Digital innovation and in particular blockchain technology can increase small business access to finance, according to a new study by Asian Development Bank.
In a report, titled Fintech for Asian SMEs, ADB explores how technologies such as distributed ledger technology (DLT), cloud computing and artificial intelligence (AI) can enable faster and more convenient and cost-efficient financial services for Asia’s small and medium-sized enterprises (SMEs).
DLT to improve startup funding
According to the research, while startups play a crucial role in local Asian economies, these still face significant challenges to their development and growth, including the difficulty of accessing finance and investment.
By integrating DLT into hometown investment trust (HIT) funds, a type of community-based trust fund that’s project driven, these funds can be made more transparent with reduced risks, thus resulting in greater investment into startup projects, the report says.
Integrating DLT with HIT funds can facilitate direct and fully transparent investments between partners who would not previously have collaborated, bringing together retail investors from different countries to invest in specific startup companies.
In parallel, these investment opportunities can benefit retail investors who could get greater returns than saving money in the form of bank deposits or buying government bonds with very low interest rates.
One company that’s using blockchain to enable startups to gain greater access to capital is Estonia’s Funderbeam, a company that offers a primary and secondary marketplace for early-stage investments, secured by the blockchain.
Kaidi Ruusalepp, a former CEO of Nasdaq Tallinn Stock Exchange, built Funderbeam to support startups in countries like Croatia, Estonia and Denmark where funding beyond seed level has historically been scarce.
But beyond startup funding, blockchain technology can also help Asia’s SMEs gain greater access to credit from traditional financial institutions.
Although several Asian countries including China and Thailand have implemented legal frameworks to make it simpler for borrowers and lenders to include movable assets as collateral, technology and in particular blockchain could make the use of such assets more practical, improving credit access and affordability, the report says.
Blockchain for trade finance
Another area in which blockchain can have a huge impact on is trade finance.
The complex sequence of steps related to international trade implies that a range of documents must be tracked across multiple ledgers, with several third parties required to verify and coordinate with banks. Not only does that add time and cost to transactions, it also increases the risk of errors.
By providing a single system for tracking the various steps in the trade finance process, a blockchain-enabled platform can enhance interoperability among previously incompatible systems, improve accuracy and eliminate redundancy in record keeping, reduce end-to-end transaction time, and increase transparency, the report says.
In this area, banks and financial institutions have made inroads in implementing and deploying blockchain-enabled systems.
In 2016, Barclays claimed to have issued the first blockchain-based letter of credit, executing a transaction that normally takes up to 10 days in under 4 hours. In Asia, the Hong Kong Monetary Authority and Monetary Authority of Singapore have been individually developing DLT platforms in collaboration with major banks, with plans to link their respective systems.
Additionally, the use of blockchain in foreign currency transactions can help reduce the role of correspondent banks, hence reducing time and cost related to trade finance transactions.
While cross-border payments using traditional correspondent banking networks can take a full business week, new blockchain networks allow banks to establish bilateral relationships for quicker transfers and at lower cost.
The Society for Worldwide International Financial Telecommunication (SWIFT), which has traditionally served a central role in international correspondent banking, is now experimenting with DLT to increase the speed and transparency of its own services.
Other technologies and trends explored by the report include the use of alternative data to support credit analysis, Open Banking and how this movement can spur further innovation in the financial sphere and solve some of the issues faced by SMEs, especially the problem of poor access to credit, as well as the rose of digital payments fintechs in accelerating the development of micro, small and medium-sized enterprises (MSMEs).
Featured image: Fintech for Asian SMEs, Asian Development Bank, May 2019