Micro, small and medium-sized enterprises (MSMEs) are important contributors to the national economies worldwide. In most countries, they represent the majority of enterprises, provide most of the employment and also make an important contribution in terms of income generation.
The Addis Ababa Action Agenda (AAAA) emphasised the importance of generating full and productive employment for all and promoting MSMEs which create the vast majority of jobs in many countries. The AAAA also noted that MSMEs often lack access to finance, particularly those that are women owned. Therefore, financial inclusion and access to financing are critical for strengthening the MSMEs and ensuring their sustainability and growth. In addition, it stressed the need for adequate skills development training, including for youth.
The role of Accounting and Insurance regulation in financial inclusion
One of the major obstacles that MSMEs face in their access to finance, when they initially start or need to scale up their operations – is setting and maintaining proper accounts and generating meaningful financial statements. Access to such services or skills can enhance their chances of obtaining financial resources. Therefore, efforts of policy makers in the areas of accounting and insurance regulation, are required, among others, in order to foster financial inclusion of MSMEs. This is why accounting for MSMES has been a regular issue discussed during the annual sessions of UNCTAD’s Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) which is the United Nations focal point on enterprise accounting reporting matters. It was established in 1982 by the United Nations Economic and Social Council (ECOSOC). ISAR reviews developments in the field of international reporting and promotes best practices to facilitate investment, inclusive and sustainable growth.
In order to address the needs of MSMEs, at the request of its member States, UNCTAD-ISAR developed the Accounting and Financial Reporting Guidelines for Small and Medium-sized Enterprises Level 3 Guidance (SMEGA level 3), which was originally published in 2003 and revised in 2009. This guidance applies to the smallest entities that are often owner managed and have few employees. It proposes a simple accruals-based accounting, but closely linked to cash transactions and taxation.
In 2016, UNCTAD issued a publication entitled Accounting and Financial Reporting by Small and Medium sized Enterprises: Trends and Prospects, which provided an overview and analysis of the status and development trends on accounting and financial reporting of SMEs, including microenterprises. In particular, it discussed the importance of MSMEs in the economy, the adoption rate of the International Financial Reporting Standards (IFRS) for SMEs, the specific issues of microenterprises, oversight and enforcement challenges, audit requirements and capacity-building needs in this area. It also provided some policy recommendations on addressing practical implementation challenges. This publication also reviewed the application of the SMEGA level 3.
As part of the Development Account 9th Tranche activities, in 2016 and 2017 UNCTAD organized two regional workshops on Best Practices in the Implementation of Accounting Standards and Insurance Regulation for the Financial Inclusion of Micro, Small and Medium-sized Enterprises (MSMEs) in Latin America (Conclusions) and Africa (Summary report).
Concerning discussions on the role of accounting in financial inclusion for MSMEs, participants emphasized the importance of keeping a realistic view of the type of accounting information needed by and from each type of company (in terms of size) in order to avoid excessive compliance costs that discourage the micro and small entrepreneurial activity. There was agreement that a simplified guidance – such as the SMEGA Level 3, developed by UNCTAD-ISAR – would be a good basis. It was stressed that raising financial literacy of entrepreneurs would significantly contribute to facilitating MSMEs financial inclusion, their access to finance and reducing defaults on loans. Participants highlighted affordability of financial services as a key underlying issue and the need for greater responsiveness of the industry and regulatory frameworks on considering the needs of MSMEs.
More specifically the need to develop simplified products tailored to the needs of MSMEs, and to create a culture of risk awareness and prevention were stressed. It was also discussed that financial education and awareness of the insurance culture is an important way to integrate the MSMEs into the insurance schemes on a suitable basis.
Both workshops stressed the importance of regional cooperation and coordination to address common challenges and develop synergies to facilitate the efficiency of the use of available scarce resources and technical skills in developing countries.