Investments in this strategy aim to contribute to income generation and creation of more and better jobs through increasing financial inclusion of MSMEs. The sections below include an overview of the strategy for achieving desired goals, supporting evidence, core metrics that help measure performance toward goals, and a curated list of resources to support collecting, reporting on, and using data for decision-making.
Unemployment affects more than 190 million people worldwide (1). The global economy needs to generate 600 million new jobs over the next 15 years to absorb a growing workforce and begin to tackle current unemployment (2). Additionally, among those employed, many do not have “decent work."* An estimated 1.4 billion people worldwide are in vulnerable jobs (1).
Micro, small, and medium-sized enterprises (MSMEs) form the backbone of economies around the world, contributing vital job creation. Formal small and medium-sized enterprises (SMEs) account for more than half of all worldwide employment and 40% of GDP in emerging economies, where they create four out of every five new jobs (3).** MSMEs also contribute indirectly to employment through their supply chains, although this impact is harder to quantify (4).
Yet despite their many economic, social, and political benefits, MSMEs remain largely underserved by financial institutions. The difficulty MSMEs face in obtaining financing to start, sustain, or grow is one of the biggest constraints to their development (3).
* As defined by the International Labour Office (ILO), “decent work” is employment that “respects the fundamental rights of the human person as well as the rights of workers in terms of conditions of work safety and remuneration" and also "include[s] respect for the physical and mental integrity of the worker in the exercise of his/her employment.”
** These figures do not include SMEs in the informal sector. SMEs' economic contributions would be larger still if the informal sector were also taken into account.
The problem with quality jobs and economic development is twofold:
* Still, vulnerable jobs are not necessarily negative. According to research by Innovations for Poverty Action, women in some developing countries with heavy domestic-care burdens might benefit from the flexibility of self-employment.
Unemployed or Underemployed Individuals: Those without jobs, in vulnerable jobs, or in jobs for which they are overqualified benefit from investments that create quality employment opportunities.
Micro, Small, and Medium-Sized Enterprises: MSMEs that require financial services to start, sustain, or expand benefit from this strategy, as do those employed by MSMEs.
Individuals in Vulnerable Jobs: Such individuals are more likely to have informal employment and less likely to benefit from job security, regular incomes, and access to social protection such as health care and pensions (1).
Youth: The global rate of unemployment for those younger than 25 is three times higher than the adult rate of 13% (1).
Women: On average, the percentage of women participating in the labor market is more than 26 percentage points lower than that of men, and women who are looking for a job are less likely to find one. Once employed, women face segregation by sector, occupation, and type of employment relationship, restricting their access to quality employment (1). Furthermore, of the 31-38% of formal SMEs in developing economies owned fully or partially by women, 63-69% are unserved or underserved by financial institutions (5). While financing is a challenge for all SMEs, these difficulties are amplified for women-owned enterprises, as women are less likely to own assets that can serve as collateral and more likely to suffer exclusion based on unequal property rights or discriminatory regulations, laws, and customs (2). Women-owned SMEs provide important contributions to job creation and productivity growth.
While job quality is a global issue, the largest need is in developing economies.
Developing countries are home to 65-70% of formal SMEs (25-30 million SMEs).
Productive employment and decent work are keys to reducing inequalities and poverty. MSMEs create jobs, diversify an economy, enhance productivity, promote innovation, help to deliver goods and services to the bottom of the social pyramid, and can greatly help to integrate women and youth into the economic mainstream.
Improving MSMEs' access to formal financial products and services that are tailored to their needs, as well as the provision of entrepreneurship training, can increase jobs, job quality, and incomes, especially when provided as a package (6).
Delivery channels, such as agent networks, can help increase reach and drive down costs of delivering financial products and services, thus also contributing to job creation.
The extent to which this strategy will successfully support the creation of quality jobs and improve the broader of the economic environment depends on several aspects including, at the enterprise level:
At the policy level, this strategy's success depends, among other aspects, on:
*At the level of the financial service provider, the design of customer-centric products and services can be informed by the Universal Standards for Social Performance Management; the development of viable branchless banking agents can be informed by CGAP’s Agent Management Toolkit.
**At the level of the financial service provider, treatment of employees can be measured against the Universal Standards for Social Performance Management. At the SME level investors can require the use of “exclusion lists” to ensure that as a minimum, SME employees are protected from abusive, harmful, or dangerous practices.
