New approaches to MSME lending: Challenging traditional credit assessment models in electronic cash-flow environments

Abstract

Micro, small, and medium-sized enterprises (MSMEs) play a critical role in economic growth and wage employment in both developed and developing economies, yet significant obstacles remain in unlocking the potential of these businesses-especially as regards access to credit. A confluence of three new market trends is reshaping longstanding efforts to overcome this dilemma: 1) increasing access to real-time, 'electronically verifiable' cash-flows; 2) the mining of cash-flow data to reveal insights into repayment likelihood beyond that discoverable in traditional credit analysis; and 3) the adoption of financial technology and certain principles of microfinance lending-most specifically uncollateralized lending and frequent incremental repayment-to meet the funding needs of MSMEs. This paper explores the interrelationship of these trends and contends that, together, they enable suitably empowered financial institutions to originate and manage short-term, unsecured loans to formal MSMEs on a profitable and scalable basis.