A Research on Financial Inclusion Among Smes

Introduction

Financial inclusion is the process of ensuring that everyone especially poor people have access to basic formal financial services. Financial inclusion has received much attention because it is considered to be a major strategy used to achieve the United Nation’s sustainable development goals; it helps to achieve improvement in the level of social inclusion in many societies; it can help in reducing poverty levels to a desired minimum, and brings other socio-economic benefits. Policy makers in different regions continue to commit significant resources to increase the level of financial inclusion to reduce financial exclusion. Several previous findings have examined numerous themes in financial inclusion research such as: promoting development through financial inclusion, the effect of financial inclusion on financial stability (Hannig and Jansen, 2010; Cull et al, 2012); the correlation between financial inclusion and economic growth; financial inclusion practices that are country specific (Fungáčová and Weill, 2015; Mitton, 2008), achieving financial inclusion through microfinancing and financial institutions (Ghosh, 2013; Marshall 2004), and the role of financial innovation and technology in promoting financial inclusion (Donovan, 2012; Ozili, 2019; Gabor and Brooks, 2017; Ozili, 2018), among others.

Access and quality of financial services

This section reviews the factors that promote use, access and quality of financial services. Financial services are not used by everyone. There are 2 types of groups of nonusers of financial services which are voluntary and involuntary. Reasons for not using financial services voluntarily vary and can include religious or cultural reasons. The involuntary excluded pose as more of a problem for policy makers as there is need to formulate proper policy advice. Among the involuntary excluded are households and firms that are considered unbankable because their incomes are too low or they are considered too high a lending risk. Many SMEs are involuntarily excluded due to discriminatory policies, deficiencies in the contractual and informational frameworks and price and product features. Three different approaches to measuring and usage of financial services have been used to produce promising results.one approach looks at the subjective assessments of firms as to the quality of the financial services that they obtain and the other approach looks at physical and cost barriers to access, while the last approach seeks to assess the number of users of basic financial services. These approaches only provide us with a partial perspective to barriers in usage and access to financial services and not forgetting that some of the data used to come up with a conclusive result maybe questionable.

Studies on barriers to financial inclusion were conducted and these provided hints on how to formulate more accurate policies that could be helpful in removing these barriers and widening access to financial services.

Promotion of use of financial services

Migrants residing in the EU were deeply affected by the economic crisis in Italy and were particularly exposed to social and financial exclusion, and policies aimed at meeting the financial needs of migrants led to greater integration into the destination society for migrants (De Matteis, 2015). The government of Argentina used financial inclusion to draw more people into the formal banking system, consumers began to use less cash and increased their usage of credit and debit cards causing more consumption to occur in formal markets which could be easily taxed by the government (Mitchell and Scott, 2019). In Comoros, study findings showed that there were barriers hindering access to Islamic financial services for disadvantaged women in Comoros, these barriers were because women lacked finances and knowledge on financial services which made it difficult for them to be taken out of poverty (Ali (2019).

Factors that promote access and quality of financial services.

Stable access to appropriate funding sources is an important factor for the survival and growth potential of SMEs. However different regions of the world have set up different polices to aid access and quality of financial services. Most SMEs face poor access to finance within the region`s bank dominant system. Bank loans to SMEs consist of 11.6% of GDP and 18.7% of total bank lending in the region, with a decreasing trend of the latter since the 2008/09 global financial crisis. This implies that further policy support for bank loans to SME finance is needed. However, such policy support alone is not sufficient to provide long-term financing to growth-oriented SMEs because of the nature of the banking sector`s short term credit and rigid banking regulations. Furthermore, the bank dominant system makes SMEs more vulnerable to financial shocks because these firms do not have an opportunity to diversify their funding during a crises.

US and UK studies

Financial inclusion strategies in the UK and US are quite similar. Marshall (2004), policy initiatives for reducing financial exclusion in the UK and US were compared, it was found that British policies, despite taking on experience from the US, giving little attention to the wider interconnections between people and their location which can affect their ability to participate in the formal financial sector, hence treating financial exclusion as a personal problem.

The British policies for financial inclusion provides `joined-up' solutions to financial exclusion by ensuring that a small number of large banks compete on a level playing field with other financial institutions, however, one notable problem is that it is often difficult to get the cooperation of financial institutions in achieving financial inclusion. In the UK, Mitton (2008) show that people outside the UK formal financial sector suffer financial disadvantages such as higher-interest loan, lack of insurance, no account into which income can be paid, and higher cost of utilities. Also, even those with bank accounts may barely use them, preferring to withdraw all their money each week and manage it as cash.

