What the EBRD does to support small businesses

By Axel  Reiserer


EBRD at 25: companies are at the forefront of job and wealth creation

Support for small and medium-sized enterprises (SMEs) is at the core of the EBRD’s mandate. These private companies are at the forefront of job and wealth creation and represent the foundation of a prosperous society. In many successful advanced economies the small business sector is the backbone of the economy.

 

 

SMEs stand at the cradle of the development of sound market economies. New firms usually start small. Some of them grow into global enterprises. But the vast majority remain close to the markets they were initially established to serve. This means that they are often more efficient, flexible and responsive to market developments.

For an economy to succeed it needs a fine balance between a few global champions and the big mass of smaller companies. Huge modern car manufacturers need a wide web of small supportive suppliers, often spanning many countries and even continents. It is the interaction between the various actors which makes an economy successful.

The small business sector is particularly important because it represents the advantages of a market economy in a nutshell. It stands for ownership, personal engagement and responsible risk taking. A vibrant private sector thrives on competition and inspires participants to keep improving their performances, innovation and creative solutions.

While state-owned enterprises under communism floundered under the absurdities of central planning and the lack of ownership, private companies are at the foundation of a society formed by stakeholders. It is no coincidence that communism all but destroyed the private sector.

One of the major tasks for the EBRD in its first 25 years of supporting its countries of operations was to re-build the small business sector. As Lech Wałęsa, the former leader of “Solidarność” and President of Poland, put it in a speech in 1996: “It is easy to make fish soup from the aquarium with living goldfish, but just imagine what challenge it is to try to make the aquarium with living goldfish out of the fish soup.”

No matter how difficult it sounded at the time, there has been huge progress. Today, the SME sector in central and south-eastern Europe is on a scale with the advance economies of western Europe. In countries at an earlier stage of development, micro enterprises (with up to 10 employees) dominate. Where the medium-sized sector remains underdeveloped, economists have demonstrated the negative impact of this “missing middle” on the wider economy as is, for instance, the case in Russia or Kazakhstan.

The EBRD has played a major role in supporting the development of a viable and sound small business sector. About a third of the Bank’s investment of more than €107 billion since 1991 has been directed towards micro, small and medium-sized enterprises. Over the years the Bank has developed many initiatives and products to support this sector, ranging from direct credit lines under facilities to dedicated credit lines to financial institutions for on-lending, trade finance facilities and risk-sharing support.

With the global economy stuck in sluggish growth, the SME sector faces challenges that stand in the way of its development. Last year, the Turkish G20 presidency identified three critical “I”s: investment, inclusion and implementation.

Investment is about money, but is also about advisory services and helping entrepreneurs to translate a genius idea into a sound business.

Inclusion stands for the effort to widen economic participation. The EBRD, together with partners, has developed highly successful Women in Business programmes. The impact of such initiatives goes beyond the economy. Similarly, the Bank is engaged in efforts to fight youth unemployment and support the economic integration of disadvantaged groups.

Implementation, finally, is key. Here the EBRD not only has the benefit of long-standing experience and close cooperation. Recognising the importance of the sector, the EBRD launched its Small Business Initiative in 2013 which combines and simplifies the EBRD approach to make it even more far-reaching and effective.

Donor support has been vital for the success of this programme. It remains all the more important as analysis shows that small business and private sector support is particularly important for “new” EBRD countries like Egypt, Jordan, Morocco, Tunisia and Turkey.