Poverty literature review summary : small and Medium Enterprise (SME) finance and poverty reduction

The most dominant effect of SME financing on poverty reduction is through financial deepening and development of the financial sector. This has an indirect pro poor effect which helps alleviate SMEs’ financing constraints, enables new firm entry, and better resource allocation. This can further have economy-wide demonstration effects to improve efficiency and competition of the whole financial sector. Direct pro-poor effects through a larger SME sector and greater employment are likely to result from this though evidence is mixed. Further, different segments of the SME population have different characteristics, resulting in different impacts when access is provided. Larger transformational enterprises have greater scope for growth and economy wide effects. The nature of binding constraints on both the demand and supply side to SME financing will eventually determine these direct and indirect transmission effects. The nature of these binding constraints will also determine the nature of user, institutional or policy level programs that need to be introduced to maximize pro-poor impacts.