Small business financing has become a central focus of global economic policy, especially in the wake of the COVID-19 pandemic and the post-2023 cost-of-living crisis, which tightened banking liquidity worldwide. According to the latest World Bank data, micro, small, and medium enterprises (MSMEs) account for 90% of all business entities, create over 50% of jobs, and contribute up to 40% of GDP in many countries. Ironically, despite this significant contribution, MSMEs remain trapped in a financing gap, unable to access the productive credit they need to grow.
Governments across countries—Indonesia, Brazil, Ecuador, and Kosovo among them—have implemented a variety of policy interventions to close this gap. However, the effectiveness of such programs remains mixed and continues to spark debate among economists and policymakers.
Case Study: Indonesia and the People’s Business Credit Program (KUR)
Indonesia offers one of the most notable public financing models. The People’s Business Credit Program (Kredit Usaha Rakyat/KUR) has disbursed more than US$100 billion (over IDR 1,600 trillion) to 50 million MSMEs since its launch in 2007. This subsidized lending scheme provides interest rates capped at 6% and partial credit guarantees to reduce risk for banks.
Yet, recent impact evaluations show that while KUR successfully expands initial access to formal credit, only 3% of borrowers transition to fully commercial lending, indicating a low graduation rate. Over half of the beneficiaries rely on repeat KUR loans without a significant upgrade in credit capacity.
In response, the Indonesian government implemented a graduation policy in 2023, which gradually reduced subsidies for repeat borrowers. Early 2024 data shows promising results: the share of new borrowers rose from 50% to 93%, signaling a healthier move toward sustainable financial inclusion.
Brazil: Inequity in Access to Subsidized Credit
Brazil’s earmarked credit program provides below-market-rate loans to MSMEs through commercial banks to stimulate investment. However, a 2024 study (Ornelas et al.) found that large firms captured most of the benefits. Private banks employed cross-subsidization strategies—compensating for low-margin subsidized loans by increasing interest rates on commercial products for the same clients.
As a result, smaller and riskier firms—those the program was designed to help—were often excluded or charged higher rates for other types of credit, thereby undermining the program’s equity and effectiveness.
Kosovo: Lessons from Credit Guarantee Funds
Kosovo’s Credit Guarantee Fund (KCGF) covers up to 50% of bank losses on loans to MSMEs, and up to 80% during the pandemic. While the goal was to incentivize banks to lend to unbanked businesses, 75% of the beneficiaries already had existing credit histories. Banks, once again, favored borrowers they deemed less risky.
However, a robust matching-difference-in-differences impact evaluation showed that MSMEs without credit histories—when they did receive financing—experienced significant gains in productivity and job creation, underscoring the value of directing funds toward truly underserved segments.
Ecuador: Tangible Impact on Previously Unbanked MSMEs
In Ecuador, the Corporación Financiera Nacional, supported by World Bank funding, distributed credit lines between 2021 and 2024 through participating financial institutions. Like in Brazil and Kosovo, banks showed a clear preference for MSMEs with previous credit access. Nevertheless, the program’s strongest impacts on job creation and revenue growth were seen among first-time borrowers (Bruhn et al., 2025).
Strategic Takeaways for Policymakers
Cross-country evidence reveals a recurring challenge: public financing schemes struggle to reach the most credit-constrained businesses. Banks naturally lean toward firms with credit histories, larger balance sheets, or cross-sell potential, leaving riskier MSMEs behind.
Insights from the KCGF study show that adjusting eligibility criteria—such as reducing reliance on credit scores—could significantly widen access. Regression and machine learning simulations estimate that if banks were more willing to serve unbanked businesses, programs like KCGF could reach up to 25 times more MSMEs with similar profiles to existing beneficiaries.
Key policy implications include:
- Credit guarantee schemes must promote new lending, not simply reduce risk on loans to existing clients.
- Profit-driven banks may miss viable lending opportunities by adhering too rigidly to risk-averse strategies.
- Banks should experiment with inclusive risk assessment models, such as machine learning-based underwriting, to unlock underserved borrower segments without compromising portfolio health.
2025 Recommendations: Rethinking Intervention Design
In today’s climate of economic uncertainty, geopolitical stress, and ongoing financial market volatility, governments must take a more strategic and data-driven role in correcting market failures in small business finance. Fiscal injections alone are insufficient.
A more effective intervention strategy should include:
- Program redesign that aligns incentives for commercial lenders to expand outreach without compromising credit quality.
- Rigorous monitoring and evaluation of additionality and long-term impact on MSME growth.
- Investment in financial literacy and digitalization, ensuring MSMEs not only access capital but also build sustainable, growth-ready businesses.
When designed and implemented with precision, public financing for small businesses can become a catalyst for inclusive growth, not just a temporary fix for credit gaps.
Jason Meads 
Randall Brown