Is SME finance an alternative strategy to microfinance?

If micro-businesses tend to stay micro, perhaps there are better options?  Critics of the hoopla around microcredit suggest that job creation is better done by larger enterprises (e.g., Karnani 2007). The rush to support small and medium enterprises (SMEs) has been given attention by the G-20 countries and is tied in part to the idea that SMEs can contribute to the goal of poverty reduction by employing low-skilled workers. But can they? It’s an empirical question which has been met with little evidence so far.

Bauchet and Morduch investigate data on the employees of SMEs supported by BRAC Bank in Bangladesh. Their conclusion is that these employees are far more educated and skilled than microcredit borrowers; in line with this, SME employees come from households that are considerably less poor on average. And they tend to be men, while microcredit borrowers in Bangladesh are mainly women. In sum, the two groups – SME employees and microcredit borrowers – look very different in the Bangladesh surveys. Will these kinds of results hold up elsewhere, particularly in Latin America and Eastern Europe where the gender and education profiles of microcredit borrowers is different from that in South Asia?

More important: if SMEs won’t generate much poverty reduction through direct employment, can they create enough a difference by spurring regional demand and broadening the base of economic growth?

Read other posts from the 10 Research Questions on Improving Financial Access series focused on the questions that need answers if we are to make informed decisions on how to improve financial access:

The series has been compiled as a framing note on the FAI site and will be published later as part of a collection of studies in a forthcoming book.