Digital lending for small businesses, merchants

There are around 12 million micro, small and medium enterprises (MSMEs) in Bangladesh. They employ about 30 million people and contribute about 25 per cent of national gross domestic product.

Yet, it is one of the most underserved sectors when it comes to access to finance.

More than 60 per cent of the micro-enterprises remain outside of credit facilities, and those who get credit pay exorbitantly high interest rates such as 24-40 per cent.

In recent years, digital lending is playing a key role in developing the MSME sector in many countries, including neighbouring China and India.

Ant Financial in China has built a strong digital credit business within four years of its inception.

It has made $16 million in loans and created a loan book of $290 billion in partnership with 400 banks.

Their end-to-end digital lending platform's default rate is 1.3 per cent and acquired 50 per cent market share.

It is high time that Bangladesh also adopts the digital credit system and services leveraging financial technology (fintech), including smartphones, internet, big data and artificial intelligence (AI).

Recently, Bangladesh Bank (BB) has issued a circular to encourage small digital loans (digi-loans).

Here digi-loan denotes loans offered by scheduled banks using end-to-end digital process and digital channels (such as internet banking, mobile apps, MFS and electronic or digital wallets).

On top of this, the Bangladesh Bank also has created a Tk 100 crore refinancing fund at 1 per cent interest rate for banks for digi-loan.

This circular represents a shift in gear where all steps of customer selection, underwriting decision, fund disbursement, and repayment will be done using digital systems and processes.

This implies that bankers cannot use traditional physical verification and fixed-asset collateral for the loans.

They will need to assess credit-worthiness digitally using business information, cash-flow and alternate data.

For this, bankers can work in collaboration with fintech and digital platforms such as TallyKhata.

TallyKhata is a digital platform for small businesses in Bangladesh.

It has 4.4 million registered users recording more than a million transactions daily.

Small businesses use the TallyKhata app for keeping business transaction records and use the built-in digital wallet to receive and make payments.

TallyKhata is working with local banks to develop a cash-flow based working capital loan product for micro-merchants.

Recently, TallyKhata was selected by the Visa Accelerator Program for APAC as the first Bangladeshi fintech to be selected in this prestigious cohort.

TallyKhata provides credit score for each business using more than a thousand data points, such as business cash-flow and transaction data, owner KYC, shop photos, utility bills and major FMCG invoices.

The digi-loan service enables a merchant to apply for a loan to a bank using the app, and the banker can assess the application based on business profile, cash flow data and credit score, and activate the loan using a digital lending portal in a few minutes.

For micro and small enterprises (MSEs), digi-loan promises simple and easy access to working capital loans from banks.

It offers a simple process, quick turn-around time and reasonable interest rates.

For a bank, digital lending promises low cost of customer acquisition, low default rate, and low operations cost.

Currently there is more than Tk 25,000 crore credit gap only in the micromerchant sector.

We have a great opportunity to expand credit into the MSME sector, which impacts the livelihoods of millions of families and expedite national economic growth using increased productivity and employment.

Digital lending for MSMEs is expected to work as a smart solution for building a smart Bangladesh.

The writer is the founder and CEO of TallyKhata.