Mitton also noted that the number of adults in the UK without a bank account fell from 2.8 million between 2002 and 2003 to 2 million between 2005 and 2006. Mitton show that despite the progress made towards greater financial inclusion in the UK, there will continue to be people who cannot take full advantage of bank accounts and other financial services, and the reasons for this depend on the different characteristics of vulnerable groups and their low income level.

Similarly, Collard (2007) argue that as the UK become increasingly cashless in its economy, the consequences of being outside the mainstream formal financial sector is becoming more serious.

In the United States, show that the mobile payment ecosystem in the United states can help individuals gain access to a broader range of financial services at lower cost; however, the intense advertising of mobile payments in the US is more about affluence and advertising than creating financial access for the unbanked population, and such practices require regulations to be applied to the delivery of mobile banking and mobile payment services to the population to ensure that payment services and payment systems are pro-poor and pro-financial inclusion. Fonté (2012)

African region

Financial inclusion has gained increased attention in policy circles in many African countries, and many studies on financial inclusion in Africa have begun to emerge. According to Beck et al (2014) examine the factors affecting financial inclusion in Africa, and find that African countries witnessed improved access to finance; specifically, foreign banks from emerging markets helped to improve access to finance in African countries while the presence of foreign banks from Europe and U.S. did not lead to greater access to finance in African countries.

Zins and Weill (2016) examine some determinants of financial inclusion in 37 African countries, and find that being a man, richer, more educated and older is associated with greater financial statuses. P.K. Ozili (2020) Financial inclusion research around the world: a review inclusion in African countries. Allen et al (2014) show that innovative financial services helped to overcome infrastructural problems and improved access to finance in some African countries. Evans (2018) examine the relationship between internet, mobile phones and financial inclusion in Africa from 2000 to 2016, and find that the internet and mobile phones improved the ability of individuals to access basic financial services thereby increasing the level of financial inclusion.

European region

In Europe, access to credit markets to increase the number of borrowers in the credit market and ensuring the stability of the credit market brought increase in financial inclusion. Sinclair (2013) looks at financial inclusion of access to mainstream banking services for low income customers and a lack of appropriate and affordable credit provision to these customers was a problem in Britain. Corrado and Corrado (2015) a survey of financial inclusion across 18 Eastern European economies and Western European countries using demographic and socio-economic information on 25,000 European households from the second round of the Life in Transition Survey undertaken during the 2007 to 2008 global financial crisis. It was discovered that households affected by unemployment or income shocks and without any asset to pledge were likely to be financially excluded, especially in Eastern Europe. Infelise (2014) efforts used to increase access to finance for small- and medium-sized enterprises (SMEs) were examined in 2012 in the five biggest European economies: Germany, France, the UK, Italy and Spain, it was highlighted that greater access to finance in these countries was achieved through government subsidization of bank loans to SMEs to promote financial inclusion.

International and regional studies

Turegano and Herrero (2018) found that financial inclusion contributes to reducing income inequality while the size of the financial sector does not improve financial inclusion after controlling for economic development and fiscal policy. Kabakova and Plaksenkov (2018) found that socio-demographic, political factors and economic factors were significant factors affecting financial inclusion in developing countries. Yangdol and Sarma (2019) analyse the financial inclusion demand-side factors, and show that, being a woman, less educated, jobless and poor are negatively associated with financial inclusion for individuals while higher level of education and income increases the level of financial inclusion for individuals. Owen and Pereira (2018) analysed 83 countries over a 10-year period, and found that countries which had regulations that allowed banks to engage in broader scope of activities had greater banking industry concentration which is associated with more access to deposit accounts and loans and this led to more financial inclusion.

Experiences of SMEs with integrating financial technology in their operations

Financial technology (fintech) is the technology and innovation that aims to compete with traditional financial services. It is an emerging industry that uses technology to improve activities in finance. Some examples of fintech are; the use of smartphones for mobile banking, investing, borrowing services and cryptocurrency. To mention a few.

Information technology has critically become an essential tool for day to day operations of many organizations. A significant amount of financial resources has been invested in IT by a number of SMEs, this has be done to strengthen their competitive positions (Premkumar, 2003).

