NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Purpose

Suggest ways to address two main challenges faced by MSMEs when applying for a bank loan: (i) information asymmetry between MSMEs and fund providers, and (ii) collateral shortage for MSME loans.

Background

In Asia, rejection rates for small firms applying for a working capital loan are much higher than for large firms. The difference is remarkable as small and medium-sized enterprises (SMEs) struggle to collect data required by financial institutions to assess risk. As a result, financial access for SMEs is below the socially optimal rate. This is exacerbated by the global de-risking trend as banks consolidate away from populations that they perceive as high-risk.

This project brings together practitioners and researchers to address the two main challenges—information asymmetry and collateral shortage—faced by MSMEs when applying for a bank loan. The discussions will range from innovative new methods for assessing SME risk to the increased reach of traditional forms of assessment such as credit scoring. Crowdfunding platform providers will present innovative, non-bank, non-collateral funding opportunities for MSMEs. The discussion will also cover the important role of regulatory frameworks and government supervision in connecting MSMEs to fund providers by (i) requiring both banks and MSMEs to declare information, (ii) balancing personal privacy protection and information database development, and (iii) creating a sound legal system for innovative funding platforms that promote entrepreneurship and protect investor interest.

Objectives

• Suggest ways to address challenges faced by MSMEs when applying for a bank loan
• Promote better understanding of credit databases and credit scoring for MSMEs
• Encourage growth of start-ups and MSMEs