Opportunities remain for fintech to turbocharge MSME growth

Mere disruptors no more, financial technologies have offered considerable evidence that affirm them as significant contributors to economies and its digital ecosystems.

Southeast Asia’s micro, small and medium enterprises (MSMEs), universally seen as critical to countries’ growth, are recovering or have recovered from the height of the pandemic due to fintech’s intrinsic advantages in providing needed relief.

In the Philippines, opportunities remain for fintech in fueling or even turbocharging MSMEs in order for it to catch up with its more developed neighbors.

The numbers offer a clear picture: while it accounts for about 99.6 percent of all Philippine establishments and responsible for about two-thirds of employed Filipinos, various sources indicate that funds obtained by most of these businesses in the country from formal financial institutions account for only between 12 percent to 21 percent of their total current funding while 44 percent of MSMEs are in need of immediate funding to cover operating costs, with 56 percent turning to credit to grow their business.

Despite the widespread acceleration of digitalization and the emergence of “COVID-preneurs,” 77 percent of MSMEs in the Philippines have been unable to secure sufficient, or any, funding on at least one or more occasions over the last five years.

Data from the International Finance Corporation revealed the potential demand for MSME finance in developing economies is estimated at $8.9 trillion, compared to the current credit supply of $3.7 trillion. The finance gap from formal MSMEs in these developing countries is valued at $5.2 trillion, which is equivalent to 19 percent of GDP. This in turn amounts to 1.4 times the current level of MSME lending in these countries.

In other words, the clarion call for these businesses to have better access to working capital remains. Thankfully, there’s been a united front across stakeholders – progressive regulators, agile fintechs and trade organizations –  in broadening the financing instruments available for MSMEs.

Speaking from a fintech’s point-of-view, the positive impact of digital technologies on solving the credit constraint of MSME enterprises has been noted at the scientific level, with AI-based credit fintech solutions able to provide an adequate response to the difficult challenges from MSMEs, taking into account their number, the degree of urgency of the problem, geographical fragmentation, the lack of clear formal scoring criteria and the individuality of each specific request.

Some of fintech’s unique solutions to the problem of MSME funding include:

• Supply chain finance (SCF), where the supplier receives payment for goods before they are received by the buyer using credit funds. Remember that the average agreed payment time after shipment is estimated to be 57 days, and more than half of the MSME sector in the Philippines is in trade and auto/motor repair (industries that depend more on uninterrupted supply than most others). It is no surprise that the potential demand for SCF has been projected to supply 15 percent of costs by next year.

• Short-/medium-term credit lines for the full-fledged strategic development of the MSME business (primarily from banks for clients with increased reliability).

Affordable personal loans that can quickly cover unplanned financial gaps of MSMEs, a direction covered by digital finance services that are able to work effectively in conditions of minimal formalization. From March 2022 to February 2023, our internal data tell us that around 17 percent to 20 percent turn to these services for business purposes.

• Comprehensive business service packages, including lending, insurance, leasing, cash collection, etc. (also predominantly a banking initiative).

• Specialized solutions aimed at certain audience groups, such as credit options to fishermen or specific geographies. In the latter case, projects similar to a savings/rural bank positioning themselves as more of a fintech company have a strong development potential. Located in provincial and rural areas, these banks are more accessible to, and more cognizant of, local MSME businesses. The combination of a high degree of customer trust and adequate business data, coupled with cutting-edge financial technology, has the potential to truly revolutionize MSME”s current understanding of efficient lending.

With progress in several directions and in close cooperation between the private and public sectors, there is reason for optimism for MSME funding in the Philippines to eventually be a thing of the past.

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Farit Shakirov is the country manager of consumer finance company Digido.