The Financial Gap in MSME Sector: A Review of Literature for the Period of 2014 to 2023

Abstract

Purpose: The study aimed to determine the financial gap in the MSME Sector, analysing the factors responsible for this gap, and probable solution. The term financial gap refers to the disparity between financial requirements of MSMEs and their capacity to secure adequate financing options.

Design/Methodology/Approach: The study adopted a systematic literature review of selected papers published during 2014 to 2023 by applying keyword MSME; Micro, Small, and Medium Enterprises; Financial Gap.

Findings: The Micro, Small, and Medium Enterprises (MSME) sector plays a crucial role in the economic development of the country. Despite the fact of such contribution, the MSMEs are facing various challenges viz. lack of skilled manpower, scarcity of raw material, and a significant challenge of financial gap. Lender’s perception of high risk inherited in MSME financing, insistence for adequate collateral security is challenge for MSMEs in their pursuit of securing the funding. On the other hand lack of transparency in information disclosed by MSMEs presents a challenge for financial institutions while evaluating the creditworthiness of MSMEs.

Practical Implications: The study founds its relevance among MSME owners and financial institutions. Lenders shall be assisted by considering a cash flow based lending approach instead of collateral based lending.

Originality: Numerous studies have discussed the problems of MSME sector. Nevertheless, only few studies have been attempted to address the financial gap in MSME factor.