Digital Technology to Increase Credit Access for MSMEs

Micro, small and medium enterprises comprise the majority of businesses across the world and are important contributors to job creation and employment generation worldwide. MSMEs, however, are highly vulnerable to cash flow problems, and smaller firms are usually financially unprepared to cope with a sudden decline in sales or breakage of their supply chain. The COVID-19 pandemic massively disrupted the operations of MSMEs worldwide, resulting in hefty income losses and closure of many businesses. To effectively transition from crisis to recovery, it is crucial for MSMEs to unlock sources of capital and gain access to finance. 

While access to finance is critical for businesses to re-start, lenders would still require proof of creditworthiness—typically a credit score—of the borrower to determine loan conditions. Credit agencies traditionally use standardized approaches and conventional sources of information to generate an estimate of the borrowers' creditworthiness or probability of repayment default. However, during a pandemic when MSMEs have sudden low liquidity and are challenged with keeping up with financial obligations, rigid conventional credit scoring mechanisms would not work. Aside from painting a negative picture of current borrowers' creditworthiness, conventional credit scoring would even hinder other businesses from gaining access to financial support. As MSMEs scramble to adjust to the new normal, financial institutions are also challenged to respond accordingly and revisit the ways they grant loans.