As noted above, 190 million people worldwide are unemployed, and 1.4 billion have vulnerable jobs. In developing countries, around 55–68% of formal SMEs, or 13.8 to 20.4 million firms, are unserved or underserved by the formal financial sector. In developed economies, around 16% of formal SMEs are unserved or underserved by the financial sector.
The amount of change end users derive from this strategy depends on whether the offered products or services are customer-centric and tailored to MSMEs; whether the non-financial services such as training in entrepreneurship and business skills are provided, and whether an enabling environment in the country or region promotes the creation and growth of MSMEs and the improvement of working conditions and productivity at MSMEs.
Examples of change aligned with this strategy from studies using rigorous research methodologies include the following:
Risk factors include the following (categorized according to the IMP Impact Risk Framework):
Other categories of risks included in the IMP framework were not seen to be significant. Diversification of investments across countries and regions, together with a generally strong commitment to the principles of expanding responsible access, putting client interests first, integrating the voice of those significantly affected (refer to Engaging All Affected Stakeholders), and a focus on environmental screening and monitoring means that on a global level, such risks are well-mitigated.
The inclusive finance community engages in direct discussions with external parties including regulators to strengthen the sector, proactively addressing issues such as client protection (refer to Client Protection Principles), environmental standards, management standards, mobile money provider principles (refer to GSMA Code of Conduct for Mobile Money Providers), and best practices to put clients at the center of financial service providers' decisions (refer to Universal Standards for Social Performance Management). The inclusive financial sector also has third party assessments, certifications, and ratings that allow investors to better understand whether and how the practices of financial service providers (investees) align with global principles and standards (e.g., Client Protection Assessment and Certification, SPI4 Assessment, Social Rating, Mobile Money Certification).
*Refer to EIU Global Microscope rankings.
Such risks could lead to client inability to use the services provided effectively and could result in negative impacts on clients who carry excessive debt burdens or suffer opportunity costs from the use of products and services that are not effectively tailored to meet their needs. In cases where there are harmful social and environmental practices (e.g., unhealthy work environments, child labor, practices that damage the environment), considerable negative effects on employees and planet could take place.
The Women Entrepreneurship Development Project (WEDP) is a USD 50 million individual development account (IDA) investment lending operation designed to address key constraints for growth-oriented women entrepreneurs in Ethiopia. WEDP’s objective is to increase earnings and employment for women-owned businesses. To this end, it created Ethiopia's first-ever line of credit focused on women entrepreneurs, and the program offers an entrepreneurship training program that teaches business skills and the ability to “think like an entrepreneur." As of June 2016, the program had provided loans to more than 4,000 and delivered entrepreneurship training to more than 7,500 women entrepreneurs. Seventy-six percent of WEDB clients had never taken a loan before. For repeat borrowers, loan sizes increased by 870% on average, showing the program could meet the demands of enterprises that MFIs could not serve. Loan repayment stood at 99.6% (2).
Smoke Open Fire is a catering business in California, United States. Thanks to the support of a local community development finance institution (CDFI) that provided a USD 150,000 loan and pro bono business advisory, the business was able to open a brick-and-mortar location and grow from five employees in 2015 to 22 employees at the end of 2017. Smoke Open Fire supports employees' career- and wealth-building opportunities by providing retirement plans, offering paid time off for both full- and part-time employees, reimbursing employees for the cost of obtaining career-related credentials, and promoting from within. Based on its performance, Smoke Open Fire received a second loan of USD 500,000 from the CDFI in 2017 to expand its restaurant, and expects to create more quality jobs in its community.
ILO. “World Employment and Social Outlook”, 2018 http://www.ilo.org/global/research/global-reports/weso/2018/WCMS_615594/lang--en/index.htm
Alibhai, Salman, Bell, Simon, and Conner, Gillette, What’s Happening in the Missing Middle? : Lessons from Financing SMEs, World Bank, 2017 http://mimosaindex.org/wp-content/uploads/2015/11/MIMOSA-White-Paper.pdf
“SME Finance.” World Bank. Accessed May 22, 2018. http://www.worldbank.org/en/topic/smefinance.
