Micro, Small and Medium Enterprises (MSMEs) play a major role in most economies, particularly in developing countries. There are 160 000 million in developing and emerging markets and of this number, 87% are micro enterprises. In this webinar Elizabeth Friend, Ethel Mupambwa and Jackie O’Neil explore the key issues they face and how we can design to meet their needs and support their growth.
IFC’s definition of MSMEs is based on three indicators: number of employees, annual sales, and total assets. A micro enterprise has less than 10 employees and sales and assets lower than $100,000. Our discussion will focus more on small scale enterprises in developing countries. These are run, normally by single entrepreneurs operating in the informal sector or undertaking low skilled work, with a focus on daily cashflow.
In developing countries there is a demand of $8 trillion in credit facilities for SME’s, however the supply is sitting at $2.3 trillion. This leaves a huge gap of $5.8 trillion. Access to finance is a key constraint to SME growth. Factors influencing this challenge are:
- The lack of the “right” Identification documents and collateral means that an entrepreneur is unlikely to have access formal financial services and have things such a credit score to access loans.
- When looking for investors, friends and family are often the only available source and can have few funds they can invest.
- The cost of servicing micro entrepreneurs by financial institutions is high because they are hard to reach or generally off the grid.
- Lastly, the process to reach out to formal financial institutions can be time consuming and impact the day’s earnings for the microentrepreneur, and completion of paperwork can be daunting coupled with lack of financial history and documentation.
As well as having a financial gap, there is also a knowledge gap. Most entrepreneurs do not have role models to look up to for financial advice or have the skills and experience to understand key concepts such as profit, loss, and market opportunity. Many duplicate what they see others doing which dilutes everyone’s profits. They also lack long-term vison as they are focused on meeting their own basic needs in Maslow’s Hierarchy.
Technology is rapidly advancing, we have more people with mobile phones and are improving connectivity in remote areas, we also have AI and machine learning. These along with things such as the covid pandemic are advancing digitalisation. This is bringing advantages such as enabling alternative data to be collected to give information on a microentrepreneur to help with access to finance and is helping financial service providers to support MSME’s in a more streamlined and cost effective way. It also allows products to be customised to meet the needs of the entrepreneur and can include financial education training.
We do need to be aware that digitisation can amplify inequalities and widen gaps such as the gender gap. For example, who owns the smart phone in the household? People of lower digital literacy can also struggle using the technology of the product. A language barrier can exist if the interface/ model is not catering to the indigenous language(s). When creating a product the Micro-entrepreneur should easily be able to understand and feel confident in using it. Visibility of data being collected also has the potential to penalise marginalised groups in some countries.
When designing technology or a product for micro-entrepreneurs the following are key steps in meeting the needs of micro-entrepreneurs and improve their financial health:
- Understand which segment within MSME you are designing for as they are very different sizes and scales with different needs
- Understanding the needs of your chosen segment the micro enterprise and designing the to meet these, and use human-centred design principles
- Don’t exclude humans – use people such as agents to assist, they play a key role in supporting the entrepreneur and build their trust. Consider how you can use technology to aid these agents further
- Include literacy, education, and support in your product offerings – help the entrepreneur assess how their business is doing and how they can grow
- Collect and use data wisely to help improve your product offerings to that individual and also to similar individuals