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Expanding the supply of finance through the non-financial private sector - Increasing SME Access to Finance: A Four Pronged Approach
| Guest post by: OECD Development Centre |
Article Overview: Financial institutions are not the only source of money for SMEs. Apart from remittances by nationals working abroad, which are a key boost to private-sector growth, the interdependence between SMEs, large firms and sectoral “clusters” is a major potential source of finance, as shown in Asia and Latin America.
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Expanding the supply of finance through the non-financial private sector - Increasing SME Access to Finance: A Four Pronged Approach
Financial institutions are not the only source of money for
SMEs. Apart from remittances by nationals working abroad,
which are a key boost to private-sector growth, the interdependence
between SMEs, large firms and sectoral
“clusters” is a major potential source of finance, as shown
in Asia and Latin America.
Big firms can do a lot to help SMEs get finance more easily
by transferring resources (money and factors of
production) and guaranteeing SME solvency with financial
institutions. Links with major companies can also help SMEs
get export credits, which are especially important in
countries with weak institutions, since commercial partners
are better informed than other creditors (especially financial
institutions) about the ability of their customers to repay
debts. Export credits have been proved useful in Zambia’s
agro-food industry. Subcontracting is still uncommon in
Africa, but has grown rapidly in South Africa since 1998,
though there is increasing scepticism about it because it
may confine SMEs to low-skill informal activities.
Clusters of SMEs, which are very active in Asia, enable memberfirms
to seek finance together, provide collective guarantees
or even set up their own financial body. The threat of expulsion
from the cluster ensures that promises are kept, which allows
the network to overcome shortcomings in the legal system.
Frequent interaction with financial authorities, as well as the
role that reputation plays in the cluster, can greatly increase
confidence between firms and financial institutions and thus
make it easier to get loans and lower rates of interest.
Working together also means firms can get supplier credits
and can borrow from each other when necessary, which
reduces general costs. Such clusters, however, are very
little developed in Africa and are concentrated in South
Africa, Kenya, Nigeria, Tanzania and Zimbabwe.
Financing SMEs in Africa
by Céline Kauffmann
Policy Insights No. 7 is derived from the African Economic Outlook 2004/2005, a joint publication
of the African Development Bank and the OECD Development Centre
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