The Importance of MSMEs in Developing Countries

August 29, 2023
Updated on

Micro, Small and medium-sized enterprises (MSMEs) are crucial drivers of economic growth, particularly in developing countries, where they play a pivotal role in job creation and global economic development. These enterprises represent most businesses worldwide and contribute significantly to employment opportunities. In fact, MSMEs account for approximately 90% of businesses globally and are responsible for over 50% of global employment, making them a vital component of thriving economies.

Given the projected growth of the world’s workforce, with an estimated 600 million new jobs needed by 2030, fostering the development of MSMEs has become a top priority for many nations. MSMEs have demonstrated their ability to generate formal job opportunities, particularly in emerging markets, where they account for seven out of ten jobs. This highlights their potential to alleviate poverty, reduce inequality, and create a more inclusive economy.

However, despite their importance, MSMEs face significant challenges, with access to finance being a persistent obstacle. Lack of adequate financing options and limited access to capital prevents many MSMEs from reaching their full potential. Access to capital is consistently cited as one of the major barriers hindering SME growth, ranking as the second most common challenge in emerging markets and developing countries. This financing gap restricts their ability to invest in technology, expand operations, hire skilled talent, and compete in the global market.

Addressing the financing gap is crucial to unlocking the full potential of MSMEs and enabling them to thrive. Governments and financial institutions have a vital role to play in creating an enabling environment that fosters the growth and sustainability of MSMEs. This includes implementing policies and initiatives that facilitate access to finance, such as dedicated SME loan programs, venture capital funds, and innovative financial products tailored to the specific needs of MSMEs. Collaboration between public and private sectors is essential to build robust ecosystems that support MSMEs throughout their lifecycle, from startup to scale-up.

By improving access to finance, governments and financial institutions can empower MSMEs to unleash their capacity for innovation, job creation, and economic progress. This, in turn, has a ripple effect on the overall economy, driving productivity, stimulating market competition, and fostering inclusive economic growth. It is through these concerted efforts that MSMEs can realise their full potential as engines of economic development and agents of positive social change.

First, let us begin with – What is MSME?

India, known for its burgeoning demographic dividend, has witnessed a remarkable surge in the number of MSMEs across various sectors. The Micro, Small, and Medium Enterprises Development Act of 2006, specifically Section 7, provides a comprehensive framework for defining and classifying MSMEs in India. These enterprises are categorised based on the investment made in the respective industries.

According to the Act, small enterprises are characterised by investments ranging from Rs. 1 crore to Rs. 10 crore, with turnover thresholds falling between Rs. 5 crores and Rs. 50 crores. On the other hand, medium enterprises are identified by investments between Rs. 10 crores and Rs. 50 crores, while their turnover ranges from Rs. 50 crores to Rs. 100 crores. It is noteworthy that MSMEs contribute significantly to both the manufacturing and services sectors, playing a vital role in India’s secondary, tertiary, and quaternary sectors.

As engines of economic growth and employment generation, MSMEs have emerged as a key component of India’s diverse and vibrant economy. Their presence across multiple sectors underscores their contribution to the country’s overall development and highlights their potential to drive innovation, create jobs, and foster entrepreneurial spirit.

MSMEs are pivotal in addressing poverty, inequality, and job creation, with a particular impact on rural areas. They serve as a significant source of employment, offering opportunities to marginalised groups such as women, low-skilled workers, and young individuals. By fostering entrepreneurship and providing avenues for economic participation, MSMEs play a crucial role in generating jobs, fostering wealth creation, and ultimately alleviating poverty.

The inclusive nature of MSMEs allows for the empowerment of communities and individuals who may face limited opportunities in formal employment sectors. Through their resilience, adaptability, and potential for growth, MSMEs contribute to building more equitable and prosperous societies by promoting economic stability, social mobility, and sustainable development.

Grow your MSME with collateral-free business loans

Challenges Faced by MSMEs

Now that you have gained an understanding of what MSMEs are and their significance, it is important to delve into the challenges faced by these enterprises, particularly in accessing finance. 

In comparison to large firms, MSMEs often need help in obtaining bank loans, which can hinder their growth and expansion plans. Due to various factors such as limited collateral, lack of credit history, and perceived higher risks associated with smaller businesses, traditional financial institutions may be hesitant to provide loans to MSMEs. As a result, MSMEs are often compelled to rely on internal funds or seek financial support from friends and family to launch and sustain their businesses.

