How Developing Nations Take The SME Finance Lead

5 January, 2016

Traditionally, developed nations have brought their experiences and expertise to developing countries; today, however, with fintech players helping underbanked SMEs in developing nations manage their cash flow or apply for financing on a mobile device, these markets are spearheading the future of SME finance.

Source: PYMNTS

For much of the world, the G20 members are seen as leaders that can usher the rest of the planet into new eras of government and economic matters. The G20 is taking such a role in the process of small business finance reform, encouraging G20 countries to guide developing nations in their development of regulations and policies that make it easier for small businesses to access financing.

Part of that initiative is the SME Action Plan on Financial Infrastructure, developed by the G20 SME Finance Forum and the World Bank Group, and ratified by the G20 last month.

The proposals offer international best practices for governments and regulators to support SME financing through legislative overhauls. But while the G20’s proposals were presented as a way to aid developing nations in their SME lending efforts, one World Bank Group official says that it’s the developed nations that will be able to learn a thing or two about the new era of SME financing from developing countries.

The Proposed Reforms

Last month, the G20 ratified the SME Action Plan in an effort to encourage non-G20 countries to guide the development of their financial markets in a way to support small business lending.

The proposals focus on three goals to do so: improving SME credit reporting systems, allowing SMEs to borrow against movable collateral, and reforming insolvency laws.

Specifically, the proposals encourage nations to reform their markets to allow small businesses to borrow against assets like accounts receivable and inventory, as well as fixed assets like land. They also support the exploration of new methods of credit assessment, including the use of data aggregation and analytics innovations to mitigate risk of a potential borrower.

“The G20 should encourage G20 countries and non G20 countries to fully develop credit infrastructure for SMEs, improve SME financial capability through targeted learning and support interventions and enable competition through an enabling regulatory environment,” the G20 said in a statement announcing the Action Plan on SME Financing.

The group noted that nations without a “sound financial infrastructure” are particularly vulnerable to making it more challenging for their small businesses to gain financing.

In an article for The Huffington Post last week, the Senior Director of the World Bank Group’s Finance & Markets Global Practice Gloria Grandolini championed these reforms as ones that will be particularly supportive of smaller businesses and startups struggling to access financing because of a lack of credit history or fixed assets – especially new entrepreneurs or agricultural SMEs. And while Grandolini acknowledged that technology is key to making these reforms possible, the innovators of that technology are also creating an economic environment in which the developed nations can learn from the developing ones.

A Modern Approach

Grandolini pointed specifically to advancements in data aggregation and analytics, and the use of these technologies by telecommunications firms, alternative lenders and new payments players, companies that are putting these innovations to work within developing nations.

Traditionally, Grandolini wrote, developed nations have brought their experiences and expertise to developing countries; today, however, with fintech players helping underbanked SMEs in developing nations manage their cash flow or apply for financing on a mobile device, these markets are spearheading the future of SME finance.

“In other words,” Grandolini wrote, “fintech has enabled developing countries to leapfrog and create unprecedented financing products and approaches to finance.”

With the G20 and World Bank Group already moving to implement these reforms (recently, as noted by Grandolini, the World Bank Group launched its Global Credit Reporting Program to help nations establish a more robust credit assessment and reporting process), the leaders of the developed world will be guiding developing nations’ legislative reforms in the name of easing small business access to financing.

After all, doing so is crucial to the global economy. But as Grandolini suggested, the embrace of fintech innovation has led developing nations to become early adaptors of modern financing, money management and risk mitigation efforts, placing them in a position of leadership among the world’s markets.

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