Financial Markets

Small and Medium Enterprises (SMEs) Build Economies
SMEs account for over 60% of GDP and 70% of total employment in low-income countries. In middle-income countries, SMEs produce 70% of GDP, and 95% of employment. SME participation in individual economies range from Portugal, where 1.6 million SMEs are responsible for over 81% of total employment, to Armenia, where 34,000 SMEs account for just 25% of total employment.

Financial Constraints on SMEs in Emerging Markets
Obtaining capital is the foremost challenge to SME growth and investment in emerging markets. SME access to capital or credit is restricted in the following ways: (1) SMEs lack know-how to provide accurate, transparent, and understandable financial information to potential capital sources; (2) creditors and investors are conservative and risk averse in their lending practices and typically demand excessive amounts of collateral for SME loans; and (3) most commercial banks lack the ability and techniques to assess and manage repayment risk in order to lend profitably to SMEs.

International Agency Approach to SME Financing
International donors have attempted to alleviate the constraints on SME financing by providing incentives to commercial banks to extend credit via loan guarantee funds. However, the banks often lack know-how and appropriate tools to prospect for clients, analyze company credit-worthiness, or manage risk. As a result, cash flow lending never occurs, the banking culture never changes, and collateral demands recur when the credit facility ends. Moreover, this approach does not develop the financial skills base of SME owner/managers to help them manage their businesses financially, nor communicate effectively with lenders/investors based on standardized financial data.

The result: SME owners complain that banks are not open to them without excessive collateral, and bankers respond that they can not judge credit worthiness without adequate financial information from the SME.

FMI is Bridging the Gap between SMEs and Banks
FMI has developed an innovative user-friendly software program that works “both sides of the street.” For SMEs, the program enters company financial data to produce an internationally accepted income statement and balance sheet, and a set of financial ratios. For banks, the program presents relevant financial information, evaluates and scores credit risk, analyzes the SME business qualitatively and quantitatively, and generates covenants for loans. Along with the software, FMI trains bankers and SME owners/managers in financial concepts and the use of the software. In this way, FMI bridges the gap between SMEs and commercial banks, enabling them to converse on profit and loss, cash flow, financial projections, and credit worthiness, to facilitate capital mobilization and build economies.