Microfinance and the Missing Middle:
Moving Upstream to Finance Small and
Growing Businesses (SGBs)


As microfinance institutions (MFIs) have provided needed credit to microenterprises, some experts have questioned what role they can play in financing and serving small businesses. While some MFIs have grown to accommodate more mainstream services, a study by CGAP has noted that the challenge for many MFIs to service the SGB market requires different systems, risk assessment tools, staff capacities, and more diverse product offerings. Yet, the need to finance and grow the SGB sector exists as it constitutes the “missing middle”. Some multilateral organizations (e.g. IFC) have committed resources to finance SGB’s, but the gap is enormous.

The following are some observations by Randall Kempner, Executive Director, Aspen Network of Development Entrepreneurs (ANDE), a global network of 260+ organizations that promotes small business entrepreneurship in emerging markets.  Mr. Kempner, as moderator, offered these comments recently at a Microfinance Club of New York event. 

When I started at ANDE eight years ago, I brought a hypothesis….That there would be an easy and obvious pathway for microenterprises to become what we call SGBs (small and growing businesses). I thought that maybe 5% made the jump from micro to small. I was wrong.

It turns out that is closer to .5% There are many reasons for this low “passage rate” including the inherent limitations of the types of businesses that are formed, the lack of business training for micro entrepreneurs and the lack of finance available.

ANDE was formed (in 2009) explicitly to focus on Small and Growing Businesses – those firms that need growth finance between US$20,000 and US$2 million. This is above where most MFIs play, but below where most international private equity firms play; the so-called “missing middle” in development finance.

According to an IFC/McKinsey study, an estimated US$750B credit gap exists for formal SMEs in emerging markets. [although US$2 Trillion if all MSMEs are included.] And, the “most missing part of the missing middle” comes at the lower end of the finance range (US$20K to US$250K).

This is where one would hope traditional commercial banks and angel investors would play. But most emerging markets lack angel investment networks. There are banks in the emerging markets; but they prefer to make bigger loans or make easy profits on government paper. No doubt lending to SGBs is hard, and indeed, more costly on a relative basis than making than bigger loans.

But there is money to be made and social impact to be had. I would think that microfinance institutions could easily move up with their existing clients and fill this void.

As the CGAP Focus Note (2012) Financing Small Enterprise: What Role for Microfinance Institutions? argues, “Despite many challenges, MFIs might bring important advantages to the small business market; including closer relationships with existing clients, faster lending procedures, and comfort with clients that don’t have much collateral”. An interesting point is that BRAC, which has been providing microfinance services for the past 20 years, had more dollars in SME loans than microloans; with more than US$500 million outstanding at the end of 2011.

Yet, MFIs, seem not to be following the BRAC model in great numbers.

At the above-mentioned meeting, there were a number of microfinance experts on the panel to explore the SME finance opportunity. To the surprise and dismay of the moderator, only one of the panelists felt that we would see a significant increase in SME funding by MFIs over the next five years.

Readers, do you agree?



ANDE is focused on specific strategies to build out SME/SGB lending and is exploring both challenges and opportunities in that space. According to the latest ANDE Impact Report, SGB investors continue to enter this market, with emerging market deals below US$2 million increasing annually. In 2016 alone, 53 investment vehicles were launched and raised more than US$2.7 billion in committed capital. In addition, funding for SMEs, especially from European donors, continues to increase.


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