Digitization of Credit Information in Emerging Markets
As I have touched in my previous article, close to 70% of SMEs worldwide and more specifically in the emerging markets of Asia, Africa and South America lack funds to trade — both to purchase raw materials and to sell finished goods. A major reason for this lack of availability of funds is the lack of access to trustworthy information regarding customers (both individual as well as corporates) for the lending institutes namely the local banks.
We all know that credit history plays an important part in one’s ability to access financing from any lending source. This lack of information leads to improper understanding of the risks that are associated with repayments.
Many multi-laterals like Asian Development Bank, International Islamic Trade Finance Corporation etc have rolled out numerous programs and schemes over the years like Credit Guarantees, Risk Participation, Risk Distribution, Supply Chain Finance Program etc to help the growth of lending to SMEs but these actions have shown limited improvement in the overall scenario. In fact, from 2015 to 2017, the total trade finance funding gap globally increased from USD1.5T to USD 1.7T.
Limited credit information with respect to business payments can sometimes be offset through use of historical data of payments for other goods and services like payment of rentals, taxes, phone bills, school fees etc. But access to such data is also either not available or difficult to integrate because of lack of investments in updated processes, infrastructure, technologies etc.
Looking at the above developments and their limited effect, maybe it’s time to use a different approach. We should attack the root cause and not just the tip of the problem. And the core reason here is credit history which can be attributed to lack of digitization amongst the lending institutes in these geographies.
The proposal is for multilaterals to work with central banks and other regulators in various countries in a systematic way and get them to digitize the banks and other segments like tax calculation and collection. High upfront cost of implementation of banking solutions can be mitigated by the economics of scale, standardization and if required, by credit guarantees from the multilaterals.
Furthermore, there is a going realization from banking software product companies too on the affordability of the various costs attributed with the implementation of digital solutions and they are working (some have already developed) pay per use or per transaction payment models and proposals. This along with standardization and economies of scale would further reduce the costs and risks for implementation, servicing and upgrading, thus allowing for a faster implementation, proper maintenance and reaching the goal of providing ways to capture credit and thus, start to create lending history for banks to make better lending decisions, with better understanding of risk and at much lower costs.
We should not forget that increased transparency in a country’s banking system helps to better manage the fiscal and monetary policy which in turn helps to improve the credit rating and lowers borrowing costs for central banks. This systematic approach where we are fixing the core problem would go a long way into providing finance to those who require it, at the right cost thus leading to both micro (more job creation) and macro (better access to global trading partners and integration with global trade) benefits.
