Manish Joshi, VP Middle East and Africa, Lending at Finastra

By Manish Joshi, VP Middle East and Africa, Lending at Finastra
Fostering Sustainable Growth for MSMEs

In a business environment marked by fierce competition, emerging Environmental, Social & Governance (ESG) regulations, and uncertainty, banks cannot neglect supporting the growth of micro, small, and medium-sized enterprises (MSMEs). These enterprises still face a substantial funding gap and hurdles in navigating the complex ESG landscape. By providing access to essential financial services, affordable capital, and funding catered to strengthening their ESG credentials, banks play a pivotal role in helping MSMEs grow, innovate, and future-proof their business.

However, bridging the funding gap is a complex endeavour. Manual and paper-based lending processes, extensive bureaucracy, and stringent borrowing requirements often impede MSMEs’ access to crucial funding. Despite their essential role in powering global economies, MSMEs often encounter reluctance from lenders due to factors like perceived risks and limited credit records.

The rise of fintechs and open banking is bringing a transformative shift in corporate financing. Big data, artificial intelligence (AI), and fully digital neo or challenger banks are revolutionizing the landscape, offering innovative and accessible financing solutions to businesses of all sizes to promote sustainable growth. Traditional banks must prioritize partnerships to implement these technologies and better support their customers.

The power of big data and AI for enhanced decision making

To remain agile in our current environment, drive costs-to-serve down and pursue growth, traditional banks must first ensure that their middle and back-office processing systems are up-to-date and support the adoption of new technology-driven processes and improved data access. By decoupling their value-added products from their monolithic core systems, redeploying to the cloud and consuming ‘as a service’ in an open banking world, they can, securely, decrease their time to value when releasing new services to the market.

Banks can then integrate technologies such as big data, machine learning and AI into decision-making processes through partnerships. By adopting solutions from specialist fintechs, banks can, for example, assess a corporate’s creditworthiness with alternative data, including transaction history, online payments, social media presence, and more. This data-driven approach alongside machine learning enables them to evaluate risk more accurately and overcome challenges associated with traditional credit scoring methods that often exclude MSMEs. 

Furthermore, sophisticated machine learning and AI tools can assist digital lenders in analysing massive datasets quickly, yielding actionable insights for real-time decision-making. This leads to shortened approval times, and swift responses for urgent financing needs. AI and machine learning can also enhance understanding of customer behaviour, allowing banks to tailor solutions for each customer. Generative AI is increasingly being explored for several use cases, such as enabling corporates to engage directly with banking systems to source lending offers that are tailored to their needs.  

Futureproofing through ESG

Without a doubt, ESG principles are crucial for long-term risk management and growth. Yet, many MSMEs face challenges such as a lack of knowledge and limited resources to adapt. Navigating multiple ESG standards and reporting frameworks used globally adds another layer of complexity.

With the UAE hosting COP28 this year, financial institutions operating in the GCC are recognizing the vital role they play in financing climate-related projects. For example, by integrating ESG performance criteria into pricing based on agreed key performance indicators (KPIs), banks provide MSMEs with the support needed to strengthen their ESG credentials. Banks can also keep corporates on track by maintaining oversight on progress and suggesting timely corrective actions. 

A recent Finastra study shows the appetite for green lending in particular continues to soar, as 63% of MEA banks expect over 12% growth in green lending exposure in the next year to 18 months. Sustainability-linked loans (SLLs) incentivise MSMEs to reduce their environmental footprint by receiving favourable interest rates from banks, with tracked progress using sustainability performance targets (SPTs) based on KPIs. 

Banks can also create lending programmes to fund specific projects. These might involve the construction of sustainable housing, the supply of alternative energy sources and clean water sources, the financing of environmentally friendly steel production utilising green energy instead of coal-powered blast furnaces, ferrous metal instead of mining iron ore, and so on. 

To do this effectively, banks need to have the right technology in place. By leveraging cloud and SaaS based solutions alongside open APIs through partnerships, banks can easily integrate effective ESG financing within their offering. 

The future is bright

To remain competitive and effectively support all corporates, banks need the right technology to remain agile enough to evolve with new industry, regulatory, and customer demands. Access to capital is crucial for MSMEs to survive and flourish long-term whatever the future holds. Banks have a responsibility to facilitate this growth and help their customers navigate the complex ESG landscape. Ultimately, supporting MSMEs represents more than just a business opportunity; it is a crucial responsibility that safeguards economic progress and stability, along with the prosperity of society as a whole.

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