Transforming the SME lending experience (DigiBank MENAT Conference)

During DigiBank MENAT Conference Finverity had an opportunity to present and participate in a panel discussion moderated by Elliott Gotkine. The event focused on new ways for companies to effectively use digitisation in emerging markets to propel access to financing for sustainable international trade through supply chain finance (SCF).

DigiBank MENAT Conference – SCF – The Way to Sustainably Resume Economic Growth
DigiBank MENAT Conference – Transforming the SME Lending Experience (Panel)

Small and medium-sized enterprises (SMEs) are the bedrock on which many economies are built, creating half the world’s jobs and generating up to 40% of gross domestic product (GDP). The pandemic has however hurt this group disproportionately, making it even harder for SMEs to access the finance they need to drive sustainable global recovery.

Finding ways to solve this challenge was on top of the agenda during a panel discussion at the recent DigiBank MENAT Summit.

Panellists outlined the hurdles small and mid-sized companies face attracting finance, with Viacheslav Oganezov, co-founder and CEO of supply chain finance (SCF) technology platform Finverity, noting that SMEs receive barely more than 5% of bank lending in MENA and most developing countries. Alex Fenechiu, Finverity’s co-founder and COO, flagged in a separate panel presentation that the trade finance gap – estimated at $1.5 trillion pre-pandemic and over-doubled during the crisis – as a particular impediment for mid-sized firms’ contribution to the real economy.

Saad Ansari, co-founder and CEO of Xpence, a business banking platform for freelancers, entrepreneurs and start-ups, outlined the difficulties faced by the smallest SMEs, with some struggling even to open bank accounts.

Suraj Gopal, investment director at peer-to-peer lending platform Beehive, noted that despite SMEs employing four-fifths of the private-sector workforce in Gulf Cooperation Council (GCC) countries and contributing up to 60% of the region’s non-oil GDP, they pay far too much for what funding they can attract.

Here are some of the panellist's recommendations for overcoming these obstacles and improving the flow of affordable capital to SMEs.

Facilitate trade and supply chain finance

Supply chain finance is one of the most effective ways of lending to SMEs in a way that is scalable, sustainable and supports their growth, argued Oganezov. The vast majority of emerging market SMEs and mid-cap firms are traditional companies that buy and sell goods cross-border with multiple buyers and suppliers, but which struggle to secure bank finance to support their activities, he noted. The durability of those trading relationships means such firms’ receivables or payables can be excellent assets against which to lend, even in the absence of strong balance sheets.

By onboarding a mid-sized obligor and then funding a number of their suppliers through an SCF programme, lenders gain extra comfort by holding the risk of the larger entity that is responsible for paying their invoices, rather than that of the smaller suppliers, Oganezov added. Those suppliers also benefit from the programme as early payment of their invoices ensures they have working capital when they need it to operate and grow.

“In a world where the balance sheets of the SMEs are simply not strong enough and we don’t have enough credit data to be able to price that risk correctly, holding the risk of the slightly larger entity, the mid-cap buyer, and forwarding the payments to the SMEs early on unlocks that capital which is trapped in receivables,” added Fenechiu.

More providers in the region are looking to offer trade finance to SMEs, with Ansari revealing that Xpence is currently building out an invoice financing feature for micro-enterprises. “If I went to my bank and asked them to discount a 10,000 dirham invoice, they’d show me the door,” he noted.

Tap technology

As more central banks dictate that commercial lenders channel at least a certain percentage of their funding towards SMEs, lenders are increasingly open to partnering with fintech as a way of expanding their SME portfolios quickly and economically, said Gopal. “Some of the banks are accepting a fintech like us to be their SME sourcing arm, where we do all the background and customer-facing stuff while the funding comes purely from the banks,” he said.

Fintechs add similar value in the SCF sector. Investors in Europe and other developed markets are increasingly keen to find alternative, better-yielding homes for their capital, noted Oganezov. However, sourcing the right opportunities and the back-office processes associated with lending to smaller companies – such as conducting credit analysis, satisfying know your customer (KYC) and anti-money laundering (AML) rules and monitoring live transactions – are expensive and labour intensive.

Finverity, therefore, shoulders these processes using the reach and automation of its platform. “We want to make it as seamless and easy as possible for funders, providing value at every step… with the lender being the capital engine in the background and our technology being what allows it to work,” Fenechiu said.

Finverity also offers a white-label Software-as-a-Service (SaaS) solution that uses the same core technology as its platform but is customised for individual lenders to run their own books a lot more efficiently. “It takes as little as 12 to 30 weeks for us to get a system completely up and running for a bank or NBFI to be able to service their clients via a digital SCF platform,” he added.

Innovate with data

A lack of data around SMEs is one of their main barriers to tapping capital, as lenders struggle to accurately price the risk associated with lending to them. Finding innovative ways to source, share and analyse data about small firms is therefore vital, panellists agreed.

Young MSMEs that cannot provide the three years of audited accounts typically required for a bank loan face a particularly big challenge, noted Ansari. With only an MSME’s bank account or balance sheet to go by, “how does a bank know how good they are at collecting money or at paying suppliers?” he asked. “You’re just seeing a snapshot of the company right now, not a track record of it over time.”

As well as enabling MSMEs to better organise their books, Xpence helps them build a history around everything from expense management and invoicing to payroll. Its aim is to make this data available to lenders and investors, giving them a richer picture of each SME’s trading behaviour and financial strength, Ansari explained.

By funnelling capital to SMEs via their larger customers, who have much better data, SCF offers investors an immediate solution to the same data problem. Moreover, in the longer term it allows lenders to build a bigger and more granular data set around small suppliers that could persuade them to start funding such SMEs directly, Oganezov added. “You’re seeing how they’re being paid, what is happening from a trade perspective, and you can build on this further,” he said. For example, “you can incentivise them to provide data, through a simple integration with their accounting package, and we support most of them.”

Create networks

Surrounding SMEs with an ecosystem of financial services partners that share data with each other about individual firms’ behaviour and performance could help SMEs develop a quasi-risk rating that increases their financing opportunities, argued Gopal. Partners in the system could also refer SMEs to each other for additional financial products that might benefit them.

Some central banks – for example, in the UAE, Russia and Pakistan – are already helping by building data repositories about SMEs for local banks and financiers to tap, noted Oganezov. He also called on governments to provide more guarantees and risk-sharing instruments to encourage private-sector financial institutions to fund SMEs.

Governments could enable SMEs to unlock more financing opportunities and reduce their borrowing costs by championing the development of credit bureaus and mobile asset registries, Gopal added. Creating secondary markets comprised of venture capital and angel investors that SMEs could tap for funds is another way governments could assist.

Ultimately, SMEs also have a responsibility to make themselves more bankable, but to do this they need feedback and guidance from financial institutions, Gopal concluded.