Digital finance platforms in Asian developing markets are bridging the financing gap for micro, small and medium-sized enterprises (MSMEs), providing easier access to capital, contributing the financial growth and broadening financial inclusion, according to a new study conducted by the Cambridge Centre for Alternative Finance (CCAF) and the Asian Development Bank Institute (ADBI).
The second edition of the ASEAN Access to Digital Finance study, released in January 2025, provides insights on how fintech is enhancing MSME access to finance while fostering their development, sharing results of a survey of 819 MSMEs users of digital financial platforms operating in Bangladesh, China, India, Kazakhstan, Mongolia, Pakistan and Vietnam.
The study found that before turning to digital finance providers, MSMEs primarily sought funding from banks, with 73% of respondents reporting seeking funds before using fintech providers. However, only 57% of those MSMEs indicated that they were able to successfully secure funding. This suggests that a significant portion of MSMEs in developing markets face challenges in obtaining financing from banks, leading them to turn to digital finance alternatives.
The second and third most popular sources of funding were family and friends and microfinance institutions, with 67% and 57% of respondents, respectively, seeking funds before using fintech providers. Family and friends had a success rate of 53%, followed by microfinance institutions, which had a higher success rate of 66%.
Convenience among key criteria
The study also examined how MSMEs choose fintech providers for financing, highlighting the key factors influencing their decisions. The research found that in general, MSME customers of digital finance were strongly influenced by platform usage and convenience factors, with more than 70% of respondents citing better customer service (72%) and better approval rates (72%) as the most important factors when financing through online financial platforms.
Additionally, speed in receiving funds (70%), increased transparency, including eligibility checks (70%), less complex application process (70%) and flexible terms, such as early repayment and debt rollover (70%), were also deemed critical decision-making criteria.
Impact of digital finance on business growth
The study found that financing through digital platforms led to significant improvements in MSME business performance. A large portfolio of MSMEs, particularly medium and small enterprises, reported expanding their operations (40%) after receiving fintech financing. Further, about a third of surveyed MSMEs reported purchasing assets for their businesses and increasing their inventory/raw materials (34% and 33%, respectively), largely by small and micro businesses.
Additionally, 5% of respondents indicated that they were able to apply for and receive funding elsewhere as a direct effect of fintech financing. A closer look at their subsequent financing sources shows that nearly half of these businesses obtained subsequent funding from traditional finance providers such as banks. This aspect of fintech impact is significant and suggests a positive effect of fintech credit on MSMEs’ creditworthiness.
These improvements led to measurable business growth. Specifically, 82% of respondents reported an increase in their revenue, 79% saw higher net income and 79% experienced growth in their customer base. This emphasizes the importance of access to finance for healthy business operations.
Enhancing financial inclusion and engagement
Beyond capital access, digital finance platforms are also enhancing financial inclusion and fostering broader financial engagement and literacy among MSMEs.
62% of the MSMEs polled reported they began using or increased their usage of savings and checking accounts, a trend largely observed among micro and sole businesses, as well as among MSMEs in Bangladesh, Pakistan and India.
Further, 46% reported they began or increased their use of credit products like overdrafts and loan contracts, and payment products. This trend is especially prominent among small businesses, as well as MSMEs in Bangladesh, India, Mongolia, Kazakhstan and Vietnam.
Opportunities remain
Despite the inclusiveness of digital finance solutions, MSMEs still suffer from a large financing gap in Asia, suggesting that growth opportunities still exist for financial service providers.
80% of respondents noted that less than half of their financing needs came from digital finance platforms, with a larger proportion covering less than 25%. In contrast, the remaining 20% of MSMEs reported that more than half of their financing needs were met through online finance.
These findings suggest that currently, digital financial providers only partially fulfill the financial requirements of MSMEs in developing markets, mostly supporting those businesses to cope with their short-term needs. This means that there is still a potential market opportunity for financial services providers to contribute in closing the financing gap.
The MSME financing gap
The Global System for Mobile Communications (GSMA) Association estimates that there are more than 400 million micro-enterprises in developing markets, up to 345 million of which are informal. Though these businesses are crucial for economic development, job creation, and poverty reduction, they often struggle to access the capital they need to expand, innovate, or even survive.
According to the SME Finance Forum, there is currently an estimated US$5.7 trillion financing gap for MSMEs. This gap is caused by a combination of factors, including the lack of credit history and collateral required by traditional lenders, making small businesses appear high-risk. Additionally, complex application processes, and a lack of tailored financial products further exacerbate the issue.
To tackle this challenge, alternative finance platforms have emerged, leveraging technology to overcome traditional barriers like high collateral requirements, lengthy application processes, and inflexible loan terms. Notable players across Asia include Vayana, a leading supply chain finance platform from India; Micro Connect, an exchange group headquartered in Hong Kong that connects global capital with MSMEs; iFarmer, a digital platform based in Bangladesh that connects farmers with financial services; as well as Funding Societies and Validus, two peer-to-peer (P2P) lending platforms from Singapore serving businesses.
Featured image credit: edited from freepik
