Micro, Small, and Medium Enterprises (MSMEs) are widely recognized as engines for growth and inclusion, particularly in EMDEs (namely Bangladesh, Republic of China, India, Kazakhstan, Mongolia, Pakistan and Vietnam). They play a crucial role in fostering economic development by creating jobs, stimulating innovation, and driving competition. In most EMDEs, MSMEs constitute a significant portion of the economy, providing employment opportunities for a large segment of the population, including women and youth. This not only helps reduce poverty but also promotes social inclusion. However, in East Asia-Pacific and South Asia, about 45% and 38% of MSMEs, respectively, faced credit constraints, according to the International Finance Corporation (IFC) in the MSME finance forum.
For several reasons, MSMEs are less likely than larger firms to obtain credit from traditional finance sources, such as high-street banks. They typically lack collateral and adequate financial performance data, have shorter or no credit histories, and face higher interest rates compared to larger enterprises. These challenges arise because MSMEs are perceived as higher risk due to their smaller size and limited financial transparency. Consequently, this barrier in access to finance hinders economic growth.
These challenges are particularly acute in EMDEs. According to the International Finance Corporation (2017), it is estimated that about 40% of formal MSMEs cannot meet their financial needs in EMDEs, with the financing shortfall amounting to over USD 5 trillion per year. Factors contributing to this include underdeveloped financial systems, a lack of credit information infrastructure, and regulatory environments that may not support MSME lending. Furthermore, the IMF (2023) reports that the macroeconomic effects of COVID-19 have exacerbated these challenges, leading to a reduction in commercial banks’ outstanding loans to MSMEs as a share of GDP in many economies by 2022.
Amid these challenges, financial technologies and business models have rapidly evolved. Fintech companies have become crucial providers of innovative solutions tailored to offer credit and other financial services to underserved customers. With improved credit scoring techniques and channel partnerships, fintech companies are effectively addressing some of the credit constraints faced by MSMEs, especially those operating in EMDE countries. A global study on fintech companies shows that nearly 56% reported providing specialised fintech products and services to MSMEs in EMDEs, compared to 39% in Advanced Economies (AEs). Specifically, digital lending and capital-raising fintech companies are focusing on closing the financing gap for MSMEs and are becoming a popular choice.
To this end, the Cambridge Centre for Alternative Finance (CCAF) at Cambridge Judge Business School, University of Cambridge and the Asian Development Bank Institute (ADBI) jointly conducted this study to assess how MSMEs use online digital finance (alternative finance or fintech) platforms to access credit or raise funds in the selected EMDE countries across Asia. The study explores how digital finance products and services are being used, how they complement consumers’ existing banking activities, and how they can evolve to serve consumers’ changing needs. It focuses on key opportunities and challenges faced by MSMEs, their financing needs, and concerns regarding the use of digital finance services. Finally, the report aims to provide valuable data and insights to aid regulators, policymakers, and stakeholders in supporting MSME development and economic growth.
The research is based on the survey responses from 819 MSME users of digital finance platforms operating across 7 countries:
- Bangladesh
- China
- India
- Kazakhstan
- Mongolia
- Pakistan
- Vietnam
Source: Cambridge Centre for Alternative Finance