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Written by Ajit Raikar, Co-founder & Advisor, Validus Capital

It is an accepted truth that MSMEs are the core and backbone for all economies in the
world, representing 90% of the workforce and accounting for 40-60% of GDP of most
countries. While definitions of MSMEs may differ, they are not a homogenous set, with
needs of Micros being quite different from their Small and Medium sized brethren. However, it is universally accepted that MSME funding needs are not met fully (more so for the Micro and Small segments), leading to them growing slower than their business potential, greatly due to a lack of growth capital. It is estimated that the financing gap just in ASEAN is a staggering USD 420 Bn with USD 160 Bn in Indonesia and USD 17 Bn in Singapore alone. 

Why is there a funding gap?

While there is adequate capital and liquidity sloshing around in the financial services
industry and persistent calls from governments to support MSMEs, why does the funding gap exist? There is no silver bullet single answer to this important question but several such as:

  • lack of hard collateral
  • inadequate risk / reward balance
  • often unreliable financials
  • high cost to serve
  • higher regulatory capital required for unsecured lending etc

… are some of the common reasons which lead to a shortage of growth capital for the perceived higher-risk MSMEs.

There isn't a single factor that drives this gap but many broken things, all of which need
to be addressed to close this gap.

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