Assisting MSMEs — lessons from recent approaches
As COVID-19 continues to threaten lives and livelihoods, the most severe impact is being felt by MSMEs; yet we can learn from the experiences of others and avoid catastrophe.
Micro, Small and Medium Enterprises (MSMEs) are critical to promoting inclusive economic development and poverty alleviation. They constitute a vast number of businesses and employ a large number of people in developing countries. They are the backbone of the global economy and are fundamental to the day-to-day provision of goods and services around the world. It is estimated that there are approximately 400 million SMEs within low and middle-income countries, which account for around 60 percent of GDP in low-income countries.
As COVID-19 continues to threaten lives and livelihoods, some of the most severe economic impacts are being felt by these MSMEs and their workforces, in both developed and developing economies. Thus, action is needed from governments, private sector leaders and international institutions to ensure the continued viability of MSMEs.
The case in the Maldives
Where the impact was felt
According to the ‘Impact of the COVID-19 crisis in the Maldives’ report published by the Ministry of Economic Development, businesses in tourism services, including resorts, guesthouses, dive/water sports and excursion services, etc, and support services of tourism, such as freelancers, community vendors, transport services, were the first to be impacted from the border closure. Restricted operating hours and lockdown in the Greater Malé Region further affected several formal and informal MSMEs, particularly, cafés, traders, restaurants, taxi service providers, education services, event planners, dressmakers, suppliers and freelancers in art and entertainment areas.
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What was the impact?
The report states that during the period of February to June 2020, 80 percent of MSMEs shut down while only 19 percent of businesses continued. It was further explained that those MSMEs who had completely stopped operations either did so due to the COVID-19 crisis or prior issues with performance, which worsened with the pandemic. The report further indicated challenges produced due to supply disruptions, negative impacts on the cost of operations and the subsequent impacts on cashflow.
Actions moving forward
The March 2019 report, ‘Impediments to SME Growth in Small Island Developing States - The Case of the Maldives’, published by MMA highlights that the SME sector in the Maldives was given ‘scant attention’ until very recently. It was only in 2006 that The Ministry of Economic Development (MED) in collaboration with the Asian Development Bank (ADB) started the SME project with the aim of promoting SMEs, particularly in atolls, as part of the Private Sector Development Program (PSDP).
The SME Act was ratified in 2013 and MED has been providing technical support through the seven established business centres that cover every atoll and every inhabited island in the Maldives. The report also said that MED introduced various micro-finance schemes with the objective of creating a sustainable environment for SME growth.
On 3 December 2018, SME & Entrepreneurs Federation of Maldives (SEFM), a legal entity was registered with the intention of building more robust SME engagement in the country. In addition, SME Development Finance Corporation Pvt Ltd (SDFC) was also established as a specialised financial institution providing financial products and ancillary services to MSMEs and entrepreneurial start-ups with the primary purpose of easing access to finance for MSMEs.
Even with these initiatives the report states that SMEs continue to face challenges, and this has been further aggravated due to the ongoing pandemic. Therefore, it is important to explore what more can be done to support and develop MSMEs.
1. An alternative to addressing the financing gap
MSMEs face a financing gap whereby the financing avenues are limited. The European Investment Bank (EIB) in 2011, listed financing constraints as the second most-severe obstacle faced by the sector. Often, the costs and risks of serving SMEs are perceived to be too high by commercial finance. Microfinance loans, on the other hand, are too small to meet SME capital needs. Therefore, EIB recommends the use of International Financial Institutions (IFI) to bridge this financing gap.
EIB believed that IFIs are often better placed to perform this role than individual donor governments or local governments, due to the IFI model of working through intermediaries, the provision of technical assistance, as well as benefits in cost efficiency, incentive alignment and sustainability. The report broke down the types of financing options that can be made available to MSMEs as;
- Credit lines — loans to intermediary banks and financing institutions. These institutions pass on the loans to local SMEs in support of their investment projects.
- Guarantees — credit guarantees insure/guarantee part of the credit risk for banks. The IFI takes on part of the credit risk for intermediaries by committing to reimburse the intermediary if the final beneficiary fails to repay a loan.
- Private equity investments — IFIs provide financing to private equity funds, whose managers in turn invest the IFIs’ and other private investors’ money in equity of businesses in developing countries
2. More intentional and diverse role of government
Without a doubt, governments have a monumental role in supporting and developing MSMEs. Proactive government policies are needed, and not simply regulatory reform of the business environment. Considerable evidence, especially from Asia, shows that successful economic development has mainly been due to proactive policies by the state. So, what more can governments do?
- Business Development Services — such as training, advisory services, information, and technology transfer. For rural enterprises, extension services and marketing support can be especially valuable.
- Targeted Technical Assistance — information and advisory services, and finance to specific enterprises.
- Value Chain Programmes — whereby SMEs are linked to large corporations as suppliers or distributers.
- Procurement and Local Content Programmes — whereby governments and/or large companies source inputs or services from domestic SMEs.
- Tax Policies — must be progressive whereby adopting a more pro-poor tax policy by reducing taxes on SMEs.
There is evidence that government intervention has helped the sustainability of MSMEs. A report published in June 2021 by the Organisation for Economic Co-operation and Development (OECD) titled OECD SME and Entrepreneurship Outlook 2021 found that quick and unprecedented public policy responses helped cushion the blow of COVID-19 and maintain most SMEs and entrepreneurs afloat. Available data so far points to sustained start-ups creation, no wave of bankruptcies, and an impulse to innovation in most OECD countries.
3. Business incubation
Business incubation is a strategy that has proven successful in fostering and developing MSMEs. An incubator helps startups to grow and accelerate the successful development of businesses through an array of business support resources and services. Government agencies, educational institutions and the chambers of commerce usually are seen to lead such projects locally while international organisations and large multinational corporations (MNCs) also run their own successful programmes. Strong examples of such projects include the case of Centre for Entrepreneurship Education and Development’s (CEED) SME Incubator Project in Canada, Google Campus London in the UK for tech entrepreneurs and the eFactory project run by Missouri State University in the USA which synergises startups with the programs the University offers.
4. Broader and more proactive role of Chamber of Commerce
Traditionally, chambers of commerce and industry often neglected the MSME sector by concentrating on larger firms which are able to pay higher membership fees. However, as The International Chamber of Commerce (ICC) is leading by example, the local Chambers have a mammoth role to play. In addition to providing services in the field of advocacy, counselling and mentorship in conventional business areas such as management, marketing or finance, Chambers of Commerce must also run training and learning programmes with a keen focus on knowledge transfer. Networking by bridging MSMEs with larger enterprises is also another key role that must be executed. The ICC has launched a call for urgent and decisive action under their programme ‘Save Our SMEs’ to combat the economic repercussions of the COVID-19 pandemic.
MSMEs are a fundamental part of the economic fabric in developing countries such as the in the Maldives. They play a crucial role in furthering growth, innovation and prosperity. As the effects of COVID-19 still lingers, there is no doubt that in order to sustain and grow these businesses, the input and support from many key stakeholders are necessary.
We need to facilitate, enable, support and develop MSMEs, through programmes focused on policy development/modification, advocacy, training & capability development, incubation, access to finance and market access.
