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Financial inclusion for small businesses in the digital economy

Anju Patwardhan,Standard Chartered’s global Chief Innovation Officer | May 3, 2016
Can digital plug the SME credit funding gap and support financial inclusion?

This vendor-written piece has been edited by Executive Networks Media to eliminate product promotion, but readers should note it will likely favour the submitter's approach.

More than 200 million small and medium enterprises (SMEs) in emerging markets lack access to finance. This inability to raise working capital is particularly a problem for small businesses, including technology start-ups and professionals branching out into entrepreneurship.

SMEs are a major driver of economic growth and job creation, accounting for more than half of the world's GDP and two-thirds of its work force. Yet, these companies have difficulty securing financing, limiting their ability to grow and thrive.

Financial inclusion means having universal access to reasonably priced financial services, provided by sound and sustainable institutions. It includes saving, investing and borrowing.

In recent years, a lot of progress has been made in promoting financial inclusion for individuals, through new mobile payment systems and increased access to bank accounts and savings products. In the three years to 2014, the number of unbanked adults globally dropped 20 percent to 2 billion.

The bottom of the small business pyramid is enticing

Meanwhile, limited progress has been made in addressing the credit needs of small businesses.

The International Finance Corporation estimates that financially excluded micro businesses and SMEs (MSMEs) account for a significant credit gap of USD2.1 to 2.6 trillion in developing economies. This represents a major constraint for MSMEs, and a massive missed revenue opportunity for the financial sector.

A recent study by CARE International and Accenture estimates that bringing today's excluded small businesses into the formal banking sector could generate annual revenues of about USD270 billion for banks by 2020, by closing the credit gap at average lending spreads and adding fee-based services. The greatest revenue potential is estimated to be in Asia-Pacific region at USD95 billion.

What under-banked small businesses need

Widening access to financing for small businesses is top of almost every government's agenda, given the sector's importance for jobs and economic growth.

While the revenue opportunities for banks are huge, the financing needs of MSMEs are so far met largely by informal service providers, governments, state agencies, development organisations and non-governmental organisations (NGOs).

MSMEs need financial products and services that are appropriate for them, at the right price and design, with ease of access and fast processing.

Their credit needs can be summarised as high in complexity and low in scale, leading to the traditional banking view that MSME financing is low-end and unprofitable. The credit underwriting process is time-consuming and expensive for a variety of reasons, such as a lack of credit bureaus, stringent regulatory know-your-customer requirements, and the fact that many MSMEs lack an audited financial history.

Small businesses are the Goldilocks of digital banking: corporate apps are too complex for them, but retail ones are way too simple. They often end up being offered retail credit products, though their diverse needs call for a more customised service. Lending in this area by banks is often pursued under regulatory pressures or as part of philanthropic ambitions.


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