Unlocking SME potential through improved access to credit

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Small and medium-sized enterprises (SMEs) often face challenges in obtaining financing from banks. This is a global issue compounded by the conventional methods used by banks to mitigate the risk of lending to smaller companies seeking growth.

A new wave of open banking is set to alleviate these challenges by revolutionising the way SMEs access funding for their businesses.

Open banking is a catch-all term referring to the practice of enabling secure interoperability in the banking industry, allowing third party payment service and other financial service providers to access banking transactions and other relevant financial data.

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One of the main obstacles for SMEs seeking financing from banks is the requirement to provide a significant amount of financial data about their business for due diligence purposes.

Banks want to see evidence of the SMEs’ financial transactions in order to assess their creditworthiness and ability to repay the loan.

However, many SMEs may not have this information readily available or may be caught up with other responsibilities at hand.

The emergence and advancement of open banking and fintechs using it has made the collation and sharing of financial data with lenders much simpler. 

As most SME transactions are already done online or moving towards digital platforms, open banking can automatically gather and share this data, with the SMEs consent, with lending institutions.

This allows lenders to assess and qualify applicants for commercial loans more efficiently and accurately.

Open banking has been live in Bahrain since 2019 and in Saudi Arabia since November 2022, and is set to go live in the UAE this year.

As Mena’s markets adopt open banking, so the numbers accessing it will grow, providing more information that provides vital feedback to developers. 

New services such as lending at point-of-sale – or “embedded finance” – will become available and we will eventually see taxes collected using similar systems.

Open banking not only changes the protocols for obtaining business finance but also makes it significantly faster, with almost immediate account aggregation, credit risk assessment, and faster customer onboarding.

In Europe there are already examples of online companies which offer small or modest business loans and provide fast quotes. This enables SMEs to access business finance in minutes rather than weeks or months.

In a cash-dominant society, such as Mena, SMEs may also struggle to gather financial data required by banks to fulfil their protocols.

Some may not even yet have a bank account but hope to move to that stage in their development. That’s where many face a Catch-22 where they cannot easily open an account, cannot obtain a loan, and therefore continue working only in cash and without a bank.

However, there are some positive developments taking place, such as the announcement made in 2021 by Saudi Arabia’s Ministry of Commerce that SMEs will be exempt from registration fees.

The kingdom has also committed to increasing the percentage of loans allocated to SMEs by financial institutions to 20 percent.

These steps are seen as a move in the right direction to unlocking the potential of SMEs in the region.

Saudi Arabia has also announced the Kafalah Initiative, established by the Ministry of Finance, which provides access to financing, including Shariah-compliant loans, for small and medium-sized enterprises. What’s more, Saudi Aramco recently launched an $800 million dollar fund for an SME support programme.

Thanks to the growing adoption of open banking in Mena, these services are about to become more mainstream in a region where SME finance services are often sorely underrepresented. This development will help to boost regional inclusion.

By using open banking solutions and, consequently, direct bank payments, SMEs can evade costly payment gateways for transactions.

Open banking also allows smaller companies to directly debit authorised payments from customers’ accounts – replacing costly manual procedures that tend to delay cash flows.

The old days of institutional barriers to SMEs obtaining finance could soon become a thing of the past – and it will be Mena’s open banking revolution that will have delivered the change. 

Nino Ocampo is chief product officer at Tarabut Gateway