BEYOND RISK SME Credit Strategies for Sustainable Global Growth

INTRODUCTION

Small and medium-sized enterprises (SMEs) are the backbone of both developed and developing economies, playing an indispensable role in job creation, innovation, and economic growth. Despite their significance, SMEs face significant barriers to accessing affordable credit, which limits their ability to invest in technology, infrastructure, and human capital. Traditional risk assessment models have long considered SMEs as high-risk borrowers due to their size, limited collateral, and lack of financial history. However, recent research—including key studies by Olivia Kim and Deniz Aydin—challenges this perception, revealing that many SMEs adopt fiscally conservative approaches, underutilizing available credit and maintaining liquidity buffers to safeguard against uncertainty.

This paper makes a unique contribution by synthesizing insights from these studies and presenting a comprehensive argument for revising conventional credit risk models. It explores how SMEs' prudent financial behavior should be recognized as a strength, rather than a liability, in lending decisions. Furthermore, it offers actionable recommendations for financial institutions and policymakers to create tailored financial products that unlock the potential of SMEs without exposing lenders to undue risk. Drawing on global research from the OECD, the World Bank, and the European Central Bank, this paper positions SME credit reform as a critical enabler of long-term economic growth and stability. 

RESEARCH INSIGHTS AND ECONOMIC IMPLICATIONS

Recent research has increasingly challenged conventional views of MSME credit risk, revealing that small businesses are far more fiscally conservative than previously assumed. One of the key studies contributing to this shift in perspective is Olivia Kim and Deniz Aydin’s Precautionary Debt Capacity (Kim & Aydin, 2024). Their study demonstrates that SMEs, contrary to the belief that they are high-risk borrowers, tend to manage credit cautiously. On average, these firms used only 39% of their available credit, even after being offered more, reflecting a prudent financial strategy. This fiscal conservatism opens a window for growth if financial institutions adjust their lending strategies to better support SMEs.

Several other studies echo the findings of Kim and Aydin. For instance, the OECD’s 2022 SME Financing Scoreboard shows that SMEs across various economies tend to prioritize liquidity over expanding their credit usage, even when they have access to affordable financing. This pattern holds across both developed and developing countries, where small businesses maintain financial buffers as a hedge against uncertainty. This conservative approach suggests that SMEs are not inherently risky borrowers, but rather manage credit with care, further challenging traditional risk models used by financial institutions.

Similarly, the World Bank’s 2021 report on SME Credit Behavior found that globally, small businesses use only about 60% of their approved credit lines, emphasizing their preference for financial flexibility. This behavior aligns with the findings of the European Central Bank’s (ECB) 2020 study, which showed that SMEs in the Eurozone, constituting over 99% of businesses, utilized less than half of the credit available to them. These global trends reflect a widespread pattern of underutilization, highlighting the risk-averse nature of SMEs and their reluctance to take on excessive debt.

The implications of these findings are significant for banks and policymakers. Research consistently shows that expanding credit access for fiscally conservative SMEs can lead to substantial economic benefits, including increased investment, sales, and profits. For example, Kim and Aydin’s study found that firms receiving increased credit capacity grew their profits by 35% annually without raising delinquency rates, confirming that SMEs can manage larger credit responsibly.

Moreover, McKinsey & Company’s 2024 report, America’s Small Businesses: Time to Think Big, emphasizes that providing SMEs with affordable credit could help close the productivity gap between small and large firms. The research shows that SMEs that receive improved access to credit invest more heavily in technology, innovation, and human capital, leading to higher growth rates and enhanced competitiveness.

Expanding credit availability for SMEs is not just a matter of supporting small businesses but also of fostering broader economic stability. Studies from the OECD and World Bank have consistently found that SMEs are major drivers of job creation, innovation, and economic diversification. When these businesses have access to affordable financing, they are better positioned to adopt transformative technologies, expand operations, and contribute to national and global economic growth. 

SME ROLE IN GLOBALE ECONOMIC GROWTH

Small businesses are the backbone of most economies—both in developed and developing nations. They play a crucial role in fostering innovation, creating jobs, and driving economic growth. Across the globe, SMEs represent over 90% of businesses and account for a significant portion of employment, with variations by region. For instance, in developed economies like the U.S., SMEs employ nearly 60% of the workforce and contribute around 40% of national value added. In developing economies, SMEs often account for an even higher percentage of employment, acting as key drivers of social stability and poverty reduction.

Yet, despite their importance, SMEs face a persistent productivity gap compared to larger firms. McKinsey’s America’s Small Businesses: Time to Think Big (2024) report highlights that U.S. SMEs are only 47% as productive as large companies, a disparity seen across many economies. In other advanced economies, small firms are on average 60% as productive as larger businesses. The productivity gap is not only a matter of firm size but is also influenced by access to critical resources such as credit, advanced technology, skilled labor, and infrastructure.

