Innovative Mechanisms for Financing MSMEs:

FinTech Solutions and Policy Actions in Asia

ADBI-Bank of Thailand Conference on Innovative Finance for Future Growth: Session 4

6 August 2018, Bangkok, Thailand

Shigehiro Shinozaki

Financial Sector Specialist (SME Finance)

Sustainable Development and Climate Change Department

Asian Development Bank

This presentation was prepared under the author’s responsibility. The views expressed here do not necessarily reflect the views or policies of ADB, its Board of Directors, or the

governments they represent. ADB does not guarantee the accuracy of the data included in this presentation and accepts no responsibility for any consequences of their use.

MSMEs in developing Asia, especially women-led MSMEs, have faced the highest financing gap in the world.

MSME Finance Gap in Developing Economies

Source: Recomposed from IFC, 2017. MSME Finance Gap.

Women-led MSME Finance Gap in Developing Economies

2

278 140 111 57 46 86

2,110

636

1,098

138 291 245

-

500

1,000

1,500

2,000

2,500

East Asia &

Pacific

Europe &

Central Asia

Latin

America &

Caribbean

Middle East

& North

Africa

South Asia Sub-Saharan

Africa

Micro SME($ bi l lion)

103 36 5 16 4 8

1,236

67 93 22 23 42 -

500

1,000

1,500

East Asia &

Pacific

Europe &

Central Asia

Latin

America &

Caribbean

Middle East

& North

Africa

South Asia Sub-Saharan

Africa

Micro SME($ bi l lion)

0%

20%

40%

60%

80%

100%

Collateral/

guarantee

Lending

policy of FI

Complicated

procedures

Exclusive

lending

attitude of FI

High lending

rate

Short loan

term

SMEs' lack of

knowledge

No demand

on SMEs

SMEs'

insufficient

management

PHI KAZ PNG SRI

PRC MAL KOR IND

Both supply-side and demand-side factors constrain access to finance.

Barriers to Accessing Financial Institutions

Notes: Percentage as the share of SMEs that answered yes plus somewhat yes from five scale scores (yes, somewhat yes, neutral, somewhat no, and no) about barriers to access finance. Valid samples: the Philippines (PHI): 63; Kazakhstan (KAZ): 98; Papua New Guinea (PNG): 19; Sri Lanka (SRI): 15; People’s Republic of China (PRC): 303; Malaysia (MAL): 60; Republic of Korea (KOR): 28; India (IND):40.Source: Author’s compilation.

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� Basel III may negatively affect banks’ lending attitude to SMEs.

� Basel III requires banks to have tighter risk management as well as greater capital and liquidity.

� Resulting asset preference and deleveraging of banks could limit the availability of funding for SMEs.

o Capital requirements

o Liquidity framework

o Leverage ratio framework

Strict banking regulation may be a contributing factor.

4

5

MSMEs as main beneficiaries of FinTech.New players & alternative finance products have been emerging.

Traditional offerings

Digital offerings

Invoice discounting

Capital markets

VC/angel investment

Purchase order

finance

Leasing

FactoringCredit guarantee

Bank/non-bank credit

Payment/ remittance

Internet banking

Digital savings

P2P lending

Mobile banking

e-commerce

finance (B2B) Online

trade/SCF platform

Equity crowdfunding

Digital Insurance

E-wallet

Online payment

Trade finance

MSMEs

Digital finance highly contributes to reducing financing gap in developing Asia.

Potential Impact of Digital Finance on Access to Finance in Asia

Source: Recomposed from ADB, 2017. Accelerating Financial Inclusion in Southeast Asia with Digital Finance. INO=Indonesia, PHI=Philippines, CAM=Cambodia, MYA=Myanmar. 6

0% 20% 40% 60% 80% 100%

MYA - credit

MYA - payments/transfers

CAM - savings

CAM - credit

CAM - payments/transfers

PHI - savings

PHI - credit

PHI - payments/transfers

INO - savings

INO - credit

INO - payments/transfers

Gap to be reduced by digital finance (% of gap) Unmet demand (% of demand)

Digital finance can create $2.1 trillion in new credit and $4.2 trillion in new deposits globally.

South Asia has the highest potential of benefits from DFS.

Source: Recomposed from Mckinsey Global Institute, 2016. Digital Finance for All. DFS=digital financial services.

Digital channels are more actively utilized than bank branches for daily transactions in Asia.

7

753

448 455

295

197

1,111

758

535

368 376

-

200

400

600

800

1,000

1,200

South Asia Africa &

Middle East

Latin America Southeast

Asia

Eastern

Europe &

Central Asia

New credit New deposits($ bi l lion)

Digi tal

9.3

Digital

2.8Branch

1.8Bra nch

1.7

Developed Asia Emerging Asia

(a verage transactions per customer per month)

Source: Recomposed from Mckinsey&Co., 2018. Asia’s digital banking race: Giving customers what they want.

0%

20%

40%

60%

80%

100%

Digital

banking

Internet

banking

Smartphone Digital

banking

Internet

banking

Smartphone

2011

2014

Emerging AsiaDeveloped Asia

Digital banking has an increasing trend but still low penetration in developing Asia.

Digital Banking Channels

Digital Banking Penetration

8Source: Recomposed from Mckinsey&Co., 2015. Digital Banking in Asia: What do customers really want?.

96%

96%

94%

93%

92%

83%

57%

44%

41%

36%

19%

18%

13%

0% 50% 100%

Korea, Rep. of

Australia

Singapore

Hong Kong, China

Taipei,China

Japan

China, People's Rep. of

Viet Nam

Malaysia

Indonesia

Thailand

India

Philippines

0

100

200

300

400

500

600

700

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

East Asia & Pacific (excluding high income) East Asia & Pacific South Asia

($ bi l lion)

Business Opportunities for MSMEs

� Labor productivity growth is slowing in developing Asia and estimated to continue.

