Why more capital alone will not solve the SME financing gap

Small and medium-sized enterprises (SMEs) are central to employment and economic activity across emerging markets. Yet their access to formal finance remains disproportionately limited.

The contradiction is particularly striking in the Philippines. According to a February 2026 study by Boston Consulting Group (BCG), micro, small and medium-sized enterprises (MSMEs) account for 67% of employment but receive less than 5% of bank loans. Despite operating in a growing credit market, most small businesses continue to finance their activities through personal savings or other informal sources.

This is not an isolated problem. Research from Kazakhstan and several African financial markets reveals similar challenges, although their underlying causes vary considerably.

The conventional response to the SME financing gap is to increase the availability of capital through dedicated lending programmes, subsidised credit or government-backed financing facilities. These interventions can be valuable, particularly where commercial finance is scarce.

However, recent studies by KPMG, BCG and the World Economic Forum, in collaboration with McKinsey & Company, suggest that capital availability is only part of the problem.

The ability of financial institutions to assess credit risk, the reliability of financial information, the productivity of enterprises and the effectiveness of financial infrastructure all influence whether businesses can obtain financing.

Understanding these relationships is essential for designing financial markets that can serve SMEs sustainably.

The problem is not always a lack of creditworthy businesses

Consider an established small enterprise with recurring customers, stable sales and a commercially sound expansion opportunity. The business requires additional working capital to purchase inventory or fulfil larger orders.

Despite its commercial potential, the enterprise may be unable to provide audited financial statements, demonstrate a sufficient banking history or offer the collateral required by its lender.

Its application is rejected.

This does not necessarily mean that the enterprise cannot repay a loan. It may indicate that the financial institution lacks sufficient information to assess the business within its existing credit policies.

BCG’s Activating the Philippine Credit Flywheel identifies weaknesses in credit information infrastructure as a significant obstacle to financial inclusion.

The report explains how incomplete borrower information increases lending costs and uncertainty. Financial institutions respond by conducting additional checks, charging higher interest rates or declining applications.

This creates a difficult cycle. Businesses without established credit histories struggle to obtain formal financing, while their continued exclusion prevents them from developing the repayment records needed to demonstrate creditworthiness.

Breaking this cycle requires improving how financial institutions evaluate risk.

Traditional collateral-based assessments remain relevant, but they can be complemented by cash-flow analysis, transaction histories, supplier relationships, verified purchase orders and evidence of recurring commercial activity.

These approaches do not eliminate credit risk. They can, however, improve lenders’ ability to distinguish between genuinely weak borrowers and viable enterprises whose financial performance is not adequately captured by conventional documentation.

For emerging markets, this distinction has important implications. Expanding credit access without improving risk assessment can undermine financial stability. Improving risk assessment, by contrast, can make additional lending commercially viable.

Financing constraints and business performance reinforce each other

Limited access to finance is frequently considered an external constraint on business growth. Yet enterprise performance itself can influence whether lenders are willing to provide financing.

Research conducted by KPMG and Mastercard on Kazakhstan’s SME sector illustrates this relationship.

According to the April 2026 report, 79% of surveyed SMEs identified access to credit as a barrier to growth. However, businesses also faced challenges involving taxation, macroeconomic instability, skills shortages and digital capabilities.

The study found that labour productivity among micro and small enterprises was approximately half that of medium-sized businesses.

In 2025, micro and small businesses generated approximately KZT 7.4 million in output per employee, compared with KZT 15.9 million among medium-sized enterprises.

These productivity differences matter for financing.

Enterprises with weak operational efficiency, inadequate financial management or limited capacity to plan investments may struggle to generate the cash flows required to service additional debt.

Conversely, businesses unable to access financing may postpone investments in equipment, technology, staff and expansion, leaving underlying productivity constraints unresolved.

The relationship can become self-reinforcing.

This is why SME financing programmes should not be designed independently of enterprise development needs.

Financial management, business planning, cost control, inventory management and operational improvements can contribute directly to investment readiness.

For financial institutions and development partners, targeted technical assistance can also reduce information gaps and strengthen the quality of investment decisions.

