FinTech collaborations to overcome financial exclusion of MSMEs
Micro, small and medium enterprises (MSMEs) are a crucial pillar of Malaysia’s economy, making up 98.5% of the almost one million business establishments in the nation. However, despite a vibrant local SME ecosystem, poor access to capital and financing has hindered these businesses’ ability to flourish and reach greater heights. A survey conducted by Bank Negara Malaysia in 2018 revealed that financing barriers faced by MSMEs mainly concern the aspects of documentation, costs and business viability.
Simultaneously, the advent of Financial Technology (FinTech) is now transforming Malaysia’s financial services landscape. This includes the rise of digital services such as digital investment managers, e-wallets and digital financing platforms such as peer-to-peer (P2P) financing. As traditional financial institutions continue to under-serve MSMEs, P2P financing will become an increasingly important financing avenue for MSMEs to support their growth.
How P2P financing fits into the picture
As MSME activities intensify especially with the emergence of new types of businesses that are innovative – be it in new areas of the economy, or of high-growth in nature – traditional forms of financing may no longer be sufficient. One newer type of business in particular that is thriving well is the e-commerce space, bringing with it lower costs and lower barriers to starting up a business, further contributing to the vibrant local MSME activities.
Although there is high demand for MSME financing in Malaysia, the e-commerce sector notes that obtaining funds from financial institutions has always been challenging given the need to fulfil unnecessary requirements. Very often, MSMEs like most e-commerce merchants are unable to provide the required collateral and track record to the traditional financial institutions due to their nature of businesses being digital and thus might not possess a physical store. Besides that, some might not even require a warehouse to keep any stocks with drop-shipping platforms.
Alternatively, P2P financing makes an attractive option for these MSMEs with an established business but encumbered by the arduous requirements of traditional financial institutions. New approaches to risk assessment by leveraging on a plethora of alternative data and machine learning, P2P financing platforms widen financing opportunities for greenfield companies – in this context, our local MSMEs – further contributing to its targeted GDP growth rate of 41% by 2020.
Thanks to strategic collaborations between digital service providers and platforms, micro financing is now made easier and more possible. Commenting on this, Mr Wong Kah Meng, Co-founder and CEO of Funding Societies Malaysia, said, “Micro and small businesses play an integral role in Malaysia’s economic growth but are often left out in terms of access to financing. In addition, these businesses are increasingly going digital but traditional financing avenues have not kept pace to remain relevant. Through collaboration with digital platforms, such as e-commerce marketplaces or other digital service providers, these businesses are now able to obtain tailor-made financing products to address their cash flow needs. These collaborations will also help to significantly simplify and speed up the process for obtaining financing whilst ensuring that risk is well managed.”
Funding Societies Malaysia, the first and largest P2P financing platform in Malaysia with over 50% market share, has recently announced its collaboration with Fave via its Fave for Growth Malaysia, which aims to help offline retailers in Malaysia to embrace digital services including payments, marketing and financing. It is also partnering with AVANA, the leading e-commerce enabler in the space of social commerce in Malaysia, to offer financing to AVANA’s customers.
Mr Wong Kah Meng added, “Digital platforms, in particular, have started to capitalise on the opportunities brought about by the rise of digital commerce. To this end, we have formed strategic alliances with e-commerce platforms such as Fave and AVANA to provide more financing opportunities to online businesses, which majority of them being micro and small businesses. Our financing product, FS Bolt, aimed at these businesses (MSMEs), designed to be simple and easy for all users from the digitally savvy to the tech averse – where applicants can obtain financing sums of up to RM50,000 in as quick as 24 hours with only two minutes of application process, without the need for collateral. This product uses transactional data instead of financial reports and collateral requirements for credit approval, therefore enabling MSMEs to obtain financing via a seamless procedure with minimal documentation requirements.”
Malaysia’s e-commerce landscape has been booming in recent years, with the highest forecasted growth in the region of 20% between 2018 and 2022, a trajectory that will see e-commerce sales in the country rise to a projected USD12.9 billion in 2022, according to Fitch Solutions’ latest E-Commerce Index report.
As part of their efforts to close the significant SME financing gap, Funding Societies has disbursed close to RM2 billion in Southeast Asia across more than 500,000 SME notes, whilst maintaining an impressive 1% default rate as of June 2019.