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Embracing Digital Transformation in Financial Services: How Digital Credit Guarantees help advance Digital Finance and Financial Inclusion

Credit guarantee schemes (CGS) provide useful assistance for smaller enterprises that face difficulties attaining creditworthiness, by serving as a form of indirect security for banks and financial institutions. With the push for a digital economy and improved digital financial infrastructure in Malaysia, the digitalization of credit guarantees is an integral part of a digital first approach, by going back-to-back with financiers to offer innovative solutions aimed at expanding financing access for micro and small businesses.

The importance of credit in lending

Compared to larger enterprises, MSMEs typically face an uphill battle obtaining loans from financial institutions, due to stringent credit requirements needed to prove their creditworthiness. Poor documentation of financial records, lack of collateral and inconsistent cash flow are some common reasons why smaller and medium-sized enterprises tend to face barriers in accessing financial support from banks.

While these challenges are not new, in the current troubled economic climate, MSMEs are likely to face an even greater struggle in making ends meet while also expanding their working capital. During these times, it is crucial that smaller enterprises have access to financing support in order to maintain a steady growth momentum and grow their business, so that they are able to compete to their fullest potential in the market.

How credit guarantee schemes help MSMEs

Credit guarantee schemes (CGS) are a popular tool used by governments to help MSMEs overcome barriers to accessing credit in the conventional banking system. Such schemes reduce banking risks in the distribution of credit to MSMEs, by guaranteeing a share of the default risk of bank loans to MSMEs.

In essence, CGS involve the partial transfer of credit risk stemming from a loan or a portfolio of loans to a third-party guarantor, thus cushioning lenders’ exposure to credit loss. In the case of non-performing bank loans, the bank recovers the value of the guarantee, which is usually provided against a fee covered either by the borrower (MSME), the lender (bank) or both. CGS can encourage financial institutions and other creditors to offer loans to MSMEs, not only during normal economic conditions, but also during periods of financial crisis and downturns[1][2].

At the height of the COVID-19 pandemic in 2020, data from the World Bank showed that as many as 41 countries had launched 57 credit guarantee schemes as stimulus measures to catalyse credit extension to financially distressed MSMEs, and assist them in recovery from the fallout[3]. In many developed and developing economies, public or state-owned CGS are a commonly applied financial instrument to help bridge the MSME financing gap. These include Asian countries such as Bangladesh, China, India, Indonesia, Philippines, Sri Lanka, Taiwan and Malaysia[4].

In Malaysia, the Credit Guarantee Corporation (CGC) acts as the leading provider of credit guarantee products and services for SMEs, especially those who have not yet built up a robust credit history, to gain access to credit[5].

What is digital credit guarantee and why is it the way forward?

Ever since the pandemic accelerated greater adoption of digital technologies, technology has played a significant game changer role in many advanced economies. Malaysia is no exception to this trend of adoption. During the crisis, when the entire country was forced into a series of lockdowns, many households and businesses turned to innovative products and solutions to facilitate online economic activities, and embraced seamless data sharing and e-commerce on digital platforms and ecosystems.

Today, technology continues to transform and drive growth in our economy, even in industries and sectors that had historically been less digitalised. As outlined in the Digital Economy Blueprint, the government aims to eventually embrace a fully digital economy, where economic and social activities are driven by technological infrastructures and web-based or technology-oriented companies.

In line with the strong push for whole-of-economy digital transformation, Malaysia’s digital economy is projected to take a 25.5 per cent share of the country’s GDP by 2025, according to government statistics[6].  Likewise, an emerging transformative effect is reshaping the landscape of Malaysian financial services. In its Financial Sector Blueprint 2022-2026[7], Bank Negara Malaysia highlighted its focus to support a more vibrant digital financial services landscape, and to promote a holistic digitisation of the sector.

The digitisation of credit guarantee forms an important part of this equation as it helps facilitate alignment with financiers and lenders migrating to digitalised services. Similar to traditional credit guarantee schemes, a digital credit guarantee shoulders credit risks for lenders.

While take-up is more evident among Fintech companies and digital lenders, certain banks have also recently begun to integrate digital credit guarantees into their suite of digital financing solutions, in response to a rise in appetite for digital tools and financing[8][9].

CGC Digital: From digitising to digitalisation of credit guarantee

As the wholly-owned digital arm of CGC, CGC Digital’s core mission is to create a seamless financing experience for MSMEs in the digital ecosystem[10], by utilising meaningful data and necessary tools and implementing efficient mechanisms. In line with advances in financial sector digitalisation, the start-up has invested into digitalisation efforts to develop its own digital credit guarantee assessment tool that can be used to assess MSMEs’ creditworthiness. In addition, it has reached out to various like-minded players and stakeholders to embark on proof-of-concept initiatives aimed at validating the viability of this tool, while shaping it to be more nuanced and effective.