One of the major obstacles faced by MSMEs is the limited access to formal credit. Studies indicate that approximately half of all MSMEs worldwide lack access to formal financial services, such as bank loans or lines of credit. This financing gap is further exacerbated when considering micro and informal enterprises, which significantly increases the number of businesses needing help to secure external funding. With adequate access to formal credit, MSMEs can acquire the necessary capital to invest in equipment, technology, inventory, marketing, and other critical aspects of business expansion.

The lack of access to formal credit restricts the growth potential of MSMEs, preventing them from fully capitalising on market opportunities, scaling their operations, and creating more employment opportunities. It hampers their ability to innovate, adopt new technologies, and compete on a level playing field with larger enterprises. Moreover, the reliance on internal funds or informal sources of finance can limit the financial stability and sustainability of MSMEs in the long run. 

To address these challenges and bridge the financing gap for MSMEs, concerted efforts are needed from governments, financial institutions, and other stakeholders. Governments can play a crucial role by implementing policies that promote inclusive and accessible financial systems, fostering an environment conducive to SME financing.

This may include developing specialised lending programs, establishing credit guarantee schemes, and providing financial incentives to encourage banks and financial institutions to extend credit to MSMEs. Additionally, fostering financial literacy and entrepreneurship education can empower SME owners with the knowledge and skills needed to navigate the financial landscape effectively and access appropriate funding sources.

Innovative financial solutions such as microfinance, peer-to-peer lending platforms, and impact investing also hold promise in expanding MSMEs’ access to finance. These alternative financing mechanisms can leverage technology and digital platforms to reach underserved MSMEs, facilitate faster loan processing, and provide tailored financial products to suit their specific needs.

By addressing the financing challenges faced by MSMEs, we can unlock their growth potential, stimulate economic development, and promote job creation. Ensuring that MSMEs have access to adequate and affordable credit is crucial for fostering entrepreneurship, reducing inequalities, and achieving sustainable and inclusive economic growth.

Kinara Capital believes in the impact of small businesses and provides collateral-free business loans to bridge that gap. MSMEs can apply for a loan by entering a few details and uploading their documents on Kinara’s secure online portal. 

Tips to Expand MSMEs

Grow the Team

Embracing a diverse workforce comprising individuals with various skills, experiences, backgrounds, beliefs, and specialities is essential for unlocking innovation and driving success in any organisation. Such diversity fosters a rich tapestry of ideas, perspectives, and approaches that can lead to creative problem-solving and enhanced decision-making processes. Moreover, by recognising the value of diversity, businesses can tap into a pool of untapped talent and perspectives that may otherwise need to be explored.

Business loans from Kinara Capital help MSMEs to open up opportunities to expand their hiring initiatives and attract a diverse range of skilled individuals. By accessing additional capital through business loans, MSMEs can invest in recruitment efforts and reach out to talented professionals from various backgrounds and expertise areas. This infusion of fresh perspectives and skills can energise a team, foster a culture of inclusivity, and drive innovation within an organisation.

Moreover, a diverse workforce brings about numerous benefits beyond just fresh perspectives. Studies have shown that diverse teams are more adaptable and resilient, better equipped to navigate challenges, and capable of understanding and meeting the needs of a broad customer base. By recruiting individuals with diverse backgrounds, MSMEs can cultivate a workforce that better reflects the diversity of their customers, leading to improved customer satisfaction and loyalty.

Kinara Capital understands the significance of a diverse workforce and its role in driving business growth and success. By providing accessible and flexible business loans, Kinara Capital empowers MSMEs enterprises to invest in expanding their teams and recruiting talented individuals. So, MSMEs should seize the opportunity and partner with Kinara Capital to unlock the potential of a diverse workforce and propel their organisation towards greater achievements.

Better Equipment

In today’s competitive business landscape, having access to modern and efficient equipment is crucial for driving growth and maximising profitability. Kinara Capital recognises the importance of equipping a business with the right tools and offers MSMEs the option to avail an asset purchase loan. This loan enables them to acquire the necessary equipment that can significantly enhance their production capabilities and ultimately contribute to the success of their business.

By partnering with Kinara Capital and utilising the asset purchase loan, MSMEs gain the opportunity to upgrade their equipment and leverage the latest technology in the industry. Upgraded equipment often translates to increased efficiency, improved quality, and reduced downtime, all of which can have a direct impact on the bottom line. By investing in high-quality equipment, MSMEs can streamline their operations, increase productivity, and meet customer demands more effectively, giving them a competitive edge in the market.

