The World Bank Group commits an average of $3 billion a year to directly supporting small and medium-size enterprises. There are many successes, but as a recent IEG evaluation reported, more could be done to measure what’s working and what isn’t.
Diego had already shown that he had what it takes to be an entrepreneur. After losing his job as an accountant in Léon, Nicaragua, he started a bakery in his home and was soon employing six people. The bakery was a success, but Diego wanted to grow it further and to do that he needed financial assistance.
Under a project financed by the World Bank Group, Diego won a competitive selection for a matching grant to buy new equipment. He also received training on using his accounts as a business management tool, and on how to reorganize his bakery to improve energy and technical efficiency. Diego dramatically increased productivity, doubling his staff from six to 12, while reducing work shifts to eight hours a day. He also expanded his product line, which especially pleased him since it created jobs for his wife and daughter.
The World Bank Group promotes the growth of small and medium size enterprises (SMEs) through both systemic interventions that work to level the playing field and targeted interventions that aim to deliver financing, training or other benefits to individual SMEs. In fact, targeted support for SMEs is a big business for the World Bank Group, worth an average of $3 billion annually in recent years.
We know that financial sector development can have both a pro-growth and pro-poor impact, in part by disproportionally alleviating SMEs’ financing constraints.
In Kenya, for instance, the World Bank and the International Finance Corporation (IFC) worked together to create a new market in equity investments for SMEs. They helped the finance company get started, and seeing that it was profitable other companies soon followed, creating a whole new source of investment finance.
These interventions are clearly having an impact, but our evaluation also raised some key questions.
Achieving maximum Bank Group impact through targeting
Our evaluation found that, given the huge gap between what SMEs are estimated to need and the amount of aid that is provided, the only way to have a significant impact is to intervene in ways that permanently expand the supply of services, such as creating a new market for SME finance or providing training that can operate long after the project is complete.
The Bank Group has more impact near the “frontier” – in less developed economies, and with client groups, such as women and people living rural areas, who are not adequately being served by existing markets. The IEG evaluation found that by building markets or addressing market failures, the Bank can make an enduring contribution to SME development.
What are the limitations?
Often interventions do not appear guided by a clear enough understanding of the specific challenges of local SMEs or a clear understanding of how to fix them.
Learning from experience is challenging. The evaluation found that the World Bank Group doesn’t collect enough information to know if its interventions are working to help SMEs or build markets.
Too often opportunities for collaboration are not exploited. Coordination among World Bank Group institutions could be improved with more frequent communication and shared strategic objectives.
Taking a different approach?
To better help the World Bank Group assist SMEs, IEG made a number of recommendations. Among them were to:
Harmonize and clarify its approach to supporting SMEs. Targeted support should be firmly rooted in a clear understanding of how it will permanently remove the limitations affecting the SMEs' ability to contribute to employment, growth, and economic opportunity.
Enhance added value by shifting benefits from better-served firms and markets to frontier states, frontier regions, and underserved segments such as female-led SMEs.
The evaluation also uncovered some surprising findings:
Many projects that say they will help only SMEs don’t define what an SMEs is; require that benefits go to these enterprises; or monitor whether the SMEs actually received the benefits.
The main advantage of Bank Group interventions is not for the SMEs directly served, but for the building of institutions and markets that can serve many more SMEs.
Do you work with, support or run a small or medium size business? We’d love to hear your thoughts.