Financing Technology Entrepreneurs & SMEs in Developing Countries: Challenges and Opportunities
This study reviews the main issues involved in the financing of small businesses, especially small and medium sized enterprises (SMEs) in the information and communication (ICT) and in ICT-enabled (ICTE) activities. It also assesses financing conditions in ten selected countries in South America, Eastern Europe, Africa and Asia. Access to traditional growth capital is costly for SMEs due to insufficient legal and regulatory policies, and inadequate financial markets. For SMEs in ICT and ICTE industries, the challenge of accessing growth capital is particularly acute. The main obstacles in SME financing include:
- Existence of information asymmetries between small businesses and lenders;
- Intrinsic higher risk associated with small scale activities because they operate in a more competitive environment;
- Existence of sizeable transaction costs in handling SME financing;
- Lack of collateral that typically characterizes SMEs.
The paper offers recommendations to alleviate the financing gap SMEs in the ICT sector experience. They include efforts to improve access to equity financing and promote use of quasi-equity instruments. It also recommends supporting access to bank lending through credit guarantee schemes and improving the interaction between supply and demand.
