Blended Finance as Alternative Financing for MSMEs

Innovative Financing Lab under the UN Development Programme (UNDP) published a policy brief titled “Deploying Blended Finance to Broaden Financial Access for MSMEs”.

by Nazalea Kusuma April 12, 2023

Photo: Innovative Financing Lab.

Within the last few years, more and more small businesses have popped up. Campaigns and hashtags to #supportsmallbusiness also arise. However, MSMEs still need systemic support to increase their financial resilience in times of crisis like the COVID-19 pandemic. A recently published a policy brief proposes blended finance as an alternative solution to this problem.

Micro, Small, and Medium Enterprises (MSMEs)

What we familiarly call small businesses are categorized as Micro, Small, and Medium Enterprises (MSMEs). Although, the definition of this category can vary across countries and regions.

According to the OECD (Organisation for Economic Co-operation and Development), SMEs contribute 50% of private sector GDP (Gross Domestic Product) in high-income countries and 40% in emerging economies. SMEs also account for over half of private sector employment globally.

Despite this massive contribution, MSMEs have yet to reach their full potential. They face challenges that severely limit their shock resilience; many have to do with finance. In April 2023, Innovative Financing Lab under the UN Development Programme (UNDP), published a policy brief at the “Gender Responsive Programs Showcase and Report Launch” event in Jakarta, Indonesia.

two men and three women holding the policy brief on a stage — Policy brief launch at the “Gender Responsive Programs Showcase and Report Launch” in Jakarta, Indonesia. | Photo: Innovative Financing Lab.

Deploying Blended Finance to Broaden Financial Access for MSMEs

From information gaps to regulatory frameworks, MSMEs’ financial challenges are aplenty. Blended finance is a financing strategy that goes beyond conventional donors and banks. It includes philanthropies, Islamic finance, and the public as individuals through crowdfunding, fixed income (bonds market), stock exchange (capital market), and zakat contributions (social donation).

The policy brief shares four recommendations to expand financing solutions that will improve the productivity, competitiveness, and long-term resilience of MSMEs. The blended finance recommendations are:

Increasing Access to Finance

For small businesses, conventional banks, credits, investment, and other instruments are too complicated, time-taking, and full of barriers. Using catalytic capital to increase access to alternatives such as philanthropic sources and private sector investment could help.

Building Ecosystem for MSMEs

A collaborative ecosystem comprising banks, NGOs, donors and funders, government, and social enterprises is essential for developing MSMEs. It can take advantage of existing capabilities, leverage external resources (thus reducing own costs), share risks, and enable interventions to live independently.

Improving Digital Infrastructure

Digitizing and automating access to finance for MSMEs through a marketplace platform will help them access to credit more easily. It can also enable alternative credit evaluation methodologies so it’s easier to get loans. Meanwhile, policy measures are needed to mitigate digital financial fraud and scam risks.

Bridging the Capacity and Information Gap

Without adequate digital literacy, digitalization can widen the existing gap in capacity and information. Capacity building on both the demand and supply sides of finance is crucial. Follow-up actions may include holding courses on SDGs (Sustainable Development Goals), encouraging transformative projects, and establishing a business case for new de-risking products.

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