This gap is particularly evident in developing countries, where limited access to financing and technology can stifle growth and innovation in the SME sector. In many of these regions, informal business practices and lack of integration into formal financial systems further compound the challenges. Access to affordable credit and technological advancements could significantly narrow this gap, enabling SMEs to boost their productivity and contribution to economic growth.

Moreover, fostering partnerships between SMEs and large enterprises is a vital strategy for improving productivity and innovation across the board. These collaborations allow small firms to leverage the resources of their larger counterparts, including access to technology, supply chains, skilled labor, and financing opportunities. For example, in sectors such as manufacturing and services, larger businesses often outsource specific tasks to smaller firms, allowing SMEs to specialize and increase efficiency while benefiting from economies of scale.

The role of SMEs in global economies cannot be overstated. In both developed and developing countries, SMEs are integral to maintaining dynamic, competitive, and inclusive economies. By improving access to credit, technology, and infrastructure, and encouraging collaborative networks between SMEs and larger firms, policymakers and financial institutions can unlock the full potential of small businesses. This, in turn, would foster sustainable economic growth, reduce inequality, and create resilient economies capable of adapting to global challenges. 

UNLOCKING SME POTENTIAL

The McKinsey report emphasizes that small and medium-sized enterprises (SMEs) that embrace technological advancements, such as artificial intelligence (AI), cloud-based services, and customer relationship management (CRM) systems, tend to experience accelerated growth. Despite the clear benefits, SMEs often lag behind larger firms in adopting these technologies. For instance, the adoption rate of AI and CRM systems among SMEs is only half that of larger companies. This technological divide limits their ability to optimize operations, improve customer service, and scale efficiently.

This challenge is not confined to developed economies. In developing countries, where SMEs constitute the majority of businesses, the gap is even wider due to limited access to capital, infrastructure, and digital skills. According to a report by the International Finance Corporation (IFC), SMEs in emerging markets face a financing gap of approximately $5 trillion annually. This lack of access to financing prevents them from investing in the digital tools that are crucial for enhancing productivity and competitiveness in an increasingly digital global economy.

Access to affordable credit is a key enabler for SMEs to invest in technology. Research by the Organization for Economic Co-operation and Development (OECD) shows that SMEs which gain access to financial resources are more likely to adopt advanced technologies, automate processes, and enhance their innovation capabilities. Furthermore, these firms are better positioned to withstand market volatility, create new jobs, and contribute to economic diversification.

A report by the World Bank highlights that the adoption of digital technologies by SMEs could lead to a productivity boost of up to 25%. Yet, the cost of acquiring these technologies, coupled with a lack of access to credit, prevents many SMEs from fully realizing this potential. Small businesses also face challenges in accessing the necessary training and expertise to effectively implement and use these technologies.

In addition to AI and CRM systems, other digital tools such as cloud computing, e-commerce platforms, and data analytics have the potential to revolutionize SME operations. A study by Deloitte found that SMEs adopting cloud-based solutions see an average 20% increase in revenue growth, driven by enhanced flexibility and scalability. Similarly, businesses that implement e-commerce platforms experience expanded market reach and improved customer engagement, enabling them to compete with larger firms on a more level playing field.

By improving access to credit, financial institutions can empower SMEs to overcome these barriers and invest in transformative technologies. Increased credit availability would not only enable SMEs to finance digital tools but also support investments in training and capacity-building to make the most of these technologies. Governments and policymakers can further support SMEs by providing targeted grants, tax incentives, and technical assistance programs that encourage the adoption of digital solutions.

In developing countries, where SMEs face additional challenges such as unreliable internet infrastructure and limited digital literacy, a coordinated effort involving governments, international organizations, and the private sector is essential to bridge the digital divide. Programs that promote digital inclusion and provide low-cost financing for technology adoption are critical to helping SMEs unlock their full growth potential.

Ultimately, closing the technological adoption gap for SMEs would have significant ripple effects on global economic growth. Empowering SMEs to leverage digital tools will not only enhance their individual productivity but also contribute to broader economic stability, job creation, and innovation, particularly in sectors that are integral to national and regional economies. 

POLICY RECOMMENDATIONS

Both Kim and Aydin’s study and McKinsey’s report align on a crucial insight: financial institutions and policymakers need to reevaluate how they assess the risk profiles of small businesses. Traditional risk assessment models often categorize SMEs as high-risk borrowers due to their smaller size, lack of collateral, and perceived volatility. However, recent research, including Kim and Aydin’s findings, indicates that many small businesses are more fiscally conservative than previously believed. They maintain financial buffers, strategically manage credit, and demonstrate low delinquency rates even after credit expansion.

