Unlocking SME Finance in Fragile and Conflict Affected Situations

Access to finance is a key obstacle for the growth and development of small and medium-sizedenterprises in fragile and conflict affected situations. This paper provides empirical evidence on the keymacrofinancial and institutional drivers of financial inclusion of small and medium-sized enterprises in a largesample of countries, highlighting the comparative importance of factors affecting countries with and without fragile andconflict affected situations. The results show that macroeconomic and institutional stability, along withreduced informality, banking sector soundness, and improved credit information environment, are associated with higherfinancial inclusion of small and medium-sized enterprises. The results also show that strengthening the rule of law,government effectiveness, and control of corruption while increasing financial depth and reducing public sectorborrowing and banking market concentration could help close the small and medium-sized enterprise financial inclusiongap between fragile and conflict affected situation countries and the best performing countries. These effectsare generally stronger in middle-income countries with fragile and conflict affected situations than in low-incomecountries with fragile and conflict affected situations. The results point to the importance of adopting comprehensivemacrofinancial and institutional strategies to improve financial inclusion of small and medium-sized enterprises incountries with fragile and conflict affected situations, tailoring reforms to country contexts.