ALTERNATIVE LENDING — WHAT IS THE OPPORTUNITY?

Meeting the unmet demand for credit to SMEs

Small to medium-sized businesses (SMEs) make a surprisingly large contribution to the world’s economy, yet they struggle to access finance from the traditional banking sector. According to Oliver Wyman, the total unmet demand for credit by SMEs is $3.5 trillion. The World Bank estimates that this represents the needs of more than 200 million SMEs. See here for more detail.

While this lack of access to loans for SMEs represents a threat to the world’s economic growth, it also represents an opportunity for alternative lenders.

FinTech companies are non-bank financial intermediaries, linking borrowers and funders via online lending platforms. Goldman Sachs expects these platforms to gain market share in areas that represent $11 billion in profits to the banking sector in the US alone. However, the opportunity is expected to be much larger, as Fintech companies will grow the market through including SMEs currently unable to access finance.

The advantages of Fintech for SMEs and investors

FinTech companies can provide loans to SMEs because they don’t have the constraints that banks do. They can provide unsecured loans; technology and online systems cut the time and cost of providing loans, so they can accommodate smaller loans for SMEs; algorithm-driven tools assess borrower risk, to include SMEs with limited credit profiles.

FinTech companies can attract investors because they offer higher returns than bank deposit rates. Initially, most investments came from retail investors, but there is increasing interest from institutional players, both as lenders and as shareholders in lending platforms. Even banks are partnering with, investing in, or acquiring lending platforms. A good example is the United Overseas Bank of Singapore’s investment into the crowdfunding company called OurCrowd.

Read Business Lending In Asia — A Significant Investment Opportunity. Part 2 >>>