Digital credit scoring can open new doors for CMSMEs
Traditional financing methods often leave CMSMEs struggling to access the capital they need. This is where digital credit scoring could offer a powerful solution
Technological interventions like artificial intelligence (AI), big data, blockchain technology, etc, are becoming part of the assessment and monitoring module of CMSMEs.
To develop 'Smart Bangladesh,' we cannot overlook the adoption of technology in financing. Financial technology employs digital tools, platforms, and services that enable financial institutions to process and evaluate any prospects or borrowers quicker, more efficiently, and more easily.
In Bangladesh, the roles of banks, NBFIs (non-banking financial institutions), MFIs (microfinance institutions), and MFS (mobile financial services) in the CMSME lending process are different in nature. As CMSMEs are the most numerous business formations in Bangladesh's economy, they are gradually maturing to utilise digital platforms.
According to the Economic Census 2013 published by the Bangladesh Bureau of Statistics (BBS), more than 7.80 million CMSMEs are operating in Bangladesh, of which 71.49% are rural establishments. The readiness of rural establishments to utilise technological means is nominal due to a lack of knowledge, fear of adopting digital means, availability, and ability to procure these means.
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Rural entrepreneurs mostly navigate their businesses with less capital and financial literacy, making investment in digital transformation quite challenging for them. It is encouraging that the Financial Inclusion Department of Bangladesh Bank has advised all banks to implement financial literacy programmes nationwide.
Banks are leading these programmes and workshops to promote financial literacy throughout the country. Farmers, CMSME entrepreneurs, women entrepreneurs, and students are given priority as target participants for these programmes.
Considering the needs of rural establishments and cottage and micro enterprises (SMEs), Mobile Financial Services (MFS) are stepping ahead to finance them through digital nano loans. Some top-tier microfinance institutions (MFIs) are also using MFS as a payment mechanism to finance them. Retail loans can effectively utilise digital platforms.
When it comes to CMSMEs, every enterprise has a distinct business nature and establishment. It is complicated to reshape CMSME financing by incorporating a single method. Therefore, some financial institutions are working on introducing credit scoring as a lending mechanism.
Credit scoring is a statistical technique or structured framework for assessing the probability that a borrower will default or become delinquent. The digital scoring used for prospective borrower analysis is becoming lucrative for inclusive CMSME (cottage, micro, small, and medium enterprise) financing.
Additionally, the Bangladesh government is also initiating the establishment of a credit scoring system to facilitate loan services from digital banks. If a customised credit scoring model can be implemented, CMSME financing can become easily accessible from anywhere in Bangladesh.
The elements of credit scoring include risk drivers that incorporate various features or ideas. These drivers may use data on demographics, past credit behaviour, firm and financial statement information, and alternative data available in the market, with scaling in a numerical range.
In CMSME financing, a significant challenge is analysing the physical existence and business data of the enterprises.
To verify physical existence, a Contact Point Verification (CPV) report from authorised CPV agencies can be used, and to assess business data, a credit rating report from authorised credit rating agencies can be considered.
In the long run, when all individual data is integrated with the National Identification Number (NID) of owners, partners, and directors in the national database, there will be an alternative to skipping the CPV report and credit rating of CMSMEs.
It is noteworthy that after the Covid-19 pandemic in Bangladesh, several CMSMEs have been suffering due to capital shortages. To revive CMSMEs in Bangladesh, we need to consider the credit scoring model to fill the financing gap. Some common credit scoring models operating worldwide are FICO Score, VantageScore, etc.
Every financial institution can initiate its own credit scoring models to finance CMSMEs. By doing so, banks and non-banking financial institutions will be able to minimise turn-around time (TAT) in loan processing and monitoring, which will be beneficial for both lenders and borrowers in the economy of Bangladesh.
Sanjoy Pal is a seasoned banker and certified Financial Modeling & Valuation Analyst (FMVA®) from the Corporate Finance Institute, Canada.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.
