Clarity Connect

Micro, small, and medium-sized enterprises (MSMEs) help drive growth across developing countries with their contribution towards job creation and economic output. Based on available data, MSMEs in Asia and the Pacific accounted for an average 96.6% of all enterprises, 55.8% of the total workforce, and 28% of a country’s economic output. MSME development has been supported by the public and private sectors through skill and entrepreneurship development, expanded access to markets and technology, and better access to finance.

However, constraints on MSME development remain, including a large percentage of unregistered or informal businesses, limited participation in global markets, skilled labor shortages (particularly for women and youth), and limited access to formal financial services for working and growth capital. Development of MSME credit markets and enabling alternative financing options (such as non-bank finance and capital markets) require continued efforts alongside national financial inclusion and MSME development policies.

Key Financial Services Needed by MSMEs

1. Working Capital Financing
   • Short-term loans and overdraft facilities to manage cash flow gaps.
   • Invoice financing and supply chain financing to bridge payment delays.
   • Merchant cash advances for businesses with high transaction volumes.
2. Trade Finance
   • Letters of credit (LCs), guarantees, and export financing to facilitate cross-border trade.
   • Foreign exchange risk hedging for businesses dealing in multiple currencies.
   • Buyer’s credit and supplier credit to ease import-export transactions.
3. Credit Facilities
   • Term loans for asset purchases (machinery, equipment, real estate).
   • Revolving credit lines for flexible borrowing needs.
   • Collateral-free loans for informal or new businesses using alternative credit scoring (e.g., cash flow data, mobile money transactions).
4. Insurance Products
   • Business interruption insurance to cover losses from unforeseen disruptions.
   • Credit insurance to protect against buyer defaults.
   • Parametric insurance (e.g., weather-indexed) for agriculture-based MSMEs.
5. Digital Banking & Embedded Finance
   • Neobanks & mobile-first business accounts with low fees.
   • Automated bookkeeping & tax compliance tools for easier financial management.
   • E-commerce embedded financing (e.g., BNPL for merchants, revenue-based financing).
6. Green & Sustainable Finance
   • Loans for energy-efficient equipment, solar power adoption, and waste reduction.
   • ESG-linked financing with preferential rates for sustainable businesses.
7. Cross-Border Payments & Remittances
   • Low-cost, fast international transfers for MSMEs in global supply chains.
   • Multi-currency accounts to reduce forex conversion costs.
8. Advisory & Capacity-Building Services
   • Financial literacy programs on cash flow management, creditworthiness, and digital tools.
   • Mentorship networks connecting MSMEs with investors and industry experts.

Role of Digital Public Infrastructure (DPI) in MSME Financial Inclusion

Strengthening Digital Public Infrastructure (DPI)—such as digital ID, interoperable payment systems, and data-sharing frameworks—is critical to enabling efficient and secure digital financial services for MSMEs. DPI supports:

• Faster, cheaper B2B & B2C transactions (e.g., real-time payments, QR-based systems).
• Alternative credit scoring using non-traditional data (e.g., utility bills, mobile money history).
• Government-to-business (G2B) disbursements, such as subsidies, tax refunds, and procurement payments.
• Fraud prevention & cybersecurity to build trust in digital transactions.

With over 80 governments having launched digital transfer programs, DPI can help formalize informal MSMEs, reduce operational costs, and enhance financial transparency.

Summary

MSMEs are the backbone of emerging economies, yet their growth potential remains constrained by financial exclusion, informality, and operational inefficiencies. By expanding access to tailored financial products—from digital lending and trade finance to green credit and insurance—financial institutions, fintechs, and policymakers can empower MSMEs to scale sustainably. Coupled with robust DPI, these efforts can unlock greater financial inclusion, drive economic resilience, and ensure that small businesses thrive in an increasingly digital global economy. The future of MSME growth lies in innovative, inclusive, and digitally enabled financial solutions that bridge the gap between informal enterprises and formal economic opportunities.