New, innovative financial technology (fintech) can be the solution to improve lending to micro, small and medium-sized enterprises (MSMEs) in developing countries. Setting up a traditional banking network through bricks and mortar bank branches in developing countries is too expensive. It is therefore unlikely that such a network would get off the ground. Whereas better access to lending for MSMEs in developing countries can in fact lead to a growing economy with more jobs. ING’s Economics Department is investigating the role of fintech in the MSME sector and the opportunities that fintech offers for tackling poverty in developing countries. The results of this research will be presented during the A Billion to Gain conference at the NEMO science museum in Amsterdam, where the sector is meeting to discuss financial inclusion, on 11 and 12 October.
MSMEs as the job engine for the poorest
Globally, around two billion people are living in extreme poverty. These are people without a job and an income, the foundations they need to get a step ahead in life and business. For a long time, the sector had hoped and believed that self-employment and microfinance were the solutions to lift people out of poverty. In practice, this has not proved to be the case. Most of the poor are better off with a job instead of imposed entrepreneurship because of a lack of alternatives. These jobs are not there yet. Globally, around 1.1 billion jobs need to be created for the poorest, 300 million by large businesses and 800 million by SMEs. This calls for a 34% increase in the number of MSMEs in developing countries, from the current 400 million to 537 million. Half of the growth is needed in Asia, followed by Africa.
80% increase in lending to MSMEs needed
Limited access to credit is the biggest obstacle met by MSMEs in developing countries to grow and create jobs. Lending needs to grow by 80% to create the jobs required. The current financial infrastructure is based on physical branches and relationship managers. This only works well in cities and is too expensive for more thinly populated areas. To break through this, fintech is offering a promising solution.
Fintech is increasing customer knowledge in countries with limited information systems
Fintech focuses on offering the MSME sector convenient and fast banking services, anytime and anywhere. Fingerprints and iris scans allow lenders to establish the identity of the business owner more reliably. This is especially needed in countries where there are no identification registers and addresses and where millions of people could have the same surname. Psychological testing or analysing data on the business operator’s mobile phone allows lenders to establish an individual’s creditworthiness more quickly.
Fintech is changing the face of lending
Fintech is also changing the face of lending itself. Mobile banking and crowdfunding mean that loans no longer have to be arranged at a bank branch. And bitcoin allows international payments to be settled in just a couple of minutes, whereas it now often takes days.
If businesses owners can keep their accounts or manage their finances using simple apps, it is much easier for lenders to keep a finger on the pulse, for example, by sending texts or advising the business automatically (robo advice). These developments mean that SMEs have easier access to credit at a lower cost.
Fintech at ING Turkey
In 2013, ING Turkey set itself the goal of offering payment services and lending to MSMEs that had no access to financial services by using fintech solutions. In the past three years, ING Turkey has lent to 42,000 MSMEs with a total credit value of €1.5 billion. The experiences so far have been positive. Fintech is effective at attracting new customers. These customers are on average less well educated than the business operators who visit bank branches, so education does not appear to be an obstacle to using fintech solutions. Fintech also appears to be more readily accessible. And a loan approved via fintech seems to lower the threshold for less well-educated business owners to visit a bank branch.