Enabling financial inclusion for the missing middle

Nagarajan, right, and two members of his team, left.

What is the ‘missing middle’? And why is it so important for financial institutions?

An opportunity gap

The missing middle refers to small and medium enterprises (SMEs) that have very limited access to financial services because they are either too small to access traditional banking services or too big to benefit from microloans. In 2014, it was estimated there were 30 million MSMEs in India. They employ around 80 million people who represent 40 percent of the workforce and contribute towards 45 percent of India’s manufacturing output. However, most SMEs have very low productivity due to low scale, poor adoption of technology, and lack of access to formal financial services. Whenever SMEs want to benefit from financial services, they often face high fees, inefficient procedures, and burdensome regulations. In fact, SMEs only contribute towards 17 percent of GDP. In mature markets, SMEs represent 50 percent -60 percent of GDP. Overall, the IFC estimates that the financing gap (the difference between demand and supply of financial services) in India is above $140 billion. Clearly, this is a huge opportunity for Financial Institutions.

Baking a future

Swadhaar Financial Services in Mumbai, India is trying to address this problem. It recently launched an MSME division that will specifically target the ‘missing middle’ by creating 42 new branches in 4 states of India. One of Swadhaar’s clients is Nagarajan, who owns a small business owner in Ambalapattu Village in the southern state of Tamil Nadu. Now forty, he started his business when he was seventeen, inspired by his father who also owned a bakery. He is a true example of hard work as he wakes up at 4:30 a.m. to open his shop at 5:00 a.m. and doesn’t close until midnight.

Almost 20 hours of work per day would be unbearable for most people, but Nagarajan loves his work and keeps himself motivated. His wife and two children help as a source of inspiration. Not only does Nagarajan work hard running his business, but he also helps his community by employing his two brothers and seven people from his village. In the mornings, his employees help him bake some bread and pastries in a kitchen he rents.

nagarajan_swa_2016_8One of Nagarajan’s employees baking goods in the rented kitchen

In addition to a successful business, Nagarajan owns his home and makes additional income from renting out other properties he owns in the city. A lot of his successes are a consequence of his father’s teachings. As a kid, he learned to save two-thirds of his earnings and to look for good offerings that yielded high profit margins. His store is always full of people and the space has recently become restrictive. That’s why Nagarajan wants to open a second, larger shop in Poonamallee, a nearby town west of Chennai, and move to a bigger house in the area. He’s secured a loan for $9,850 from Swadhaar to help him accomplish these goals.

Solving the ‘missing middle’

Swadhaar’s new initiative has the potential to benefit more businesses like Nagarajan’s and help enable the SME segment of the economy to prosper. As Nagarajan’s, there are multiple established small businesses that could reach a further stage of growth if given the right push. Unfortunately, the number of firms that offer financial products for this specific segment is still lacking. Swadhaar is taking a step in the right direction. In doing so, they will hopefully inspire both MFIs and traditional banks to expand their product offerings and cover this unattended segment.

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