BY SAKSHAM KHOSLA, SARAH SASSOON, ROHAN SRINIVAS, AND SOPHIE WANG
Saksham Khosla, Sarah Sassoon, Rohan Srinivas, and Sophie Wang are second-year International Development students who traveled to Indonesia and the Philippines this January to gain a better understanding of the ecosystem around digital financing for small and medium enterprises (SMEs). The team is working with the International Finance Corporation (IFC)’s SME Finance Forum.
The IDEV Practicum allows students to work directly with public, private and non-governmental organizations as a capstone to their graduate studies. The 2020 IDEV Practicum Blog is a seven-part series that chronicles the travels of IDEV students who take on client projects over winter break.
At the beginning of January, our team jetted off for our two-week stint in Jakarta and Manila. Unsure of what to expect—as none of us had ever traveled to either country—we packed our bags in anticipation of tropical humidity, spicy food, and what we hoped would be fruitful field research.
To describe our project at a high-level, we are working with the International Finance Corporation (IFC)’s Small and Medium Enterprise (SME) Finance Forum to create a country-agnostic assessment framework for regulators to use when regulating digital SME financing. In comparison with traditional banks, which have been heavily regulated worldwide for decades, financial technology (fintech) companies and other sources of digital financing are a largely nascent—and thus, largely unregulated—industry. But as the fintech industry continues to morph and change, regulators are having a hard time catching up.
Thus, as a prominent voice in international finance, the IFC has tasked our team with identifying core “pillars” of the swiftly-moving digital finance ecosystem that regulators should focus on when deciding on a suitable regulatory framework. In other words, the IFC wants to guide regulators on implementing policies that will create opportunities for growth and innovation in digital financial services without compromising on consumer protection.
With this high-level task in mind, we set out to gain an understanding of the SME digital financing ecosystem in two different economies, Indonesia and the Philippines. We wanted to answer the question of how SMEs, which play a large part in driving economic development within emerging markets, access alternative sources of financing? Furthermore, what are the biggest challenges and primary enablers for digital credit?
It is important to note that a lot of emerging market SMEs do not qualify for loans from traditional banks, largely due to a lack of formal, standardized financial performance reports that allow banks to assess their risk. Thus, they turn to fintechs, who are willing to offer loans to businesses by assessing credit risk using alternative data—such as social media behavior or e-commerce transactions—and technology, like machine learning and artificial intelligence. fintechs also have an edge over banks because they offer innovative products—such as P2P loans, working capital loans, and supply chain finance—that are tailored specifically to SME needs.
Who were our stakeholders, and what were our main learnings? We wanted to get as holistic a picture of the ecosystem as possible, and so we approached a healthy mix of central bank officials, investors, commercial banks, microfinance institutions (MFIs), development finance institutions, fintechs, and SMEs themselves. Through our conversations, we were able to identify the major barriers to SMEs receiving digital financing, and how country regulators can attempt to be industry enablers.
What we found was that stakeholders in both economies faced similar pain points, which ranged from poor access to financial data to a lack of consumer protection laws. In contrast to our initial assumption that increased regulation would be frowned upon by ever-innovating fintechs, the fintechs actually expressed a desire for increased regulation, largely to prevent fraud, reduce policy uncertainty, foster healthy competition, and protect SME customers.
Overall, nearly all of the ecosystem stakeholders seemed generally optimistic regarding the power of digital financing to contribute to national financial inclusion agendas by incorporating more and more SMEs into the formal financial sector. In terms of our deliverable, we plan to use our country-specific findings to color a set of best practices that can be applied to economies at different stages of digital advancement.
And finally, we managed to have some fun while on our trip too, with photographs below to prove it.
Visit to the Asian Development Bank global headquarters in Manila, Philippines.
Meeting with AFTECH, the Indonesian FinTech Association.
Site visit to a village called “Cisauk” where Indonesian microfinance institution MBK has small-business clients. This photo depicts a weekly collection of loan repayments (cash only) amongst women who receive “group loans” to finance their micro-businesses.
PHOTO CREDIT: Sarah Sassoon