To the developing countries those within that broad category, especially to those with major employment and income distribution SMEs are very crucial. In addition to developing countries SMEs are important to almost all economies in the world. In many countries, SMEs are the key actors in generating well-brought-up employment in most developing countries involves the expansion of this sector fast enough to absorb people previously unemployed (a few) or engaged in low productivity informal sector jobs and the majority of jobs are provided by SMEs, In low-income countries, especially where the informal sector is large, but it is still significant. The SME sector’s contribution to GDP also confirms its economic importance. In high-income countries, …show more content…
SME growth and domestic economic development has a direct relationship through increased output, value add and profits. The GDP contribution per SME is the difference between the return on capital and the cost of capital. Returns on capital are often high, with different datasets showing ranges up to 20-30% a month (for the most capital-strained firms), which is considerably higher than typical interest rates. The GDP contribution can be illustrated on a micro-level by looking at the additional economic activity generated by a hypothetical loan. This example gives a simplified view on how a SME owner who invested his loan into the purchase of imported goods increases consumption and GDP. This example does not cover the significant multiplier effect in the wider economy, through the increased economic activity of employees and suppliers.
SME growth also influences GDP indirectly, through increased innovation and macro-economic flexibility of the overall economy. Every year new SMEs enter the market, representing 5 to 20% of the existing number of firms. Smaller firms are often the most dynamic and innovative, and can be a test ground for new business ideas. Although …show more content…
The conceptual framework developed describes the services from microfinance institutions to the small and medium enterprises and links with the outcomes which are measured by social economic growth of the SMEs to the borrowers after investment. The outcomes are measured at both business and household levels.
MFIs services are expected to have influences not only on the financial performance of SMEs but also on the owners’ life standard and community at large. Therefore, the conceptual framework developed reflects also the outcome of financial performance of SMEs at household level this is due to the assumption that an increase on growth of SMEs result into an increase of owner’s wealth and overall standard of living since the profit obtained from enterprises activities enables the SMEs owners to meet his/her living expenditure, ownership of more fixed assets and increasing their confidence. Guy Vincent (wwwgdrcorg) refers to this change of economic state as getting out the vicious circle of poverty. The diagram above highlights the position and the role of microfinance concept in poverty alleviation process. MFIs play the role of financial and technical linkage between the formal financial institutions. The disburse loans to the SMEs where the capital is invested for the purpose of generating profits.