Out of the shadows and into the banks: financing very small and informal enterprises

Abstract

Informal and very small enterprises (VSEs) face a similar set of obstacles to adequate financial access. Despite the challenges, this market presents a profitable business opportunity for banks in developing countries, while also supporting the objective of policymakers to increase financial inclusion for the un- or underserved micro, small, and medium enterprises (MSMEs). Banks which have successfully served these firms have done so by developing innovative products and services that allow them to target these commonly un- or underserved enterprises, while taking into account common constraints. This paper showcases and discusses unconventional banking models currently targeting VSEs, analysing noteworthy business models which could also serve the informal market, and highlighting innovative approaches adopted by banks with regard to strategy, segmentation, products and services, distribution channels, and risk management. Additionally, this paper identifies a set of recommendations at the policy level that could facilitate financial inclusion of informal enterprises. The data and evidence used for this article are based on IFC projects with clients and publicly available sources.