Alternative Data: Transforming SME Finance

How can digital data for SME lending address both demand and supply problems in access to finance?

Access to financing remains one of the most significant constraints to the survival, growth, and productivity of micro, small, and medium enterprises (SMEs). The SME credit gap has proven to be an enduring structural feature across both developing and developed markets, even in countries that have enacted a variety of policy measures to support SMEs and enhance financial inclusion more broadly.

In the world’s developing markets, about half of the estimated 400 million SMEs still have unmet credit needs totaling USD 2.1 to USD 2.6 trillion. The credit gap results from both demand and supply side problems. Many SMEs are reluctant to seek or cannot access credit due to: the reams of financial documentation and collateral requirements for obtaining a loan; high costs and interest rates; and multi-week decision timeframes. Digitizing SME finance and making use of transactional and alternative data offer an opportunity for addressing both sides of this problem. Therefore, this report focuses broadly on digital data for SME lending which includes new uses of both traditional as well as alternative data.

This report identifies the landscape of alternative data being increasingly used to expand access to SME finance. It also explores some of the new operating models and the new breed of SME digital lending originators. It also looks at collaborative partnerships that are harnessing alternative and transactional data. The report concludes by listing potential areas that policymakers and regulators need to understand in order to enhance SME access to finance. 

About this Publication

By Owens, J. , Wilhelm, L.