PODCAST | What makes an MSME, and how can they be better included?

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The exclusion of micro, small, and medium-sized enterprises (MSMEs) from finance isn’t driven by mere moral neglect, but by systemic infrastructural constraints – amplified by incomplete data.

Financial inclusion initiatives like the International Finance Corporation (IFC), a part of the World Bank Group, aim to reshape the financial market architecture. Through product innovation, IFC works to offer competitive solutions to MSMEs in developing countries and maximise their long-term benefits.

Silvia Andreoletti, Senior Reporter at Trade Finance Global (TFG), sat down with Adel Meer, Manager of SME Finance, Solutions & Impact, at the World Bank Group (WBG).

They explored why certain groups are more excluded than others and the future of the MSME finance gap in terms of market design and data visibility.

The most-excluded groups

The MSME finance gap currently sits at $5.7 trillion and rising, with women-owned businesses accounting for 34%. 

“Within that gap, you have disparities,” said Meer. “Businesses managed by women tend to have fewer options for financing. Vulnerable communities, displaced populations, and youth also have smaller degrees of optionality when it comes to financial services.”

There are a range of reasons behind this; some are social, some are economic, and, according to Meer, some are purely procedural. 

For instance, in many markets, lending is collateral-based. A borrower only gets a loan if they are able to provide assets (like property, land, or equipment) that the lender can seize if the loan isn’t repaid. 

“If assets tend to be in the name of the male household member, there’s a general tendency to have loans attached to those assets, and then the beneficiary of that financing also becomes the male household member,” said Meer.

Another key factor is transaction history. Individuals who have been within the business ecosystem tend to find it easier to gain access to financing, while newer entrants are treated differently. “That is changing, especially with database lending solutions,” said Meer. 

According to a World Bank policy paper examining gender and financial service usage in sub-Saharan Africa, there is no evidence of gender-based discrimination or lower inherent demand for financing among women. Instead, the gender gap is due to underlying socioeconomic and structural differences, like women having a “lower level of income and education, and by their household and employment status,” found the report.

These procedural and positional barriers all point to a systemic exclusion: women struggle to access financing, not because of direct discrimination or behavioural differences, but because they operate in social and economic conditions shaped by long-standing inequalities. 

The MSME finance gap

While it may seem that the MSME financing gap is only growing wider despite the industry’s best efforts, much of this depends on what is actually being reported, said Meer.

Right now, “a lot of fintech and database lending solutions aren’t always being captured through the official numbers that go through credit bureaus or traditional central bank data,” he said.

Because much of fintech lending is short-term, self-liquidating credit in small amounts, it doesn’t always show up in traditional reporting systems. As a result, official figures understate what is actually happening, and a significant volume of financing remains invisible.

“Do you really have a sense of how much debt is being held at the household level or at the MSME level if part of their debt is not being captured by the system?” asked Meer. 

Many initiatives have been taken to ensure that what is being reported is closer to the actual numbers. For instance, Pix, the Brazilian instant payment system, uses an enterprise or individual’s digital identification to connect multiple data points related to both traditional and non-traditional financial services. 

India, on the other hand, has the UPI (Unified Payments Interface) system, a real-time payment platform with an interoperable infrastructure that allows users to send and receive payments across different banks and applications. 

Meer also stressed the importance of collaboration between development institutions and private investors for financial inclusion. IFC mobilises private capital to help solutions reach MSMEs under the right regulatory conditions. 

“We know that most product innovation comes from the private sector,” he explained. “Where there is a market demand, you will have private sector players looking to design solutions for that. Their ability to design effective and responsible solutions is where we get involved.”

ESG responsibility without punishing MSMEs

Meer rejected the idea that financial institutions can be judged as moral or amoral, seeing them rather as “players in the spectrum.” Some may take opportunistic risks without adequately considering their clients’ needs, but the majority play a constructive role in local economies.

Banks hold public deposits, provide mechanisms to save, and are expected to lend responsibly, incentivised and constrained by regulation.

He argued that profitability isn’t incompatible with responsibility; in fact, stable profits are necessary to protect depositors, since a failing bank would put their funds at risk. 

This understanding of responsibility as systemic rather than moralistic becomes even more relevant when considering environmental, social, and governance (ESG) goals. 

A recurring concern is that MSMEs may not track or report their emissions as rigorously as larger corporations do, raising the question of whether expanding access to finance could undermine climate targets. According to Carbon Direct, many small and medium-sized businesses don’t track emissions due to a lack of resources, budget constraints, or unfamiliarity with certain concepts.

However, it’s crucial to remember that MSMEs make up a smaller fraction of total greenhouse gas emissions. At the IFC, the threshold to classify as an MSME is having less than 300 employees or annual sales or profits of less than $15 million – a size that Meer argued doesn’t create significant social or environmental risks.

He pointed, instead, to national regulations, arguing that standards should be set at the country-level and operations should only be allowed if they meet the domestic norm. 

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Meer emphasised that the future of financial inclusion will depend not just on expanding access, but on ensuring that financial services genuinely improve financial health. 

As affordability becomes an increasingly pressing issue in both emerging markets and developed countries, financial services “have to allow for households to have better livelihoods, better savings, and better planning.” 

The future of financial inclusion, then, is all about protecting the next generation from low asset accumulation and high debts, while giving them the resilience to withstand sudden shocks.