To date, CGC Digital’s collaboration efforts have included Fintech companies such as Funding Societies, a unified SME digital finance platform, to jointly develop a digital credit guarantee product for Malaysian micro and small enterprises[11], and a recent tripartite partnership with Malaysia Digital Economy Corporation (MDEC) and payment system operator Payments Network Malaysia Sdn Bhd (PayNet) to further drive financial empowerment and foster inclusivity among MSMEs. The latter partnership involved CGC Digital driving its digital guarantee model, while using PayNet’s payment data for insights and to perform alternative credit scoring, and leveraging on MDEC to connect with financial players and champion policy and frameworks[12].

Aside from partnering with financiers in the digital lending space, CGC Digital has also collaborated with banks looking to expand their digital financing solutions, while facilitating greater inclusivity for MSMEs that would otherwise struggle to access traditional means of credit. Recently, the startup launched a Digital SME Startup Financing scheme in collaboration with Alliance Bank, to provide simplified access to working capital for young companies as young as six months in their earliest growth journey[13][14].

Digital credit guarantees provide a solution to widening financial inclusion

At the end of the day, the true value of the digital credit guarantee product lies not just in driving transformation within the financial services landscape, but in addressing the challenges of financing access for MSMEs that would otherwise struggle to access traditional means of credit.

By harnessing technologies such as artificial intelligence (AI), machine learning (ML), blockchain and big data analytics to evaluate transactional data such as utility and assessment payments, rental payments, mobile payments and other non-traditional data points for credit assessment, digital credit guarantees have the potential to spur greater inclusion and access to credit and financial services for the MSME segment.

By going back-to-back with banks and alternative financiers in the digital ecosystem, CGC Digital and other FinTech companies that are involved in developing digital credit guarantees play a pivotal role in widening access to finance for underserved and unserved MSMEs in the digital credit space, bridging the gap for such companies to be supported at each stage of their financing journey.

References:

  1. Vienna Initiative Working Group on Credit Guarantee Schemes, “Credit Guarantee Schemes for SME Lending in Central, Eastern and South-Eastern Europe” (European Investment Bank, November 2014), https://www.eib.org/attachments/efs/viwg_credit_guarantee_schemes_report_en.pdf.

  2. Vienna Initiative Working Group on Credit Guarantee Schemes.

  3. World Bank, “Map of SME-Support Measures in Response to COVID-19,” accessed November 21, 2023, https://www.worldbank.org/en/data/interactive/2020/04/14/map-of-sme-support-measures-in-response-to-covid-19.

  4. Ruth-Helen Samujh, Linda Twiname, and Jody Reutemann, “Credit Guarantee Schemes Supporting Small Enterprise Development: A Review,” 2012.

  5. CGC Malaysia, “FAQ | Credit Guarantee Corporation – Powering Malaysian SMEs®,” accessed November 21, 2023, https://www.cgc.com.my/faq/.

  6. The Edge Markets, “Catalysing Malaysia’s Digital Economy,” September 27, 2022, https://theedgemalaysia.com/article/catalysing-malaysias-digital-economy.

  7. Bank Negara Malaysia, “Financial Sector Blueprint 2022-2026,” January 2022, https://www.bnm.gov.my/publications/fsb3.

  8. “Axiata’s Digital Bank Consortium Inks Deal With Credit Guarantee Corp,” Fintech News Malaysia, June 28, 2021, https://fintechnews.my/27770/virtual-banking/axiatas-digital-bank-consortium-inks-deal-with-credit-guarantee-corp/.

  9. “Boost Bank Receives Nod from BNM to Launch Its Digital Bank,” FinTech News Malaysia, January 8, 2024, https://fintechnews.my/41751/virtual-banking/boost-bank-rhb-bnm-approval/.

  10. “CGC Digital: Making Finance Inclusive and Accessible for MSMEs,” CGC Digital, accessed November 21, 2023, http://www.cgcdigital.com.my/.

  11. TechNode Global Staff, “Funding Societies Partners CGC Digital to Support MSMEs via Digital Supply Chain Financing Guarantee – TNGlobal,” accessed November 21, 2023, https://technode.global/2023/08/03/funding-societies-partners-cgc-digital-to-support-msmes-via-digital-supply-chain-financing-guarantee/.

  12. Bernama, “MDEC, CGC Digital, Paynet Tie Up To Address RM 90 Bln MSME Financing Gap,” December 18, 2023, https://www.bernama.com/en/business/news.php?id=2255362.

  13. Alliance Bank, “MSMEs Continue to Depend on Banks for Financial Support in 2024 to Boost Growth Prospects,” March 21, 2024, https://www.alliancebank.com.my/About-Us/Media-Centre/MSMEs-Continue-to-Depend-on-Banks-for-Financial-Support-in-2024-to-Boost-Growth-Prospects#:~:text=To%20further%20grow%20and%20expand,boost%20productivity%20for%20further%20growth.

  14. Berita Harian, “Alliance Bank, CGC Digital Bantu Syarikat Baharu Dapat Modal,” January 23, 2024, Berita Harian Online edition, https://www.bharian.com.my/bisnes/korporat/2024/01/1203621/alliance-bank-cgc-digital-bantu-syarikat-baharu-dapat-modal.