Spotlight 3.1 Supporting microfinance to sustain small businesses
M
icro, small, and medium enterprises (MSMEs) and the informal sector will play a critical role in the long-term recovery from the COVID-19 (coronavirus) crisis. In low- and middleincome countries, small firms are vital for job creation, economic growth, provision of goods and services, and poverty alleviation. Formal and informal MSMEs make up over 90 percent of all firms and account, on average, for 60–70 percent of total employment and 50 percent of GDP worldwide.1 Yet despite their important economic role, these businesses struggle to access formal financial services. About 130 million, or 41 percent, of formal MSMEs in low- and middle-income countries faced credit constraints before the COVID-19 pandemic, and the MSME finance gap (the difference between current supply and potential demand, which can potentially be addressed by financial institutions) was estimated at $5 trillion.2 The demand for finance from informal enterprises was an estimated $2.8 trillion, equivalent to 11 percent of GDP in these countries.
Policies to support the continuity of financial services to MSMEs and the informal sector and protect these clients through restructuring processes are essential to avoid a delayed recovery. Although microfinance institutions (MFIs) are often small and may seem unimportant in balance sheet terms, they serve a segment of an economy that is macroeconomically significant. MFIs typically have detailed operational knowledge of local business conditions and the skills and abilities of individual entrepreneurs, which enables them to direct funds from recapitalized institutions to productive lending opportunities. Globally, the formal microfinance sector provides over 140 million lowincome clients with credit and savings services.3
The sector’s reach is much larger when nongovernmental organizations (NGOs), cooperatives, and informal savings and loan groups are included. In 2018 the global microfinance sector oversaw $124 billion in outstanding loans and $80 billion in savings. Specialized microfinance investors had a $17 billion portfolio in MFIs.4
The state of MFIs during COVID-19 and the policy response During the pandemic, several governments took important steps to protect MFIs when borrowers
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