Greater financial inclusion of small and medium enterprises (SMEs) can promote higher economic growth and employment, especially in the Middle East and Central Asia regions, according to a recent research paper released by the International Monetary Fund (IMF).
The IMF found that countries with higher SME financial inclusion show more effective monetary policy transmission and tax collection and substantial employment and labour productivity growth gains at the firm level from access to credit.
The research paper tested "whether the effectiveness of monetary and fiscal policy is positively associated with SME financial inclusion."
The paper said that potential gains from greater SME financial inclusion may include larger effectiveness of monetary policy.
As more SMEs have access to formal borrowing and lending, the role of the interest rate in the economy may increase, facilitating stronger monetary policy transmission, while higher financial inclusion may strengthen the linkage between real and nominal sides of the economy, making it easier for monetary authorities to target and achieve price stability, leading to lower relative volatility of inflation.
"Higher SME financial inclusion, under appropriate risk management and financial supervision, could lead to greater financial stability. For example, one mechanism that could lead to this is that as more firms get access to formal loans, banks’ credit portfolios become more diversified," the research paper found.
Moreover, the research paper asserted that SME financial inclusion strengthens tax collection and is thus associated with more effective fiscal policy.
"Sustained and inclusive economic growth and job creation are critical for most countries in the Middle East and Central Asia regions, thus, it is a necessary matter to bring small and SMEs, which represent an important share of firms and employment in the regions, closer to their output and employment potential," the research paper proposed.
Indeed, SMEs represent about 96 percent of all registered companies in the region and employ 48 percent of the labour force, and these shares are likely to be higher if one includes the informal sector where SMEs are even more prevalent, according to the IMF research.