Sustainable MSME Financing: Building Stronger Domestic Markets

Sustainable MSME Financing: Building Stronger Domestic Markets

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It’s Time for Real Action

For over two decades, I have been deeply involved in the financial inclusion sector, and one topic that continues to dominate discussions is how to improve access to debt capital for MSMEs. Despite countless conferences, studies, and initiatives, including risk-sharing mechanisms, fintech innovations, and new regulatory frameworks, the real breakthrough is still missing.

We have all seen the IFC estimates of an MSME funding gap of over $5 trillion. Fintech was seen as the silver bullet; the reality has been more sobering. The fintech boom of the 2010s, driven by low interest rates and overregulation in traditional banking, saw the rise of payment systems, trade finance platforms, and online lending solutions. Some unicorns emerged, but many projects struggled to build a sustainable customer base.

The last few years have shifted the landscape entirely:

  • Rising interest rates have made U.S. Treasuries a more attractive, low-risk investment.
  • Local currency devaluations have dried up capital inflows.
  • Risk reassessment by investors has led to a VC funding crunch.

Technology alone is not the solution—without strong client acquisition strategies and local market integration, solutions will continue to fall short.

So where do we go from here?

We cannot wait for market conditions to improve or for a new wave of international support. Instead, we must focus on local, fundamental solutions that build long-term financing opportunities for MSMEs.


A New Approach to MSME Financing

To make meaningful progress in MSME financing, we need to move beyond conventional discussions and incremental solutions. While efforts such as risk-sharing mechanisms, fintech innovations, and regulatory adjustments have contributed to some improvements, they have not been sufficient to close the funding gap or create a sustainable financing ecosystem for MSMEs.

A more practical and market-driven approach is required—one that focuses on leveraging domestic resources, enhancing financial institutions’ capacity, and creating long-term partnerships between banks, investors, and regulators.

1. Unlock Domestic Funding in Local Currencies

A major challenge in MSME financing is the shortage of long-term local funding for capital investments. While banks often have liquidity, they lack the risk capital and long-term financing instruments needed to expand lending sustainably. Strengthening domestic financial markets and exploring ways to channel local investment into MSMEs will be essential.

2. Expand Bank Products and Services Beyond Traditional Lending

Many banks still operate with a product-centric approach, focusing on standardized loan offerings rather than tailoring financial solutions to business needs. A shift toward a client-centric model—one that considers the full financial requirements of MSMEs, including working capital, trade finance, and risk management—could help banks develop longer-term, more sustainable relationships with their clients.

While these ideas are not new, they have often been overshadowed by alternative solutions that seemed easier or more cost-effective. However, given the current economic and financial landscape, it is time to reconsider these fundamental steps. A more resilient financial sector, improved MSME access to financing, and a stronger domestic market will ultimately contribute to long-term economic stability and growth.

Achieving these objectives requires collaboration among stakeholders and a structured approach to implementation. The following key steps outline a practical way forward.


Five Actionable Steps for Transformation

To drive real change, we need to commit to the following five initiatives:

1. Structured Data Collection & Market Insights

A well-structured and continuously updated knowledge base is essential for banks to make informed lending decisions, particularly in the MSME segment where financial information is often scarce or unstructured. However, many financial institutions still rely on fragmented data collection methods, limiting their ability to assess risk effectively and tailor financial products to business needs.

To address this, banks need to establish systematic and ongoing data collection processes, ensuring that relevant information on sectors, customers, and transactions is continuously gathered and classified. This includes:

  • Standardizing data collection across all client interactions, including financial statements, transaction histories, and qualitative business insights.
  • Developing structured databases that enable deeper analysis of market trends and MSME creditworthiness.
  • Integrating Universally Trusted Credentials (UTCs) or similar standardized borrower data frameworks to improve risk assessment.

2. Develop Local Risk Appetite Frameworks

Banks need to upscale the way they are defining their risk appetite frameworks, which guide their lending decisions and overall risk management strategies. These frameworks remain often either too conservative or too loosely structured.

To improve MSME financing, banks need to refine their credit risk assessment methodologies and establish clear, data-driven risk appetite frameworks that align with market realities. This includes:

  • Enhancing credit risk assessment tools to incorporate both financial and qualitative factors relevant to MSMEs.
  • Improving risk-adjusted return calculations, ensuring that lending decisions balance profitability and sustainability.
  • Defining clearer risk limits and credit policies that allow for greater flexibility while maintaining sound risk management.
  • Collaborating with regulators to ensure capital adequacy requirements reflect the actual risk environment, rather than imposing overly restrictive lending constraints.