Because SMEs have largely and widely applied the usage of IT, they have found themselves being exposed to several associated risks within the adoption and development of IT solutions (Kazi, 2007). Prior literature on IT adoption in SMEs approximately show that most of failures and dissatisfaction were the result of one or more of the subsequent reasons. Some of the reasons for failure are articulated below:

• An inappropriate connection of adopted IT to the enterprise strategies.
• An inadequate realization of issues within the organization.
• An inadequate realization of end users’ necessities.
• Lack of required resources, such as knowledge, skills, financial and managerial.
• Inadequate teaching and preparation of end users.
• The size of the business and limitations especially in terms of funds to employ IT specialists.
• Having management that is highly unqualified in highly centralized CEO structures of the organization.
• An inappropriate government assistance role and supportive regulation.
• The dissatisfaction with IT created competitive advantages due to improper interactions with competitors, suppliers and customers.
• Particular characteristics of organization, culture, and nepotism in business.

In order to have a better understanding of a more appropriate way to achieve a well-organized deployment and efficient application of IT, SMEs must realize their need for and proportionate advantages of IT for their business. SMEs ought to judge costs and benefits associated with utilizing IT.

SMEs need to consider what predictability impact could be imposed by adopting IT on their business situations, customers, supplier, competitive position as well as their competitors. Henceforth, SMEs have to consider these expressed drivers, barriers and many other issues that might affect the successful adoption of IT solutions. It is imperative that SMEs should precisely evaluate their capability to reap benefits from IT adoption and not underestimate it.

SMEs should know that IT has a level of competence good enough to act as a strategic tool to assist them to compete with their larger counterparts in the globalized market (Tan et al., 2009). However, it should be considered that deficient IT investment decision and imprecise IT adoption strategy may reduce the survival of businesses (Ghobakhloo et al., 2011a). In addition, as suggested in literature, external assistance is imperative for successful IT implementation in SMEs since these businesses are generally suffering from lack of IT knowledge, skills and training resources.

As a result, external consultants meaning those outside the organization and vendors are main sources of external IT knowledge and skills in SMEs (Thong et al., 1997). Accordingly, higher levels of external consultants and vendor effectiveness and support will be resulted in increase in IT effectiveness in SMEs (Chau, 1995; Thong, 2001). This is because the size of the SMEs may not be able to accommodate and employ people skilled in the IT filed due to many reasons like insufficient financial resources in the business being the biggest reason.

The role of governments support and initiatives to help and encourage to adopt IT is much more significant in the context of SMEs.

According to the literature, it could be suggested that it is very important that governments precisely put into consideration what is demanded to support IT adoption in SMEs to avoid the gap between supports provided by government and what is really required for SMEs.

Moreover, in spite of some reports of governments being disadvantageous and ineffective assistance to the adoption of IT, a number of studies have demonstrated that IT adoption in SMEs has been significantly improved through supportive policies and initiatives provided by both developed and developing governments in certain countries especially in recent years, thus, governments should provide comprehensive policies and support systems to encourage small and medium enterprises to develop and use IT which should be periodically re-evaluated regarding the dynamic characteristics of SMEs, IT tools and dynamism of global economy, and market conditions.

Structural and financial factors associated with adoption of Fintech and access to formal financial services

In the modern era of digitalisation, financial institutions are transforming in a sea way providing new variant of services, adopting new technology to meet customer expectations. The convergence of technology with the financial service institutions will lead to build a strongly digitalized economy.

Technological innovations are adopted and implemented by financial service providers in their business models for providing a better service to their customer segments. According to Financial Stability Board, of the BIS (Bank for International Settlements) Fintech is referred as an innovation enabled with new technology to provide new applications, services, processes, services and business models by financial service companies.

In the dawn of Fintech in the early 1950s with the intention to reduce carrying of physical cash, and enhance online banking in 1990s and digitalization in this 21stcentury provided abundant financial opportunities in the form of payment apps, mobile wallets. Global adoption of Fintech will increase on an average by 52%. Projected Fintech transactions values for the year are 5.49 USD trillion in 2019 and expected to rise to 9.82 USD trillion in 2023 with 15.64% of CAGR.

