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Microfinance and microenterprise are critically linked; microenterprise development is
an essential extension of microfinance schemes. If microfinance is to have a sustainable impact
on poverty eradication, it must eventually scale-up into creating a private sector of entrepreneurs
who function in the formal economy. In other words, microfinance has the potential of
formalizing the informal sector, empowering micro-entrepreneurs to participate and benefit from
the formal economy.

Microfinance can support initiative for direct supply and market linkages to small and
medium businesses targeting promising micro-entrepreneurs in non-traditional, low volume but
high value-added products in potential niche growth areas of the economy. Such an approach
could reach existing micro-entrepreneurs who are seeking to graduate from the survivalist profile
of microenterprises into a more secure and productive foothold of the formal sector of the
economy. It would expose microenterprises to larger enterprises "higher up the chain",
encouraging forward and backward linkages with established companies. Targeted microentrepreneurs
can potentially develop, produce, and perhaps market low-volume but higher profit
products, expand, and take on additional employees, thus scaling-up.

This potential, however, is contingent upon a supportive environment at all level and
among all actors, supporting business incubation and expansion. For example, at the local level,
regulation and standards among MFIs and their respective microenterprises can lend legitimacy
to these initiatives, while networking among MFIs can provide a lobby platform to propel
enterprises stemming from microfinance into the formal economy. MFIs can work together to
ensure that Governments and donors do not support organizations that undermine the market for
microfinance services and microenterprises by subsidizing loans.

At the national and international level, actors can promote legislation, business services,
and infrastructure to enable African micro-entrepreneurs and producers to increase market
opportunities, technical know-how, and management. Government policies are often biased to
the formal and urban sectors of the economy, pre-empting opportunities for informal and microentrepreneurial
initiatives to scale up into the private formal sector. Taxation schemes should be
fair, progressive, and economically efficient, with particular sensitivity to the vulnerable sectors
of the economy which microfinance serve and in which microenterprises operate.

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