Columnist: Brandon Lundie
New players that are taking on unpopular financing segments should be incentivised
As with most developing countries, micro, small, and medium enterprises (MSMEs) are the backbone of economies in West Africa. They account for the majority of businesses, are important contributors to job creation, and have evolved to become key suppliers and service providers.
This limits their potential to grow and more effectively contribute to economic development, job creation, and tax contributions. In fact, the International Finance Corporation (IFC) estimates that 65 million firms, or 40% of formal micro, small, and medium enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of global MSME lending.
Attempts to move this curve outward through social impact funding and corporate social investment has improved market development but haven’t solved the core problem of legacy thinking that is holding back access for a whole new market.
IFC’s global SME Banking Survey in 2019, identified the three biggest challenges accounting for the SME lending gap as credit risk, external environmental risk, and technology adoption.
Through the use of advanced data science and artificial intelligence, JUMO’s information processing engine is able to accurately predict the risk profiles of SMEs in order to match them to affordable bank capital.
“This predictive capability is constantly improving through an increase in the quantity and variety of data available. It also shows SMEs to be a viable market segment for the allocation of bank capital,” he continues.
The SME funding gap requires a multifactor approach from the private sector as well as policymakers. Governments tend to subsidise cash providers but penalise digital financial service distribution and products, which is not tenable for a healthy financial system in the long run.
We need to invest in distribution infrastructure to reduce unit economics or cost to serve. Responsibility for development should be shared between government interventions and private sector initiatives. There is also a need to invest in citizen identity and address systems to improve KYC, as well as credit reference bureaus to improve confidence in lending to SMEs.
The artifacts built for notes and coinage financial services need to be revamped for a modern digital financial services architecture.
“There should also be a conscious effort to incentivise new players that are taking on unpopular financing segments and trying to bridge the SME funding gap. With the conscious and collaborative design, the SME funding gap can be reduced,” concludes Kavaarpuo.