IFC, a member of the World Bank Group, has launched a new initiative to help financial service providers deliver funds to small businesses in emerging markets, especially those owned by women and those focused on agriculture and climate.
The MSME Finance Platform (the Platform) will include a financing package of up to $4 billion from IFC’s own account to banks, non-bank financial institutions, microfinance institutions, and innovative digital lenders that focus on micro, small, and medium enterprises (MSMEs).
It will be available to both new and existing IFC clients.
The Platform will also utilize various forms of credit enhancement to mobilize private capital, including an innovative Catalytic First Loss Guarantee, which together aim to crowd in an additional $4 billion in financing from eligible financial service providers to expand lending to these businesses.
“Micro, small, and medium enterprises form the backbone of most developing economies, yet they face significant financial barriers that hinder their potential,” explained Makhtar Diop, Managing Director of IFC. “Our new financing platform addresses these challenges head-on, empowering financial service providers to extend critical support to these businesses, particularly those that are women-led or environmentally focused.”
MSMEs make up over 90% of all firms and account, on average, for 60-70% of total employment and 50% of GDP worldwide. Still, according to the SME Finance Forum, there is currently a roughly $5.7 trillion financing gap for MSMEs.
In emerging markets, MSMEs and the informal sector are essential to economic growth, job creation, and poverty alleviation.
Recent crises have weakened financial service providers financially, constraining their ability to meet increasingly stringent lending requirements. As a result, businesses are seeing a credit contraction in emerging markets and developing economies due to tighter credit conditions, rising interest rates, and a limited appetite for risk.
As the largest development finance institution supporting the private sector in emerging markets, IFC is well positioned to help financial service providers offer support.
IFC will leverage its risk capital to extend first loss protection to eligible financial service providers, which often have ample local currency liquidity but have limited exposure to MSMEs due to the segment’s perceived high risk.
Through this mobilization approach, the MSME Platform aims to create a financing solution through capital optimization structures and potentially redirect significant amounts of local currency financing to businesses.
The Platform will be supported by the International Development Association’s Private Sector Window (IDA PSW) to help de-risk the credit and foreign currency exposures in projects in low-income countries. Up to $100 million will come from the IDA PSW Blended Finance Facility (BFF).
In addition, resources from the Global SME Finance Facility (GSMEF) and the Women Entrepreneurs Opportunity Facility (WEOF) will be allocated to support and incentivize lending to businesses in the agriculture sector and women-owned MSMEs.