Small and medium enterprises (SMEs) serving vulnerable communities in semi-urban and rural areas of Brazil, Colombia and Peru only generate a low number of jobs.
This issue represents a missed opportunity since SMEs are considered the main engines of job creation: they make up over 90% of all firms and contribute to a significant share of employment (41% in Brazil, 80% in Colombia, and 88% in Peru). [OECD]
In the countries of Brazil, Colombia and Peru, which have experienced significant economic growth but continue to show persistent inequality, sustainable job creation through SMEs provides a significant strategy to address the 65 million individuals living in poverty, [poverty defined at $5.50 per day] and 51% of nonagricultural workers employed in the informal economy (the number for women is 53%). [World Bank]
SMEs serving low-income communities experience low levels of job creation because they are not well connected to the financial system. While no formal statistics are available on the financing of SMEs operating in poor communities, the data across the entire SME sector paints a challenging picture. On average across Brazil, Colombia, and Peru, the SME share of all outstanding business loans is less than 35%. In Colombia and Peru, only half of SMEs apply for bank credit, and more than 9 times out of 10, banks reject their applications. [OECD] Unfortunately, women are under-represented in the SME sector. Across Brazil and Colombia, only 7% of SMEs are female-led. [IFC SME Finance Forum]
“Unfortunately, women are under-represented in the SME sector. Across Brazil and Colombia, only 7% of SMEs are female-led. ”
Governments are attempting to unlock SME financing. For example, since 2011, the Peruvian government’s direct lending to SMEs has increased by more than 10 times; the Brazilian government’s by 40%; and the Colombian government’s by more than two times. [OECD]
Nevertheless, evidence from NESsT’s work demonstrates that SMEs serving poor communities continue to face limited financing options, and more severely than the broader and traditional SME sector. Because of the vulnerability of the populations SMEs serve, and/or communities in which they operate, financial institutions are ill-equipped to perform underwriting and assess the credit worthiness of these enterprises. These institutions also deem poor communities as riskier, though the evidence from micro-finance points to the contrary. Furthermore, while official statistics present that more long-term loans are available to SMEs than short-term loans, [OECD] NESsT’s interviews with hundreds of SME owners operating in poor communities show that the opposite is true: financial institutions prefer providing short-term loans in poor areas and almost no long-term loans are available.