New ways to assess credit worthiness of MSMES
Micro, Small and Medium Enterprises (MSMES) face several challenges when trying to expand, especially in accessing adequate funds to finance their operations and growth, but their credit worthiness can now be assessed by exploring alternative data, the World Bank has said.
Estimated at 37 million, Nigerian MSMES are said to have a finance gap of $158.13 billion, data compiled from the 2017 MSMES report by the World Bank and Finance Forum with the title: MSME FINANCE GAP- Assessment of the Shortfalls and Opportunities in Financing Micro, Small and Medium Enterprises in Emerging Markets, show.
The Washington-based financial institution says that MSMES play a huge role in facilitating economic development due to their flexibility and affinity to innovation, “even more so in emerging economies with a high contribution from the informal sector.”
“Access to credit for MSMES and individuals can be enhanced and expanded by promoting the use of alternative data in credit reporting,” World Bank said.
Out of the total 162 million formal micro, MSMES in developing countries, of which 141 million are micro-enterprises, and 21 million are SMES, Nigeria accounts for one of the countries with the highest number of MSMES.
“Three countries - Brazil, China and Nigeria; contribute 67 percent to the total number of MSMES, which is equivalent to 109 million enterprises. There are close to 12 million SMES in China alone, which represents 56 percent of all SMES in developing countries,” World Bank noted.
World Bank’s claim on the use of alternative data in assessing credit worthiness of MSMES can be affirmed by the 2016 report by Global Partnership for Financial Inclusion (GPFI) as it said in its G20 publication that it encourages service providers to use multiple sources of digital data for evaluating consumer and small and medium enterprise (SME) creditworthiness.
“This approach should include appropriate safeguards while facilitating development of such data and ensuring a fair, nondiscriminatory approach to its use. Examples of such alternative data sources include mobile phone use, utility payments, data enterprise registration information, and other information that can complement traditional loan repayment or insurance-related data,” G20 report explained.
Earlier this year, Renmoney, one of Nigeria’s leading Fintech companies, launched a new solution for self-employed individuals, business men and business women, the micro loans for MSMES
The new product allows the market segment to access credit of up to N4million either via Renmoney’s, contact centre, agent network or branches.
But for these businesses to access credit from the Fintech Company they are expected to present financial record of at least six months.
“We’ve always been aware of the need to solve credit challenges for another equally important segment- the self-employed, the businessman, the business woman,” Oluwatobi Boshoro, Renmoney’s CEO, said.
This means that the businesses which are constrained by barriers to financial inclusion may not be able to have access such credit loans.
The Central Bank of Nigeria (CBN) has a set target to ensure it includes 80 percent of the country’s adult population into the financial cycle by the year 2020.
With less than two years to the projected deadline, Africa’s most populous nation has about 36.6 million or 36.8 percent of its adult population excluded from the financial cycle.
According to the International Committee on Credit Reporting (ICCR), alternative data are ways to collect and analyse data on creditworthiness based on information readily available in digitised form but ‘alternative’ to conventional methods such as documented credit history.
It has been broadly categorised as structured data e.g. utilities, mobile phone, rental information and taxes and unstructured data e.g. social media and internet usage, emails, text and messaging files, audio files, digital pictures and images.
The World also cited some of the key policy areas and issues to look at when promoting alternative data.
According to the lender, improving the availability and accuracy of the information being collected due to the lack of clarity on what constitutes alternative data and how it should be treated is one aspect that should be considered when using alternative data.
“There are many issues countries face while ensuring the availability and accuracy of information collected. This is further exacerbated by the absence of digitized public information and digital footprint of MSME transactions, unavailability of data, or poor data quality. Regulators and policy makers can address this by issuing guidance on how alternative data may be sourced and processed,” World Bank explained.
On how to go about this, the world financial service provider said it could include implementing the use of unique identifiers like passports, identification alternatives such as social security numbers, tax identification numbers etc.
“Government agencies can also work towards digitizing their records and promoting the development and provision of access to Open Data Systems and Standards for MSMES.”
Other policies as noted by the World Bank include: expanding credit information sharing, enabling cross-border data exchanges, balancing integrity, innovation and competition, and data Privacy, Consumer Protection and Cybersecurity