Micro, small, and medium enterprises or MSMEs are the backbones of economies in the Asia Pacific. An ADB whitepaper, Asia Small and Medium Enterprise Monitor 2020, states that small to medium enterprises comprise a majority of enterprises and workforce in the region, as well as a big part of the respective national economies. “Based on national classifications, during 2010–2019, MSMEs in the region accounted for 97.2 percent of all enterprises, 69.4 percent of the national workforce, and 41.1 percent of a country’s gross domestic product (GDP).”
The same study, however, cites that the Asia Pacific region accounts for a big proportion of the financing gap: “According to the International Finance Corporation report (2017), the Asia and Pacific region accounted for 52 percent of the global MSME financing gap, or $2.7 trillion. Women-led MSMEs have great difficulty in accessing finance, estimated at $1.4 trillion in the region, or 83 percent of the global total.”
Technological innovations support strategies for improving financial inclusion, especially those that provide solutions that traditional finance could not. This will, for instance, involve mechanisms for information sharing that can serve as a means for establishing credit. Some decentralized solutions, meanwhile, utilize technology as a go-between for transactions, negating the need for centralized institutions, thus improving efficiency and reducing the cost of finance.
One innovation more grounded in the current financial services ecosystem addresses the needs of the region’s MSMEs through customized financing solutions. In this TechNode Global Q&A with Renchun Zeng, Singapore Office Chief Executive Officer of IFS Capital Limited, we learn how the collaborative nature of such solutions will facilitate the process wherein financiers can support the credit needs of MSMEs. Zeng told TechNode Global that such innovatios will come from both the FinTech and traditional financial sectors.
IFS Capital is a financial institution specializing in providing customized financing solutions in Southeast Asia. The Group was incorporated in Singapore in 1987 and has been listed on the Singapore Exchange since July 1993. The Group is part of the Phillip Capital network of companies, with a global presence that provides factoring, leasing, and lending services covering individuals, family offices, and corporate and institutional clients across Singapore, Thailand, Malaysia, and Indonesia. ECICS Limited, a wholly-owned subsidiary of IFS Capital, also provides bonds and general insurance services in Singapore.
Here is the full TechNode Global Q&A with Renchun Zeng, Singapore Office CEO of IFS Capital Limited.
What are the trends driving innovation in finance, particularly in the Southeast Asia region?
FinTech–innovative technology in Finance
We are seeing technology-enabled progress in all core elements of SME financing (origination, credit decisioning, client relationship management, collections, and funding). An example will be the more structured use of alternative data to overlay traditional credit decisioning.
The future of SME financing will be increasingly tech-driven, inclusive, and accessible. Innovative financial solutions by traditional financial institutions and fintech firms will emerge. A good example will be the partnership between IFS Capital Limited and Prime Revenue to avail Supply Chain Finance solutions in Southeast Asia, partnering Anchor buyers to address the financial needs and challenges of SMEs today.
E-commerce–digitalization of physical transactions, and progress on payment rails within the region, with more efficient/cost-effective cross-border payment options to be launched
Rapidly expanding economies in Southeast Asia, together with fast increasing mobile and internet penetration in the region creates an unprecedented opportunity for SMEs. COVID-19 measures, while unfortunate, are driving exponential growth in e-commerce, which was already growing rapidly.
Governments have also been supportive and launched various initiatives with the aim to create conducive environments for Fintech. (For example, from mid-2021, users of Singapore’s PayNow and Thailand’s PromptPay will be able to send money instantly and securely across the two countries, in the world’s first linkage between two countries’ national faster payment systems.)
What are the three key challenges for middle-market companies and MSMEs that can be addressed by such innovations in finance?
- Financial inclusion: Access to appropriate, affordable, and timely financial products and services to reduce barriers to growth and success;
- Financial literacy: Understanding of the funding gap for their business, the purpose of their financing requirements, and available options in the market which matches them;
- Information asymmetry between financiers and SMEs: A robust information infrastructure to help establish efficient matches between liquidity providers and users of capital.
The future of SME financing will be collaborative, with financial institutions partnering with fintech firms/e-commerce platforms to co-create solutions for SMEs. IFS Capital’s Supply Chain Financing solution supports large and middle-market corporations in Southeast Asia, who are keen to build resilience in their own supply chains, by availing financing options for their invoices to MSME suppliers, empowering them to gain access to competitively priced financing and shorten their cash conversion cycles.
How is IFS Capital making a difference in this sector. Can you identify your unique approaches to these challenges?
For more than 30 years, IFS Capital has been supporting SMEs in Southeast Asia through customized financing solutions. Over the years, we have established digital first businesses within the IFS Group to better serve the SME community. One example is Lendingpot, which is a digital platform to bridge the information asymmetry between MSMEs and Financiers. Today, the platform connects the financing requirements of MSMEs with more than 50 financiers in Singapore, with the objective to secure the best business loans for them.
On August 24, 2021, IFS Capital announced a strategic partnership with Prime Revenue to launch a set of differentiated supply chain financing solutions to address the high friction in trade finance faced by large and middle-market corporations and MSMEs in Southeast Asia. Around 80 percent of global trade relies on trade finance and the Asian Development Bank has estimated that the global trade finance gap pre-COVID was around $1.5 trillion. Surveys have shown that around 40-50 percent of trade finance applications by micro, small and medium enterprises are rejected by financial institutions.
This gap has since been further exacerbated by the pandemic. In line with our mission to make financing more accessible to MSMEs, we would like to work with large and middle-market corporations on customized Supply Chain Financing solutions to support MSMEs in Southeast Asia.
What is your view on emerging trends in FinTech, including decentralized finance and on-demand liquidity, among other technologies? Are these within IFS Capital’s strategy of providing access to finance in your markets?
Technology will continue to play a critical role in IFS Capital’s strategy as we grow the businesses in our markets. We will be investing in all core elements of MSME financing as highlighted above–origination, credit decisioning, client relationship management, collections, and funding. We are also studying the possibilities of adoption of the new technology frontiers such as decentralized finance within our businesses, and exploring how we can bridge digital and real-world assets with liquidity.
IFS Capital’s strategic partnership with PrimeRevenue is an example of how we are combining our deep trade finance expertise in Southeast Asia with PrimeRevenue’s industry-leading supply chain financing platform, to offer a set of differentiated supply chain financing solutions to address the high friction in trade finance faced by large and middle-market corporations and MSMEs in Southeast Asia.
What is your strategy in expanding your market in the region?
It is estimated that there are more than 70 million MSMEs in Southeast Asia (source: BCG), which contributes significantly to both the GDP and total employment of these economies. IFS Capital remains focused on our goal to ensure that all deserving small-and-medium enterprises have access to capital through simple and affordable solutions.
Through our strategic partnership with PrimeRevenue, we will be keen to work with like-minded progressive corporations in Singapore, Thailand, Malaysia, and Indonesia, who are seeking to build stability and resilience in their supply chains, to established customized supply chain finance programs on our platform solution. This will help their MSMEs suppliers gain access to capital, to unlock cash trapped in the supply chain.
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