How to successfully develop an MSME finance policy

By Jason Barrantes – former Chair of AFI SME Finance Working Group and SUGEF Costa Rica Supervisor for cooperatives and non-banking institutions and Nik Kamarun, AFI Senior Policy Manager, SME Finance

Micro, small and medium size enterprises (MSMEs) are the backbone of the world economy, consistently contributing to the gross domestic product (GDP) of many countries and regions. MSMEs account for more than 90 percent of businesses and more than 50 percent of employment around the world. MSMEs drive development, provide employment and contribute to reducing a gender gap and alleviating poverty and inequality. Despite of its importance, access to finance is one of the main challenges for MSMEs.

As a response to these challenges, SMEFWG developed the MSME Finance Policy Model. Based on experiences of 62 member institutions from 59 countries, as well as more than 20 knowledge products that the working group developed since its inception in 2013, the policy model offers best practices from the network, which align with international standards

Leveraging on bottom-up approach, the MSME Finance Policy Model highlights policy guidance for different stages in establishing, developing, implementing, monitoring, and evaluating MSME finance policy. The policy model also helps regulators to revise their existing MSME finance framework(s) through the establishment of six basic pillars. Besides acting as a practical guide, the policy model is a reference document for policymakers, financial regulators, and government agencies responsible for promoting financial inclusion for MSMEs through access and use of affordable and quality financial products and services in their respective jurisdictions.

What are the six basic pillars of the MSME Finance Policy Model?

Legal and Regulatory Framework
MSME´s Access to Financing Policy
Credit Infrastructure
Alternative Financing Infrastructure
Market Efficiency
Priority Sectors.

What useful information can I find in the MSME Finance Policy Model?

There are over 60 guiding principles that cover different policy areas across each pillar, with valuable information about how to promote financial inclusion for MSMEs. In addition, it includes 10 country cases (Fiji, India, Malaysia, Tunisia, Costa Rica, Mexico, Zambia, Ghana, Nigeria and Jordan) of the SMEFWG members across different regions.

What are current issues and focus areas that financial regulators should look at?

Although the reality for each organization, market, and country is different and the sector faces similar challenges, the lessons and experiences presented in the policy model can be adapted to the unique context of their country, based on their needs, policies and guiding principles such as:

Establishing an appropriate MSME definition s
Setting priorities in developing, implementing, and monitoring MSME policies
How to serve priority sectors (women-owned /led, youth-owned and Forcibly Displaced Persons (FDPs))
Bringing the informal sector onboard
Inclusive green finance, and alternative finance (crowdfunding, leasing, factoring, among others)
Consumer rights, consumer protection and risk management
Institutional coordination and collaboration in policy monitoring
Setting up of registries and implementing regulations on secured transaction schemes
Financial enablers such as credit information, bureau and innovative credit guarantees

How to select the best alternative finance option for MSMEs in my country?

Although MSME finance policies can be in a form of a new regulation or identify barriers to financial inclusion by reviewing existing laws and regulations, it is important to proceed in a holistic and systematic way in planning, developing, implementing, and monitoring. In order to guarantee long-term sustainability of the programs over and maintain their effectiveness it is important to follow and comply with the following stages:

Identify and define the problem and objectives, using real evidence such as baseline surveys, available international instruments, and an inventory of existing policies.
Determine the target population and carry out a consultation process prior to survey sample.
Formulate solutions and alternatives that involve not only specific activities but also allocate a budget that transcends electoral periods and includes an adequate system of governance by creating effective coordination through committees and duly regulated institutional collaboration.
Implement selected alternatives; along with a communication and dissemination program on the scope and results achieved in the implementation phase.
Evaluate and monitor results obtained essential in establishing clear and measurable objectives, based on evidence, survey or instruments used as a baseline, as well as a set of indicators as solutions.

For more information, I invite you to learn more about the policy model at the following link: Policy Model for MSME Finance

You can visit our official SME Finance Working Group webpage where you can earn about the following knowledge products developed in 2021 during my tenure as SMEF Working Group Chair.