Closing the Funding Gap for SMEs: Redefining Finance for Good in Asia

Closing the Funding Gap for SMEs: Redefining Finance for Good in Asia

by September 22, 2020

The wide-ranging impacts of the COVID-19 pandemic have brought many of the world’s problems into sharp focus and increased the urgency to create better outcomes for society as a whole. In Asia, a region with some of the world’s fastest growing populations and expanding economies, we see an important opportunity to reshape the future of finance.

How can the industry redefine finance for good?

The pandemic has sped up organisations’ digital transformation strategies. For the financial industry in particular, it’s an optimum time to come together around a common goal to improve the lives of millions of people. The move to the cloud is also increasing collaboration across the financial services landscape, to build new solutions and initiatives that help to deliver better outcomes for everyone.

Banking for all

The number of adults without a bank account in Asia is estimated to be 1 billion. The problem is particularly acute in Southeast Asia, where more than 7 out of 10 adults are either “underbanked” – meaning they have no access to credit cards or have no long-term savings product, for example – or are “unbanked,” without access to a basic bank account. It’s therefore unsurprising that the United Nations Capital Development Fund (UNCDF) sees financial inclusion as a key enabler of its Sustainable Development Goals for 2030, with some form of financial inclusion featuring in eight of its 17 goals. It believes that digital finance alone could benefit billions of people by creating the platform for more inclusive growth. There’s also growing evidence that empowering women to manage their finances and access savings leads to greater investment in their businesses, increased productivity and profits.

Digital banking will be critical in broadening banks’ reach to help the underbanked and unbanked. In addition, new solutions which are often provided by non-banks, such as e-wallets and faster international remittances, are being brought to market and have the potential to help millions of people.

Closing the funding gap for SMEs

Financial exclusion is also a problem for Asia’s SMEs, many of which struggle to gain access to traditional lending. This is disproportionately large here given that SMEs are the backbone of many of the region’s economies. In ASEAN, for instance, SMEs make up around 97-99% of the enterprise population and account for more than 60% of employment. Without ready access to funding, businesses cannot thrive and communities suffer. Last year, the global trade finance gap was estimated by the Asian Development Bank to be $1.5 trillion, mostly impacting small- and medium-sized enterprises in developing countries, where over 50% of requests for financial support to trade are rejected. Last year The World Economic Forum estimated this could reach $2.5 trillion by 2025.

Against such a backdrop, Finastra’s collaboration with Mastercard and the Asian Development Bank aims to provide an estimated 5,000 SMEs with access to funding.

In addition, a revolutionary microfinance initiative, Trust Machine, can play a role. The Trust Machine project, being piloted in Kenya, brings together partners in data, financial literacy, blockchain and scenario modelling as well as technology, reducing the costs of small loans for micro and small business owners. The program aims to reduce the country’s funding gap by 1% and potentially create 50,000 new jobs and sustainable economic growth.

Trust Machine initiative

Trust Machine Ecosystem

Financial literacy

To enable the underbanked population to truly reap the benefits of digitalisation, there must also be a greater focus on financial literacy efforts. This is to ensure that while technical solutions needed by vulnerable and underserved communities are delivered, members of these communities are also empowered with the knowledge they need to manage their finances. A good example of this is Rang De, India’s first social peer to peer lending platform, which has launched the Rang De Swabhimaan project to provide doorstep digital financial literacy and credit in rural India. The key, as we look ahead to what the ‘new normal’ will bring, is that fintechs, businesses and governments alike must continue to work together to drive greater financial literacy alongside innovation, so nobody is left behind.

Collaboration between fintechs and financial institutions will be vital if these goals are to be achieved. With that in mind, the pandemic has highlighted the importance of moving to cloud.

With countries experiencing lockdowns and bank staff having to work remotely, cloud has been a key enabler of collaboration – and fundamental to fintechs and tech firms around the world helping banks and institutions better support the communities they serve. With this technology at our disposal, now is the time for everyone in the finance industry to come together and contribute to a fairer, more inclusive financial system.