By Mauricio González Lara
Yashmita Bhana is no stranger to adversity. In 2007, she was unemployed and even struggled to put food on the table for her family. Almost 14 years later, Bhana is now a respected South African entrepreneur and mother of three children. When the pandemic started straining small businesses, she didn’t panic.
Bhana is the founder of the Nihka Technology Group, an information, communication and technology company based in Johannesburg. When she needed money to expand operations, she turned to Lulalend, an online lending platform providing fast, affordable financing to small and medium-sized enterprises (SMEs) in South Africa. The company extended her a loan in 21 hours.
“Lulalend fulfills a huge need during these troublesome times,” Bhana said.
Small businesses such as Nihka have always faced enormous challenges in emerging economies in securing timely financing, despite playing a major role in economic growth and job creation. SMEs represent about 90 percent of businesses and generate more than 50 percent of employment worldwide. In emerging economies, formal SMEs contribute up to 40 percent of GDP – a number that increases significantly when informal SMEs are included. In emerging markets, SMEs generate seven out of 10 formal jobs.
Yashmita Bhana, founder of South Africa’s Nihka Technology Group. Photo courtesy: Yashmita Bhana
Before COVID-19, less than 15 percent of SMEs in emerging economies had access to the resources they needed to grow and create wealth. The unmet financing need of SMEs in developing countries is estimated at $5.2 trillion every year. But during the pandemic, access to financing from traditional banks has dried up even more, which has contributed to slowing economic growth.
In response, SMEs have turned to financial technology, or “fintech,” as one way to meet their financing needs. The term originally referred to the back-end systems of established financial institutions, but now includes a myriad of sectors that seek to improve the delivery and use of online financial services. Online lending is a central part of fintech, which has roots in the 2008 financial crisis. That crisis reduced trust in the financial system and created an opening for technology-enabled financial institutions to grow, according to Andrés Fontao, co-founder and managing partner of Finnovista, an innovation and venture development firm with strong presence in Latin America.
Fintech’s potential has attracted investor attention: In 2019, investment in fintech companies amounted to $135.7 billion, with 2,693 deals around the globe. During the pandemic, many of these digital lending platforms moved quickly to respond to the surge of loan applications triggered by business shutdowns and layoffs. Because fintechs use cutting edge technology to assess the creditworthiness of borrowers through alternative data and electronic platforms to process requests, their services have been more accessible and faster to small and medium-sized enterprises.
Examples from three countries—Mexico, South Africa, and India—illustrate the growing role of these platforms in a time of economic crisis.
The Mexican revolution
In Mexico, the third most populous country in the Americas, just 37 percent of adults have bank accounts, but 71 percent have access to the Internet. While a commercial bank loan application in Mexico can take an average of two months, fintechs can approve loans in hours.
Agro-IPSA helps Mexican farmers in Chihuahua and other states affected by recurrent droughts. Photo courtesy: Agro-IPSA
After the COVID-19 outbreak, Agro-Ipsa, an SME in Chihuahua state, reached out to Konfío, a Mexican fintech company, for a loan to maintain business continuity and continue with expansion plans. The business specializes in hydraulic infrastructure and provides advice on irrigation systems that allow the region’s many chile farmers to use scarce water resources in a smarter way. Konfío, whose name is a play on the Spanish for “I trust,” approved Agro-Ipsa’s loan on the day it applied.
“Managing a SME is like riding a bike,” said Sergio Martínez, administrator of Agro-Ipsa. “If you stop pedaling, you fall. Our goal is to cover Chihuahua and maybe other states in the next months.”
Konfío CEO David Arana believes that the pandemic is eliminating apprehensions about digital lenders. “Unlike entities that still require the customer to go to a branch, we already offered financial services 100 percent online,” Arana said. “Although frustrating for many users, these face-to-face processes were perceived as [conveying] an element of trust between them and the company. Social distancing has created critical changes in consumer behavior.”
His prediction? Digital lenders will grow quickly: “There’s no turning back,” he said.
Inspiration from South Africa
In South Africa, GDP contracted by an annualized 51 percent in the second quarter of 2020. South African SMEs, which were already reeling from a contracting economy before the outbreak, represent more than 98 percent of businesses, employ between 50 and 60 percent of the country’s workforce, and are responsible for a quarter of job growth in the private sector, according to McKinsey.
Many SMEs needed fast access to working capital to survive the crisis, whether in the form of government-backed relief plans or loans from the private sector.
Fintechs have played an important role to help them, said Trevor Gosling, CEO of Lulalend. “Periods of economic uncertainty force lenders of all types to be more cautious. This is when the ability to accurately assess a small business’s ability to borrow is vital.”
Founded in 2014, Lulalend, or Easy Lend (Lula means ''easy” in Zulu), offers long-term funding and credit facilities. The company’s focus on automation and its data-centric approach allows it to underwrite and serve customers quickly. “Our proprietary, AI-driven, technology helps us to do this effectively through a scoring algorithm that allows us to approve more SMEs for funding,” said Tom Stuart, CMO of Lulalend.
Trevor Gosling, CEO of Lulalend. Photo courtesy: Lulalend
Since the onset of the pandemic, Lulalend has seen a significant increase in the number of businesses applying for bridge financing to cover short term cash flow gaps required for salaries and paying suppliers. As businesses are now starting to reopen and trade at higher levels, Lulalend is seeing more applications for growth-related reasons again, such as inventory or equipment purchasing.
Accelerating progress in India
India’s SME sector employs close to 124 million people and contributes 31 percent to India’s GDP. But 68 percent of Indian SMEs are not connected to the Internet, according to KPMG, leaving room for large growth opportunities.
The pandemic has further decreased the cashflow and working capital of SMEs. Mintifi, a non-banking financial company focused on supply chains, has partnered with over 50 leading companies in India and has integrated with their Enterprise Resource Planning systems to unlock massive amounts of underlying transactional data. This helps the company provide financing for the network of small distributors, dealers, and retailers all over the country.
Anup Agarwal, CEO and co-founder of Mintifi, said he expects COVID-19 to accelerate fintech in India. “Online lenders in India have attracted nearly $2 billion of equity capital from marquee global investors in less than five years, and yet we haven´t been able to solve more than 1 percent of the total unmet demand for financing of SMEs in India.”
The future, Agarwal believes, looks full of possibilities.
Fontao, the managing partner of innovation and venture development firm Finnovista, also sees a period of acquisitions of fintechs in the coming years as well.
“Looking forward five years, we are probably going to see consolidation in a crowded space, with larger, pan-regional fintechs acquiring smaller, country-specific lenders to gain market access,” he said.
And the result? He and others believe that SMEs will benefit from greater access to financing in the years ahead.
Published in November 2020