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How digital lending is fostering growth of SMEs

By People Reporter
Wednesday, September 9th, 2020
Digital world. Photo/Courtesy
In summary

Duncun Motanya

Small and medium enterprises (SMEs) play a significant role in Kenya’s economic growth. 

They are the contributors to employment and income that helps in poverty reduction and boosting national wealth and development.

World Bank data shows that SMEs represent approximately 90 per cent of trades and over 50 per cent of employment globally. 

In developing economies such as Kenya, formal SMEs account for more than 50 per cent of the national income. The number is considerably higher with inclusion of informal sectors. 

Despite its strategic role, the sector’s growth has faced a lack of access to trade capital and growth financing. 

Inaccessibility to credit has been identified as the second most obstacle SMEs face in evolving markets and developing countries.

Financial needs of small traders have not been met efficiently by traditional financial players due partly to manual, paper-intensive processes that do not match SMEs’ evolving needs.

Traditional financial institutions are accustomed to moving ‘big money’ over secure, thoroughly checked and verified credit backgrounds.

SMEs cannot enjoy the same privileges because their credit history is still on the mend. 

Traditional forms of lending account for approximately 80 per cent of financing for world trade.

Nevertheless, due to stringent collateral demands and credit history supervision, financial lenders decline 50 per cent of financing for SMEs.

  Consequently, this can be linked to woes affecting this critical sector. 

The 2016 National MSME Survey revealed more than 400,000 small businesses die annually.

The survey revealed that lack of access to the market, infrastructure and credit pushed up their operating costs.

But things have significantly changed over the last five years, with the emergence of digital lending slowly returning operators to profitability and sustainability.

SMEs are now able to access and manage daily cash flow needs because they experience cash flow every hour every day.

Provision of money on the fly to offer solutions and meeting such demands is the complementary advantage that digital lending has brought to SMEs.

Digital lending has replaced old templates with new era analytics, social media behaviour and other active factors that assist digital and peer-to-peer financiers scrutinise and initiate more loans within a short period.

The influence of Fintech on monetary services goes past retail and consumer facing requests and services to comprise of all fundamentals of financial services production procedure.

While banks rely on security and guarantee, physical assets and collateral, digital lending  relies on Artificial Intelligence-powered credit processes and social behaviour metrics, allowing lenders to offer unsecured loans with basic documentation. 

Consequently, MSMEs now make smart money choices and develop financial discipline which then improves their credit scores.

Cloud integration has enabled systems to synchronise information and data from credit bureaus, credit scorecards, risk services and assessments. 

Machine learning and AI is the new tech kid on the block applied to determine applicant’s credit scores and establish whether the loan application is at an acceptable risk The amalgamation of AI-powered machine learning and algorithms refined underwriting proficiency compared to human judgement. 

SMEs have warmed up to this lending revolution due to immense benefits that is keeping their business afloat especially during emergencies.

A study from majority of SMEs in the country  has attested to this point. Access to credit from platforms such as Tala, Zenka, Branch and others is just by a click of a phone.

A 2019 Geopol survey on behalf of DLAK (Digital Lenders Association of Kenya) showed that the top three most important features of mobile or web-based loans are ability to get a loan any time, getting loan approval without paperwork and quick access to money.

The report indicated an 83 per cent satisfaction on levels of services amongst clients of digital lenders.

Fifty per cent of respondents indicated they used loans for business, most citing purchase of goods. 

Half of the respondents were female business owners with an average age of 36 years.

Digital lending therefore, is a remarkable sector, not just due to its potential of investment, or the ability to disrupt traditional financial institutions but it is due to the capacity to revolutionise how business is done and altering people’s way of life in a positive way. — The writer is the chief executive officer of Zenka Finance