The emphasis should be on identifying the specific weaknesses affecting each business rather than delivering generic capacity-building activities.

A manufacturer struggling with production efficiency requires different support from a distributor experiencing cash-flow pressure due to delayed customer payments.

Financing becomes more effective when it addresses a commercially viable investment need and is supported by the operational capacity necessary to use that investment productively.

Digital payments have expanded faster than access to credit

Digital financial services have transformed payment systems across many emerging markets, particularly in Africa.

According to BCG’s March 2026 report, Beyond Payments: Unlocking Africa’s Second FinTech Wave, Africa accounts for approximately 74% of global mobile money transaction volume.

Mobile payment systems have reduced transaction costs, expanded access to formal financial services and enabled millions of individuals and businesses to participate in the digital economy.

Yet their success has not been matched by equivalent growth in formal lending.

BCG observes that even in relatively mature mobile money markets, including Kenya, Ghana and Uganda, access to formal credit remains limited and substantial borrowing continues through informal or semi-formal channels.

This raises an important question: why has the expansion of digital payments not translated into broader SME financing?

One explanation is that payment infrastructure and credit infrastructure serve different purposes.

Digital transactions can provide valuable information about business activity, but this information does not automatically become accessible or useful to financial institutions assessing loan applications.

The availability, reliability, standardisation and responsible sharing of financial data are all important considerations.

BCG identifies interoperable digital infrastructure, stronger credit information systems, regulatory clarity, cybersecurity and access to growth-stage capital as priorities for deepening financial markets.

For policymakers, the implication is that financial inclusion should not be evaluated solely through payment adoption or account ownership.

A more meaningful assessment considers whether financial services enable businesses to obtain working capital, finance productive investment, manage risk and expand their operations.

The next stage of digital financial development therefore requires closer integration between payment systems, credit assessment and the wider financing needs of enterprises.

Credit guarantees must create additional lending

Where financial institutions remain reluctant to finance underserved SMEs, guarantees and risk-sharing facilities can provide an important incentive.

The World Economic Forum’s December 2025 white paper, developed in collaboration with McKinsey & Company, examines how governments, multilateral development banks and private enterprises can work together to strengthen resilience and unlock investment in emerging markets.

The report identifies improved access to finance as one of four priorities for collaboration, alongside infrastructure, digitalisation and enabling policy.

Risk-sharing mechanisms can encourage financial institutions to enter markets or serve customer segments they would otherwise consider too risky.

For example, the report highlights a partnership launched in 2024 between the International Finance Corporation (IFC) and Bridge Bank Group Côte d’Ivoire to expand SME financing in Côte d’Ivoire and Senegal.

However, the effectiveness of guarantee schemes depends heavily on their design.

Providing a guarantee does not automatically make a business commercially viable. Nor does it resolve deficiencies in financial information, repayment capacity or credit monitoring.

Guarantee schemes must therefore balance several considerations: sufficient coverage to encourage lender participation, clear eligibility conditions, efficient claims procedures, appropriate pricing and mechanisms that preserve sound lending practices.

An equally important consideration is whether guarantees generate financing that would not otherwise have been available.

If a scheme primarily protects loans that financial institutions were already willing to provide, its developmental contribution may be limited.

The objective should be to encourage additional financing while helping participating institutions build experience and confidence in underserved market segments.

Performance should consequently be assessed beyond the number of loans guaranteed or the value of facilities disbursed.

Relevant measures include additional private capital mobilised, the number of previously underserved businesses financed, repayment performance, business growth and whether participating lenders continue serving these segments after the intervention ends.

Building a pathway towards commercial finance

A particularly useful concept emerging from BCG’s Philippine credit study is the development of graduation ladders for underserved borrowers.

Rather than expecting enterprises with limited financial histories to qualify immediately for conventional commercial loans, this approach allows them to establish creditworthiness progressively.

The report examines India’s MUDRA programme, which uses different financing tiers to serve microenterprises and support their progression towards larger financing facilities.

The underlying principle extends beyond any single programme.