Current credit risk models used by banks tend to penalize SMEs by assigning higher risk weights based on simplistic criteria such as limited financial history or smaller loan sizes. This results in higher borrowing costs, making it harder for SMEs to access affordable credit. However, studies like Kim and Aydin’s show that SMEs are not inherently riskier. Instead, their borrowing behavior is often more conservative, with many firms underutilizing available credit due to risk aversion.

Recommendations for Financial Institutions

• Adopt more nuanced risk models. Financial institutions should develop risk assessment models that account for the conservative borrowing patterns of many small businesses. Incorporating behavioral insights, such as credit utilization trends and debt management practices, can provide a more accurate understanding of SME risk. For example, businesses that demonstrate consistent cash flow management and maintain liquidity buffers should be treated more favorably in terms of creditworthiness.
• Introduce SME-tailored financial products. Banks should consider creating financial products specifically designed to meet the needs of SMEs, such as flexible credit lines, low-interest loans for technology adoption, and long-term investment loans. These products could be structured with repayment terms that align with the cash flow cycles of small businesses, minimizing the financial burden during periods of low revenue.
• Promote collateral-free lending. In many developing economies, lack of collateral is a significant barrier for SMEs to access credit. Policymakers can work with financial institutions to promote collateral-free or asset-light lending programs, underpinned by guarantees from credit insurance schemes or public funds. This would provide a safety net for lenders while giving SMEs the opportunity to borrow without the traditional collateral requirements.

The Role of Policymakers

• Regulatory frameworks and incentives. Governments can play a pivotal role by incentivizing banks to lend to SMEs. This can be done through regulatory adjustments such as lower capital reserve requirements for loans made to small businesses with proven fiscal prudence. Additionally, tax incentives can be offered to financial institutions that prioritize lending to SMEs, particularly in sectors that contribute significantly to job creation and innovation.
• Strengthen credit guarantee schemes. Credit guarantee schemes (CGSs) have proven to be effective in de-risking lending to SMEs. By guaranteeing a portion of the loan, governments can encourage banks to lend more freely to small businesses while minimizing the potential loss. Expanding the scope of CGSs to cover more SMEs and sectors would reduce perceived risks and foster a more inclusive lending environment.
• Foster public-private partnerships (PPPs). Public-private partnerships can be instrumental in bridging the SME financing gap. Governments and financial institutions can collaborate to create initiatives that provide SMEs with access to affordable credit while supporting their broader business development needs, such as technical assistance, training, and technology adoption.

Global Best Practices for SME Credit Access. Countries that have successfully improved SME access to credit offer valuable lessons. For example:

• Singapore implemented the Enterprise Financing Scheme, which supports SMEs through government-backed loans with preferential terms for startups and businesses in growth phases. By sharing the lending risk with financial institutions, Singapore ensures that SMEs can access credit without high-interest rates.
• Germany’s KfW Development Bank has a successful model of extending credit to SMEs by providing long-term loans for investments in innovation and sustainability. KfW acts as a financial partner for banks, covering part of the loan risk, which encourages greater SME lending.
• South Korea’s “SME Financing Agency” also stands out, providing guarantees for loans issued to small businesses, especially those in tech-driven sectors. This model fosters innovation and ensures that small firms can access the necessary funds to adopt new technologies.

Economic Impact of Improved Credit Access. Expanding credit access to SMEs, especially those with a proven track record of fiscal conservatism, would not only drive economic growth but also ensure financial stability. When small businesses have the resources to grow and invest in technology, infrastructure, and talent, they create jobs, increase productivity, and contribute to higher tax revenues. As SMEs make up the majority of businesses globally, facilitating their access to credit could lead to broader economic gains, particularly in emerging markets where SMEs are central to development.

However, it's essential that credit expansion is done responsibly, ensuring that SMEs are provided with the financial literacy and tools needed to manage increased debt effectively. Programs that combine credit access with financial management training can empower small businesses to maximize the benefits of new credit lines without risking financial instability.