Sachs, Goldman. “Giving credit where it is due: How closing the credit gap for women-owned SMEs can drive global growth.” 2014
Stein, Peer, Oya Pinar Ardic, and Martin Hommes. “Closing the credit gap for formal and informal MSMEs.” International Finance Corporation, Advisory Services, World Bank Group (2013).
ILO. “Small and Medium Sized enterprises and decent and productive employment generation”, 2015
CBN, Banks, MMOs Roll out Agent Network for Financial Inclusion.” The Guardian. Accessed May 22, 2018. https://guardian.ng/business-services/cbn-banks-mmos-roll-out-agent-network-for-financial-inclusion/
ILO. “Microfinance for Decent Work: Enhancing the Impact of Microfinance–Evidence from an Action Research Programme.” (2015).
Behrenz, Lars, Lennart Delander, and Jonas Månsson. “Is Starting a Business a Sustainable way out of Unemployment? Treatment Effects of the Swedish Start-up Subsidy.” Journal of Labor Research 37, no. 4 (2016): 389-411.
KPMG International Cooperative. “Safaricom Measures the Value It Creates for Society in Kenya.” Accessed May 22, 2018. https://home.kpmg.com/content/dam/kpmg/pdf/2016/07/case-study-safaricom-limited.pdf
This mapped evidence shows what outcomes and impacts this strategy can have, based on academic and field research.
ILO. “Microfinance for Decent Work: Enhancing the Impact of Microfinance–Evidence from an Action Research Programme.” (2015).
Kondo, Toshio, “Impact of microfinance on rural households in the Philippines.” Asian Development Bank, 2007
Arbuckle, J. G., and Elizabeth Dunn. “The Impacts of Microcredit: A case study from Perú.” Assessing the Impact of Microenterprise Services (AIMS) (2001).
The Impact of Microcredit report, Microbank, 2016
The Impact of Microcredit report, Microbank, 2012
Each resource is assigned a rating of rigor according to the NESTA Standards of Evidence.
Each organization should tailor this metric depending on product offering (e.g., loans, savings, or insurance). The definition of “active” might vary by product. SME clients using several types of services the organization offers, such as loans, savings, and insurance products, may be included in all relevant categories.
When collecting data on this metric for savings and insurance, separating between compulsory and voluntary insurance is advisable.
Organizations should disaggregate data by male and female owned SMEs, as well as by other target groups of priority.
(Total number of start-up SMEs that obtained a loan during the reporting period) / (Total number of business loans)
This metric is collected by survey. Organizations may use a representative sample of clients to gather data or may adopt lean data approaches (for details, refer to Acumen at Lean Data/).
To gather this information, organizations can add a few key questions to client data already being collected by survey. For example, one added question might be: "Over the last year(s), has the income you have been able to earn: (a) increased significantly, (b) increased somewhat, (c) stayed the same, or (d) decreased?" Ideally, organizations will also include a follow-up question to solicit details regarding the reasons for clients’ change in income.
This metric is intended to capture the number of unique individuals who belong to minority or previously excluded groups and who are employed by the SME in full- or part-time roles at the point in time defined by the end date of the reporting period. This metric excludes Temporary Employees (OI9028).
The term “minority” can be adapted to each investor’s specific goals and targets (e.g., women, youth, other minorities).
Given the difficulty of obtaining data on this metric, data may be collected by survey. Organizations may use a representative sample of clients to gather data or may adopt lean data approaches (for details, refer to Acumen at Lean Data).
Calculations of a living wage are not standardized. Some online tools are available to estimate living wages in different geographies. Examples include the Wage Indicator and Living Wage. Note that the latter is only for U.S. states.
For further details on what a living wage means around the world and for methods to estimate it, refer to the International Labour Organization'sConditions of Work and Employment Programme.
Given the difficulty of obtaining data on this metric, and since it might not apply to very small organizations, data may be collected by survey. Organizations may use a representative sample of clients to gather data or may adopt lean data approaches (for details, refer to Acumen at https://acumen.org/lean-data/). Alternatively, investors may ask the financial service provider to implement an environmental, social, and governance policy that screens investees on living wages.
Investors can request an SPI4 score from financial service providers or conduct an SPI4 ALINUS themselves. ALINUS is a streamlined version of the full SPI4, developed for and by investors as a common tool for social due diligence and monitoring (see CERISE).