Fintechs can unlock advantages of digital financing to CMSMEs

The shift towards digital lending is crucial for banks to meet the fast credit demands of Cottage, Micro, Small, and Medium Enterprises (CMSMEs). 

Automation, enhanced data analytics, and streamlined processes are key to revolutionising credit offerings and maintaining relevance in the evolving financial era.

Bangladesh, still a member of the least developed countries group, is on its way to graduating as a developing nation. And then it will have to face many challenges at different micro and macroeconomic levels. 

Along with its developments in large industrial manufacturing sectors, the country needs to focus on its service sectors as well as agriculture and agro-based CMSMEs. Financing these huge economic sectors and sub-sectors is becoming crucial, particularly in the evolving digital technologies where financial inclusion at individual levels and in trade and business is an accelerating trend. Bangladesh is no exception to this in fostering digital financing.

CMSMEs are the country's largest sub-sector of the economy, accounting for 25% of GDP and directly creating employment for 7.8 million people. Despite much support from the government and private sectors, the CMSMEs sector, especially in rural settings, faces several challenges in starting and growing their business. Limited access to finance has been one of the core impediments to the sector's growth. 

It is important to focus on this to enhance economic growth as it creates employment opportunities at all levels and empowers people's financial independence.

Financing to CMSMEs through digital transformation facilitates conglomerates and vendors to be smart in borrowing and depositing money with an easy process. It will shift them towards transformed ways of manufacturing, handling, storing, and transporting things by expanding internet access and the growing use of smartphones.

As SMEs seek seamless and immediate fund availability, banks require flexible, open, easy-to-integrate solutions, and advanced technologies like artificial intelligence-driven systems to achieve this.

While traditional banks are still preferred by many SMEs, a trend started during the prolonged pandemic, shifting expectations towards digital-led, simpler, and faster lending. 

At that time, fintechs and other challengers capitalised on this by providing swift credit scoring and expanding services beyond lending.

In collaboration with tech firms, banks became competitive in doing business during the pandemic, and they regained their strengths with potential partnerships with fintechs' white-label solutions. 

Unlike offline business, online business is more profitable, increasing revenue, providing access to a higher customer base, increasing operational efficiency, and enhancing customer experience.

Offline business limits an enterprise from market reach. Customising technology and having an online presence leads to remarkable opportunities for CMSMEs to grow and up their game in local and overseas markets. Increased digital engagement allows CMSMEs to explore new markets, enabling them to compete with the top giants in the industry. 

E-commerce platforms expand geographical boundaries by engaging in enhanced customer experience and providing support for better supply chain solutions. This allows companies to sell 24/7 and increase their customer base rapidly with limited operational costs.

A local leading private commercial bank introduced an innovative financial product called Tally Loan – 'Druti' to promote greater financial inclusion in Bangladesh. Undoubtedly, it is a good initiative designed specifically for small traders, often overlooked by formal financial institutions.

This innovation helps customers obtain necessary documents, such as trade licences for loan applications. Male entrepreneurs with at least two years of experience and women with one year of experience are eligible for loans of up to Tk1.5 million without requiring any mortgage, which can be repaid within two years. 

Under the system loan sanctioning process is straightforward – loans are disbursed within 72 hours after assessing only Tally Khata records. Grassroots business entities greatly benefited from this digital transformation.

Agro-based industries and farmers in agriculture could greatly benefit from digital financing. Under devised digital methods, farmers, micro and small agro-based businesses, and vendors can come in direct contact with the experts in this field who are in constant touch with recent updates or advancements. By doing so, they can assure optimum return on investment using effective digital transformation techniques. The SMEs could also be free to make the necessary changes in their ongoing online marketing campaigns as the need arises.

Though there is an optimistic digital financing and transformation trend, several challenges should be solved. Lack of identity and necessary business documents, complexity in application and disbursement process, high operational cost of the financial institutions for processing small amounts of loans, little or no data exist for credit assessment, and lack of digital footprints of CMSMEs are among them. 

To overcome these challenges, there is a need to increase the accessibility of CMSMEs in the formal financial system, reduce the operational cost of financing using digital solutions, and increase the financing amount at lower rates to facilitate the growth of their businesses. There could also be a consortium or organisation for group financing.

We need to study many such financing methods, and there should be coordinated and collective efforts among bankers, IT professionals, and fintech experts to reduce operational costs and bring the CMSMEs under digital financing.

The writer is the founder and CEO of Agam International Limited – an AI algorithm-based fintech company.