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Analysts say fintech will close funding gap for SMEs

Samuel Mungadze
By Samuel Mungadze, Africa editor
Johannesburg, 23 Jul 2019

SA’s traditional banks remain stringent on lending policies, stifling growth prospects for small and medium enterprises (SME), according to analysts.

However, they predict that new fintech players will help close the lending gap in the country. As fintech lenders grow, small businesses will have more options to access funding.

Business coach and strategist Dr Muriel Chinoda, MD of Business Engine, says the SA economy is growing more and more towards the informal and small enterprise sector, whose players traditionally do not have a credit history.

“There are opportunities for fintechs in the areas of order or receivables financing, working capital financing and equipment financing. Point-of-sale transaction-based lending, where credit is extended using data or electronic transactions at point-of-sale and against future receivables, is one area that is now opening up using technology,” she says.

Technologies like machine learning, artificial intelligence, neural networks, big data analytics and evolutionary algorithms enable computers to crunch huge, diverse and deep datasets.

With the use of technology, credit underwriting can be done based on the value, volume and frequency of transactions – making redundant the need for income statements and credit history or credit scores, she adds.

“This will relieve SMEs of the onerous processes, heavy documentation and waiting times that they are subjected to by traditional lenders.”

Chinoda’s comments come as a new study says there is a staggering financing gap for small businesses across the country, while digital technologies are now starting to disrupt the traditional SME lending value chain in ways that could increase small businesses’ access to credit.

“Fintechs can also adopt a venture builder model of financing, where lending is only to specific sectors where a venture builder (the fintech) has specific interest and expertise, and uses its experience, economics of scope and scale to bring on board start-ups venturing into the same industry segments. Rather than starting from scratch, the SME has access to a proven business model, processes, technology and systems,” Chinoda explains.

Says Dominique Collett, head of AlphaCode, which incubates, accelerates and invests in early stage financial service ventures: “We’re interested in helping fintechs that are doing things that the banks aren’t doing well.

“SME lending is a massive gap and a global problem. As SMEs are the lifeblood of any economy, it’s important that these new financing players succeed and meet the needs of this market.”

Alternative financing

Michael Koenitzer, financial inclusion project lead at the World Economic Forum and Global Agenda Council manager, in a paper titled The Future of Fintech: A Paradigm Shift in Small Business Finance, says: “Financing for SMEs is lacking, although there is an ample amount of cash ready to be deployed. But in this case, fintech disruptors are increasingly filling the gap banks and investors leave.”

Referencing innovations in lending to small businesses, the WEF in the paper points to the arrival of new players in invoice and supply chain financing, equity crowdfunding and SME-to-SME loan packaging practices as a credible alternative to traditional bank lending.

“Small businesses account for more than half of the world’s GDP and two-thirds of all employment”, notes Peer Stein, director of finance and markets global practice at the World Bank Group. “If fintech can provide levers to help them succeed, we should create the right environment to make this happen.”

Johan Bosini, partner at Quona Capital, which invests in tech businesses providing financial services for under-served consumers and SMEs in emerging markets, comments: “South African banks have historically focused on consumers rather than small businesses as businesses are less homogenous and therefore more complicated to service.

“Our banks’ credit products are usually inflexible in their loan requirements and take a long time to process more complicated credit applications. Banks can at times provide better pricing than alternative lenders, but small businesses often need funding immediately as opportunities present themselves and they are willing to pay a premium for speed and flexibility.”

Quona last month helped another South African start-up, Lulalend, raise a R93 million ($6.5 million).

Lulalend was founded in 2014 by Trevor Gosling and Neil Welman.

The small fintech utilises proprietary credit scoring technology to enable it to provide quick decisions, fast funding, and transparent pricing to SMEs.

Bosini believes that South Africa is going to see a lot of activity in this sector. Startups, banks and insurance companies will focus more on this market owing to its strategic importance – this is the sector from where more job creation will come.

“There needs to be healthy competition and multiple players to grow the entire ecosystem. We will see more collaboration to support small businesses. So much more needs to be done,” he adds.

Alternative financing is available in SA from a number of players, including Fincheck, Lulalend, Fundrr, Merchant Capital, iKhoka, Zande Africa, Bright on Africa and ProfitShare Partners.