Digitization, fintech can facilitate SME access to finance: ADB report

Policymakers should look into digitization and financial technology or fintech as potential solutions to the lack of access to finance of small and medium-sized enterprises (SMEs), according to a new report released by the Asian Development Bank (ADB).

The ADB’s latest “Trade Finance Gap, Growth, and Job Survey” found that the global trade finance gap this year remains at around US$1.5 trillion and is rising. It also found that SMEs and women-owned firms face greater challenges accessing finance.

It said SMEs account for 37% of trade finance demand received by the banks surveyed and that 45% of SME loan proposals are rejected, higher relative to mid-sized and larger-sized firms (39%) and multinational corporations (17%).

Among SMEs initially rejected that sought alternative financing, 47% were unable to find anything appropriate. A slightly higher percentage of firms use informal (18%) rather than formal financing alternatives (16%), while the take-up of digital finance as an alternative is negligible (below 1%).

Women-owned firms find it even more difficult to access finance. Among women-owned firms surveyed, the average rejection rate of their proposals was 44% compared with 38% for male-owned firms. Once rejected, women-owned firms were less likely to seek alternative finance-whether formal or informal.

However, there is growing optimism that fintech and digitization are potential solutions to bridge the trade finance gap, particularly for SMEs, said the report released this month.

“There is still no evidence showing that technology reduces the trade finance gap, but 86% of banks surveyed say they are preparing to service more SMEs using technology,” it said.

But there are challenges to technology’s uptake by banks, including high cost of technology adoption; lack of global and established standards, laws, and rules for digital finance; lack of expertise in technology because it is too complicated and fast moving; and too many platforms.

To realize technology’s potential to close the trade finance gap, the report recommends putting a basic legal and institutional framework in place.

“Governments need to adopt laws-preferably common laws-on digital trade and more broadly e-commerce,” it said. “The United Nations Commission on International Trade Law (UNCITRAL) has developed model laws that governments should consider and adopt. Until firms and banks have legal grounds to transact digitally, technology will not materially reduce gaps.”

Moreover, to make information on individual SMEs accessible in an ocean of meta-data, the Legal Entity Identifier (LEI) should be adopted globally, it suggested. “The LEI, overseen by over 70 financial regulators worldwide, verifies who is who and who owns whom. This would facilitate the KYC [know your customer]/AML [anti-money laundering] process, also identified in the survey as a major impediment to closing the trade finance gap.”

In the Philippines, the Bangko Sentral ng Pilipinas (BSP) said it is currently pursuing various financial inclusion initiatives to assist small borrowers, acknowledging that lack of access to credit remains a big obstacle to MSME development and sustainability.

BSP Governor Benjamin E. Diokno in a recent speech at a meeting of MSMEs and small exporters said these programs include building a strong and reliable credit information system, supporting laws on financial inclusion, providing surety cover for SME bank loans, boosting interoperability among banks, and promoting electronic retail payments.

Diokno said that in February last year, the BSP issued one of its most pivotal policies for financial inclusion-Circular 992, which outlines the framework for Basic Deposit Accounts (BDA). By easing financial and documentary requirements, the BDA aims to encourage account ownership among the country’s unbanked and low-income population, and provide them an entryway into the country’s financial ecosystem.

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