SMEs and Financial Inclusion: An interview with Alexander R. Malaket, Finance for Impact Board Member
Finance for Impact
Alexander R. Malaket*
Finance for Impact
TS. The lack of access to financial services really leaves small firms in a vulnerable position, in particular in the developing World. What are the major barriers preventing these SMEs from gaining access to reliable, affordable and sustainable financial services?
ARM. Small business, including micro-enterprises live and die by cash flow and access to working capital, and face fundamental challenges in accessing timely and affordable financing on a global basis, and particularly in developing and emerging economies. Barriers to access include a range of issues, both on the demand side and the supply side. Financial literacy among small business owners is limited, the ability of small firms to articulate bankable proposals is a recurring and well-documented challenge. Traditional suppliers of financing solutions – banks and others – have tended to under-serve the MSME segments, partly due to risk optics and the absence of credit data, cost profile, the need for significant coaching and resourcing relative to other client segments.
In developing and emerging markets, infrastructure challenges exacerbate the problem, though there is increasing focus on financial and economic inclusiveness from a variety of directions that will, over the medium term, facilitate greater focus on SMEs based in developing markets.
Trade, specifically, is evolving from a bilateral “one-buyer, one-seller” view, to a more holistic, supply chain and ecosystem view, which brings into focus, the need to ensure the commercial and financial health of suppliers, the majority of which are based in developing markets.
TS. Do you see the regulatory environment as incompatible with the goals of significantly improving access to financial services for SMEs?
ARM. Political leaders and regulators recognize the importance of SMEs, including as drivers of economic value-creation and major contributors to job-creation. At the same time, advocates for SMEs frequently point to complex regulatory requirements, standards, quality and a range of issues that complicate cross-border activity.
I would tend to suggest that regulatory authorities are challenged by a very broad and complex remit, and that some of the regulatory requirements and expectations – including the absence of global alignment – create unintended adverse consequences that need to be managed and that require effective, consistent advocacy in support of SMEs and MSMEs.
This is less a matter of incompatibility, but rather, a matter of ensuring that regulatory authorities are aware of the direct and indirect impact of their work, and of the alternatives that can be pursued to ensure inclusiveness, including among SMEs and MSMEs.
TS. It seems like there is more innovation happening in financial inclusion now than ever. In your experience, how should innovation and technology be used to solve financial inclusion problems, in particular for SMEs?
ARM. There is both increasing innovation and increasing focus and attention on the issue of financial and economic inclusiveness, and technology is recognized as a key enabler of economic inclusiveness, particularly in developing economies where the ability to “leapfrog” legacy technologies has proven very effective in achieving material progress.
The use of technology to incrementally improve existing processes, practices and modes of interaction is fine, but in the context of economic inclusiveness, what is required is rather more transformational in nature. Mobile phones enabling access to financial service, drone-based delivery of medications to communities in remote parts of the world, 3-D printing and its disruptive impact on global supply chains, the widespread use of online platforms to enable cross-border trade – all are examples that will address financial and economic inclusion in some way.
TS. Can you share some recent examples of work done to enhance financial access that have positively impacted SMEs in concrete terms?
ARM. The International Trade Center in Geneva does excellent work in this area, as do other entities and organizations with a specific mandate around supporting SMEs – the SME Finance Forum of the World Bank is an example, as is the World SME Forum which was a direct outcome of Turkey’s Presidency of the G20 in 2015.
Initiatives by PayPal to provide working capital loans to SMEs on the basis of transaction volumes, or Alibaba to provide online trade finance for cross-border users of the platform are specific illustrations of evolutions in the ecommerce and online trade space.
In the traditional financial sector, growing uptake of Payables Finance programs enable small suppliers – many located in emerging markets – to access financing on the more favourable terms available to their large global buyers, with banks or others intermediating these programs.
The World Trade Symposium, likewise, is initiating a working group to contribute in concrete terms, to MSME access to trade financing, in the context of our broader mission which brings together trade, finance, technology and economic inclusion.
TS. What advice would you offer traditional financial institutions (e.g. commercial banks) to extend greater financial services access to SMEs?
ARM. Banks have faced a challenging post-crisis environment as a direct result of the actions of part of the industry itself, and continue to deal with the consequences of the global financial crisis, partly through necessarily stringent regulation, and partly through an erosion of trust. While banks are, in many parts of the world, primarily commercial enterprises driven by profitability and the need to create shareholder value, they are at the same time, an important part of the economic and social fabric of the economies which they serve and in which they thrive.
In the midst of complex, high-cost capital and compliance requirements that vary across jurisdictions, the resulting consolidation and de-risking across the industry, and the disruption caused by financial technology (“FinTech”) firms, banks need to consider some existential questions about their role as businesses and as corporate citizens. This must include moving beyond rhetoric to concrete solutions aimed at supporting SMEs and economic inclusion. Innovative partnerships and the judicious application of technology to redefine business models aimed at supporting SMEs must be part of such an evolution, and the wider deployment of specific services around, for example, supply chain finance techniques, can help make SMEs both reputationally and commercially attractive for banks and financial institutions.
TS. In your practice/area of work, where do you hope to make real changes over the coming years?
ARM. OPUS Advisory has been in business for the last seventeen years, and as a sole practitioner (with a global network of associates with whom we work) I have the privilege now of enjoying a bit of market visibility and some credibility in a few areas. This allows one to serve on numerous boards, committees and industry bodies, which, in their ensemble, facilitates contribution at levels that range from global policy (B20/G20 Task Forces, Asia Pacific Finance Forum) to industry advocacy (The ICC Banking Commission), training and professionalization (FITT and the ICC Academy) and to specific issue or sector-focused activity (the World SME Forum), and even to one or two “think tank” type organizations like the WEF/ICTSD “E15 Initiative”, among others.
Our contributions will flow in part through ongoing advisory and strategy work, in part through the various boards and committees, including the innovative World Trade Symposium, where we are looking at sustainable trade, SME access to trade finance, digitalization of trade in specific economic sectors and even something as esoteric as the deployment of a global “Legal Entity Identifier” which we believe has significant concrete potential.
OPUS Advisory has been invited to provide support and counsel to a couple of entities, including Singapore-based Tin Hill Capital and of course, Finance for Impact, which further enables contribution in areas of interest with transformational potential.
We have, some months ago, initiated discussions on a global framework and model aimed at financing the UN Sustainable Development Goals – a notion which thus far has been quite well received, and where OPUS Advisory may also find a channel for significant, even game-changing, contribution. More later!
*Alexander R. Malaket, CITP, CTFP is President of OPUS Advisory Services International Inc., a Canadian consultancy established in 2001 with a focus on international business, trade and trade-related financing, as well as international development and economic inclusion. Mr. Malaket has researched and authored thought leadership reports, program assessments and reviews, public and international policy reports and has participated in or chaired numerous international initiatives for industry bodies and other institutions.