How should financial systems be designed to allow small and medium-sized enterprises (SMEs) to access external finance? Christoph Sommer, researcher at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) investigates this in his dissertation. SMEs play a crucial role in low- and middle-income countries as they account for most firms and more than half of the formal jobs (even significantly more when considering informal jobs as well). Furthermore, SMEs foster inclusive development and thus contribute to reduce poverty and income inequality. Yet, SMEs face particular challenges in accessing finance as they often cannot meet the requirements of the standard credit assessment such as securities (certified ownership of land and buildings), audited financial statements, credit histories and the like.
Development and trends like a growing microfinance sector or increasing digitalisation change the landscape of actors and instruments in the financial system. It is pivotal to understand the consequences of these changes for SMEs and to shape them in a positive manner. In the first part of his dissertation, Christoph Sommer explores the interactions between microfinance and the SME financing activities of conventional financial institutions. The purpose of his research is to examine how microfinance can be reconciled with functioning SME finance in the conventional financial system. In his second paper, he studies the importance of longer-term finance (‘patient capital’) for SMEs since the share of short-term finance further increases because of the promotion of digital finance – potentially with unintended negative consequences for SMEs.
The findings of his dissertation can support decision-makers in designing respective policies that improve SMEs’ access to finance and thus foster inclusive economic development.
Christoph Sommer works in the research project Social Cohesion in Africa at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) and writes his dissertation at the Heidelberg University. He studied Economics at the University of Tübingen, University of Botswana and Yale University.