Detailed Findings from the Study. Kim and Aydin’s study provides a comprehensive analysis of how SMEs manage credit:

1. Low Credit Utilization. Small businesses were found to use only 39% of their available credit lines, even when offered expanded credit. After credit limits were increased, utilization rose to just 55%, indicating a consistent trend of underutilization and prudent financial management.
2. Strategic Use of Debt. When credit capacity was expanded, SMEs used additional debt strategically, focusing on long-term investments rather than immediate operational needs. Over time, firms shifted from revolving credit to term debt, a move signaling sustainable growth.
3. Profit Growth Without Increased Delinquency. Firms that received increased credit experienced substantial profit growth (35% annually) without a corresponding rise in delinquency or restructuring rates, showcasing their ability to manage credit responsibly.
4. Economic Growth Opportunity. The study revealed that only a small percentage (less than 10%) of firms were financially constrained. Most had the capacity to grow if provided with more accessible credit, suggesting that targeting these firms could unlock significant economic benefits.
5. Global Applicability. Although the study was conducted in Turkey, the findings have broader implications. Given that 80% of U.S. companies and 90% of global firms are privately held and bank-dependent, these results suggest that SMEs worldwide could benefit from more nuanced credit strategies.

Evaluation and Broader Trends. The cautious borrowing behavior observed in Kim and Aydin’s study is consistent with broader trends in SME financing across the globe. Numerous studies have demonstrated that small businesses in both developed and developing economies tend to maintain liquidity buffers, refraining from fully utilizing available credit lines. This conservative approach to borrowing often stems from the high levels of uncertainty that SMEs face—ranging from economic fluctuations to industry-specific risks—as well as the personal financial exposure of their owners, many of whom are heavily invested in their businesses.

SMEs, particularly in developing economies, operate in unpredictable environments where access to stable financial systems is often limited, and macroeconomic volatility can be high. This uncertainty encourages small business owners to adopt risk-averse strategies, including underutilization of credit. Studies from the World Bank and OECD suggest that SMEs prioritize maintaining financial flexibility as a buffer against unexpected economic shocks, such as sudden changes in interest rates, currency fluctuations, or supply chain disruptions.

Moreover, SMEs tend to view debt not merely as a tool for expansion but as a critical element of survival, particularly in sectors with low margins or seasonal volatility. This perception further contributes to their conservative borrowing habits. For instance, research from the International Monetary Fund (IMF) highlights that SMEs in emerging markets often face disproportionate risks, including political instability, inflationary pressures, and regulatory changes, all of which contribute to their cautious credit usage.

Strategic Use of Credit for Long-Term Investments. One of the key findings from Kim and Aydin’s study is that when SMEs do access credit, they tend to use it strategically for long-term investments rather than for immediate operational needs. This aligns with broader trends identified in studies conducted by the World Bank and OECD, which show that SMEs often use credit to invest in technology upgrades, equipment, and capital improvements. Such investments enhance productivity and competitiveness, helping small businesses scale in the long run.

For example, research conducted by Deloitte on SME adoption of digital tools shows that businesses that invest in technology tend to see a 10-20% improvement in operational efficiency. This strategic use of credit for long-term growth suggests that expanding access to affordable credit for SMEs could have profound impacts on their ability to innovate, adapt to changing market conditions, and enhance overall productivity.

Global Trends in SME Credit Utilization. While the cautious borrowing behavior of SMEs is common across many regions, it is particularly pronounced in countries with limited access to formal financial institutions. The OECD has reported that in many developing economies, SMEs rely on informal lending channels due to a lack of trust in formal banking systems or because traditional banks impose stringent lending criteria. This limits the growth potential of SMEs, as they are unable to leverage institutional credit for expansion or innovation.

In contrast, in countries with more developed financial systems, SMEs are more likely to use formal credit channels. However, even in these regions, SMEs often underutilize credit lines. According to a report by the European Central Bank (ECB), SMEs in the European Union only use 65% of their available credit, preferring to maintain reserves to manage future uncertainties. This mirrors Kim and Aydin’s findings that SMEs in Turkey used only 39% of their available credit prior to an expansion in credit lines, increasing usage to just 55% post-expansion.

Balancing Growth with Risk Management. While SMEs are known for their risk-averse borrowing practices, their ability to balance growth with risk management is an essential factor in their long-term success. Research from the Harvard Business Review suggests that SMEs that carefully balance debt with strategic investment tend to outperform their peers in terms of profitability and resilience. Rather than using credit to meet short-term liquidity needs, SMEs that use debt for capital investments—such as new equipment, technology integration, and workforce training—are better positioned to drive sustainable growth.

The OECD’s findings on SME financing behavior also emphasize that small businesses often need guidance and education on how to use credit effectively for growth rather than for purely operational needs. Financial literacy programs targeted at SMEs can help bridge the knowledge gap, allowing them to make more informed decisions about leveraging credit for business expansion. Furthermore, fostering a deeper understanding of risk management within SMEs could enable these businesses to maximize their use of available credit lines without compromising financial stability.