How to identify structural and financial factors associated with adoption of Fintech

Several research trends are trying to establish sustainable adoption models, identifying factors that would influence a person to use fintech services. However, it is still unclear how consumers will continue to use these services. Moreover, the identification of these factors is not the only way to look at adoption rates. The public needs to be educated more on financial literacy and support from stakeholders which can support the running of the Fintech industry within different countries and globally. This is an important role in the collaboration of all stakeholders. Fintech should no longer be considered a disruptive business, this means financial service providers and all organizations offering this service should maintain good relationships with each other, some of these organizations include banks. As well as good relationships between fintech and regulators significantly affect the continuation of fintech practices.

Fintech should be able to aid transition of the economy. The government must see the fintech sector as helping with this transition, for example, by providing permission to use electronic money and digital wallets and their implementation as a payment method.

These methods clearly make it easier for people to pay in cash via their smartphones, which would reduce the number of people walking around with large sums of cash.

Previously, fintech was the enemy of banking as it was seen as a way that would make a number of people lose their jobs especially bank tellers as there would be no need for them due to the introduction of technology when it came to cash deposits and withdraws, but now banks can collaborate, and the government is not only a regulator but a player to create a better digital payment ecosystem.

The second is supervision. Loans are one of the many financial service models influenced by fintech, in addition to payments, wealth management, and digital insurance. Although the idea of peer to peer (P2P) lending which is the lending of money to businesses or individuals through online services that match lenders with borrowers is not something new, it is actually a product of fintech that is developing in countries such as the USA, China, and Indonesia. The hope is that P2P can help SMEs and individuals to obtain loan capital from various borrowers.

However, many illegal fintech loans have emerged due to fintech practices that rely on user trust. The approaches taken to fintech regulation vary widely. For example, the US has taken a reactive approach by relying on its rules and regulations, whereas China is taking a proactive step in developing a specific regulatory structure. Product-focused regulatory oversight sometimes does not lead to rapid technological advances.

There is an impression that regulations and policies are slow and incompatible with digital transformation. For this reason, regulators should adopt a “regulatory sandbox” approach. The sandbox allows regulators to work alongside industry players to develop this industry. Fintech operators should be officially registered and members of government-recognized fintech associations. The regulator should implement a direct inspection mechanism by checking the website and application channels. In addition, the government is also advised to have a complaint forum for illegal fintech. A more interesting suggestion is to explore public opinion using social media commentary data, highlight fintech product reviews, and analyse user complaints using text analysis, such as sentiment analysis and opinion mining.

The third is protection. New technology trends in the development of fintech cannot be separated from the use of Big Data, artificial intelligence, and machine learning. The effect of using data is complicated and extensive, motivating this industry to pay close attention to its security. Security in this context applies not only to technology, but also to data.

Fintech must protect consumers from issues regarding data leaks and data access restrictions, including personal data protection. Thus, the existence of strict rules regarding personal data protection is needed. Consumers must also be aware of digital literacy. Digital literacy demands smart technology users. Furthermore, the fintech industry must maintain the quality of fintech software, taking advantage of technology integration to avoid fraud.

Access to formal financial services

There are many reasons why the poor do not have access to financial services.

Social as well as physical distance from the formal financial system may matter, as well as them not having access to gadgets that might help them have access to these services and also not having enough knowledge on financial literacy. The poor may not have anybody in their social network who understands the various services that are available to them. Lack of education may make it difficult for them to overcome problems with filling out loan applications, and the small number of transactions they are likely to undertake may make the loan officers think it is not worthwhile to help them. Mainstream financial institutions are more likely to locate their retail outlets in relatively prosperous neighbourhoods, explaining why the poor are often located far from banks.

Even if financial service providers are nearby, in some cases, poor clients may encounter prejudice from bank staff, for example being refused admission to banking offices. Specifically for access to credit services, there are two important problems. First, the poor have no collateral, and cannot borrow against their future income because they tend not to have steady jobs or income streams to keep track of. Secondly, dealing with small transactions is costly for the financial institutions.

The new wave of specialized microfinance institutions serving the poor has tried to overcome these problems in innovative ways. Loan officers come from similar backgrounds and go to the poor, instead of waiting for the poor to come to them.

