A data-focused initiative that aims to help small businesses to access financing and financial services has been launched by organisations including the United National Development Programme (UNDP) and Monetary Authority of Singapore (MAS).
The ‘Universal Trusted Credentials’ (UTC) programme – which is also backed by the Bank of Ghana, Global Legal Entity Identifier Foundation and SME Finance Forum, among other organisations – aims to ‘build global consensus’ around a data-driven, digitally-enabled characterisation of micro-, small- and medium-sized enterprise (MSME) creditworthiness and business trust.
The plan is to combine ‘source data’ – for example, information from utility providers, trade platforms and national registry – and ‘derived data’, for example an MSME’s ‘willingness to upskill itself in financial literary’ and past repayment behaviour to ‘empower each MSME with a self-owned standardised set of UTC credentials’, according to press materials. It is currently being tested in Ghana, and with an initial focus on the developing world.
‘This is a notable advancement from the traditional collateral-based lending that focuses on available hard assets, board resolutions, three-year profitability, long-term business contacts and other collateral metrics that businesses are expected to furnish before financing and financial services are provided,’ notes a newly published ‘White Paper on Universal Trusted Credentials (UTC): Transforming Access to Finance for MSMEs and Beyond’.
Formal SMEs contribute up to 40 per cent of national income (GDP) in emerging economies – a number that is significantly higher when informal SMEs are included – according to the World Bank. But access to finance is a major constraint to SME growth. About half of formal SMEs do not have access to formal credit. The financing gap is even larger when micro and informal enterprises are taken into account.
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‘Further additionality in scaling SME finance’
The organisations behind the initiative are looking to develop an ‘ecosystem of suitable data source providers that would contribute towards the creation of alternative data-sets’ as they look to create and promote a global platform of standardised credentials for MSMEs.
A steering committee of central banks, financial institutions and multilateral agencies is to be ‘explored’ to identify suitable trusted data sources and ‘vet’ international UTC issuers, according to the announcement.
UNDP, MAS and partners will collaborate with the public sector and private sector to develop a common UTC standard to ensure interoperability internationally and ‘to cater for the evolving needs of the industry’. Further work is planned with central banks and financial institutions in other emerging markets to ‘fine-tune and test the use of UTCs across borders’.
‘An immediate next step is to have this white paper reviewed by a number of key international organisations to ensure that its content is relevant and welcomed globally,’ the 16-page document concludes. ‘Following the review process, a pilot will commence in selected countries to test a live-setting of using the UTC framework in a loan-issuing process. The white paper proposes to begin with Cambodia, Ghana, Indonesia and Rwanda.’
The Global Legal Entity Identifier Foundation (GLEIF) is a Switzerland-headquartered accreditation organisation. The UNDP, MAS and GLEIF in June embarked on ‘Project Savannah’ to digitise basic environmental, social and governance (ESG) credentials for MSMEs.
The SME Finance Forum brings together financial institutions, tech companies and development finance institutions. Its chief executive, Qamar Saleem, said UTC “should aim to complement standard-setting work led by the International Committee on Credit Reporting (ICCR) and build upon credit infrastructure, open banking/finance initiatives being implemented by the World Bank Group and other stakeholders, thus providing further additionality in scaling SME finance.’
‘Game-changing opportunity’: Mohanty
UNDP assistant secretary-general (and director of its bureau of policy and programme support) Marcos Neto described the initiative as having the potential to “revolutionise how we tackle the global MSME financing gap in a way that empowers SMEs to support business growth and their green transition, encourages financial institutions to reach to new clients, leaves no one behind, and supports a greener, more sustainable economy.”
MAS chief fintech officer Sopnendu Mohanty, meanwhile, described the UTC as a “game-changing opportunity to augment the traditional collateral or asset-backed financing that almost all MSMEs face, towards a holistic approach that includes self-owned non-financial and financial credentials that each MSME should possess.”
MAS has worked closely with Bank of Ghana since establishing a ‘Financial Trust Corridor’ in 2020. The two authorities and Development Bank Ghana then signed an MoU 12 months ago to develop the ‘Ghana Integrated Financial Ecosystem’ (GIFE).
The West African country’s central bank’s first deputy governor, Dr Maxwell Owusu-Afari, said (in an annex to the UTC press notice) that the GIFE had “started yielding results” and that he was “positive about the immense potential of UTC, which is multijurisdictional and enhanced with ESG requirements, to boost the economic fortunes of Ghanaian MSMEs and advance intra-African trade under the African Continental Free Trade Area.”
Private-sector organisations named in press materials as supporting the UTC initiative include Chinese company Ant Group, Philippines-headquartered Esquire Financing, Singapore-based digital payments firm Liquid Group and Singapore-headquartered bank UOB. Spain’s central bank (Banco de España) is also mentioned in the white paper.
MAS, IFC and WEF sign MoU
In a separate development, MAS, the International Finance Corporation (IFC) and World Economic Forum (WEF) have signed a Memorandum of Understanding (MoU) to collaborate on initiatives to advance digital inclusion through financial services.
The partnership will focus on finding ways to better mobilise financing to make digital services more affordable and accessible for underserved individuals and communities, as well as MSMEs, with the support of financial institutions and fintech companies.
The IFC will lead on creating guidelines for digital financial inclusion financing instruments, as well as ‘efforts to promote the guidelines in the Asian market,’ according to an announcement. This states that an example of such an instrument could be a five-year digital inclusion bond, issued by a bank to support and empower a specified number of small businesses with access to e-commerce capabilities, online products and ‘digital educational resources’.
MAS plans to ‘explore synergies’ with its other initiatives to improve financing access for MSMEs in emerging markets, while the WEF will ‘leverage its deep international network of government and private sector partners to promote and share these new solutions and learnings’.
The EDISON Alliance, a WEF digital inclusion initiative, released a 27-page ‘Guidebook to Digital Inclusion Bond Financing’ in 2021. Sebastian Buckup, who is a WEF executive committee member and co-head of the WEF Centre for the Fourth Industrial Revolution, said the partnership with would be “vital to turning recommendations into actionable steps to channel financing towards digital public infrastructure, digital skills and digital services for the underserved.”