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Pol Afb Iiatf
Pol Afb Iiatf
In the years since the 2007–8 financial Even so, other factors beyond the crisis
crisis, the issue of access to finance for of the developed world’s banking
small and medium-sized enterprises system have also contributed to the
(SMEs) has taken on a new prominence, initiatives that this paper will discuss,
having been formally recognised as an notably technological developments
issue of pressing importance at the G20 and increasing access to online services;
summit in Pittsburgh in September 2009.1 electronic data from a growing variety
of sources; and innovative financial
Of course, one of the key reasons for instruments and structures that together
the increased attention that this subject help to create new ways for savers and
now receives is the well-documented borrowers, investors and entrepreneurs,
problems of the banking system in to meet and do business.
many parts of the world following the
‘credit crunch’ of 2008–9. This This paper provides examples of a
dimension of the financial crisis – and range of important innovations in SME
the policy and regulatory measures finance and discusses some of the
subsequently put in place – has had a lessons we can draw from them.
notable effect on the ability and Although the definition of an SME
willingness of the conventional banking varies widely across different markets,
system to fund SMEs in some parts of the for the purposes of this report a small
world, and has therefore contributed to enterprise is considered to be a company
the emergence of innovative alternative with 50 or fewer workers and a medium-
forms of SME finance. In other regions, sized enterprise is any business with 51
a general lack of development in to 249 workers. In common with other
commercial banking and other sorts of definitions of SMEs, this excludes
financial infrastructure has been a more companies in extractive industries,
pressing issue. utilities and financial services.
Although by no means exhaustive, this expand its lending capacity. Writing in well-known such service is M-Pesa in
section offers an overview of some of Global Times in February this year, Lu East Africa, which now has more than 20
the most significant innovations and Zhengwai, chief economist at ICBC, said million users. Other similar services are
developments in access to finance for that from its establishment through to also spreading fast, including Ecocash
SMEs that have emerged in recent the first half of 2012, Alipay Financial and Textacash in Southern Africa. More
years, under four headings: had made loans worth some RMB13bn recently, services such as M-shwari have
($2.09bn). appeared, which add a loan facility to
• New lending and equity funding the basic mobile payments service.
initiatives In the US and Europe, where M-shwari is a joint venture between
e-commerce operations such as eBay mobile provider Safaricom and a
• Innovative financing structures and and Amazon dominate, similar but Kenyan bank, Commercial Bank of
instruments smaller networks of alternative finance Africa (CBA). The service enables users
have begun to appear. In September to borrow sums ranging from the
• New proxies for credit information 2012, Reuters reported that Amazon equivalent of about $1 up to about
had begun offering funding to some of $235, although the largest loan
• Legal and regulatory infrastructure. its largest sellers under a programme advanced to date is less than $100.
called Amazon Lending. Although
NEW LENDING AND EQUITY Amazon has released no official details The attraction of this service has
FUNDING INITIATIVES of the programme publicly, industry resulted in a very rapid uptake of bank
observers told Reuters that Amazon was accounts at CBA, with 2.15 million bank
The most obvious way to increase offering advances of up to $800,000 to accounts opened in the three months to
access to finance for SMEs is for more some merchants and charging interest September 2013, transforming it over
new organisations within or outside the rates that ranged from 1% to 13% a year. that period into the second largest
banking system to start lending to retail bank in Kenya.2 Over the same
them, and in many parts of the world Independent operators are also starting period, the overall number of bank
this has happened. to offer finance to Amazon and eBay accounts in Kenya grew 11.3% to a
sellers. The largest such company, record 21.5 million.3 Kenya Commercial
In June 2010 the giant Chinese Kabbage, which was founded in 2009 Bank, the country’s largest by asset
e-commerce platform Alibaba launched and is based in the US city of Atlanta, value, has introduced M-benki, a similar
a micro-credit company, Alipay obtains borrowers’ consent to access service to M-shwari.
