Small and medium-sized enterprises (SMEs) play a vital role as a driving force in economies in developing and emerging markets. SMEs in the Association of Southeast Asian Nations (ASEAN) region are estimated to comprise more than 98% of the total number of enterprises, and they contribute to around 40% of gross domestic product. In order to enhance productivity and ensure sustainable growth in Asia, providing smooth financing for SMEs is of critical importance
According to the Asian Development Bank Institute’s 2019 report titled “Fintech for Asian SMEs”, despite their essential role, SMEs receive a disproportionately small share of credit from the financial system. However, digital innovation is paving the way for SMEs to have access to better financial services. Crowdfunding, peer-to-peer (P2P) lending, and other new tools can support start-up finance.
Internet-enabled peer-to-peer (P2P) lending platforms provide an online marketplace that matches investors willing to lend with borrowers seeking loans, removing the need for banks to act as intermediaries P2P lending platforms attempt to solve the problems of lending to SMEs by utilising automated processes to reduce costs and credit risk models that use nontraditional data.
Borrowers may be individuals or businesses, depending on the platform. Likewise, lenders may be individuals or collectives. In light of the much-discussed failure of banks to provide adequate loans to SMEs, this development offers a significant opportunity.
The report highlights that the benefits to SMEs may go beyond mere access to this mode of alternative funding—competition from P2P platforms may also prompt banks to recapture market share by extending more loans to SMEs and improving the services offered to them
However, according to the report, the rapid development of fintech is increasing the need for financial education. SMEs need to improve their financial literacy to take the most advantage of the financial opportunities made possible by fintech. Also, SMEs themselves can use fintech as a tool for analysing their own businesses and improving performance.
Also, although the regulation of P2P lending has evolved significantly in recent years, with mostly beneficial effects on the industry, despite these regulatory efforts, some issues remain. There are problematic incentives for platforms that rate credit and originate loans without holding the risk of these loans. In addition, stringent regulation in some countries has tended excessively impeded new entrants from providing competition to established platforms. Regulators should be mindful of these risks and others, while also seeking to capitalize on the benefits that the sector offers for providing new funding opportunities to SMEs.