When the aim is to create jobs then what is more effective, lending to the very smallest businesses, often referred to as microenterprises, or lending to slightly larger businesses commonly called Small and Medium Enterprises (SMEs). This was the question addressed by an interesting workshop that I attended recently on the relationship between microcredit and job creation at the Microcredit Summit in Valladolid, Spain. I am not sure that we reached any sort of agreement, apart from the obvious that both are important.
Traditionally, microfinance institutions (MFIs) have provided quite small short-term loans, often lasting no more than 3-4 months, to microenterprises to use as working capital. These businesses tend to be family owned and operated ventures. If these businesses are successful and grow, it usually means that the microentrepreneurs work longer hours. If they actually reach the stage when they require extra labour they tend to employ other members of the same household, often spouses, elder children or even other members of the extended family. It has been argued that little employment is created outside the immediate family and that many micro-businesses tend to remain micro.
In the context of low-income countries, SMEs are broadly defined as businesses with between 5 and 50 employees and typically require much larger, longer-term loans. They are often described as occupying a void called ‘the missing middle’ in terms of accessing finance; that is they are considered as being too large for the MFIs and too small for the banks. Nevertheless, it has been suggested that creating jobs is actually better achieved by focusing on SMEs, particularly those in labour-intensive industries, and even that such enterprises contribute more to the goal of poverty reduction. This occurs, it is argued, because SMEs often employ low-skilled workers; that is those that are among the poorest segments of the population and who are usually too risk averse even to begin their own microenterprises let alone qualify for micro-loans.
In fact, which of the two approaches is most effective in terms of creating employment is largely an empirical question. Lendwithcare’s MFI partners have recognised the potential of SMEs and while they still concentrate on providing finance to microenterprises, they have extended lending to include SMEs. In the Philippines, for example, approximately 10% of our partner SEEDFINANCE’s portfolio is targeted at SMEs. The employment creating potential of SMEs is demonstrated by Christina Reyes who has a business producing woven products made from the stalks and leaves of water hyacinths. Christina employs 25 workers from her local community in San Miguel in Central Luzon - all of whom are single parents and who would have struggled to receive a loan and establish their own businesses.
Undoubtedly, SMEs do possess considerable potential to create employment and while different organisational lending skills are required for lending to larger businesses, perhaps more MFIs should complement the provision of microfinance with lending to SMEs as well. However, aside from the obvious concern with the quality, not simply the quantity of jobs, we should also recognise that SMEs vary considerably between different economic sectors in terms of the types of workers they employ. For example, a forthcoming investigation on SMEs supported by the BRAC Bank in Bangladesh reveals that SME employees were far more educated and skilled and came from households considerably less poor on average than microcredit borrowers. Furthermore, SME employees tended to be men while microcredit borrowers were largely women. We cannot assume, therefore, that lending to SMEs will always create opportunities for the poorest.
By Ajaz Ahmed Khan, microfinance adviser at lendwithcare.org