FRAMEWORK FOR FINANCING SMEs

A Framework for Financing Small-, and Medium-Sized Enterprises (SMEs) Beyond Traditional Banking Systems

Small-, and Medium-Sized Enterprises (SMEs) are the backbone of economies worldwide, contributing to employment, innovation, and economic growth. In Lebanon, as in many developing and developed economies, SMEs face numerous obstacles to accessing affordable and appropriate financing. Historically, financing has been channeled through traditional banking systems, which have viewed SMEs as high-risk borrowers due to their limited collateral, lack of financial history, and small size. However, the current economic environment, particularly Lebanon's financial crisis, has necessitated a rethinking of financing models to support SMEs more effectively.

This framework proposes alternative financing models that move beyond the traditional banking system to empower SMEs with sustainable financing options. These options will be tailored to the specific needs of SMEs, reflecting their unique characteristics, financial behaviors, and potential for growth.

1. Public-Private Partnerships (PPPs) for SME Financing

Public-Private Partnerships (PPPs) can provide a robust financing mechanism for SMEs by pooling resources and expertise from both sectors. The government can offer guarantees or partial subsidies, while private investors and institutions can provide capital and technical support.

• Government-Backed Credit Guarantees. One way to reduce the perceived risk of lending to SMEs is through government-backed credit guarantee schemes. These programs guarantee a percentage of the loan, reducing the risk for private lenders and encouraging them to extend credit to SMEs without the need for substantial collateral.
• PPP Funds for MSME Development. Governments can collaborate with private investors to create special funds that target SMEs. These funds can focus on sectors that offer high growth potential, such as technology, manufacturing, and renewable energy. In Lebanon, for instance, focusing on rebuilding key sectors could be a priority.
• Technical Assistance Programs. Alongside capital, SMEs often lack the technical skills needed for business expansion and innovation. PPPs can provide financial literacy training, business advisory services, and technology integration support to help SMEs grow sustainably.

2. Alternative Financing Platforms: Crowdfunding and Peer-to-Peer (P2P) Lending

Crowdfunding and peer-to-peer lending platforms provide an innovative way for SMEs to access financing without relying on traditional banks. These platforms connect SMEs directly with individual investors, offering more flexibility in terms of repayment schedules and lower interest rates.

• Crowdfunding for Specific Projects. SMEs can leverage crowdfunding platforms to raise funds for specific projects, such as the development of a new product or the expansion of business operations. Crowdfunding campaigns also allow businesses to build a customer base and generate interest in their products or services before they are fully developed.
• Peer-to-Peer (P2P) Lending Networks. P2P lending enables SMEs to borrow directly from individual investors. These platforms reduce the intermediaries and often have more flexible terms compared to traditional bank loans. In Lebanon, where trust in the banking sector has eroded, P2P lending could provide an alternative route for SMEs to access necessary funds.

3. Impact Investment and Venture Capital

Impact investment and venture capital (VC) funds are essential financing mechanisms for SMEs, especially those in innovative sectors like technology and sustainability. Impact investors seek both financial returns and positive social or environmental impact, aligning their goals with the long-term growth of SMEs.

• Sector-Specific Impact Funds. Creating impact funds that focus on sectors like renewable energy, healthcare, or education can help SMEs in these areas to secure funding. These sectors are vital to Lebanon’s long-term recovery and development and represent areas of high social impact.
• VC for Early-Stage SMEs. Venture capital can be a critical source of financing for early-stage SMEs with high growth potential. SMEs in Lebanon’s technology and digital services sectors, for instance, could benefit from VC investments that provide not only funding but also mentorship and networking opportunities.

4. Cooperative Financing Models

Cooperatives are member-owned organizations that pool resources to provide affordable financing and services to members. Cooperative financing models can be particularly effective for micro and small enterprises, which may lack access to formal banking services.

• Cooperative Banks and Credit Unions. Cooperative banks and credit unions are member-owned financial institutions that prioritize serving their members over generating profits. These institutions often provide lower interest rates and more favorable loan terms compared to traditional banks.
• Rotating Savings and Credit Associations (ROSCAs). In many developing economies, including Lebanon, informal rotating savings and credit associations (ROSCAs) have been an essential source of financing for small businesses. Members contribute a fixed amount to a common pool, which is then lent out to individuals within the group on a rotating basis. ROSCAs can be formalized and scaled to offer more structured financing options for SMEs.

5. Digital Financing Solutions

Digital platforms and fintech solutions are revolutionizing the way SMEs access financing. In a post-pandemic world, digital financing tools can provide SMEs with faster, more efficient ways to secure loans, manage cash flows, and invest in growth.

• Mobile Money and Digital Wallets. In regions with limited banking infrastructure, mobile money platforms allow SMEs to access and manage funds digitally. In Lebanon, where banking access has been constrained due to the financial crisis, digital wallets could provide SMEs with a secure and accessible means to handle financial transactions.
• AI-Driven Credit Scoring. Traditional credit scoring models often exclude SMEs due to their limited financial histories. Fintech solutions can utilize alternative data sources, such as transaction histories, social media activity, and business performance metrics, to create AI-driven credit scoring models that provide a more accurate assessment of MSME creditworthiness.

