Job creation and economic growth throughprivate sector development have become primary areas offocus for policy makers around the world in the aftermath ofthe global financial crisis. Recent evidence points to theimportance of small and medium enterprises (SMEs) inproviding employment across countries. In addition toemploying the largest number of people in aggregate, SMEsgenerate the most new jobs. But SMEs also face manychallenges in day-to-day operations and to grow. This noteis a report back on the state of the credit gap for MSMEswith this new and updated data, while providing additionalfocus on the sizable informal enterprise sector in thedeveloping world. In addition, this report examines variousoperational challenges that small and informal firms face,and some formalization obstacles they often cite as theprimary reasons for not registering their business. Aframework to differentiate the informal sector is offered,with the intention of segmenting the vast landscape ofinformal firms some of which exist today due toopportunistic behavior, while others are just trying tosurvive and to better design specific interventionsdepending on the stage of development and the willingness ofthe firm to register its business. The rest of this reportis organized as follows. Section I focuses on the credit gapfor formal MSMEs, and offers some innovative models andinterventions that can be used to more fully meet thefinancial and non-financial needs of formal MSMEs. SectionII focuses exclusively on informal enterprises, and goesbeyond the access to finance paradigm, describing theoperational challenges faced by informal firms, reviewingthe experiments that have tried to induce higher rates offormalization, and looking at a series of private sectormodels that if combined, could more fully meet the needs ofinformal firms.
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