Despite years of attention, financing micro, small, and medium enterprises (MSMEs) remains one of the most persistent challenges in development finance, particularly in high‑risk and underserved markets. While the scale of the financing gap is widely acknowledged, the more pressing question today is not whether the problem is understood, but what actually works in practice, and what it takes to scale it.
A recent UNCDF-convened discussion brought together voices from across the MSME finance ecosystem, including enterprises, financial institutions, fintechs, investors, and market facilitators, to reflect on this challenge. The conversation moved beyond theory, grounding the discussion in real‑world experience and portfolio realities.
UNCDF convened the discussion as part of its broader work to strengthen financial systems, deploy catalytic capital, and expand access to finance for MSMEs in high-risk and underserved markets. Through guarantees, concessional finance, technical assistance, and market-building approaches, UNCDF works to make these markets investable and crowd in larger flows of domestic and international capital.
From the outset, Omon Ukpoma‑Olaiya, Regional Investment Team Lead for UNCDF in the East and Southern Africa and Arab States Region framed the discussion in terms of what is ultimately at stake.
“MSMEs are central to job creation, resilience, and achieving development goals, yet financing continues to bypass the markets that need it most.” She also underscored a critical point that shaped the rest of the dialogue: “Capital alone cannot solve these issues when it comes to MSME finance.”
The challenge, therefore, is not simply mobilizing more capital, but designing financing solutions that work in practice and can scale, particularly in high-risk and underserved markets where cost, risk, and commercial viability remain significant constraints.
Across regions and sectors, there is broad agreement on the barriers that keep many MSMEs excluded. What remains harder is translating that understanding into financing models that can operate sustainably in difficult market conditions.
Financial institutions in these markets face structural challenges including high transaction costs, limited and fragmented data, uncertain returns, and elevated risk. As a result, many financing models struggle to achieve the scale and commercial viability needed to serve these markets sustainably. Moving beyond this requires a fundamental shift, from diagnosing the problem to making financing models work in practice.
Expanding access to appropriate finance enables MSMEs to invest, grow their businesses, and contribute to resilient local economies. Photo: UNCDF.
That shift must begin by grounding solutions in the realities of MSMEs themselves. For many enterprises, the challenge is not a lack of demand, but a lack of financing that aligns with how their businesses actually operate. Issues such as timing of working capital, seasonality, and trust-based relationships with lenders are often the difference between survival and growth.
As Razak Iganachi, Founder and CEO of Omia Agribusiness Development Group Ltd., shared:
“We didn’t lack demand. What we lacked was working capital and trust.”
This highlights a critical gap, that financing often fails because it is not designed with enterprise realities in mind. Solutions that recognize cashflow cycles and growth trajectories are far more likely to be effective.
At the same time, structural limitations within traditional lending models continue to exclude large segments of MSMEs, particularly those operating outside formal systems. Collateral requirements, rigid credit assessments, and reliance on formal financial histories disproportionately affect women-led enterprises, youth entrepreneurs, and businesses operating in informal or fragile contexts.
As noted by John Kakungulu Walugembe, Executive Director of the Federation of Small and Medium Sized Enterprises-Uganda
“Collateral requirements still keep out large swathes of potential MSME borrowers.”
This reflects a broader issue where risk models developed for formal markets often do not translate well into contexts characterized by informality and limited data. Without adapting these models, many viable businesses will remain excluded.
In response to these gaps, digital finance has emerged as an important part of the solution. Through the use of alternative data and streamlined processes, fintechs are expanding access to credit and reaching previously underserved borrowers. However, the discussion made clear that digital innovation, while important, is not a complete solution.
As emphasized by Chilufya Mutale-Mwila, Co-Founder & CEO of eShandi Financial Services Ltd
“Most customers are thin‑file customers, and when you rely on traditional metrics, you automatically reject them.”
While alternative data can help address this gap, it also introduces new challenges. Data can be expensive to acquire, fragmented across systems, and difficult to standardize. As a result, while digital tools improve access, they do not fully resolve the underlying constraints around cost, risk, and scalability.
Access to appropriate and timely finance enables MSMEs to invest, create jobs, and contribute to resilient local economies. Photo: UNDP Somalia.
These constraints point to a more fundamental issue that scaling MSME finance is not just about expanding access but about getting the underlying economics right. In many underserved markets, particularly in sectors such as agriculture, lending to MSMEs involves higher operational costs, higher perceived and actual risks, and lower margins. Given these challenges, many financial institutions are reluctant to increase their lending to MSMEs in underserved markets.
As John Robert Okware, Uganda Country Director and Regional Lender Activation Lead, Aceli Africa pointed out:
“This is not a knowledge gap; it’s a structural economics gap.”
Blended finance tools, including guarantees, can play an important role in addressing these barriers. However, the panelists emphasized that that these tools must be designed to address more than default risk. To shift lender behavior in a sustained way, they must also account for transaction costs, pricing constraints, and the operational realities of serving smaller borrowers. Without addressing these fundamentals, scaling will remain difficult.
Alongside this, there is growing recognition that MSMEs cannot be treated as a single, uniform segment. Their needs vary significantly based on size, sector, and stage of growth. More effective approaches are emerging as financial institutions tailor products, risk assessments, documentation requirements, and pricing to different customer profiles. For example, microenterprises may be assessed primarily on cashflows and simplified documentation, while larger businesses require more structured financing and financial reporting.
As explained by David Akumu, Head - Business Banking Department, Cooperative Bank of Kenya
“We stopped treating MSMEs as one segment, we designed different approaches for micro, small, and medium enterprises.”
This shift toward client-centered financial design is critical, not only for expanding access, but also for ensuring that solutions are both relevant and sustainable.
Across all perspectives, one conclusion stood out clearly, scaling MSME finance requires systems that work, from policy frameworks and regulatory environments to data ecosystems, institutional incentives, and enterprise capacity. Without this system-level alignment, even well-designed financial instruments will struggle to achieve impact at scale.
The discussion therefore reinforced a critical shift in thinking, that the challenge is not about identifying new tools, but about making existing approaches work within real-world constraints. As Omon Ukpoma-Olaiya reminded participants, the stakes extend far beyond finance:
“If we can get MSME finance right, we unlock jobs, resilience, and sustainable development at scale.”
The task ahead is clear. It is not enough to know what works, but effort must be made to ensure that what works can be delivered consistently, sustainably, and at scale, in the markets that need it most.
