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Digital banking for small and medium-sized enterprises
Improving access to finance for the underserved
Small and Medium-sized Enterprises (SMEs) are an important segment in the economies of member states in the Association of Southeast Asian Nations (ASEAN). Across the five countries of Indonesia, Malaysia, Philippines, Singapore and Thailand, SMEs contribute between 30% and 60% of the countries’ gross domestic product (GDP) and employ between 60% and 90% of the workforce.
These SMEs are fairly resilient to economic shocks and business cycles. In terms of geographical dispersion, 13% to 22% of SMEs are concentrated in the capital cities, while the remaining SMEs are fragmented across the rest of the country.
Despite characteristic differences in the nature, size and composition of SMEs in the five countries, they share common financial needs such as better cash flow management, access to external financing and a more efficient payments system; as well as non-financial needs such as input costs mitigation, access to cheap quality labour, and a business-friendly climate.
Even though SMEs play a significant role in the economy, most have limited access to financing. Less than 60% of SMEs in the five countries have access to bank loans and approximately 50% of the SMEs are unserved or underserved by financial institutions.
With the exception of Thailand, SME loan volumes in the region are less than 60% of their contribution to GDP, and constitute less than 20% of total loans. This presents a sizeable opportunity for banks to target and increase lending to the SME market.
With the advent of the digital age, financial institutions in the ASEAN region have to rethink the role banks want to play in the SME banking space to address the financing gap and capitalise on the SME banking opportunity.
Financial institutions have options to organically build capabilities by leveraging digital solution providers or import capabilities by forming strategic partnerships with challenger banks, FinTechs and e-commerce providers.
Given the importance of SMEs to ASEAN’s national economies through their significant contribution to employment and GDP, a strong well financed “banked” SME base which is able to expand regionally and internationally will support broader national economic stability and growth.