Digital financing: A new approach to bridging SME financing gaps
There are of course challenges that may constrain the full potential benefit, which should be closely considered. These include low levels of financial and business literacy, rigid regulatory frameworks and cyber security risks
Limited access to finance is a critical barrier to growth for small and mid-size enterprises (SMEs) globally. The problem of limited access to institutional credit continues to persist as a puzzle to policymakers, leaving millions of SMEs cash-strapped and hindering their growth.
Despite playing a significant role globally in driving economic activity and creating employment opportunities of huge magnitude for men, women and youth, the micro, small, and medium enterprises often face finance gaps and continuously struggle to start, sustain and grow their businesses.
The size of SME finance gap (measured by percentage of total unmet financing demand, based on data collected from 135 countries) appears to be the highest in the Middle East and North Africa (84%), followed by sub-Saharan Africa (81%), Latin America and Caribbean (74%), South Asia (67%), Europe and Central Asia (59.7%) and East Asia and Pacific (43.3%). Ignoring inter-regional differences in the size of SME finance gaps, it may be noted that SME Finance gaps are pervasive, which need to be narrowed down to finding new solutions.
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Some of the leading causes responsible for keeping SMEs from the formal financial channels have been identified as higher costs to serve SMEs, information asymmetries or the absence of traditional data used by banks to assess creditworthiness, lack of collateral and extensive documentation requirements. These are supply-leading and demand-driven consequences constraining the SMEs to obtain sufficient external funds, even if they may have potentially profitable investment projects.
Then there are formal-informality issues based on the registration status and gender considerations, such as women-owned SMEs, particularly from the vulnerable and underserved groups, who experience similar barriers to financing as men-owned SMEs. In addition, non-financial issues, such as social taboos, cultural barriers etc. exacerbate the challenges to obtain bank credits by the women-owned SMEs.
Thus, though traditional bank financing continues to be crucial for SME growth and expansion, they keep languishing due to lack of adequate access to financing. As such, there is a pressing need to develop a more diversified set of options for SME financing that's required to strengthen their capital base and enable them to seize growth opportunities and boost long term investments.
This is indispensable especially in the developing economies and emerging economies where SME growth and expansion keeps the wheels of these economies moving forward by contributing to 60-70% of employment generation, 30-40% of GDP, and above all, constituting over 90% of all business enterprises.
Digital Financing of SMEs: A New Option
This section of the analysis has been heavily drawn from the World Bank Group 2020 Report on Financial Inclusion. Earlier, the survey of 135 countries from both G20 and non-G20 groups of countries was mentioned, which is from the same report.
Introduction of "Digital Financing '' system is now considered a game changer that can help close the SME financing gap, enabling the smaller enterprises to tap alternative sources of funding, based on the database created by their digital foot-print.
Considered from a holistic approach, successful digital financing needs: (1) digital financial products and ways of access of SMES to these products (ii) the digital transformation or digitalisation of SMEs to enhance their organisation efficiency, reduce costs of production and increase profitability, (iii) finally, the impact of digital market enablers such as e-commerce, a sharing economy and an open banking system.
The delivery of digital financial services (DFS) can be carried through a number of players such as, (a) financial technology firms (FinTech), (b) banks and financial institutions which adopt these new products and services or may enter-into partnership with FinTechs to deliver these products, and (c) BigTech firms, and large technology companies which are now offering digital financial products and services, and (d) Mobile Network Operators (MNOs).
This new SME financing option is now being operated in the Middle East and North African countries (MENA) under the initiatives of the World Bank Group and relevant lessons can be learned by Bangladesh.
Given the proverbial financing gap facing the SMEs in Bangladesh, this may be a noble attempt to help the SMEs come out of the financial impasse. There are of course challenges that may constrain the full potential benefit, which should be closely considered. These include low levels of financial and business literacy, rigid regulatory frameworks and cyber security risks. Hence development of a strong digital infrastructure base, cyber security management bank-fintech partnerships are necessary preconditions.
Dr Momtaz Uddin Ahmed is former Professor and Chairman, Department of Economics, University of Dhaka.