6. Government and International Grants

Grant funding from governments, international organizations, and development agencies can provide SMEs with the capital needed for growth without the burden of debt repayment. These grants can focus on specific sectors or goals, such as technology adoption, sustainability initiatives, or job creation.

• Sector-Specific Grants: Governments and international organizations can offer grants targeted at sectors that are critical for national development. For example, grants for SMEs in agriculture, renewable energy, or digital innovation can help boost Lebanon’s economy.
• Development Finance Institutions (DFIs): DFIs such as the International Finance Corporation (IFC) or the European Investment Bank (EIB) can provide grants or concessional loans to SMEs in developing countries. These institutions also offer technical assistance to ensure that SMEs are equipped to utilize the funding effectively.

7. Trade Finance and Export Credit Facilities

For SMEs involved in international trade, trade finance and export credit facilities provide essential liquidity to facilitate cross-border transactions. These financing mechanisms can help SMEs manage the risks of international trade, such as currency fluctuations and non-payment by foreign buyers.

• Export Credit Guarantees. Export credit guarantees protect SMEs from the risk of non-payment by foreign buyers. These guarantees can be provided by government agencies or international organizations and ensure that SMEs are paid even if the buyer defaults.
• Invoice Factoring and Supply Chain Financing. SMEs can sell their outstanding invoices to factoring companies at a discount, providing immediate liquidity. Similarly, supply chain financing allows SMEs to receive early payment for goods and services provided, improving cash flow and reducing the need for external borrowing.

8. Commercial Papers

Issuing commercial papers by SMEs could be an efficient and effective avenue for soliciting financing, provided that the legal and regulatory framework exists to support it. Commercial papers are short-term, unsecured promissory notes issued by companies to raise funds for working capital needs, and they can be a valuable tool for SMEs looking to access capital quickly and at lower costs than traditional bank loans. For SMEs, the advantages of issuing commercial papers include:

• Lower Cost of Financing. Commercial papers often carry lower interest rates compared to traditional bank loans, as they are typically issued at a discount and mature within a short time (usually less than a year). This can reduce the cost of borrowing for SMEs.
• Access to Capital Markets. Issuing commercial papers allows SMEs to access capital markets directly, bypassing traditional banks. This can be particularly beneficial in situations like Lebanon's financial crisis, where trust in the banking system has eroded.
• Flexibility. SMEs can issue commercial papers to meet short-term financing needs, such as managing cash flow or covering operational expenses, without needing to rely on long-term debt.
• Broadening the Investor Base. By issuing commercial papers, SMEs can attract a broader range of investors, including institutional investors who may be interested in short-term, high-yield instruments.

However, several conditions need to be in place for SMEs to benefit from issuing commercial papers:

• Legal and Regulatory Framework. The existence of a clear legal framework is critical. Regulations must define the rights and obligations of SMEs, investors, and intermediaries, as well as the standards for issuing commercial papers, including minimum credit ratings, disclosure requirements, and investor protections.
• Creditworthiness and Transparency. SMEs would need to establish sufficient creditworthiness to attract investors. This might require credit enhancements, such as guarantees or credit ratings, to ensure investors that the commercial papers are a secure investment.
• Market Infrastructure. The development of a vibrant and liquid market for commercial papers is essential. This includes the establishment of trading platforms, rating agencies, and financial intermediaries to facilitate the issuance and secondary trading of commercial papers.
• Investor Confidence. Ensuring investor confidence through transparency, sound governance, and a track record of financial responsibility will be crucial for SMEs to successfully issue commercial papers.

In Lebanon, where SMEs are a critical part of the economic recovery process, enabling them to issue commercial papers could diversify their financing options and help mitigate the challenges posed by the financial crisis. Government initiatives, such as establishing a regulatory framework and providing guarantees or support mechanisms, could facilitate the development of a market for MSME commercial papers.

Lebanon’s financial crisis has exposed the limitations of the traditional banking system in providing financing to SMEs. As the country seeks to rebuild its economy, it is crucial to adopt alternative financing models that are more accessible, flexible, and tailored to the needs of SMEs. By leveraging public-private partnerships, digital platforms, cooperative financing, and international grants, Lebanon can empower its SMEs to drive innovation, create jobs, and contribute to long-term economic recovery.

