Digital ecosystems & SME finance for greater financial inclusion

How best to harness digital finance to improve access to finance for MSMEs and individuals was at the top of the agenda for 61 technical staff, from 33 AFI member institutions, at the 25th Digital Financial Services Working Group (DFSWG) and 18th SME Finance Working Group  (SMEFWG) meetings in El Salvador on 16 – 19 May 2022.

The week of events is an opportunity to hold technical deliberations on promoting digital ecosystem and financial innovations and providing greater support for micro, small, and medium-sized enterprises (MSMEs), women and individuals with lower incomes, including regulatory frameworks for consumer protection. Co-hosted by the Banco Central de Reserva de El Salvador (BCR) and AFI, this was the first time that the two working groups meet in person following two years of virtual gatherings.

Since the outbreak of the pandemic, AFI members have faced unique challenges caused by the global pandemic, their policy responses and interventions focused on ensuring business continuity, market stability and consumer protection. Special emphasis was put on policies that are in support of MSMEs and vulnerable populations such as rural poor, women, young, and the forcibly displaced. These SME- and digital finance-related initiatives have helped countries alleviate the negative effects of the crisis and strengthen their resilience against future shocks.

“AFI’s work in DFS and SMEF indicates that although traditional financial institutions have undergone technological upgrades in operations and money transfers, the unique capabilities of FinTech have the potential to lower entry barriers, elevate the utility of sex and age-disaggregated data and other alternative sources of data, and promote new business models that might expand access to finance”, AFI’s Director of Policy Programs and Implementation Eliki Boletawa told the meeting at the opening.

In his welcoming remarks to participants, BCR President Douglas Rodríguez highlighted strategic partnership with AFI as part of technical support that helped the Bank develop its National Financial Inclusion Policy (NFIP).

“El Salvador is a developing market that is constantly seeking to improve financial services and to provide growth opportunities for companies”, Rodriguez said

AFI member since 2012, BCR shared its financial inclusion journey and its recent experience as the mover of the private digital currency. AFI members raised questions on anti-money laundering and combating the financing of terrorism (AML/CFT), consumer protection, investor protection and the introduction of such sophisticated products to underserved populations with limited financial and digital literacy. Given early stage of adoption, AFI members clarified that this was specifically relevant to the context of El Salvador and less relevant to the network.

The two working groups held a plenary session on how regulators and policymakers can support MSME growth and productivity through increased digitalisation. MSMEs contribute significantly to gross domestic product (GDP) and provide employment to the majority of the population, including women. As MSMEs grow, so does the demand for credit and other financial services such as payments, insurance, etc. Enabling growth and productivity also requires broader and deeper access to markets and information systems, which digitization could facilitate.

DFS, a cornerstone of AFI’s work

Mobile money, branchless banking and other digital payment mechanisms have been critical in providing safe, convenient and cheaper payments and financial services to previously financially excluded populations. This week, members are examining the position of financial regulators and the emerging approaches to regulate and supervise the proliferation of private digital money (cryptocurrency, virtual assets, digital payment tokens, stablecoins etc) across developing and emerging markets economies.

Members are also exploring design, policy recommendations and key use cases for retail central bank digital currencies (CBDC) to accelerate and support financial inclusion, as well as learning from country experiences and policy approaches to regulation, supervision, and the role for RegTech/SupTech to balance risks, innovation, and inclusion. Finally, the DFSWG will provide technical inputs, feedback, suggestions, and recommendation to the BCR’s draft FinTech Strategy.

“Post-pandemic, it is important for regulators and policymakers to explore innovations in using digital financial services to accelerate productivity for MSMEs in developing and emerging countries”, said DFS Working Group Chair Ehab Nasr from the Central Bank of Egypt.

DFS Working Group is currently the largest of all the working groups with 69 member institutions from 66 countries, with total of 32 knowledge products and 250 DFS-related policy changes made across the network, which members have attributed to AFI services.

Innovative financing for MSMEs

AFI technical members are exploring non-bank financial institutions (NBFI) that complement the MSME financial landscape, especially having in mind securing of the  capital or financing via equity for the high-growth SMEs.  SMEFWG is analysing the availability and type of redress mechanism, its ability to mitigate MSME financing and help their sustainability, while maintaining consumer protection standards and reviewing case study of members’ best practices of redress mechanisms.

“The Maputo Accord (on SME finance) reaffirms AFI’s commitment to put in place financial inclusion policies that create enabling environments and cost-effective access to financial services for MSMEs”, said SMEFWG Chair Ismail Adam of the Bank of Ghana.

Even though MSMEs make up 90 percent of all businesses globally, more than 50 percent of employment and contribute to 40 percent of gross domestic product (GDP), in many economies, they still struggle to access financing. This is especially true for women-owned businesses who face challenges when raising capital for their businesses, often due to the lack of acceptable collateral, concentration in lower-growth sectors, unconscious biases of investors, among others.

SMEF Working Group has 62 member institutions from 61 countries, with 28 published knowledge products and 52 policy changes reported by members in this policy area. Globally, MSMEs represent about 90 percent of businesses,  more than 50 percent of employment and contribute up to 40 percent of gross domestic product (GDP).