The Importance of Access to Credit in Emerging Regions

Access to credit is a key issue in emerging regions where there is a lack of widespread financial infrastructure, services, and institutions. This article explores the importance of access to credit in certain regions of the world and the economic potential that can be unleashed.

Micro, Small, and Medium sized Enterprises

It is estimated that more than 500 million jobs will need to be added to the world economy over the next 15 years in order to keep up with the ongoing demographic growth. Furthermore, these jobs are most needed in the emerging regions of Latin America, Africa, and Asia. However, this dynamic poses a major challenge to the small and medium enterprises (SME) within these regions because of the lack of financial structures and access to business credit. Even though SME represent the most promising economic sector for job creation in emerging regions, these entrepreneurs are struggling to get their businesses off the ground.

According to the World Bank, it is expected that SME will create more than half of the new positions in the global economy of the 21st century. Nevertheless, 50% of SME are currently struggling to secure appropriate funding and financial credit. Approximately 70% of all micro, small, and medium sized enterprises in emerging regions of the world lack access to appropriate financing. This gap amounts to more than US$2.5 trillion in missing funding that could be used to create economic activity. Similarly, women-owned businesses throughout emerging regions suffer from a lack of access to credit. In fact, a Goldman Sachs study estimates that granting credit to SME as well as women-owned enterprises in emerging economies would increase per capita income by more than 10% in those regions over the next two decades.

The Importance of Access to Credit in Emerging Regions

Given this scenario, most SME enterprises rely on family members and personal loans to raise the capital that they need to move their businesses forward. Fortunately, over the last decade there has been an increasing awareness of this dire financial and economic need for emerging nations to be able to prosper. In turn, this has led international investors and capital raising organizations to get involved in emerging markets as angel funders, credit facilitators, and micro-financiers. However, the screening capabilities and lending capacity of these international financiers when it comes to selecting and accompanying SME is limited. There is still a large gap to be filled and financial infrastructure to be developed in terms of emerging market economics.

Major financial institutions and banks worldwide should work together with the government and private sector in regions like South America and West Africa in order to establish a solid financial services industry. In the meantime, international and institutional investors should continue to participate in pooling their resources and accompanying promising projects throughout these regions. Through private equity and crowd funding ventures, any investor can benefit from low entry points and diversify into the promising enterprises of emerging regions. Such partnerships, in sectors like technology, agriculture, and even manufacture, promise to be beneficial for both lenders and borrowers as well as key to the continued growth of the world’s economy.

(Read more about Free Trade Agreements and Agriculture Worldwide)