How banks are credit scoring MSMEs in emerging markets via digital banking

How banks are credit scoring MSMEs in emerging markets via digital banking
August 12, 2022 | By Geniusto

Micro and small enterprises (MSMEs) continue to face challenges when it comes to securing credit from traditional lending sources. Part of the problem is the inability of the lending institutions to accurately assess risk.

Most micro and small businesses do not have typical credit ratings through the larger credit rating institutions due to the nature of their business activities, much of which are still conducted on a cash basis.

It is clear that the MSME sector plays a pivotal role in creating employment and in lifting people out of poverty; it also brings the spirit of entrepreneurship to life. As a whole, it drives economic development in many ways, while providing goods and services at affordable costs. It’s a win-win.

So how can institutions solve the challenges of providing credit to these institutions whilst adequately managing risk?

Many are turning to ‘non traditional’ risk scoring mechanisms.

By empowering small business owners with digital, mobile banking applications that offer the business owner an array of tools to collect payments and pay bills, the institutions can now access detailed information on the users real time cash transactions and spending habits.

This is critical for a potential lender to better understand and measure risk based on actual earning and spending behaviors.

Scores can be built around a myriad of data points such as how frequently the user receives funds, how much average daily balance they keep in their e-wallet, how often they pay bills such as utilities and phone bills or how frequently they buy mobile load and data top up services on pre-paid devices.

These key transactional data points when combined with personal information such as age, gender, location, employment status, and historical borrowing activities can allow an institution to more accurately measure risk and make the right micro lending decisions.

Assessing creditworthiness faster helps everyone grow, especially the MSMEs to unlock the financing they need to grow their businesses.

As an added bonus, digital banking reduces the bank’s costs of credit assessments, making it more affordable to assess and fund more businesses. Digital banking is the key for banks to empower MSMEs in emerging markets and to more boldly advance economic growth. As a digital banking enabler, Geniusto helps institutions tap into the huge potential of the MSME sector. Our digital banking platform uses big data to make credit assessments easier, faster, and cheaper.

If you’re ready to see how your institution can tap into the real potential of the MSME sector, contact us today and let’s see how we can help.