SMEs in emerging markets need more finance to grow their businesses and trade with new markets. Technology can provide the data that banks need to mitigate risk and support even the smallest companies.
Most people in the world are employed by small to medium enterprises (SMEs). In emerging markets, SMEs create 70% of jobs, according to the World Bank.
And the World Bank estimated – before Covid-19 related job losses – that another 600m jobs will be needed by 2030 to support a growing global workforce, mainly in the developing world.
That suggests that a lot more finance will have to be provided to SMEs in emerging markets – particularly if they are going to be able to command higher margins by exporting their goods.
As things stand, SMEs are not on the radar of trade finance banks because they’re too small and too little is known about them. But technology holds out the promise of changing that.
“Technology makes providing trade financing to SMEs significantly more feasible,” says Alexander Malaket, President of OPUS Advisory Services International.
How technology can help mitigate risk
“The more visibility you have, the more you can mitigate both physical and financial risk. But for an SME in Africa that needs a small, life-changing amount, there is currently nowhere to go. Even export credit agencies that are public-good-driven have thresholds.”
However, Malaket sees data analysis opening up more options.
Kountable, for example – a technology platform in Kenya – enables SMEs to do business with global suppliers.
SMEs get short-term funding when Kountable pays the global firms, which are offered “fully auditable” SME business. It also deals with issues like:
- currency risk, and
- logistics for the SMEs.
Platforms that support SMEs are also taking off in Asia.
There, DBS Bank is due to launch a platform in collaboration with Infor later this year. The platform will provide pre-shipment finance to SMEs using supply chain data to assess risk and creditworthiness. Infor is a cloud business software company.
There should be a lot of demand for its services.
“Developing Asia is one of the regions most affected by trade finance shortages,” says Dr Marc Auboin, Counselor, Trade and Finance, at the World Trade Organization.
“The re-allocation of trade and production has been faster than the ability of the local, developing financial sector to meet that demand for tradeable goods.”
How technology can help finance micro-firms
Businesses that are tied into global supply chains are likely to be able to generate enough data to make them auditable. But the way technology can give SMEs the heft of much bigger companies through a platform also applies to micro-firms, such as cocoa farmers.
“Data pooling is happening in emerging markets on a small scale,” says Tedd George, Chief Narrative Officer of Kleos Consulting.
“For example, you can agree to share all your phone data to get a credit profile. That is an opportunity for banks to step up lending to SMEs.”
How banks can get the data they need for trade finance
Can banks gather enough data to support the compliance needs of trade finance for the smallest suppliers?
Increasingly, yes. In particular, the lockdowns may be a tipping point in smartphone penetration in emerging markets. Akinwale Goodluck is the Head of Sub-Saharan Africa (SSA) at the GSMA, the global trade body for the mobile telecom sector.
He says, “We have seen a significant uptake in data demand and consumption across Sub-Saharan Africa with operators reporting in many instances over a 100% increase in data consumption.”
He adds that much of this will be down to working from home, e-commerce and e-learning.
“This no doubt would have led to an increase in the demand and connection of smart devices. While we don’t yet have actual smartphone adoption figures during Covid-19, our current forecast does show that 2020 is the tipping point for majority usage – smartphone adoption in SSA will reach 51% by the end of the year, from 45% at the end of 2019.”
Big data attracts big data companies with strong machine learning capabilities
Google recently set up a partnership with Ecobank Group to help SMEs make full use of e-banking. Google is a major software presence in Africa because most of the smartphones use Google’s Android operating system.
“Banks need to understand what you can do with big data,” says Tedd George.
“A woman selling mangoes, for example, could have years of sales data from mobile payments. That data could be used to support a sizeable loan. Agriculture in Africa desperately needs financing.”
He points to cocoa farming in the Côte d’Ivoire as having a “wealth” of data that’s not yet being used because it is disaggregated and unstructured. That is, it’s not stored in databases with pre-set fields.
However, a push for the tracking of sustainable production is changing that. “Sustainability and traceability go hand-in-hand,” says George.
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