Furthermore, modern equipment often offers additional features and functionalities that can enhance the business’s overall performance. Whether it’s advanced automation capabilities, energy efficiency, or improved safety features, investing in better equipment can bring numerous benefits beyond just increased profit. It can also lead to reduced maintenance costs, minimised waste, and improved workplace safety, creating a more sustainable and productive working environment.

Kinara Capital understands the pivotal role that equipment plays in a business’ growth trajectory. Providing asset purchase loans empowers MSME businesses to invest in equipment that aligns with their business goals. So, seize the opportunity to take their business to new heights by partnering with Kinara Capital and availing an asset purchase loan today.

Continue to Look for Bigger Opportunities

In the dynamic business landscape, companies experience growth cycles and occasional plateaus. The secret to sustained success lies in continuously seeking new avenues for growth and embracing a mindset of creativity and experimentation. Therefore, it is important to proactively explore innovative strategies and ventures while also maintaining a clear focus on goals and measurable outcomes to prevent potential growth opportunities from becoming detrimental missteps.

Embracing a culture of continuous improvement and adaptability is vital for navigating the ever-evolving business landscape. By actively seeking out new opportunities, whether it be entering new markets, developing new products or services, or adopting emerging technologies, MSMEs can unlock untapped growth potential. However, these endeavours require a willingness to think outside the box, take calculated risks, and embrace a spirit of innovation.

However, it is equally crucial to maintain a strategic approach and evaluate the feasibility and potential impact of each growth opportunity. Setting clear goals and defining measurable metrics can help MSMEs assess the effectiveness of their initiatives and ensure that they align with their overarching business objectives. This enables them to make informed decisions, allocate resources effectively, and avoid unnecessary pitfalls that can impede the progress of their business.

By striking a balance between creativity and strategic planning, MSMEs can seize growth opportunities while mitigating risks. It is important to foster an environment that encourages experimentation, learning from failures, and iterating on successes. Small businesses can achieve long-term success and sustain a competitive edge in the market by continuously adapting, testing, and refining their strategies.

Remember, growth is not just about embracing new ideas; it is about executing them thoughtfully and measuring their impact. By maintaining a forward-thinking mindset, staying agile, and aligning growth initiatives with measurable outcomes, MSMEs can maximise their company’s potential and navigate the path to sustained success.

Conclusion

The importance of MSMEs in developing countries cannot be overstated. These enterprises are vital engines of economic growth, job creation, poverty alleviation, and wealth distribution. MSMEs contribute significantly to employment, particularly for marginalised groups such as women, low-skilled workers, and young people. They play a crucial role in driving innovation, fostering entrepreneurship, and promoting inclusive development.

MSMEs not only generate employment opportunities but also contribute to the overall economic development of developing countries. They stimulate local economies, enhance productivity, and spur innovation through their agility, adaptability, and potential for expansion. Moreover, MSMEs contribute to economic diversification, reduce income inequality, and empower communities by providing livelihood opportunities.

The development and support of MSMEs should be a priority for governments, policymakers, and financial institutions in developing countries. It is essential to create an enabling environment that facilitates access to finance, technology, skills development, and market linkages for MSMEs. This includes implementing supportive policies, providing targeted financial assistance, promoting entrepreneurship education, and fostering public-private partnerships.

By nurturing and empowering MSMEs, developing countries can unlock their full economic potential, create sustainable livelihoods, and foster inclusive growth. Recognising their significance and addressing their challenges will result in a more resilient, diversified, and prosperous economy for the benefit of all stakeholders.

Kinara Capital is committed to promoting financial inclusion for small business owners by offering collateral-free MSME loans. To apply for a business loan online from Kinara, MSME entrepreneurs can visit their website or the myKinara app and check their eligibility for a business loan. If they qualify for the business loan eligibility, they can continue with the application process and submit the minimum documentation. The amount will be digitally transferred to their account within 24-hours.

With the fully digital online application process, MSMEs can apply for a business loan online without waiting a long time. For further queries, give a missed call on 080-68264454 and get contacted by Kinara’s customer support team for all the answers. So, don’t hesitate to take financial aid. Choose Kinara Capital, and it’s all the way up from there!

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