� FDI inflows to Asia create opportunities for MSMEs to increase productivity.

Labor Productivity Growth

Source: Calculated based on ILOSTAT database. Output per worker (GDP constant 2010 US $). ILO modelled estimates.

FDI Net Inflows in Asia and the Pacific

Source: Recomposed from World Development Indicators, The World Bank. BoP, current US$ billion.

9

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Asia & Pacific Asia & Pacific: High income

Asia & Pacific: Low income Asia & Pacific: Lower-middle income

Asia & Pacific: Upper-middle income World

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Tech-based MSMEs

� The Fourth Industrial Revolution can create more tech-based MSMEs with more jobs, while the potential of reducing workforces from large/established firms.

� Tech-based MSMEs play a critical role of increasing national productivity, benefitting from FDI and active participation in global value chains.

� MSMEs’ innovation capability requires investment in R&D, human capital, and technology transfer & commercialization, suggesting the need for more market-based financing options.

2.0 3.9

19.1

80.2

71.3 71.3

30.6

53.0

71.9

5.9

20.0

38.4

72.8

53.1

69.7

24.3

12.59.8

0

20

40

60

80

100

Small (5-19) Medium (20-29) Large (100+)

New product/service New to the main market

Process innovation Spend on R&D

Investments financed internally Investments financed by banks

(%)

28.4

39.7 38.9

65.5

56.7

62.5

30.9

56.0 56.0

18.9

25.0

31.8

85.1

75.6

85.4

3.5

16.8

11.6

0

20

40

60

80

100

Small (5-19) Medium (20-29) Large (100+)

New product/service New to the main market

Process innovation Spend on R&D

Investments financed internally Investments financed by banks

(%)

5.09.7

16.7

75.7

69.9

82.3

11.48.7

25.8

1.14.2

9.9

68.9

54.4

67.5

11.6

17.7

11.4

0

20

40

60

80

100

Small (5-19) Medium (20-29) Large (100+)

New product/service New to the main market

Process innovation Spend on R&D

Investments financed internally Investments financed by banks

(%)

6.910.2

12.9

84.1 85.0

97.9

10.0

15.3 16.5

0.2 0.8

9.8

86.088.9

72.7

6.89.8

14.9

0

20

40

60

80

100

Small (5-19) Medium (20-29) Large (100+)

New product/service New to the main market

Process innovation Spend on R&D

Investments financed internally Investments financed by banks

(%)

Low investment in R&D makes MSMEs’ innovation capability remain weak.

Philippines

Source: Recomposed from World Bank Enterprise Surveys Data. PHI (2015), INO (2015), MAL (2015), and THA (2016). First four items: % of firms; last two items: proportion of investments (%).

Indonesia

Malaysia Thailand

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12

Approaches to reduce supply-demand gap in MSME finance

Secured lending legal

reform

Credit guarantees

Financial education

Credit data infrastructure

Credit bureau data

Credit risk database

Cloud/online data

Telecom data

e-commerce data

Credit rating/ credit scoring

services

Online collateral registry

Pledgeable assets (movable assets)

Enforcement

Asset based finance

Optimal credit guarantee

ratio

MSMEs

Credit guarantee facility

Regional CGIs

Portfolio credit guarantees

Client data

OnlinePlatform

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Alternative MSME Finance Models: Online Supply Chain Finance

Supplier(MSME)

Buyer

Financier

Smart contract

①upload invoice ②approve invoice

③request finance

④provide finance

⑥payment at maturity⑤provide finance

Accountingsoftware

• Verification• Alternative data stock

B. SME incubation segment

A. Crowdfunding segment

Alternative MSME Finance Models: Public-Private Sector Collaboration and Digital Solution

Promising SME pool

Selected/Prioritized

Businesses (seed/start-

up/early-stage firms)

I. Growth capital financing to SMEs via partner

financial institutions & the Exercise Market

II. Capacity building programs via partner institutions

III. Connect SMEs with good business models to the

Exercise Market

Agri-business

Tech-based SMEs

Woman-led SMEInvestors (mainly

individuals/supporters

for the business)

- Funded by the govt., bi-or

multilateral donor(s)

Invest

Financial

return

III

I

Social enterprises

Invest

Financial

return Invest

Financial

return Invest

Financial

return

Fund 1

Fund 2

Fund 3

Fund 4

SME recruiters

Banks

Venture capital

Regional

incubation

center/BDS

I II

II

SRO-operated OTC

III Crowdfunding platform

management company

I

Exercise Market

Exchange market

III

Public APEX Fund

(SME Incubation Fund) Invest

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� Policy actions are required to encourage the shift to digital in MSME finance.

� Diverse financing options well fit to the demand on MSMEs, with use of digital technology.

� Develop infrastructure for DFS: a national payment switch, digital identity, and open API.

� Develop methodologies to secure quality & reliable data for analysis, product design, and risk management.

� Regulation as an enabler for innovative finance products & services.

� Strengthen financial integrity to keep a financial system transparent, given the AML-CFT.

� Address consumer protection and facilitate competition further.

� Enhance digital finance literacy among MSMEs.

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Policy Implications in Asia

Thank you for your attention.

For further questions:

Shigehiro Shinozaki

Financial Sector Specialist (SME Finance)

Sustainable Development and Climate Change Department

Asian Development Bank

Email: sshinozaki@adb.org

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