No Small Business: A Segmented Approach to Better Finance for Micro and Small Enterprises

Nearly half a billion micro and small enterprises (MSEs) in emerging markets provide livelihood opportunities for millions of low-income populations around the world. Access to relevant, affordable, and responsible finance remains a persistent barrier, constraining stability and growth for these MSEs – especially the smallest firms and those in the informal sector. While the financial inclusion community has long focused on supporting MSEs, FSPs and funders tend to view the entire MSE sector as monolithic and do not consider the diversity of firms within that universe. The result has been one-size-fits-all solutions that deal with the constraints felt by the entire sector. In reality, MSEs have a variety of motivations and journeys, differing financial and nonfinancial needs, and diverse experiences in accessing financial services.

This Focus Note advocates the importance of a segmented approach to addressing MSE needs and focuses on MSEs with up to 20 employees. The paper is based on primary research conducted with 383 MSEs in India, Kenya, and Peru – three diverse emerging markets with a vibrant MSE finance ecosystem that includes strong incumbent providers like microfinance institutions, cooperatives, and banks, as well as innovative new providers like fintechs.