SME Financing in Emerging Asian Markets: Bridging The Economic Development Divide

Small and Medium Enterprises (SMEs) are the backbone of the global economy. According to The World Bank, there are approximately 400 million registered SMEs globally, representing more than 90% of businesses and accounting for over 50% of global employment. Furthermore, SMEs contribute over 50% of the global GDP, making them critical to economic development and resilience worldwide. However, SMEs face an enormous funding gap of ~$5.7 trillion, which hinders their impact on the global economy.

The importance of SMEs to Asian countries

SMEs are vital to economic growth in Asia. The Asian Development Bank estimates there are at least 71 million SMEs in the Asia-Pacific region, accounting for around 97% of businesses and ~67% of the workforce. The numbers are even more pronounced in emerging Asian countries, where SMEs are the primary source of employment and income. Compared to some developed Western countries, SMEs contribute between 40% and 60% to the GDP of Asian economies, with Indonesia leading at approximately 62%.

However, the financing gap for SMEs is enormous

It is no secret that SMEs have very limited access to formal credit. The World Bank estimates that less than 30% of global SMEs have successfully obtained funding from licensed banks and lending companies. The gap is even bigger in emerging Asian countries, where around 22% of SMEs have access to bank loans and financing products provided by financial institutions. India, where financial digital literacy is considered high given the prevalence of UPI, ranks at the bottom of that list, with less than 11% of SMEs having access to formal credit.

The IFC estimates that the global SMEs face a financing gap of approximately $5.7 trillion, with the Asia-Pacific region experiencing a ~$2.5 trillion gap alone. The negative impact of this financing gap is intuitively severe — an additional 600 million jobs are expected to be created by SMEs by 2030, while about 80% of SMEs fail within 2 years due to a lack of sufficient working capital.

So, why is it difficult for emerging Asian countries to access financing solutions?

“Low Bankability” as the initial challenge

Usually, our intuitive imagination of SMEs might be of a startup with a group of 10 people brainstorming in front of laptops and monitors, or a boutique café brewing cups of single-origin filtered coffee to awaken people’s mornings. That imagination is, however, very different in emerging Asian markets.

In Indonesia, approximately 62m SMEs power more than 80% of the country’s employment — that is equivalent to around one SME for every five Indonesians. However, more than ~98% of the SMEs (~60m) are classified as micro SMEs (MSMEs) that are mostly unbankable. A similar landscape can be seen in the Philippines, where more than 80% of the approximately 1.2m SMEs are unbankable, as well as in other emerging Asian countries, where a large number of unbankable micro SMEs play a crucial role in the countries’ employment and economies. This situation becomes a barrier for banks to conduct basic reference checks, KYB procedures, or due diligence to assess solvency and default risk.

Poor data infrastructure because of heavy cash dominance

Populations in these emerging Asian markets are also not as banked as other markets. In Indonesia, the Philippines, and Vietnam, where the total population (around 500m) is more than the entire EU, half of the population is unbanked, with Vietnam topping that list at ~30% of the population possessing a bank account.

The heavy cash dominance in these emerging Asian countries is also making credit assessment complex. It was estimated that approximately 60% of the transactions in 2021 in Southeast Asian countries were paid in cash, with the number heavily skewed by developed countries with higher digital literacy such as Singapore. Even with the increasing digital literacy and adoption of digital payment methods, cash payments are still expected to account for about 47% of transactions in 2025.

Lack of collateral for affordable credit

Most SMEs in emerging Asian countries are in the retail sector and do not possess sufficient assets to offer as collateral. It is also nearly impossible for them to pay costly collateral or provide meaningful personal guarantees to capital providers. Even if they obtain credit from risk-seeking capital providers that do not require collateral, the interest rates reflecting the risk premium are too high for SMEs to afford, drastically increasing the cost of capital and hindering their access to credit.

The Evolving SME Financing Landscape in Emerging Asian Markets

With the above challenges uniquely seen in emerging Asian countries, the following is the current landscape of SME Financing

• Companies are offering multiple financing vehicles

As ensuring affordable and accessible capital is the main challenge, most companies are offering multiple but similar financing solutions with the same pool of capital. Innovations are mainly in the business model, where companies are trying to maximize operational efficiency in distributing capital while maintaining control and risk management.

• Consolidation as a key strategy to ensure available & affordable supply of capital

Several players have acquired local banks to enter new markets and obtain local banking licenses while ensuring a steady and cost-effective supply of capital. Bukulapak acquired ~11.5% of Indonesia’s Allo Bank for ~$80m. SEA Group acquired 100% of Indonesia Bank BKE to strengthen its local embedded lending offerings on its e-commerce and gaming platform. Gojek also bought ~22% stake in Bank Jago to allow its users access to digital banking services and gradually transition into a “Super App”.

• Active multi-sector collaboration to tap into financial services

Several multi-sector consortiums have been formed across Asia to take advantage of respective competitive advantages to expand into financial services. In Singapore, Ride-hailing platform Grab and national telco Singtel jointly launched GXS Bank, aiming to embed banking solutions into their existing offerings. The Philippines’ property conglomerate JG Summit partners with South Africa’s Tyme Bank to apply for the digital banking licenses in the Philippines. The consortium of Singapore’s SEA Group and YTL Digital Capital is on track to launch its digital bank in Malaysia by the end of this year. In Thailand, Gulf Energy is setting up a joint venture with local telco AIS and Krungthai Bank to apply for the virtual banking license with the Bank of Thailand.

Where are the opportunities?

Addressing the challenges of SME financing in emerging Asian markets is crucial for fostering economic development and resilience. With the advancement of lending technology slowing down, we would anticipate the following emerging trends:

• “Verticalization” as a Key Differentiator: We would expect that players with verticalized financing products will have a better chance to stand out. In other words, those targeting a specific industry to solve industry-specific pain points would have a more effective edge than competing solely on pricing, such as leveraging embedded platform data for product tailoring and recommendation, and sector and business-specific risk evaluation and pricing.
• “Consolidation” Becoming Inevitable: We may also witness increased consolidation activities, with smaller local banks being acquired to minimize the cost of capital, or larger players acquiring startups to enter new markets or expand their market shares. Startups would need to ensure their go-to-market strategies and value propositions are competitive enough to avoid erosion from well-established incumbents. Investors are also more inclined to back

Regardless of how the market evolves, it is undeniable that SME financing will attract greater attention from investors, startups, and governments due to its significant role in driving economic growth and enhancing resilience.

If you are a like-minded investor, early-stage company entrepreneur, or thinking about opportunities in the SME Financing space, Illuminate would love to chat with you.