Fourth United Nations Conference on the Least Developed Countries
Istanbul, Turkey, May 10, 2010

It’s a pleasure to join you, to add the perspective of the World Bank and the International Finance Corporation to this important conference.

A dramatic backdrop frames our discussion today of Small and Medium-sized Enterprises, and their need for stronger financing.

In the aftermath of the worst global economic crisis in a century – amid a sudden surge in global food and fuel prices – the need for stronger job creation and income growth has never been so urgent.

As we approach the G20 summit, this conference will be crucial in addressing one key part of the development agenda: advancing the G20 SME Finance Policy Framework and Compact.

My remarks today will underscore three key points.

First: The current policy framework in many countries – especially the poorest countries – has serious shortcomings that constrain SMEs’ access to finance. Correcting these flaws is critical to unlocking SME’s potential for job creation.

Second: The G20 process gives us a unique opportunity to leverage our experience and strengthen our approach.

Third: In our search for solutions, we must all raise our level of aspiration. Perhaps, in the past, we have not been aiming high enough – or experimenting with approaches imaginative enough. The entire development community must intensify its search for innovations that can help ensure the success of SME financing for the long term.

Let’s begin by recalling the indispensable role that SMEs play – especially in developing countries.

Between 365 million and 445 million micro, small, and medium-sized enterprises are the key drivers of growth in emerging markets. Of that number, only perhaps 30 million are formal SMEs.

Those formal SMEs contribute as much as 45 percent of formal sector employment and as much as 33 percent of GDP, in developing economies.

SMEs, both formal and informal, are the unsung heroes of growth.

They are the economy’s intermediators, linked into larger value chains – providing raw materials, components and specialized services.

Yet despite SMEs’ vital role, our policy framework falls short – especially in the poorest countries.

A variety of financial services – like credit, savings, equity investment, insurance and payment facilities – are crucial for SMEs. Limited access to financing is a crucial factor restricting their growth.

Yet between 45 and 55 percent of formal SMEs in emerging economies do not have access to formal institutional loans or overdrafts.

Outstanding loans to SMEs, as a percentage of GDP, stand at 5 percent in the poorest countries – compared to an average of about 13 percent in the rest of the world.

Moreover: SMEs face tougher financing constraints than do large firms, with the smallest firms hit hardest.

The damage caused by this financing gap is enormous. According to one calculation, by Abhijit Banerjee and Esther Duflo of M.I.T., the productivity loss in medium-size firms in India – due to the misallocation of capital, caused by credit constraints – may be large enough to explain the productivity gap between India and the United States.

The SME financing gap will persist, unless we address significant flaws in our policy frameworks.

One critical shortcoming is deficient financial infrastructure – for example, credit registries and credit bureaus, collateral and insolvency regimes, and payments and settlement systems.

Consider one example: In countries where information is available through credit bureaus, smaller firms report relatively lower financing constraints.

Yet in the poorest countries, where there are few private credit bureaus, there is reliable credit information on only 0.6 percent of adults – compared to an average of about 23 percent globally.

Even when the poorest countries have only a public credit registry – and not also private credit bureaus – they provide data on only 1 percent of the population, compared to 7 percent worldwide.

The other critical set of problems, of course, is with the legal and regulatory frameworks.

Regulations that promote market competition are vital to SMEs’ growth.

Thus, through smarter regulation, we must promote a more competitive banking sector – offering more attractive SME banking products – and more accessible non-bank financial institutions.

A glance at the findings of the World Bank’s recent survey of 130 banks in the Middle East and North Africa illustrates the problem.

SMEs face severe financial constraints in the MENA countries: Only 20 percent of SMEs in MENA report having a loan or a line of credit – a lower share than any other region.

The survey found that bankers were uneasy with the lack of SME transparency, and were also skeptical of the weak financial infrastructure. Thus, their portfolios of loans to SMEs fall far short of their own targets.

Clearly, today’s shortcomings must be corrected – and, through our collective experience, we have some very strong ideas about how to correct them.

That brings me to my second point: that we now have a unique opportunity to leverage our knowledge through the G20 process.