Financial, based in the city of real-time data from their e-commerce
Hangzhou, to offer loans from its own seller’s accounts, PayPal accounts, UPS In the UK and US, particularly, new
cash resources to existing SME users of shipping accounts, as well as from a sources of equity and debt funding for
its e-commerce services. Initially it variety of SME accounting software SMEs are opening up via the
offered 30-day working capital packages such as QuickBooks, Stripe crowdfunding and peer-to-peer (p2p)
advances of up to RMB500,000 and Xero. Kabbage offers advances of movement. Equity crowdfunding
($82,000) to fund sales of goods via its between $500 and $50,000 at interest platforms wherein investors buy an
Taobao online marketplace. rates of between 2% and 7% for a actual stake in the recipient’s business
Subsequently, the business expanded 30-day period. For a six-month advance are only one of the crowdfunding
geographically and began offering a rates range from 10%–18%. In August options, coexisting with a number of
wider range of loan products. Larger 2013 the company announced it had pre-selling, donation-, or rewards-
loans could be secured by groups of made 80,000 advances in the US, four based platforms. The leading US equity
three SMEs standing as guarantors for times more than its nearest competitor. platform, Kickstarter, raised $480
each other. Reports suggest that the During 2013 it also launched in the UK. million in 2013, while UK-based
Alipay Financial loans business later Crowdcube and Seedrs raised £12.2
began originating loans among users of In many parts of Africa, meanwhile, high million and £1.4 million worth of
Taobao on behalf of China Construction take-up of mobile phones has enabled investment respectively. The platforms
Bank and the Industrial and Commercial the growth of mobile payment services
Bank (ICBC) of China, among other that allow users to send and receive
2. Business Daily, 27 October, 2013.
mainstream financial institutions, to small sums via their phones. The most
3. ibid.
4
have combined rapid growth with auction, or by racing to offer funding at receivables to raise working capital, and
geographical expansion as well as a fixed rate before the target amount is Fakturaborsen, a similar platform in
product innovation: Crowdcube, for reached and the loan request closes. Sweden.
example, has recently launched its own
venture fund, while Seedrs now also They facilitate lending in a semi-public It seems possible that direct lending via
funds non-UK companies. context in which key documents and these non-bank forms of mediation is
financial details that would normally poised to become a significant and
A common feature of such platforms is remain private are published to potential meaningful alternative source of
the ability to turn investor pitches into lenders to support the loan request. funding for SMEs in a growing number
fundraising campaigns through of countries in the years ahead.
multimedia content and social media They enable potential lenders to
integration. Platforms rely on this question borrowers during the auction International aid and community
‘campaign element’ and are built to process. Answers to these questions organisations
enable two-way investor are usually published for all potential Alongside these more novel examples,
communications and ‘crowd-based due lenders to see – hence the term ‘crowd- development organisations and
diligence’ (see explanation below). based due diligence’. community-based initiatives continue to
Finally, equity platforms are now play a vital role in promoting access to
typically eligible for the same tax They frequently operate secondary finance, often via micro-lending
incentives and public subsidies as markets in which existing lenders who institutions that accept borrowers
traditional early-stage investment. wish to take back their money can sell based on the viability of projects rather
their share of any loan to other than the availability of suitable
With p2p lending platforms, the key investors. These markets have so far collateral. In Zimbabwe, for example,
innovation has been the creation of a proved liquid, with loan parts changing micro-finance institutions backed by
Web-based marketplace in which hands rapidly and often at a premium. international funds, training and
individuals or institutions with capital to technical assistance are seen as a vital
invest are able to make contact with They tend to offer more flexible terms source of funding for marginalised
SMEs that want to borrow, and agree to than equivalent bank lending, for borrowers who struggle to access funds
advance funds to them on standardised example on security and early repayment. from traditional banks. In Kenya,
terms set out by the platform that meanwhile, there has been growing
facilitates the transaction. Their fee structures make it economical uptake of savings and credit
for small investors to build diversified cooperatives (SACCOs) whose
Although they all operate in slightly portfolios. members lend to each other in order to
different ways, lending platforms are access an alternative to expensive bank
less diverse than their equity So far this movement remains small, credit. Kenya has by far the largest
counterparts and have a number of having facilitated about £390 million of number of SACCO members in Africa,
central features in common that are loans and invoice discounting with 18% of adult Kenyans using them.
