Sources of Funding for MSMEs in Developing Countries: Success Cases in Africa

Sources of Funding for MSMEs in Developing Countries: Success Cases in Africa

Nuno Miguel Delicado Teixeira, Luísa Cagica Carvalho, Márcia R. C. Santos, Rosa Galvão
Copyright: © 2023 |Pages: 19
DOI: 10.4018/978-1-6684-5666-8.ch004
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Abstract

Access to financing for micro, small, and medium entrepreneurs continues to face obstacles and difficulties. This scenario becomes even more evident when we refer to the situation of the under-development countries, where the financial system still shows tendencies that do not favor the productive sector. Thus, this chapter begins by identifying the main financing constraints faced by MSMEs in developing countries. In the following sections, and according to several international studies and reports from the world main organizations and financial institutions that support the dynamism of the economies of developing countries, are presented and characterized the sources of capital and financial innovations developed over time, that have allowed a greater integration into the formal financial system of publics such as women, young people, and rural populations. In the last seccion are presented some of success cases in Africa and a reflexion is made about recommendations of funding sources to be implemented, to boost the activity of MSMEs in emergent economies.
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Access To Financing For Msmes In Emerging Economies

Access to finance in emerging economies continues to be a complex situation, both in terms of supply and demand (SMEFINANCE, 2020).

Financial institutions do not favor financing to MSMEs since their business mainly comprises financial services to public entities and, large companies, clients with higher financial capacity, thus ensuring financial operations of significant amounts that provide a higher return on the interest rates earned (SMEFINANCE, 2020).

MSMEs are less attractive clients to financial institutions since they generate lower income with their operations. Because for MSMEs, the risk associated with the activity is higher due to their higher business volatility and lack of collateral. Furthermore, these economies typically have higher inflation rates, meaning that interest rates are higher and impossible to sustain for the financial capacity of MSMEs, especially considering the neediest populations, such as the younger generation, women, and rural entrepreneurs (European Microfinance Network, 2012 and 2015).

Several aspects regarding MSMEs represent constraints to access to financing. The risk associated with sales volatility is one. Also, some contextual conditions make it difficult for MSMEs to access financing, such as informality of the activity of economic agents (the lack of people and property registration, even if it belongs to the government, it is the case for many properties in Angola, for instance). This is an aspect that inhibits the existence of assets to offer as collateral or a thorough business management control through a formal accounting system in the companies. Another important factor to consider is the deficit in financial literacy, which hinders knowledge about business management and financial products. This promotes an entrepreneurial and business culture focused on solving day-to-day problems instead of a strategic vision for the medium to long term, thus contributing to the countries' social progress and sustained economic growth (Teixeira & Rodrigues, 2013).

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