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SME Banking Knowledge Guide

SME Banking Knowledge Guide

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Published by International Finance Corporation's Global SME Banking Program, the Knowledge Guide outlines leading practices, market trends, opportunities and challenges, and success factors for profitable SME Banking operations.
The SME Banking Knowledge Guide draws widely from existing research and literature and from numerous primary interviews with SME banking experts and practitioners worldwide. It is primarily a technical publication intended for bank directors, managers, and staff in developing economies, who see the untapped opportunity in their local markets but still have not reached the optimal way to approach the SME segment. It is also a useful to for policy makers and other financial sector stakeholders who seek to better understand the essentials of SME finance.
Also Available in Arabic, French, Russian, Spanish and Vietnamese at http://www.ifc.org/accesstofinance.
Published by International Finance Corporation's Global SME Banking Program, the Knowledge Guide outlines leading practices, market trends, opportunities and challenges, and success factors for profitable SME Banking operations.
The SME Banking Knowledge Guide draws widely from existing research and literature and from numerous primary interviews with SME banking experts and practitioners worldwide. It is primarily a technical publication intended for bank directors, managers, and staff in developing economies, who see the untapped opportunity in their local markets but still have not reached the optimal way to approach the SME segment. It is also a useful to for policy makers and other financial sector stakeholders who seek to better understand the essentials of SME finance.
Also Available in Arabic, French, Russian, Spanish and Vietnamese at http://www.ifc.org/accesstofinance.

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Published by: IFC Access to Finance and Financial Markets on Feb 23, 2011
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06/23/2014

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The SME sector is important to national economies because it
contributes signifcantly to employment and GDP, and because
its growth is linked with the formalizing of an economy. In
many countries, the majority of jobs are provided by SMEs. In
the 30 high-income countries of the Organization for Economic
Cooperation and Development (OECD),iii

SMEs — registered
enterprises with fewer than 250 employees — represent over
two-thirds of formal employment.6

In low-income countries,
this fgure tends to be smaller, especially where the informal
sector is large; but it is still signifcant. Figure 4 illustrates the
importance of the SME sector to job creation using the median
contributions of SMEs to formal employment from a sample of
low-, middle-, and high-income countries.7

The SME sector’s contribution to GDP also confrms its
economic importance. In high-income countries, and some
middle-income countries, the sector accounts for over half of
national output.8

In low-income countries too, SMEs play a
sizable role, though the informal economy is more dominant.
Figure 5 displays the median contributions to GDP from a 55-
country sample.

The fact that the role of SMEs in an economy appears to
increase with country income level might indicate that SMEs
are themselves a driver of economic growth. While this remains
an open question, formalization has emerged as a potential
channel through which a growing SME sector is linked with
economic growth. The data demonstrate an inverse relationship

iii Note that a few of the 30 OECD countries are classifed as upper-middle
income. For a complete list of countries, see: www.oecd.org/membercountries

Figure 2: Typical business landscape in
emerging economies

Percentages represent the number of companies

0.9%

Corporate &
multinationals

Large
enterprises

5–10%

Medium
enterprises

20%

Small
enterprises

65–75%

Micro-
enterprises

Banks’
primary
target

THE SME
FINANCE
GAP

Micro
finance

0.1%

Figure 4: SMEs provide a signifcant portion of
jobs worldwide

SME contribution to formal country employment
(median values)

Source: Ayyagari, Beck, and Demirgüç-Kunt (2003)

Figure 3: Egypt’s SME market illustrates the
bottom-heavy distribution of frms by size

Makeup of Egypt’s 168,000 frm SME market

Source: IFC (2004) SME Landscape in Egypt

50–200

15–49

10–14

5–9

% of firms

% of total revenue

# EM

PLOYEES

2%

8%

11%

28%

11%

11%

76%

53%

Low-income Middle-income High-income

0%

20%

40%

60%

80%

100%

THE SME BANKING KNOWLEDGE GUIDE

12

between the size of the SME and informal sectors in a country.
In Figure 5, the informal economy and the SME sector together
generate about 65–70 percent of GDP across all country
income levels. What changes is the division of this amount
between SMEs and informal enterprises. In other words,
higher-income countries — where SMEs contribute more to
GDP — have smaller informal sectors. If informality has
created ineffciencies related to operating “underground,” then
the transformation of informal frms into registered SMEs can
boost economic growth.

Bank service of the SME sector is economically valuable
because of the sector’s importance in each country. In low-
income countries, the role of banks may be critical if the
prospect of bank fnancing can create enough incentive that
informal frms will register as SMEs in order to receive loans.
In addition, the data indicate that as a country develops, the
SME market will only increase in size.

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