Micro and small enterprise (MSE) development

Learning note

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This Note relates to KSF3: Alignment of design features with IFAD Strategic Objectives and lessons learnt; analysis and results framework
Version: January 2008

Core issues

Micro and small enterprises (MSEs) allow the rural poor – including some of the most marginalized and vulnerable strata such as rural women, youth, and the landless – to diversify their incomes, create new sources of economic growth and generate additional employment (including self-employment) in rural areas. The same strata may also be reached through MSE support to small-scale local entrepreneurs, whose business expansion can create new jobs for the rural poor. Core issues that shape the justification for and design of investments in MSE development concern:

  • The policy and institutional environment. A country’s legal framework, current business practices, government policies such as tax breaks or seed grants for MSEs, bureaucratic and administrative procedures, etc. may all act either to encourage or impede MSE development. 
  • The availability and strength of local financial services. Commercial banks, micro-finance institutions, micro-leasing companies, etc., also non-financial service providers such as business counselling, must be adequate to support MSE growth.
  • The business opportunities and evolving demand in the project area. Agriculture-related (agro-processing, input selling, food trade) and non-agricultural MSE opportunities (carpentry, metal-working, transport, shops, handicraft, other amenities) should be present, together with government commitment to an identified target clientele. There should be general indications that financial returns from typical MSEs are attractive to this clientele.
  • The institutional mechanisms for MSE promotion.  Support needs of potential MSE entrepreneurs require identification. Business development services such as entrepreneurship training, management and planning advice, and improved market information and access, are likely to be needed. Assistance in making loan applications and advice on dealing with financing agencies will also be required.
  • Micro and Small Enterprise Units (MSEs)may need setting up if institutional mechanisms are inadequate. Such units may also incorporate teams of rural business advisers (RBAs) to strengthen links between MSEs, producers or producer organisations, other market intermediaries such as traders, processors or transporters, and rural or urban businesses.
  • Related infrastructural needs and constraints. Means may have to be found to address non-commercial constraints to MSE growth such as the poor quality of the rural roads needed to link MSEs to markets, inadequate water and electricity supplies and ineffective communication networks.
Key tasks for design and review

Assessment of the constraints and opportunities for MSE development, followed by the planning and implementation of steps to address them, should, to the extent possible, be done on a participatory basis with the concerned population. They and other local stakeholders are generally the people best informed on the types of business that are attractive, as well as on prevailing input and output prices.  Main tasks to be addressed in this way are listed below:

  • Develop plans and initiate/reinforce means to ease any constraints posed by existing MSE policies or the operational framework for business – including trading laws and regulations, capital and administrative requirements, credit services, legal status, etc. When policy, legal or regulatory issues are found to require government attention, suggest solutions and set a timetable and responsibilities for action.
  • Assess demand, market and profitability of MSE products or services in the project area (prices, market demand, marketing constraints, etc.).
  • Develop simple enterprise models to illustrate the potential profitability and financial viability (cash flow generation) of sample MSE investments; quantify potential job creation among the target group; work out appropriate lending conditions/grace periods and/or cater for the need for complementary small business-related financial instruments (e.g. revolving start-up funding).
  • On the basis of identified constraints and opportunities, evolve differentiated strategies to reach diverse categories of enterprises and clients (e.g. micro vs. small; male vs. female managed).
  • Assess, and reinforce as necessary, institutional capacities to provide specialised support to MSE start-up and/or to existing rural entrepreneurs at national, regional or local level. Numbers of rural business advisers will depend on the size/importance of the area to be covered and accessibility of the target clientele. The scale of formulation support should match the degree of design innovation.
  • Initiate an institutional strategy that will eventually phase out project-financed service providers in the project area through the selection, recruitment and training of alternative, ad-hoc, business counselling capacities. Include in this strategy the means to maintain the technical competence of support to working MSE entrepreneurs after project closure.
  • Estimate the physical quantities and costs for the MSE support proposed.
  • Ensure inclusion of relevant M&E indicators, institutional assessments & responsibilities etc., in the Key Files.

 

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