according to the IMF. In other words, the money being pushed into the global economy as a result of the pandemic, equivalents the yearly need of more than 60 million SMEs, mostly in developing markets.
Without sufficient access or alternatives, SMEs may be forced into detrimental credit conditions. The global average interest rate spread between small enterprises and large corporates hovers between 2 and 2.5 percentage points. Additionally, further surcharges are expected to apply especially for MSMEs causing the interest spread to rise. Since 2010, it showed a slight decrease from 2.48% to 2.18%. In emerging and developing markets, most foremost Latin America and Eastern Europe, the overall interest rate level is significantly higher. As is its spread between small and large corporates. This discrepancy in financing costs is vicious; SME’s are adversely more affected by high financing costs than larger enterprises; they already operate under more uncertainty, higher stress and have lower liquidity reserves to balance economic downturns.