The G20 launch of the Financial Inclusion initiative has been a great step forward.

The IFC and the World Bank have been proud to play an active role, serving as a key implementing partner to the SME Finance Sub-Group of the G20 Financial Inclusion Experts Group (FIEG).

We have taken several significant steps:

• We prepared a Stocktaking Report, informed by 164 promising SME Finance models. Later this morning, you’ll hear more about this report and its policy recommendations from my IFC colleague Peer Stein.

• We established an SME Working Group on Data. The group made recommendations to the G20 for improving data, which will, in turn, help shape policies, set targets and evaluate impact.

• And we helped launch the SME Finance Challenge – a global competition to produce private-sector-led proposals to strengthen SMEs through public-private partnerships.

So the G20 process opens up strong new opportunities.

Under the Global Partnership for Financial Inclusion, the World Bank Group is committed to continue assisting efforts to implement the G20 Financial Inclusion Action Plan.

We will support the G20 in preparing a Policy Framework for SME Finance. An SME Finance Compact between G20 and less-developed countries would provide a framework for supporting policy and legal reforms outlined in the Policy Framework.

Regulators and policymakers would share knowledge, and partner agencies would support the goals and activities set by Compact members. We see these discussions today as shaping the Policy Framework and the potential SME Finance Compact.

The G20 effort on a Policy Framework and Finance Compact will accelerate progress toward reaching the G-20 development objectives and encourage expanded cooperation between the G20 and the poorest countries.

We are also working with partners toward the creation of an SME Finance Innovation Fund, to implement winning proposals from the SME Finance Challenge.

And that brings me to my third point: It will require innovative approaches to ensure the success of SME finance for the long term.

Certainly, we know that there is a huge financing gap.

But we also know that, when we get this process right, we can unleash terrific creativity among SMEs.

If the development community aims higher – if we step up our game – if we focus on the need for innovative solutions that go beyond traditional approaches – we can inspire tremendous progress.

The World Bank Group is already working intensely with governments and the private sector, working on innovations that aim to overcome the constraints that now limit SME Finance.

Let me describe just a few of the ways in which we’ve been doing this.

• In China: The China Collateral Registry was developed with World Bank Group support in 2004. Before this reform, the law prohibited the use of movable collateral. That was a constraint for SMEs – since bank lending was largely based on real-estate collateral, while SMEs typically do not have real-estate assets. Thanks to the reform, $910 billion in loans were made – 40 percent of which went to SMEs.

• Here in Turkey: Two credit-line projects by the World Bank showed the impact of medium-term finance on enterprise performance. Firms that took part in these projects obtained access to medium-term financing – which is often linked to greater employment growth, increased sales and exports, and increased investments. About 14 to 15 percent greater employment was generated by those projects – and that pattern was sustainable over time.

• In 15 African countries: The IFC’s Africa MSME Program typically helps banks increase their SME portfolios by at least 30 percent over three years. They then continue to grow profitably when the support phases out.

Globally, there is a great deal of work to be done. Yet the creativity, the willpower, and the resources exist to confront these challenges.

As of December 2009, IFC’s SME financial-institution clients had 1.3 million loans outstanding to SMEs, totaling $97.1 billion. IFC Advisory Services had more than 60 active projects related to SME finance, worth over $85 million. IFC has ambitious new targets to scale up its SME finance support.

As of July 2010, the World Bank had active commitments of $2.5 billion for SME finance support. The Bank’s SME financial-institution clients had 1.5 million loans and an outstanding portfolio of $30 billon.

Amid all the exciting efforts that are under way, we foresee that the role of SMEs could become more significant than ever before – making a positive difference in the lives of millions of people.

If all of us join together – through the G20 process and through our individual efforts – we can succeed in creating a wiser policy framework and more imaginative vehicles for SME financing.

A revival of long-term job and income growth could be the outcome – with small and medium-sized enterprises leading the way.

Thank you for the chance to join your discussion today.

I look forward to today’s conference, and to helping make SME financing a top priority on the G20 agenda.