worth setting out. transactions to SMEs in the UK by A report by their regulator, the SACCO
mid-January 2014 via platforms such as Societies Regulatory Authority, says that
Platforms seek to assemble loans from Funding Circle, ThinCats, total lending increased at an annualised
groups of individual lenders, ranging MarketInvoice, Platform Black, Funding rate of 61% in the first eight months of
from 30-day working capital advances Knight, Assetz, Lendinvest and 2013 compared with the previous year.
up to five-year term loans and asset- Relendex, among others. The majority
finance deals. All loans are therefore of these loans were advanced during INNOVATIVE FINANCING
‘fractionalised’ between multiple 2013 and the leading platforms report STRUCTURES AND INSTRUMENTS
lenders. that their lending books are doubling in
size every six to eight months. In Probably the most debated
They frequently operate auction-based Continental Europe, SME crowdfunding development in this area is supply chain
systems that force lenders to compete platforms have also started operating, finance (SCF). This involves a
to provide funding, either by offering a such as Debitos, a German platform relationship between a finance provider
‘bidding down’ in a reverse or Dutch that allows companies to auction and a large company under which the
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the same business as the IFC’s cross- transactions, and towards Open companies based in emerging markets,
border SCF programme. Aztec Account trading. It is estimated that in part owing to the difficulty of carrying
Exchange is an online platform about 85% of world trade is now out adequate ‘Know Your Customer’
launched in May 2013 to enable SMEs in undertaken on Open Account terms. procedures, as required by their
the developing world and credit- Generally speaking, companies in domestic banking regulators. BPOs
constrained developed markets, developed markets are less willing to effectively enable local banks to
particularly in Europe, to sell invoices arrange LoCs and commercial banks in onboard these suppliers and so make
that they have issued to large overseas emerging markets are normally cross-border SCF transactions easier to
buyers and those buyers’ local reluctant to extend credit to local undertake for banks.
subsidiaries and that have been exporters in the absence of an LoC.
approved for payment. Aztec is based This has made cross-border trade more Other advantages of the BPO,
in Dublin, where it has about 30 staff, difficult to finance via traditional trade according to Swift, are that the two
and currently operates in 38 countries, finance instruments in some cases and banks involved in any transaction are
including 6 in Africa, 11 each in Asia and has led to a rapid increase in cross- exposed to each other, rather than to
Europe and 10 in the Americas. The border factoring volumes. each other’s customers, that the
buyers on its platform are mainly hedge companies involved in a transaction are
funds based in London, New York and In the second quarter of 2013, however, each able to work with a bank they
Singapore. Invoices sold via Aztec the Society for Worldwide Interbank know, and that putting in place the BPO
Exchange can be outstanding for Financial Telecommunication (Swift) and allows finance to be advanced to the
anything from 30 to 180 days, although the International Chamber of supplier much earlier in the life of a
in practice most fall into the 60–90 day Commerce issued new technological transaction, from the time the order is
range. Discount rates on the platform and legal standards for the BPO, which placed rather than when an invoice is
have tended to range from 0.9% to 2% they hope will underpin greater eventually approved for payment.
per 30-day period, with advances as adoption of SCF. Swift defines the BPO
high as 85% of the invoice value. as ‘an irrevocable undertaking given on Figures from Swift show that so far
the part of one bank to pay another seven, mainly Asian, banking groups
Advance Global Capital (AGC) differs bank provided that a number of have gone live since the BPO payment
from Aztec in that it is both an investor predetermined conditions have been method was launched in April 2013,
in trade receivables and the operator of satisfied through the electronic although some were already live under
an electronic platform on which these matching of data within the Swift Trade the previous BPO rules. According to
receivables can be offered for sale. Services Utility, a data matching and Andre Casterman, global head of
AGC began operating in Kosovo in workflow engine which enables banks Corporate and Supply Chain Markets at
September 2013 in partnership with two to establish a common view of supply Swift, the banks that operate BPO are
large supermarket groups and is chain transaction data and to monitor supporting 25 live corporate clients,
offering SCF to a pilot group of their events from inception to completion’. including SMEs in China. ‘We see
farm and food processing suppliers, approximately 70 new BPO transactions
with plans to expand the project This enables the banks serving both – usually one per purchase order – per
significantly as more suppliers are taken parties in a cross-border transaction to month in total,’ he says. ‘These are very
through the education and onboarding use a standard framework for early days and it takes time to
process in coming months. AGC is also confirming export transactions and materialise given the heavy work on the
operating in Macedonia and will shortly supplying finance. In effect, use of the legal side, for example corporates
launch in Peru in partnership with a BPO enables banks in the markets re-negotiating trade flows to move from
local factoring company. where suppliers (often SMEs) are based Letters of Credit and Open Account to
to ‘onboard’ those companies so that BPOs, and banks setting up new
The Bank Payment Obligation (BPO) they can be included in SCF services. But we expect those figures to
In international trade, there has been a programmes put in place by large double in 2014 as we witness global and
steady move away from Letters of corporates and their banks located regional banks implementing the BPO.’
