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SME lending is undergoing a progressive shift. Conventional methods, which often overlook the distinct financial behaviors of small businesses, are being eclipsed by alternative data. This shift promises to address the unique needs of SMEs more effectively, moving beyond outdated practices that have long failed to capture their true potential.
Traditional financial statements are falling short. Unlike larger corporations with access to top-tier auditors, many SMEs do not get their accounts audited, or rely on local auditors whose reports may not meet rigorous standards. Consequently, this reliance on traditional financial documents can result in an incomplete and often misleading picture of an SME’s financial health.
To overcome these challenges, Mashreq is leveraging alternative data. SMEs are asked to provide their last six months of bank statements, which are then processed by the advanced analytical engine. This engine synthesizes data from multiple accounts to generate a detailed 20-line summary, offering insights far beyond what traditional profit and loss statements can provide. It reveals turnover trends, buyer and supplier relationships, payment regularity, and even the frequency of bounced checks.
This marks a significant departure from traditional practices. By analyzing transactional data, banks can gain a nuanced understanding of an SME’s operational dynamics and financial behavior. This method enhances the accuracy of credit evaluations and democratizes access to financing for SMEs that might otherwise be excluded due to inadequate financial documentation.
Additionally, cloud-based accounting systems are revolutionizing lending. With more startups and SMEs adopting cloud-based solutions, banks can gain real-time access to comprehensive financial data. Imagine a scenario where lending decisions are made based on direct access to an SME’s accounting system, such as Xero. This would enable banks to review payroll, receivables, payables, and other critical metrics instantaneously, facilitating more informed and timely credit decisions.
The utility of alternative data extends beyond traditional financial metrics. For instance, e-commerce data from platforms like Noon.com can provide valuable insights into an SME’s sales performance, customer ratings, return ratios, and inventory management. Such granular data allows banks to assess the health and potential of an SME more accurately, reducing the risk of lending and fostering a more inclusive financial ecosystem.
Traditional evaluations are becoming obsolete. Banks that persist with traditional financial evaluations will struggle to scale their SME lending operations. By embracing alternative data, banks can mitigate risks and unlock new growth opportunities within the SME sector. This shift represents a pivotal moment in SME lending, where innovation and technology converge to redefine creditworthiness and expand financial inclusion.
As banks like Mashreq lead the charge, the sector is poised for a paradigm shift that promises to make financing more accessible, accurate, and equitable for SMEs worldwide.
Rajeev Chalisgaonkar, Head of Business Banking and NeoBiz at Mashreq
