- SMEs around the world have been hit hard by the COVID-19 pandemic.
- Traditional lending models have long been a barrier to accessing finance for SMEs in fast-growing economies.
- New fintech-based approaches can unlock finance and drive economic recovery once the pandemic has passed.
Around the world, small businesses have been hit extremely hard by the impact of the coronavirus. As our brave healthcare workers and policy-makers around the world deal with this pandemic, SMEs in fast-growing economies are particularly vulnerable as they contend with reduced demand, disrupted supply chains and worsening lack of finance.
The world needs SMEs to thrive - they account for more than half of most countries' GDP and are responsible for nearly seven in every 10 jobs. Now, more than ever, it is vital that SMEs are provided with the necessary financial backing to support their employees, their communities and to give hope to the millions of people who need them to survive.
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Even before the coronavirus outbreak, less than 15% of SMEs in fast-growing economies had access to the credit they needed to grow; constraining economies and hampering job and wealth creation. According to the International Finance Corporation (IFC), the unmet financing need of SMEs in these markets is a staggering $5.2 trillion every year. This financing gap will likely widen significantly following the COVID-19 pandemic.
Traditional lending is a mismatch for today’s SMEs
Traditional lending has not solved the problem of lack of access to credit for SMEs and does not fit with the reality of today’s SMEs. Small business owners in fast-growing economies rarely have collateral against which they can borrow, often lack the time to visit a branch, and cannot wait six to eight weeks for a “maybe”. In Nigeria, for example, fewer than 7% of SMEs have ever taken out a formal loan, and SME loan requests under $50,000 are rarely approved.
The traditional lending model is based on financial systems in which lenders have access to a host of positive and negative data on a credit report – and although the situation is improving, credit scoring is hard to find in fast-growing economies. Even if an SME can produce audited financial statements, tax returns and five-year projections, the chance of a loan at the end of an application that can take many weeks to process remains low.
A new way to get capital to SMEs
In recent years, a growing crop of fintech lenders for SMEs is offering a new model of lending that is faster, easier, more cost-effective and more transparent. For the first time, SMEs can share what data they have in exchange for access to credit to help them grow. By using advanced analytics platforms and artificial intelligence to assess transactional and alternative data (something as simple as a bank statement that shows an SME’s cash flow), fintech lenders are gaining a much deeper understanding of SMEs. They can establish businesses' creditworthiness, evaluate risk more easily, and issue loans in as little as 24 hours. Today, these new, innovative, data-and artificial intelligence-led solutions are better positioned to serve SMEs’ financing needs, lead them out of the imminent financial crisis, and unlock their potential.
In fast-growing economies, digital SME lenders, like our business Lidya, which is now providing loans in Europe and Africa, as well other start-ups, are paving the way for a new economy by lending in amounts as little as $150. In doing so, these lenders are enfranchising a new generation of entrepreneurs, giving SMEs the chance to grow, creating wealth and employment, supporting economic diversification, and democratising access to credit. Our services are an important credit line for SMEs, especially now, and we are seeing increased demand following lockdowns around the world.
However, this should be just the start. Partnerships which foster the exchange of data are extremely important for the future of digital SME lending: regulators, tech giants, SME service providers, insurers, credit agencies, banks, financial institutions or alternative lenders in other sectors all have a responsibility to collaborate in order to close the SME credit gap. Together, along with government stimulus packages, these partnerships can also help to combat the economic effects of coronavirus.
The longer-term economic impact of COVID-19 is yet to be seen. With loan volumes already increasing, the spread of the virus could prompt an accelerated digitisation of the financial industry. We are encouraged that new generations of entrepreneurs will find it increasingly easy to obtain the financing they need in fast-growing economies worldwide.