No Small Change
A juice entrepreneur in Kenya has more demand than her little factory can handle, yet she cannot secure a bank loan to expand. Across emerging economies, countless businesses face the same plight. These small and medium-sized enterprises (SMEs) make up the “missing middle” of finance – firms needing capital in the order of $25,000 to a few million dollars but deemed too big for microfinance and too small or risky for traditional bank loans.
SMEs are engines of growth in emerging economies. In Africa they account for at least 90% of businesses and 80% of jobs. Yet a vast financing gap hobbles these firms. The shortfall in SME funding in sub-Saharan Africa is estimated around $331 billion – and it is expanding despite the efforts of public and private investors. In agriculture alone, the credit gap for agri-SMEs is some $106 billion, leaving millions of smallholder farmers without access to affordable loans.
‘SMEs account for 90% of businesses in Africa’
The reasons for this missing middle are clear. Banks perceive SME lending as high-risk and costly. Many small firms lack collateral or credit history. It is often easier (and safer) for a lender to finance a large corporation or buy government bonds than to vet a loan for a family-run workshop. International financiers, meanwhile, frequently insist on loans in hard currency (such as US dollars) to avoid exchange-rate risk. That practice can cripple local borrowers when their own currency depreciates, inflating loan repayments. Limited access to local-currency credit has been one of the persistent market failures hampering African entrepreneurs.
The fallout is profound. For want of credit, promising enterprises stay small, stunting innovation and job creation. A solar mini-grid start-up cannot scale its off-grid power systems without financing. A food-processing plant languishes for lack of affordable capital to upgrade equipment. Such missed growth means fewer jobs for the continent’s burgeoning youth population and fewer home-grown solutions to developmental challenges. Tellingly, under 10% of international climate finance is estimated to reach the local level, underscoring how little support typically flows to community-based enterprises.
Policymakers and development banks are starting to respond. Multilateral lenders and aid agencies are extending credit lines to local banks and offering partial guarantees to share the risk of SME loans. Blended-finance funds now combine public, philanthropic and private money to invest in businesses that commercial banks shy away from. Fintech and microfinance innovators are using mobile platforms and data analytics to reach creditworthy borrowers overlooked by traditional banks. These efforts show promise but remain small in scale. The SME finance gap continues to expand even amid pilot programmes and new funds.
The stakes are high. By 2034 the world’s largest working-age population –1.2 billion people - will live in Africa. Without vibrant SMEs to absorb this workforce, a demographic dividend could become a crisis of joblessness. Conversely, unlocking capital for the missing middle can unleash a wave of inclusive growth. Thriving small businesses create jobs and deliver goods and services to underserved communities. They can also drive locally led climate resilience – think of the renewable energy installers, agro-tech firms or recycling startups poised to expand. In short, cracking the missing-middle financing puzzle is crucial for building prosperity and climate resilience across the Global South.
