Trade Digitisation.

A new hope for MSMEs? 

Appropriate access to funding can be the difference between success and failure for many micro, small, and medium-sized companies (MSMEs) around the world today. Working to identify and ultimately overcome the obstacles that MSMEs encounter in obtaining funding will assist to guarantee that they are sustainable. The International Finance Corporation (IFC) and the SME Finance Forum estimate the entire MSME finance gap to be close to US$ 5 trillion worldwide, hindering the ability of many MSMEs to grow.

Several important factors are frequently presented to explain why MSMEs, particularly those in developing countries, have difficulty obtaining funding. These factors include a higher risk profile combined with MSMEs' lack of adequate structured documentation required for financing. As well as increased complexities for MSMEs when financing cross-border activities. A further unawareness of financing opportunities among MSMEs, and relatively high service costs, due in part to a lack of digitalization. Many of the challenges that face MSMEs in their search for financing are broad in scope and cannot easily be addressed by any single solution.

However, an often overlooked solution that can help create major market-winning sustainable offerings for Trade Finance is digitisation. It's worth noting that many MSMEs are unaware of the potential that digital technologies can provide, as well as the solutions that alternative lenders can offer. The common misconception is that technology is simply not for them and is viewed as complex and costly. However, over the past several decades, digital technology – from the IoT to blockchain– has slowly begun to penetrate supply chains, trade and finance. Digital transformation can help reduce the costs of engaging in international trade, facilitated the co-ordination of global value chains (GVCs), assisting the transfer ideas and technologies that connect a greater number of businesses and consumers globally.

 In today’s fast-paced and interconnected world, financial institutions are facing new regulatory challenges, not just in managing issues arising from digital disruption, but also in ensuring that the opportunities and benefits from digital trade can be realised and shared inclusively. The most pressing issue in MSME finance is risk assessment, specifically how to accurately analyse the risk potential of businesses with limited credit histories. Firms can approach this dilema from a new perspective, thanks to technological tools and data-driven solutions. They make it feasible to tap into a larger pool of data in order to have a better understanding of a company's operations and creditworthiness.

Data can now allow bankers to perform risk evaluations in real time. Digitalisation increases the scale, scope and speed of trade. It allows firms to bring new products and services to a larger number of digitally-connected customers across the globe. It also enables firms, notably smaller ones, to use new and innovative digital tools to overcome barriers to growth, helping facilitate payments, enabling collaboration, avoiding investment in fixed assets. Financial institutions can also do more to understand the risks associated with each type of transaction and to examine them from a different point of view through the use of alternative data sets to develop more refined credit scoring and risk assessment models. Technology can offer a clear path forward, and considerable amounts of work are already being done.

Sources

• Trade Finance Global (2021) : ‘ACCELERATING TRADEDIGITALIZATION TO SUPPORT MSME FINANCING’.
• World Trade Organisation
• The International Finance Corporation (IFC)
• Asian Development Bank