POLICY STATEMENT

Policy Statement on Facilitating Alternative Financing for Micro-, Small-, and Medium-Sized Enterprises (SMEs)

Micro-, Small-, and Medium-Sized Enterprises (SMEs) are the backbone of the Lebanese economy, playing a critical role in innovation, job creation, and economic growth. However, Lebanon’s current financial environment has severely limited SMEs' access to traditional bank financing. This policy aims to address this financing gap by promoting alternative sources of funding that will enable SMEs to thrive, grow, and contribute to long-term national economic stability.

Policy Objectives

The primary objectives of this policy are to:

1. Enhance Access to Finance. To expand the availability of financing options for SMEs beyond traditional banking channels, ensuring that these enterprises can access the resources needed to invest in growth, innovation, and operational efficiency.
2. Encourage Innovation and Technology Adoption. To support SMEs in leveraging technology and innovation by providing tailored financial products that reduce barriers to entry for new and existing businesses.
3. Foster Public-Private Partnerships (PPPs). To promote collaborative efforts between the government and the private sector in creating sustainable financing models for SMEs.
4. Support Financial Inclusion. To ensure that micro and small businesses, especially those in underserved regions or sectors, have equitable access to financing.

Key Policy Actions

In alignment with the policy objectives, the following actions will be undertaken:

1.     Establishment of Government-Backed Credit Guarantee Schemes. The government will collaborate with financial institutions and private investors to develop a comprehensive credit guarantee program that reduces the risk of lending to SMEs. This will ensure that lenders are protected against potential losses, while SMEs can access loans without requiring significant collateral.

2.     Promotion of Alternative Financing Platforms. We will encourage the growth of alternative financing platforms such as crowdfunding and peer-to-peer (P2P) lending. These platforms will be regulated and supported to ensure transparency, security, and broad access for SMEs seeking financing for new projects or expansion.

3.     Support for Impact Investment and Venture Capital. To drive innovation and high-impact ventures, the government will incentivize impact investors and venture capital funds to allocate more resources toward SMEs. Special focus will be placed on high-potential sectors such as technology, renewable energy, and sustainable agriculture.

4.     Development of Cooperative Financing Models. Cooperative banks, credit unions, and other community-based financial institutions will be promoted as viable channels for MSME financing. These institutions will provide affordable and accessible financial products tailored to the needs of SMEs, particularly in rural and underserved areas.

5.     Expansion of Digital Financing Solutions. We will facilitate the growth of digital financial tools, including mobile money platforms and AI-driven credit scoring systems, to help SMEs manage cash flows, improve credit access, and invest in technology. The government will also collaborate with international partners to improve digital infrastructure in Lebanon.

6.     Grant Programs for Strategic Sectors. Government and international grants will be offered to SMEs in strategic sectors that are vital for national recovery, including renewable energy, technology, and healthcare. These grants will be non-repayable and designed to stimulate sustainable economic growth.

7.     Creation of Trade Finance and Export Credit Facilities. To encourage international trade and reduce the risks associated with cross-border transactions, the government will support the creation of trade finance and export credit facilities. These will help SMEs engage in global trade, increase exports, and diversify their markets.

8.     Facilitation of Commercial Paper Issuance by SMEs. The government will establish a legal and regulatory framework to enable SMEs to issue commercial papers as a viable financing option. Commercial papers, which are short-term, unsecured promissory notes, allow SMEs to raise working capital efficiently by accessing capital markets directly. By facilitating the issuance of these instruments, SMEs can reduce their dependence on traditional bank loans, gain access to a broader investor base, and benefit from lower borrowing costs. The framework will also ensure transparency, protect investors, and include provisions for credit enhancements to improve MSME creditworthiness.

Partnerships and Stakeholder Engagement

To achieve these objectives, the government will actively engage with key stakeholders, including:

• Financial Institutions. Banks, credit unions, and fintech companies will be key partners in implementing alternative financing models.
• Private Sector. Collaboration with investors, venture capital funds, and large corporations will ensure that SMEs have access to not only finance but also the expertise needed to scale.
• International Organizations. Partnerships with the International Finance Corporation (IFC), World Bank, and other development finance institutions will be crucial in ensuring that SMEs have access to global best practices and funding opportunities.
• Non-Governmental Organizations (NGOs). NGOs with a focus on financial literacy, MSME development, and entrepreneurship will be mobilized to offer capacity-building programs and technical assistance to SMEs.

Monitoring and Evaluation

The success of this policy will be measured through a set of clear, quantifiable indicators, including:

• Increased percentage of SMEs with access to alternative financing.
• Growth in MSME contributions to GDP and employment.
• Increase in MSME participation in export markets.
• Expansion in the use of digital financial tools among SMEs.

Regular monitoring reports will be published, and stakeholder consultations will be held to ensure that the policy remains responsive to the evolving needs of SMEs.

