Small and medium enterprises are the backbone of many global economies, and yet they receive fewer loans from banks than large businesses and face more issues opening lines of credit and financing their businesses. And, there’s only a small fraction of fintechs that target SME financing.
In emerging economies, SMEs create 7 out of 10 jobs, and represent about 90 percent of businesses and more than 50 percent of employment worldwide. Formal SMEs contribute up to 40 percent of national income (GDP) in emerging economies, according to the World Bank.
“It’s SMEs that drive business and economy – in this part of the world especially,” said Ankit Goel, the regional head of Modifi, a fintech that helps SMEs manage cross-border trade.
Yet, the World Bank estimates the funding gap for micro, small and medium enterprises (MSME) to be $5.2 trillion across some 65 million MSMEs scattered over the 128 countries the global institute examined.
“Access to finance is a key constraint to SME growth,” one World Bank report read. SMEs less likely to obtain bank loans than large firms and instead have to rely on internal funds. Around half of formal SMEs don’t have access to formal credit.
Modifi’s website says that banks reject more than 50 percent of SME trade finance requests. Banks often require collateral or other financial requirements that small firms struggle to meet.
“That’s when lots of these fintech companies and trade finance specialised companies come into play, where they really understand the business model of SMEs and try to [make products for] their requirements,” Goel said.
A slew of digital finance solutions have cropped up in the Middle East and North Africa, but many focus on improving SME business processes, not financing, one analysis from the Consultative Group to Assist the Poor (CGAP) found.
Only 20 percent of the 400 fintechs in the Arab world identified by CGAP target SMEs, and only 5 percent target SME finance.
SMEs struggle to open lines of credit, but they still need to pay suppliers fast, which can leave an SME strapped for cash after they deliver goods if they aren’t paid immediately.
“Sales and profit are important from the SME perspective, but if they cannot manage the cash flow, there’s no way they can grow their business,” Goel said. “If I were to run a SME company, I would rather have early cash rather than 1 percent more profit.”
Fintechs can play a large role in supporting SMEs, and there is a massive opportunity for fintechs who are helping close the financing gap. CGAP found that two-thirds of the fintechs in operation in the region focus only on the United Arab Emirates, Saudi Arabia and Egypt – all of which have tried to create friendly regulatory frameworks for fintechs.
