The missing middle is a phenomenon whereby developing countries’ economies consist of a large number of microenterprises (mostly informal) and some large firms but very few small and medium sized enterprises (SMEs). Conversely, in developed economies, SMEs make up the majority of the economy, hence the term missing middle (see Figure 1). A World Bank report estimates that SMEs account for 50% of GDP and over 60% of employment in developed economies, but in low-income countries they are less than half of that: 30% of employment and 17% of GDP[1], which indicates that growing SMEs is an important aspect of development.
Figure 1: The Missing Middle
Source: Entrepreneurial Finance Lab Research Initiative, Center for International Development, Harvard University
Analysing why developing economies are organized like this is an ambiguous and complex problem (which cannot be covered by a single blog post!). However, most commentators agree that access to finance is a big contributor. Micro-credit (small scale loans) is growing in availability but most micro-credit organizations do not support enterprises heading into SME territory because evaluating these business plans become more complex and therefore more costly[2]. At the same time, evaluating individual entrepreneurs (through references, credit history, etc.) is also much harder in emerging economies, which was ultimately the solution used by banks in advanced economies in the 1990s.
The Balloon Kenya program is doing its bit in growing informal businesses. That is after all the primary objective of the organization: “grow businesses, change lives”. It fixes the above problems through an innovative business model. By having volunteer Fellows work with entrepreneurs for five weeks before they pitch for a loan, the cost of assessing (and importantly, developing) complex business plans is passed on to Fellows. Fellows also provide character references which help to assess the entrepreneurs themselves, again at no cost to Balloon. Moreover, through using a graduated tier of loans, Balloon takes a measured approach to risk. Simply put, as an entrepreneur you start at the bottom (an opportunity to pitch for a maximum of 50,000 KES approx. £310) and work your way up the access to finance ladder. So only the most trustworthy of entrepreneurs will have access to the loans that can help them reach SME status.
This sounds good on paper, but more importantly there is evidence that entrepreneurs are growing into SMEs. Before exploring this, it is worth agreeing what an SME is. The Government of Kenya[3] has defined a micro enterprise as any organization with less than 10 people, with an annual turnover of less than 500,000 KES (approx. £3,100). A small enterprise is one with between 10 and 50 people, and a turnover of 500,000 – 5M KES (£31,000).
Of my group’s five entrepreneurs on the core program, three have plans to expand and take on more employees. For two it will be their third employee and for the third entrepreneur it will be their fourth employee. The latter will do so immediately if they are awarded the loan they are pitching for. These stories are quite common amongst Balloon Fellows. Alongside the core program, I have been working with Balloon on issuing their first third tier loan (200,000 KES – approx. £1,250). This entrepreneur will also take on a third employee, and their turnover will well exceed the threshold of 500,000 KES if successful. It seems Balloon is having some success filling in the missing middle.
Increasing SMEs in Kenya is an important endeavour, first recognised by the International Labour Organization in 1972[4]. It helps to connect the economy so that large enterprises can purchase from local supply chains rather than importing. This in turn helps to increase the value in Kenya’s economy. Building SMEs also reduces income and social inequalities, creates more jobs, and leads to skilling up of the labour force. Ultimately, it is considered by leading international organizations to be a cornerstone for development[5].
Given the recent bad press about volunteering and voluntourism[6],[7], as well as recent scandals in the third sector[8] and social enterprises[9], working with Balloon is a refreshing reminder that there are organizations out there who are doing their bit in promoting development.
[1] Small and Medium Enterprises across the Globe: A New Database, Ayyagari Demirguc-Kunt, and Beck World Bank, available at http://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-3127
[2] The Missing Middle, Entrepreneurial Finance Lab Research Initiative, Center for International Development, Harvard University, available at http://www.hks.harvard.edu/centers/cid/programs/entrepreneurial-finance-lab-research-initiative/the-missing-middle
[3] Micro and Small Enterprises Act No. 55, Government of Kenya, 2012, available at: www.kenyalaw.org
[4] Employment, Income and Equity in Kenya, ILO, 1972
[5] Promoting Entrepreneurship and Innovative SMEs in a Global Economy: towards a more responsible and inclusive globalization, OECD, 2004, available at http://www.oecd.org/cfe/smes/31919278.pdf
[6] Before you pay to volunteer abroad, think of the harm you might do, Ian Birrell – The Guardian, 2010, available at: http://www.theguardian.com/commentisfree/2010/nov/14/orphans-cambodia-aids-holidays-madonna
[7] Voluntourism: What Could Go Wrong When Trying To Do Right?, Daniela Papi – Huffington Post, 2012, http://www.huffingtonpost.com/daniela-papi/voluntourism_b_1525532.html
[8] Comic Relief money invested in arms and tobacco shares, Declan Lawn – BBC, 2013, available http://www.bbc.co.uk/news/uk-25273024
[9] Confessions of a Microfinance Heretic: How Microlending Lost Its Way and Betrayed the Poor, Hugh Sinclair, San Fransisco: Berrett-Kohler Publishers, Inc. (see also http://www.microfinancetransparency.com/)