Alternative financing boost needed to mitigate MSME credit gap

Regulators and supervisors must develop new alternative financing platforms to improve and compliment access to finance for micro, small and medium enterprises (MSMEs), AFI Deputy Executive Director Norbert Mumba told participants at the Bhutan Economic Forum for Innovative Transformation (BEFIT).

Speaking at BEFIT’s 2nd biennial summit, held in Bhutan’s capital of Thimphu on 16-18 July, Mumba explained that this meant better leveraging of digital finance and alternative data that create new sources of financial information as well as regulations for data protection, privacy and crowdfunding.

“The FinTech revolution, together with the emergence of an alternative finance market, is changing the traditional ways of MSME finance and offers the potential for increased productivity and efficiencies in the way financial services are delivered” Mumba said.

Among the most popular alternative financing sources are peer-to-peer (p2P) lending, equity crowdfunding and initial coin offerings (ICO), with players in China, US and UK both dominating and transforming the market.

MSMEs are the bedrock of national economies, representing more than 95 percent of registered firms worldwide, accounting for more than 50 percent of jobs and contributing more than 35 percent of gross domestic product in many emerging markets. They also promote innovation and play a key role in integrating women and youth into the economic mainstream.

Despite this, many struggle to achieve their full market potential due to limited financing with the current credit gap for formal SME enterprises standing at USD 0.9 trillion to USD 1.1 trillion. Banks are often reluctant to lend to smaller-size SMEs, citing higher risks and limited collateral. As a result, increasing numbers to turn to non-bank financing sources and financial technology (FinTech) innovations in order to meet their funding needs.

While alternative finance offers huge potential, Mumba emphasized that their expansion must be balanced against the statutory objectives of regulators, such as protecting consumers, ensuring market integrity and promoting financial stability. Fraud, capital losses and money laundering, for example, pose the greatest risks among alternative finance activities.

“New and emerging risks resulting from use of technology may fall outside the conventional prudential responsibilities of financial regulators,” he said.

Despite the concerns, Mumba noted that most regulators reported positive impacts from alternative finance in both SME finance and consumer access to finance, as well as for competition in financial services and financial inclusion.

Mumba added that any new approaches and activities should also address the demands of traditional lenders, including by improving legal and judiciary infrastructure, establishing prudential regulations for SME lending, building effective credit infrastructure and targeted direct interventions.

He also highlighted venture capital firms, leasing and factoring institutes and microfinance institutions as other potential funding avenues for SMEs. This is in line with what is being introduced by BEFIT through the Royal Monetary Authority of Bhutan’s (RMA) “Jab-chor”, a platform that enables investment partnerships and support between entrepreneurs and angel investors. RMA, one of BEFIT’s main organisers, is an AFI member institution that joined the network in October 2010 with a focus on consumer protection and market conduct.

The major constraints facing SMEs and the different financing mechanisms that address their needs were discussed during a penal discussion that was moderated by AFI SME Finance Policy Manager Nik Kamarun Nik Kamil. Among the solutions discussed were practical credit guarantees, digitising SMEs, balancing risk sharing and promoting SMEs.

BEFIT 2019 was designed as a platform to enhance strategies and solutions, as well as learn from international and regional best practices in order to strengthen Bhutan’s SME sector as an important driver of the country’s plans for economic diversification.