The Demand for Micro and Small Business Finance

This paper attempts to look at the demand side of microfinance. It makes suggestions on how private investors can meet this demand with a reasonable level of risk-adjusted return.

The paper:

• Defines the terms, micro-enterprise small business;
• Stresses the importance of including agriculture in any discussion on micro-enterprise.

The paper examines the demand for finance from micro-enterprises and small businesses, considering:

• The number of micro-enterprises and small businesses in the world;
• The credit usage by micro-enterprises and small businesses;
• Their demand for equity;
• The need to deal with the eventual user directly.

It then examines the demand for finance from microfinance institutions (MFIs) and looks at:

• The attributes of demand;
• The profile of MFIs needing finance;
• Risk levels;
• Returns expected;
• Exit options.

The paper lists the following ways for potential investors to meet the demand:

• Changing the funding environment by using social capital to leverage commercial capital;
• Establishing specialized funds for MFIs and small businesses that may use the methods of debt, guarantee, or equity, or a combination of the three.

The paper concludes that:

• It is possible to be a socially responsible investor and also get respectable financial returns;
• There is a need to build the microfinance sector from the bottom.