The Lebanese government recognizes the critical importance of SMEs in the economic recovery and future growth of the country. Through this policy, we are committed to creating a more inclusive, accessible, and sustainable financing ecosystem that empowers SMEs to grow and thrive, even in the face of current financial challenges. By leveraging innovation, partnerships, and alternative financial models, we aim to unlock the full potential of SMEs and ensure their vital role in Lebanon’s future economic stability.

CONCLUSION: RETHINKING CREDIT FOR SMEs

The extensive research discussed throughout this paper challenges the conventional perception of small businesses as inherently high-risk borrowers. Studies from Kim and Aydin, the OECD, the World Bank, and the European Central Bank all show that SMEs across global markets adopt a fiscally conservative approach to credit. Their tendency to underutilize available credit lines, maintain liquidity buffers, and strategically invest in long-term growth suggests that they are far more financially responsible than traditional risk models indicate.

Policymakers and financial institutions must now reconsider the outdated frameworks used to assess SME credit risk. Existing models often overestimate the financial volatility of small businesses by focusing on simplistic factors like size, lack of collateral, or limited financial histories. However, a growing body of evidence shows that SMEs, when given access to credit, tend to manage it cautiously and grow sustainably.

Adapting Credit Strategies for Growth

1. Tailored Financial Products. Financial institutions should develop more nuanced credit offerings for SMEs that reflect their unique borrowing patterns. Products like flexible credit lines, low-interest loans for technology adoption, and long-term investment loans can help small businesses access the resources they need while maintaining financial security.
2. Revised Risk Assessment Models. Lenders should incorporate more behavioral insights—such as credit utilization trends and debt management practices—into their risk models. SMEs that demonstrate consistent cash flow management and strategic investments should be rewarded with more favorable terms, rather than being penalized for their smaller size or lack of extensive credit history.
3. Collateral-Free Lending and Public-Private Partnerships. For many SMEs, especially in developing economies, the lack of collateral remains a significant barrier to accessing credit. Governments can collaborate with financial institutions to introduce collateral-free lending schemes, supported by credit guarantees or public funds, to provide SMEs with the necessary capital to grow. Furthermore, public-private partnerships can bridge financing gaps and offer technical support, enabling SMEs to invest in technology and infrastructure that fuel growth.

Unlocking the Economic Potential of SMEs. Research consistently demonstrates that SMEs are vital drivers of job creation, innovation, and economic growth in both developed and developing economies. By expanding access to credit and improving financial inclusion, policymakers can unlock the full potential of SMEs to foster sustainable development, boost productivity, and strengthen global competitiveness.

Moreover, as SMEs embrace digital technologies such as AI, cloud computing, and CRM systems, they can further close the productivity gap with larger firms. This will not only enhance the growth trajectory of SMEs but also contribute to broader economic stability and resilience in times of market uncertainty.

A Call to Action: Empowering SMEs for a Resilient Future

The time to rethink and reform the SME lending landscape is now. Policymakers, financial institutions, and international organizations must act decisively to create more supportive and inclusive credit environments that empower SMEs to thrive. By expanding access to credit, enhancing financial inclusion, and leveraging digital tools, stakeholders can unlock the vast potential of SMEs to drive innovation, create jobs, and strengthen economic resilience.

Failure to act on these findings will not only slow economic recovery but will also perpetuate inequality and missed opportunities for growth. Empowering SMEs with the financial tools they need is no longer optional—it is an essential step toward achieving sustainable global growth and ensuring that small businesses, which remain the backbone of economies worldwide, continue to drive progress in the face of future challenges.

REFERENCES

1. Kim, Olivia, and Deniz Aydin. Precautionary Debt Capacity. 2024.
2. OECD. SME Financing Scoreboard. 2022.
3. World Bank. Global SME Credit Behavior Report. 2021.
4. European Central Bank. Credit Usage and Risk Behavior in the Eurozone: SME Focus. 2020.
5. McKinsey & Company. America’s Small Businesses: Time to Think Big. 2024.
6. Deloitte. SME Technology Adoption and Growth: Cloud Computing and Digital Tools. 2021.
7. International Finance Corporation (IFC). SME Financing in Emerging Markets: Addressing the $5 Trillion Gap. 2023.
8. International Monetary Fund (IMF). Political and Economic Risks Facing SMEs in Emerging Markets. 2022.
9. Harvard Business Review. Balancing Debt with Growth: Lessons from Small Business Risk Management. 2021.
10. Singapore Government. Enterprise Financing Scheme Overview. 2022.
11. KfW Development Bank. Long-Term Loans for Innovation and Sustainability in SMEs. 2023.
12. South Korea SME Financing Agency. Innovation and Technology Funding for Small Businesses. 2022.