Credit (LoCs) between issuing and elsewhere in the world. Previously,
confirming banks as the preferred developed-world banks had often
method of financing cross-border struggled to engage with supplier
8
3 The major trends driving innovation
10
4. Barriers to greater adoption of innovations in SME finance and
recommendations
Major barriers remain to the wider LIMITED FINANCIAL • uncertainty over the classification of
take-up by SMEs of the innovative INFRASTRUCTURE receivables under accounting rules
funding options that are becoming where payment terms are extended,
available in different parts of the world. Both innovative and traditional for example in multi-lender
These barriers can be briefly approaches to providing finance to platforms of SCF programmes; also,
summarised as: lack of financial SMEs depend on access to effective some large companies have
education among SMEs; limited financial infrastructure – from credit expressed concerns that these
financial infrastructure; and legal, databases to payment systems. The liabilities might need to be
regulatory and accounting experience of China after the PBoC’s reclassified as loans rather than
uncertainties. introduction of asset registries for trade payables, which would affect
receivables and leases shows very key financial ratios
LACK OF FINANCIAL EDUCATION clearly how vital these developments
AMONG SMES have been. Equally, the record of • uncertainty in some jurisdictions as
financial innovators in developing new to the status of factored receivables
Undoubtedly the greatest challenge sources of data to aid in assessing in bankruptcy, depending on
facing any financial innovator seeking to credit risk where traditional public whether the transaction is viewed by
target the SME market is the generally credit databases are not available regulators as borrowing or the sale
low level of financial awareness among demonstrates the key role that basic and repurchase of an asset
those running small businesses. This financial infrastructure plays in enabling
encompasses both a lack of awareness the flow of funds to SMEs. A keener • the need for clarification of the
of the range of options available and a focus by policymakers on ensuring regulatory risk weightings to be
lack of understanding of how those improved access to financial information applied to bank payment
options work in practice, even after the and encouraging the creation of basic obligations
business becomes aware of them. infrastructure such as asset registries,
Often today, it falls to development credit bureaux or credit risk databases, • doubts over the regulatory status of
banks and other public sector such as the International Chamber of new entrants, which can make it
institutions to provide the necessary Commerce (ICC) Trade Register, is vital difficult for them to operate.
technical assistance and financial in enabling credit to flow.
education. Although great efforts have These issues all require detailed efforts
been made in many countries to LEGAL, REGULATORY AND by policymakers, regulators and
improve financial literacy among the ACCOUNTING UNCERTAINTIES interested parties, including ACCA, to
business community, success to date ensure that work is done to clarify the
has been very limited. ACCA’s work in There are numerous instances where rules that govern key financial
this area suggests that policymakers ‘grey areas’ of law and regulation can intermediaries. To this end, an
need to reconsider their approach to create barriers to innovation in financial international effort to collate items that
financial literacy, focusing on a services and obstruct the flow of require clarification and agreement
‘business plan first’ strategy where funding to SMEs. would provide a valuable first step in
qualified finance professionals talk this necessary process, as also would
entrepreneurs through their plans for Examples include: efforts to identify and promote
the business and provide ‘just-in-time’ examples of legal and regulatory ‘best
training and mentoring for the specific • weak protection of minority practice’ in regulating financial services
types of finance that might be most shareholder rights in some for SMEs between different
effective and explain where to find jurisdictions, which discourages jurisdictions.
them. equity investment
ACCA 29 Lincoln's Inn Fields London WC2A 3EE United Kingdom / +44 (0)20 7059 5000 / www.accaglobal.com