Issues of Development and Financing of Small and Medium-Sized Enterprises

Abstract

Transformation of the informal sector among registered SMEs can significantly contribute to the economic development of these countries as they become eligible for bank loans, their employment and outcomes will be recorded in national statistics. A reliable legal system and judiciary are necessary for lenders to enforce contracts and foreclose collateral on loans. Inefficient legal processes and court proceedings increase the risk for lenders and make the foreclosure processes time-consuming and expensive. Similarly, inadequate creditor rights can diminish the incentives for borrowers to meet their financial obligations. In turn, these factors translate into a higher cost of financing for borrowers. Bankruptcy procedures are rarely used and the capacity of courts to handle insolvency issues is another bottleneck. The ongoing reform of the insolvency regime should be completed as soon as possible, bringing the law in line with international standards. Despite their size and contribution to employment and GDP, development of SMEs in most countries is insufficient. There are number of factors that limit the development of SMEs, namely a lack of long-term financing, inability to access to bank loans due to big portion of informal sector, and poor human and technical capacity. For the purpose of this article, SME financing is discussed in more detail.