Scaling Financial Inclusion for Micro-Enterprises
As world leaders gather in Addis Ababa to consider how to finance and deliver the new Sustainable Development Goals (SDGs), a recent dialogue in London attended by businesses, donors and civil society, has identified seven key actions to increase financial inclusion for micro-enterprises. Increasing finance to small businesses is an important priority for the Financing for Development Summit in recognition of the key role they will play in delivering the SDGs.
The barriers to financial inclusion are particularly acute for micro-entrepreneurs, impacting their ability to improve their livelihoods, create jobs, transition into the formal economy, generate tax revenues for governments, and catalyse a range of multiplier effects, from women’s empowerment, to improved nutrition, to better access to education and healthcare for younger generations.
The London dialogue, hosted by DFID, CARE International, the CSR Initiative at the Harvard Kennedy School, SABMiller and Business Fights Poverty, highlighted the need to focus more resources on understanding the financing needs of micro-enterprises, the importance of increasing their access to all financial services, the role of technology and the opportunities for organisations to work more systemically and collaboratively to empower micro-enterprises more sustainably and at greater scale.
1. Scaling Financial Inclusion through Innovation and Collaboration – 7 Key Take-Outs for the Financing for Development Summit:More support for small business must include a stronger focus on addressing the needs of micro-enterprises:
The bulk of poor people in developing countries can be found amongst micro-enterprises, whether smallholder farmers, small-scale distributors or retailers. They play a fundamental role in development, creating jobs and incomes in their communities, generating tax revenues for governments and playing a critical role in the value chains and markets for larger companies.
2. Micro-enterprises need access to the full range of financial services, not just credit and savings, to succeed, alongside a more nuanced understanding of “wants” versus “needs”: Access to the full range of financial services, including digital payment systems and insurance alongside credit and savings, is key to enabling micro-enterprises to succeed and for more women to be empowered. This must commence with basic access to savings and credit, which many micro enterprises still lack.
Micro-enterprises financing needs are complex and diverse and a far deeper and more nuanced understanding of what micro-entrepreneurs “want” to fulfill their dual roles as business owners and heads of households versus what large businesses and the development community believe they “need” is required. For example, research amongst smallholder farmers suggests a preference for more flexible draw-down credit facilities through the farming season rather than one off provision of credit at the start of the season. Also, many micro-entrepreneurs, whose family and business lives are indistinguishable, may value the purchase of household goods that save time and free up more time to spend with family and intrinsically linked to their success. A deeper understanding of micro-entrepreneur motivations and priorities will help to inform the identification of pathways that support the transition from informality to formality.
3. Strengthening basic financial literacy and business skills amongst micro-entrepreneurs are essential:
Alongside a more holistic and sophisticated approach to the provision of financial services to micro-enterprises, a greater emphasis on building the basic financial literacy and general business skills of micro-entrepreneurs is required.
4. Leveraging the business model is key for more sustainable and scalable impact:
Integrating micro-entrepreneurs, who are already part of many value chains, in to the core business model and strategy is key to empowering micro-enterprises more sustainably and at greater scale. Businesses with micro-entrepreneurs in their value chains need to consider how they can change the way they operate to better accommodate the needs of micro-enterprises, taking in to account for example minimum job sizes and their inventory and cash flow requirements.
5. There is significant scope for public-private collaboration, and the role of intermediaries is key to connecting micro-entrepreneurs to value chains and formal financial services:
With a focus on leveraging the core business model, donors and other socially minded investors can play an important catalytic and enabling role, helping to share the up-front risks of inclusive business models and building the capacity of the most poor who are not in value chains but have the potential to be. Civil society organisations play a key intermediary role, helping to build the financial literacy and credit-worthiness of micro-entrepreneurs to the stage where they are ready to enter the formal financial system.
6. Harnessing mobile money innovations and business to business collaboration are key to achieving scale more rapidly:
The rapid adoption and scaling of mobile money and digital payment solutions is enabling the acceleration of access to financial services amongst micro-enterprises. There is significant scope for greater collaboration between telecoms companies and mobile money operators, large companies and financial institutions to work more collaboratively to develop and deploy mobile money, digital payment systems and credit solutions for micro-entrepreneurs in value chains, alongside financial literacy programmes. Key to success will be the development of common technology solutions and platforms that reduce duplication and make it easy for micro-entrepreneurs to deal with all their business partners. Local platforms to enable this collaboration are required, ideally building off existing networks and collaborations, alongside global platforms that enable sharing of best practices and relationship building.
7. Governments have a key role to play in creating the enabling conditions that will facilitate the rapid adoption of technology based solutions:
Governments have a key role to play in establishing enabling regulatory and policy environments that will encourage banks and non-banks to invest in and deploy technology based solutions more rapidly and at greater scale. Governments can also help to accelerate the adoption of innovative solutions by increasing the use by government departments of mobile and technology based solutions in the delivery and management of public services.
Next steps: The dialogue will contribute to the development of a shared vision and blueprint for strengthening the micro-enterprise ecosystem, which will be used to advocate for more systemic, collaborative action, guide internal organisational strategy and programme design, and provide a framework for collaboration in support of micro-enterprises.