Access to finance has traditionally been a challenge for small and medium enterprises (SMEs) across the globe. It is paradoxical, given the critical role played by the sector in economic growth and employment generation. According to an International Finance Corporation (IFC) report, SMEs represent about 90 per cent of businesses and generate more than 50pc of employment worldwide. It is mentioned in the same report that formal SMEs contribute up to 40pc of GDP in emerging economies while the number rises significantly when informal SMEs are included. IFC estimates the unmet financing need of SMEs in developing countries at $5.2 trillion every year.

The share of SME loans in the overall private sector financing continues to be range-bound around 6-9pc according to Dawn report published in May 2021. The State Bank of Pakistan (SBP) has taken several initiatives to enhance SME financing including improved regulatory framework, SME supportive subsidised refinance schemes, risk coverage schemes, and Islamic SME financing. Nonetheless, presently less than 5pc of SMEs operating in Pakistan are availing financing from banks and development financial institutions (DFIs), according to a country report on NBFI and Modaraba Sector launched in January 2021.

The pandemic has adversely affected SME revenues and profitability, creating acute liquidity shortages for many firms, according to Organisation for Economic Cooperation and Development’s SME and Entrepreneurship paper published in November 2020. Against this backdrop, fintech in most developing markets has emerged as a saviour of SMEs with an easy loan application process. According to IFC, the services of fintech have been more accessible and faster because they use cutting edge technology to assess the creditworthiness of borrowers through alternative data and electronic platforms to process requests. The fintech turnaround time could be as low as a few hours contrary to months at the counters of banks.

Less than 5pc of SMEs operating in Pakistan are availing financing from banks and development financial institutions

The fintech market for SMEs is still at a nascent stage in Pakistan, despite its huge potential. According to Tellimer Research, Pakistan’s fintech ecosystem is at a rudimentary stage with only about 45 fintechs in operation, compared to double this figure in Vietnam which has half its population. The research further reveals that the fintech landscape is payments-dominated: 40pc of fintechs in Pakistan are focused on payment while only 3 out of 45 fintechs operating in Pakistan are lending focused.

Pakistan can leverage its high mobile phone penetration rate (85pc) to reach out to SMEs via fintech channels as reported by Tellimer. Although internet penetration remains poor, it is improving rapidly (34pc of the population in 2020 vs 22pc in 2018) and the pandemic-related lockdowns are accelerating digital adoption in the country as stated by Tellimer. According to Nishika Bajaj, Financial Communications, Impact Investing and Fundraising specialist, fintech firms can help SMEs in the following ways:- Credit scoring: Alternative credit scoring (using data including social media networks or mobile phone contacts) to expand credit access to those who might not have a good (or any) credit score;

  • Equity crowdfunding: Small investors take a portion of the equity of the business in exchange for funding — similar to public issuance of stock, but without the high barriers to entry;

  • Rewards-based crowdfunding: Funding is provided in exchange for a reward, such as the first run of products or film credits, opening funding to businesses that may not be able to offer a financial return on investment;

  • Marketplace and peer-to-peer lending: Loans are either pooled or made directly using an online platform offering a new source of funding;

  • Digital versions of existing tools: Expanding the reach of traditional tools such as rotating savings and credit associations and microfinance through technology.

The growing role of fintech platforms for SME lending in the post-pandemic scenario has been mainly witnessed in three countries namely Mexico, South Africa, and India as reported by IFC. In Mexico, the third most populous country in the Americas, just 37pc of adults have bank accounts, but 71pc have access to the internet. While a commercial bank loan application in Mexico can take an average of two months, fintechs can approve loans in hours.

Mintifi, a non-banking financial company focused on supply chains in India, provides financing for the network of small distributors, dealers, and retailers across the country. Anup Agarwal, CEO and co-founder of Mintifi, said he expects Covid-19 to accelerate fintech in India in an IFC report. “Online lenders in India have attracted nearly $2 billion of equity capital from marquee global investors in less than five years, and yet we haven´t been able to solve more than 1pc of the total unmet demand for financing of SMEs in India.”

In terms of fintech adoption rate, South Africa ranks third in future growth, after China and India, according to SME Toolkit South Africa. Capetown based Lulalend providing short-term loans to small businesses via an online platform, has grown more than 200pc since its inception in 2014 according to Ventureburn. “Our proprietary, AI-driven, technology helps us to do this effectively through a scoring algorithm that allows us to approve more SMEs for funding,” said Tom Stuart, CMO of Lulalend.

Zande Africa has an innovative financial and distribution platform that provides trade and merchant finance to spaza (small retail) shops.

Partnerships between fintech start-ups and banks can accelerate the pace of digital lending to SMEs, critical for sustainable economic and social development. “Partnerships can deliver better, cheaper, faster and more innovative solutions for customers,” says Daniel Goldberg, co-founder of Bridgement, a digital lender offering invoice financing and revolving credit facilities to SMEs in South Africa. According to SME Toolkit South Africa, using the latest technology, banks and fintech can jointly develop real-time, multi-channel capabilities that are highly customised and economical. In turn, banks can offer fintech start-ups insight into the regulatory environment and access to an established client base with a past track record.

The writer is a visiting faculty at the Institute of Business Administration

Published in Dawn, The Business and Finance Weekly, August 16th, 2021

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