How can alternative data help Micro, Small and Medium Enterprises (MSMEs) access credit?
This blog has been originally posted on the World Bank Blogs website.
Micro, Small and Medium Enterprises (MSMEs) play a huge role in facilitating economic development due to their flexibility and affinity to innovation. Even more so in emerging economies with a high contribution from the informal sector. Yet, MSMEs face several challenges when trying to expand, especially in accessing adequate funds to finance their operations and growth. MSME Finance Gap (2017) estimates that informal SMEs face a finance gap of $2.9 trillion annually.
Since MSMEs lack access to traditional credit facilities through banks and other traditional lenders, there is a shortage of credit data on MSME borrowers —also referred to as ‘thin file’ borrowers. This information asymmetry has paved the way for identifying new ways to assess the creditworthiness of MSME and other thin-file borrowers—including the use of alternative data in credit reporting. The G20 High Level Principles on Digital Financial Inclusion recognizes the importance of exploring alternative data as a legitimate source of credit information.
Authors: Pratibha Chhabra, Shalini Sankaranarayanan