A business may initially require a relatively small facility, supported by closer monitoring or targeted risk-sharing. As it establishes a reliable repayment history, improves financial reporting and demonstrates commercial performance, it may become eligible for larger facilities on more conventional terms.

This approach recognises that bankability can develop over time.

It also offers an important perspective on the role of development finance.

Public or donor-supported interventions should not necessarily aim to provide subsidised financing indefinitely. Their longer-term contribution may be to help enterprises and lenders establish relationships that can continue on commercially sustainable terms.

A successful intervention should ideally leave businesses better prepared to access financing and financial institutions better equipped to evaluate them.

What emerging markets can learn

The experiences of the Philippines, Kazakhstan, India and African financial markets demonstrate that SME financing constraints differ according to market conditions and institutional development.

There is no single financing instrument capable of addressing every barrier.

Where the primary challenge is insufficient credit information, improving data infrastructure and credit assessment may be more effective than expanding subsidised credit.

Where enterprises face productivity or financial-management constraints, technical assistance may need to accompany financing.

Where lenders face risks that are commercially manageable but exceed their existing risk appetite, appropriately structured guarantees may encourage additional lending.

And where digital transactions are growing without corresponding improvements in business credit, the priority may be to connect payment infrastructure with financial information systems and suitable lending products.

These distinctions should guide the design of SME financing interventions.

For governments and regulators, the priority is to establish reliable institutional and regulatory conditions that support lending and investment.

For financial institutions, it is to strengthen credit assessment and develop financing products aligned with enterprise needs.

For development finance institutions, it is to address market failures through targeted instruments that mobilise rather than permanently replace commercial capital.

For businesses, improved financial transparency, operational performance and governance remain essential components of investment readiness.

Effective financing strategies begin with a clear understanding of the constraint they are intended to address.

A different measure of success

SME financing initiatives are frequently measured by the number of businesses supported or the total volume of financing disbursed.

These indicators are useful, but they provide an incomplete picture of long-term effectiveness.

A programme can distribute substantial capital without meaningfully improving how financial institutions assess and finance SMEs.

Conversely, a smaller intervention that improves borrower information, demonstrates successful lending to an underserved segment and strengthens financial institutions’ capabilities can generate benefits beyond its initial portfolio.

The distinction is between financing individual businesses and developing a financial market capable of serving businesses sustainably.

Both objectives matter, but they require different measures of success.

The research reviewed here suggests that the SME financing gap cannot be addressed through capital supply alone.

More effective financing depends on reliable information, commercially grounded risk assessment, stronger enterprise capabilities, appropriate financial products and institutions willing and able to serve underserved businesses.

For emerging markets seeking greater private-sector investment and economic diversification, these conditions are fundamental.

The real measure of progress is not simply how much capital reaches SMEs, but whether viable enterprises become more capable of attracting finance—and financial institutions more capable of providing it—without permanent dependence on external support.

References

Boston Consulting Group (2026). Activating the Philippine Credit Flywheel. February 2026. https://www.bcg.com/publications/2026/philippines-activating-the-philippine-credit-flywheel

KPMG & Mastercard (2026). Kazakhstan’s SME Sector: Challenges and Opportunities. April 2026. https://kpmg.com/kz/en/media/press-releases/2026/04/mastercard-and-kpmg-study.html

Boston Consulting Group (2026). Beyond Payments: Unlocking Africa’s Second FinTech Wave. 13 March 2026. https://www.bcg.com/publications/2026/beyond-payments-unlocking-africas-second-fintech-wave

World Economic Forum, in collaboration with McKinsey & Company (2025). Resilient Firms and Economies: How Companies, Governments and Multilateral Development Banks Can Help Unlock Growth in Emerging Markets. December 2025. https://www.weforum.org/publications/resilient-firms-and-economies-how-companies-governments-and-mdbs-can-help-unlock-growth-in-emerging-markets

This article presents Altra Global’s independent interpretation of published research. Findings attributed to external organisations remain those of their respective authors, and the analysis does not imply endorsement by those organisations.

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