3. Shift to Customer-Centric Business Models

Traditionally, banks have operated with a sales-driven approach, setting loan disbursement targets for their teams as a measure of success. However, this model is inherently flawed when applied to credit products—the true success of a loan is not in its disbursement, but in its full and timely repayment.

To create a more sustainable MSME lending environment, banks need to shift from product-pushing strategies to client-centric business models that focus on long-term financial health and relationship-building. This requires:

  • Moving beyond sales targets to performance indicators that prioritize loan quality, repayment rates, and customer financial stability.
  • Understanding MSME needs holistically, offering tailored solutions that address working capital, trade finance, risk mitigation, and business growth.
  • Providing advisory support, helping MSMEs not only access credit but also manage it effectively to reduce default risks.
  • Encouraging long-term banking relationships, where financial institutions act as partners rather than transactional lenders.

4. Implement Risk-Sharing Platforms

Local banks can improve their risk assessment capabilities, but they will always have limitations in absorbing risk due to capital constraints and regulatory requirements. This is where international investors can play a complementary role, sharing credit risk through co-financing or risk participation. Key benefits of risk-sharing platforms are:

  • Increased lending capacity: Banks can extend more MSME loans without overextending their risk exposure.
  • Combination of strengths: Banks excel in assessing and managing credit risk, while investors bring capital and risk-absorbing capacity.
  • Stronger financial ecosystem: By working together, banks and investors create a more sustainable and scalable MSME financing framework.

5. Invest in Long-Term Training and Education

Many capacity-building initiatives in MSME financing focus on short-term training, often delivered through workshops or one-off programs. While these efforts provide immediate knowledge, they rarely lead to sustained improvements in financial management or risk assessment. What is needed instead is a long-term, structured approach to training that builds deep expertise across all levels of the financial ecosystem.

This means developing comprehensive training programs that:

  • Are rooted in best international practices while incorporating pragmatic local adjustments to fit market realities.
  • Target all key stakeholders, including MSMEs, junior employees, middle management, and senior decision-makers in financial institutions.
  • Move beyond theory to focus on applied knowledge, ensuring that training leads to measurable improvements in lending practices and financial management.
  • Create a continuous learning culture, where education is not a one-time event but an ongoing process that evolves with market needs.

What Comes Next? A Call for Action

I am deeply invested in bringing these solutions to life. As a co-founder of Q-Lana I can report that we have successfully implemented digital transformation solutions for financial institutions across multiple markets, enhancing risk management and unlocking MSME financing.

Our team has:

· Developed a knowledge focused, client-centric, risk-sensitive lending platforms.

· Designed online training modules on risk management and financial analysis.

· Conceptualized a risk-sharing platform for SME financing.

Our Vision for Change

At Q-Lana, we believe that improving MSME financing requires more than short-term fixes. It demands sustainable, market-driven solutions that strengthen local financial ecosystems. We are committed to working with banks, investors, and regulators to develop and implement actionable programs that address real financing challenges.

  • We are open to collaborating with stakeholders to launch structured initiatives that:
  • Build resilient domestic financing ecosystems that provide sustainable access to capital for MSMEs.
  • Serve as a model for other developing markets, demonstrating scalable, practical solutions.
  • Ensure local ownership and governance, with international partners contributing expertise rather than dictating solutions.
  • Q-Lana brings deep experience in digital transformation, risk management, and financial sector training. We have developed tools for risk assessment, portfolio monitoring, and risk-sharing, all of which can support this effort.
  • By partnering with local institutions, we aim to create long-term, self-sustaining financing frameworks that empower MSMEs and strengthen economic resilience. We welcome the opportunity to collaborate with stakeholders ready to drive real change in MSME financing.

Join Us in This Mission

At Q-Lana, we are eager to collaborate, develop, and implement solutions that improve MSME financing. We have the tools, expertise, and concepts to support financial institutions in building more effective, risk-sensitive, and client-centric lending frameworks.

Our goal is to share these solutions to strengthen domestic financial markets, making them more resilient and capable of supporting long-term MSME growth. By working together with banks, investors, and regulators, we can create sustainable financing ecosystems that benefit businesses and economies alike.

We welcome the opportunity to engage with partners who are committed to real change. Let’s work together to turn these ideas into action.

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