Characteristics of MSMEs

MSMEs are known for their agility, ability to adapt quickly to market changes, and focus on niche markets. They play a vital role in local economies by providing goods and services tailored to community needs. This is even more pronounced in emerging markets, where they dominate key sectors such as agribusiness, retail trade, textiles, and construction. In this section we examine the main ways that governments, regulators and banks categorise MSMEs when determining support, regulations and finance.

Size-based Classification

MSMEs are classified based on size, number of employees, and annual revenue, with benchmarks provided by global organisations such as the World Bank and the IFC (International Finance Corporation, part of the World Bank that promotes sustainable private sector investment to reduce poverty and boost shared prosperity). While specific definitions vary across countries, the European Union definition is that micro-enterprises employ fewer than 10 people, small enterprises range from 10 to 50 employees, and medium enterprises can have up to 250 employees, all within an annual turnover figure of less than €50 million ($54 million).

Ownership Structure

Another common classification is ownership structure, with many operating as sole proprietorships, partnerships, or limited companies.

Sole proprietors own unincorporated businesses and are personally liable for debts and the business is often indistinguishable from personal finances.

Partnerships involve two or more individuals sharing profits and liabilities, such as debts, and with more separation between business and personal finances.

Private limited liability companies are owned by one or more shareholders and protect owners from personal liability, while public limited liability companies trade shares on stock exchanges (but aren't usually MSMEs due to their size). Business and personal finances of shareholders are very separate. There are also unlimited liability companies and companies limited by guarantee, which are often used for non-profit organisations, such as charities and non-government organisations (NGOs).

Formal and Informal Businesses

MSMEs can be divided into formal and informal businesses. Formal MSMEs are registered with a government body, pay taxes, follow legal and labour regulations, and maintain financial records, giving them access to financial services and market opportunities.

Informal MSMEs, on the other hand, operate outside most legal frameworks, avoiding registration and taxation. However, their lack of formal status and financial records makes it difficult to access credit and financial services and often have limited growth potential.

The distinction between formal and informal MSMEs is vital for policymakers and financial institutions. Formal businesses contribute more to tax revenue and economic development, while informal ones face challenges such as low productivity and limited scalability. Banks prefer formal enterprises because of greater financial transparency, and many experts advise businesses to start informally before transitioning to formal registration to test viability.

Regional Classification Differences

Regional differences in MSME classifications reflect economic and regulatory variations. For instance, developing countries tend to use lower employee and turnover numbers. In contrast, the European Union and the United States set much higher turnover limits for MSMEs, reflecting their larger economies and business environments.

Why are Classifications Important?

Understanding these classifications helps shape policy decisions, financial support programs, and business development strategies. The balance between formal and informal MSMEs remains a key issue, influencing access to credit, business sustainability, and economic contributions. This module and the Credit Risk Management module will further explore the implications for financial institutions and strategies to support MSMEs effectively.

Contribution to Employment and the Economy

The contribution of MSMEs to employment and Gross Domestic Product (GDP) varies significantly across regions due to differences in economic structures, levels of development, and the prevalence of informal economies. MSMEs drive economic growth by creating diversification, innovation, and productivity across multiple sectors, including manufacturing, services, and trade.

Regional Contributions of MSMEs

Sub-Saharan Africa

MSMEs represent over 90% of businesses in Sub-Saharan Africa, playing a crucial role in employment, particularly within the informal sector. However, their contribution to GDP remains limited due to challenges like low productivity, restricted access to finance, and poor infrastructure. Micro-enterprises dominate, comprising 70% to 80% of businesses, followed by small enterprises (15% to 25%) and medium enterprises (5% to 10%). The primary sectors include agriculture, retail, and services such as street food vending, small shops, hairdressing, home-based tailoring or garment repairs, handyman or repair services, and informal childcare or domestic help.

Middle East and North Africa (MENA)

MSMEs account for 80% to 90% of businesses in MENA, particularly in trade, retail, and services. While they are vital for employment, their GDP contribution is constrained by regulatory barriers, political instability, and financial constraints. Micro-enterprises dominate at 70% to 80%, with small enterprises at 15% to 20% and medium enterprises at 5% to10%.

Europe

In Europe, MSMEs form 99% of businesses, contributing significantly to GDP and employment due to a well-developed regulatory framework, financial accessibility, and innovation support. They are well distributed across manufacturing, services, and technology sectors. Micro-enterprises make up 90% to 93% of businesses, while small enterprises account for 5% to 7%, and medium enterprises for 1% to 3%.

North America

North America's MSMEs, particularly in the U.S. and Canada, represent 99% of businesses, contributing significantly to employment and GDP. They thrive in technology, manufacturing, and services, benefiting from robust financial systems and innovation ecosystems. Micro-enterprises make up 75% to 80%, small enterprises 15% to 20%, and medium enterprises 5% to 10%.

Latin America

MSMEs constitute 90% to 95% of businesses in Latin America, with most operating in retail, agriculture, and low-tech manufacturing. High levels of informality and economic volatility limit their GDP contribution. Micro-enterprises dominate (80% to 85%), followed by small enterprises (10% to 15%) and medium enterprises (5% to 10%).

Asia-Pacific

The Asia-Pacific region has a highly diverse MSME landscape, representing over 95% of businesses. While micro-enterprises dominate in developing countries (85% to 90%), small and medium-sized enterprises are more common in advanced economies. MSMEs thrive in manufacturing, services, and technology, with financial accessibility and digital adoption varying widely.