source-of-finance

In a joint report released recently by the International Finance Corporation (IFC) and SME Finance Forum, it was found that the global funding gap for small, medium and micro businesses amounted to US$5.2 trillion per year, with the East Asia and Pacific region representing 58 per cent of the global demand.

A massive figure for a massive market, but one that lies in a severely fragmented region with 11 countries, each with its own unique economy, infrastructure, culture and significant differences in terms of laws and regulations.

While the region has seen exponential growth over the past few decades, financial inclusion remains limited – with only 33 per cent of businesses having access to proper financing.

The SME and startup financing landscape in SEA

Worldwide, financial regulators are enforcing stringent laws on the lending/banking industry when it comes to business loans and lending, requiring specified amounts to be held in the capital at all times to cushion them against financial emergencies.

This has led to stricter risk profile assessments, especially when lending to startups or SME’s who typically can not show constant profits or afford to offer a lot of collateral, making them too “high-risk” to qualify

In SEA, SMEs employ half of the workforce and contribute between 20-50 per cent to the national GDP. These businesses have little to no resources and some lack even the most basic business skills, such as how to add a markup to products or filling out business loan applications.

Also Read: [Updated] P2P lending platform Investree buys stake in B2B startup Mbiz, to develop supporting infrastructure for SMEs

Several companies are stepping up to the plate with initiatives to educate and inform young entrepreneurs and SMEs while at the same time investing in flexible and lively cloud data storage strategies in order to provide more personalized services to these business owners.

As the traditional banking relationship model doesn’t find any value in underwriting loans for these businesses, SME lending platforms, online lenders and fintechs are making credit more accessible by trying to address the problem through alternative lending and the use of technology and AI, bringing new solutions and new, digital-first models to assist these business owners in growing their businesses.

Who is stepping up?

  • Jenfi

One of the most exciting newcomers is the startup Jenfi, who has already established its first base of operations in Singapore. To date, they have lent over SG$600,000 to their first 50 borrowers since launching during 2019. What makes their offering profound is its business model.

Approaching their lending from a growth perspective, Jenfi helps business owners invest in their businesses mainly through digital marketing, and takes a percentage of future revenue instead of fixed monthly repayments. In their bid to revive entrepreneurial spirit across Southeast Asia, the company has confirmed that even though marketing growth is their initial product focus, they ultimately want to solve small business lending throughout the region.

  • First Circle

Growing by leaps and bounds is the Philippines-based First Circle, who managed to acquire US$26 million in funding to commence with regional expansion. This after raising US$2.5 million (including a US$1.8 million seed round) in 2017.

First Circle’s loans are usually transaction or working capital used to secure contracts or deals with guaranteed financial returns. Unlike Peer 2 Peer (P2P) models, First Circle sources capital from third parties who take on only half of the loan, as such they remain invested in the deals and do thorough due diligence before committing.

They are also looking into their data to include more options that include little to zero human interaction, as they believe a massive amount of their financing processes do not need any human interaction.

  • Venturra Capital

Venturra Capital is a US$150 million fund that is actively looking at new opportunities in the digital space. A very smart move when one considers that mobile internet adoption in the region is growing at an unprecedented rate across the population of over 600 million.

The group has already spent close to US$500 million developing its own e-commerce platform in Indonesia but continues to remain flexible in their focus. According to the founder, German Jung, “Our themes are broad and include ecommerce to fin-tech, healthcare, and education. We are primarily looking at consumer businesses, but there are bigger opportunities in the B2B space, too.”

Also Read: Venturra Capital launches seed investment arm Venturra Discovery, armed with US$15M fund

The fund will also invest in startups in various industries across SE Asia, with scope to look at international companies that may have business potential in Southeast Asia.

  • Insignia Venture Partners

Taking the success of their first fund which closed at US$120 million a bit further, Insignia Venture Partners hit an oversubscribed close for its second fund at US$274.1 million at the end of 2019. The powerhouse fund gave away that they would be doubling down on early-stage technology in Southeast Asia.

“We do not see a change moving forward, especially as there is more smart capital and top talent flowing into the region that spurs the formation of great companies,” said Tan Yinglan, founding managing partner of Insignia. Insignia has won the Singapore Venture Capital & Private Equity Association’s “VC Deal of the Year” award for two years in a row, first with the automotive marketplace Carro in 2018, and again in 2019 for their investment into the Indonesian fintech firm Payfazz.

  • Tryb Group

The Tryb group is another major player with a unique business model, focusing on fintech in the region, it functions as an umbrella company by taking stakes in promising companies and buying up other by way of acquisitions. Playing directly into predictions for the future of the financial industry and trade finance, their predominant focus lies in the digitization of the mainly analog systems of financial institutions and banking services in Southeast Asia.

Another major area of interest for the Tryb Group is in capital markets, where there is increasing interest in Southeast Asia from outside the region. The group is not currently showing direct revenue but is in the process of finalizing several acquisitions in the enterprise space which will bring revenue to the group once finalized.

Current and future trends

During 2019, both local and international players were actively investing in the region. Several local players started providing lending and micro-insurance services to businesses and individuals who previously had no access to those services provided through banks. There is a definite shortage when it comes to the financial literacy of the larger population in the region as a whole.

As such, when looking at the personal and nationwide financial statistics, it becomes easier to see the steps the US had taken to include a larger portion of the population and how this same approach can provide inclusion to smaller businesses in Southeast Asia. One of the most significant trends driving alternative lending is the number of fintech firms that have taken the opportunity to launch their products.

We’ve also witnessed the growth of Southeast Asia’s cross-border ecosystem. Countries collaborating within special frameworks like the pan-Asian Fintech Cooperation Committee and the Asia-Pacific Fintech Network will assist the market in further strengthening the region’s position in the fintech scene. 

Google and Temasek have predicted that SEA’s loan book will increase two-to threefold reaching $110 billion by 2025 (link to image)

New technologies are influencing the fintech sector in major ways with AI, chatbots and surprisingly, some ideas around the uses of social media, leading the way. According to Andrea Baronchelli, CEO of Aspire, a Singapore based company offering direct loans to SMEs, social media can be used to determine a business’s overall health.

“In this era of social media, there are huge amounts of data freely available online. Companies that have perfected the method of tapping this data will have a key competitive edge moving forward.” As such, innovative new methods of credit verification will become key in revolutionizing SME financing methods. 

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