Chart 3: Number of Enterprises by Gender

Chart 4: Number of Formal Enterprises by Level of Financial Constraint

Section D: Methodology

What does MSME finance gap mean?

MSME finance gap is estimated as the difference between current supply and potential demand which can potentially be addressed by financial institutions. The MSME finance gap assumes that the firms in a developing country have the same willingness and ability to borrow as their counterparts in well- developed credit markets and operate in comparable institutional environments — and that financial institutions lend at similar intensities as their benchmarked counterparts.

How is the MSME finance gap calculated?

The methodology used to calculate the MSME finance gap has three major steps:

Step 1. Benchmarking. At first, the methodology entails benchmarking the prototypical financing environment where MSME credit markets function with minimal imperfections. The mean debt-to- sales ratio is computed across firms operating in the ten benchmarked countries (Australia, Canada, Denmark, Germany, Ireland, Israel, New Zealand, Switzerland, the United Kingdom, and the United States), as presented in the table below:

Step 2. Potential Demand for MSME Finance. These benchmarks are subsequently applied to the universe of MSMEs in each category operating in the emerging economies where the gap is to be calculated. This results in the estimated “potential demand”.

Step 3. Existing Supply of MSME Finance. Existing lending to MSMEs by financial institutions was available for 71 countries mainly from the IMF’s Financial Access Survey (FAS), and the OECD’s SME Scorecard. For the remaining countries, an cross-sectional OLS regression framework was used to predict the missing MSME volume: MSME Lending= α{MSME} + β{Macro} + γ{Banking} + η

MSME Finance Gap

Bringing together the potential demand calculated in step 2 with the current supply collated/computed in step 3 produces the MSME finance gap for each country.
MSME finance gap = Potential demand – Existing supply

What were the data sources used?

MSME data availability and quality in emerging countries remains a significant barrier for researches and practitioners. To address the problem of data quality and scarcity, the authors of this study have expanded and diversified the data sources, which now include Bureau Van Dijk – Orbis data, the International Monetary Fund (IMF) Financial Access Survey data, the Organisation for Economic Co-operation and Development (OECD) Financing SME and Entrepreneurs Scoreboard, and the World Bank Enterprise Survey data, among others. In addition, missing data has been extrapolated using an approach with solid statistical grounds, which is replicable, allowing the database to generate better results as better data comes in. It is also well-documented for those interested in replicating or refining the results.

What are the drawbacks of using these data sources?

The data sources, surveys and studies mentioned above lack cross-country harmonization. Thus, detailed firm-level data with comprehensive information about current financial standing and financing needs are unavailable at the global level. This restriction implies that any estimation of the financing gap has to rely on less complex, firm-level data sources, for example, data collected by the World Bank

Enterprise Surveys. The lack of data also imposes the need to make stronger assumptions than would be necessary if data availability was not an issue.
The lack of uniform data about the informal MSME market segment represents an especially serious constraint. Multiple agencies are working on collecting data from microfinance institutions, including MIX and the Groupe Speciale Mobile Association (GSMA) or mobile network operators, where many informal enterprises might be traced. However, there is no governing body or unified data aggregator which can be confidently used as a source of informality data across all developing countries.

How is the current methodology different from the previous one?

IFC’s previous MSME finance gap study, conducted in 2010 in conjunction with McKinsey, used firm- level datasets to identify enterprises that were credit constrained. It also made assumptions regarding how much these enterprises would want to borrow.

The problems with the previous approach are primarily twofold: (1) the assumptions about how much credit constrained firms would borrow was highly arbitrary; and (2) the counterfactual under which the gap exists was not well defined. The problem stemming from the counterfactual definition was that it was difficult to comprehend the total increase in the demand for finance. The changes in the enabling environment would not only allow an expansion of access to those MSMEs currently without sufficient financing, but would also trigger even more borrowing by those MSMEs that currently had financing. On the supply side, the lack of a definition of the counterfactual also raised uncertainty about the bankability of those currently unserved or underserved MSMEs. In fact, the previous methodology did not consider how much financial institutions would want to finance. Hence, the bankability consideration was entirely absent.

The current methodology defines the counterfactual more concretely. By relying on a benchmarking approach, the regulatory and macroeconomic changes required for the gap to manifest are clearly defined.