Group lending schemes improve repayment incentives and monitoring through peer pressure, and also build support networks and educate borrowers on what exactly it is they are getting themselves into. Increasing loan sizes, as customers continue to borrow and repay, reduces default rates. The effectiveness of these innovations in different settings is still being debated among many recently, many MFIs have moved away from group lending products to individual lending, especially in cases where the borrowing needs of customers starts to diverge; initial evidence has shown both techniques to be successfulю

Over the past few decades, microfinance institutions have managed to reach millions of clients and achieved impressive repayment rates, forcing economists to reconsider whether it is really possible to make profits while providing financial services to the some of the world’s poorest people.

Indeed, mainstream banks have begun to adopt some of the techniques of the microfinance institutions and to enter some of the same markets. For many, however, the most exciting promise of the microfinance is that it could in turn reduce poverty without requiring on-going subsidies. While many heartening case studies are cited—from contexts as diverse as slums of Dhaka to villages of Thailand to rural Peru—it is still unclear how big of an overall poverty impact microfinance has had. The uncertainty is due to methodological difficulties in evaluating impact, such as selection bias. Rigorous micro-studies compare groups of borrowers to non-borrowers, controlling for individuals’ characteristics and using eligibility criteria or random assignment as identification restriction to overcome problems of unobserved borrower characteristics being correlated with outcomes. While some of these studies have shown a positive impact of access to credit, others have not (Coleman, 1999) or the results depend on the econometric methodology utilized. It is important to note that income is only one measure of welfare in the case of households; consumption smoothing and not having to use child labour as buffer in times of negative income or health shocks and increasing women’s participation in family and community decisions are other important welfare indicators that have been analysed, although mostly using proxy variables for financial access, such as durable asset holding and proximity to a bank branch. Although the attention of microfinance has traditionally focused on the provision of credit for very poor entrepreneurs, and enthusiasts often emphasize how the productive potential of borrowers will be unleashed by microfinance, leading to productivity increases and growth, much of micro-credit is not used for investment. Instead, a sizable amount of micro-credit goes to meet important consumption needs. These are not a secondary concern.

For poor households, credit is not the only or in many cases the priority financial service they need: good savings and payments (including international remittances) services and insurance may rank higher. For example, one of the reasons why the poor may not save in financial assets may be the lack of appropriate products that may be considered to hold high value, such a simple transaction or savings accounts rather than costly checking accounts. (Research by Ashraf, Karlan and Yin (2006 a, b, c)) has shown that innovative savings product like collecting deposits directly from customers and savings commitment products can increase savings. The demand for microcredit used for consumption purposes could thus signal a demand for more appropriate savings products. One of the most controversial questions about microfinance is the extent of subsidy required to provide access. Although group lending and other technologies are employed to overcome the obstacles involved in delivering services to the poor, even though these services are delivered to the less fortunate it is however very costly to carry out these technologies, and though the repayment rates may be high this has not always translated into profits. Overall, much of the microfinance sector—especially the segment that serves the poorest—still remains heavily grant and subsidy dependent. Recent research confirms that there is a trade-off between profitability and serving the poorest (Cull, Demirguc-Kunt and Morduch, 2007).Then the question remains whether finance for the very poor should be subsidized and whether microfinance is the best way to provide those subsidies. Answering this question requires comparing costs and benefits of subsidies in the financial sector with those in other areas, such as education and infrastructure. There is likely to be a better case for subsidizing savings and payments services, which can be seen as basic services necessary for participation in a modern market economy, compared to credit. In the case of credit, given the negative incentive effects of subsidies on repayment and the potential disincentives for service providers in adopting market-based innovations, encouraging and taking advantage of technological advances which are becoming more wide-spread and fast-paced due to globalization, may be more promising than provision of subsidies. Perhaps more importantly, as we already discussed, improving financial access in a way that benefits the poor to the greatest extent requires a strategy that goes well beyond credit for poor households. It is not only the poor that lack access to formal financial services. The limited access to financial services by non-poor entrepreneurs is likely to be even more important for growth and overall poverty reduction. There are also good political economic reasons why the focus should be on how we can make financial services available for all: defining the problem more broadly would help mobilize the efforts of a much more powerful political constituency, increasing the likelihood of success.

Conclusion

SMEs need expand their diversified funding alternatives because the financing needs of SMEs vary according to their stage of growth, for instance at the beginning of the business the SME focuses on raising capital while during the tenure of the business the funds are diverted to running the business. For example, while banks generally extend credit to SMEs that are in the steady growth stage due to their rigid regulations, the business model and the regulations of factoring, venture capital firms and MFIs are more appropriate than banks to finance start-ups and SMEs in the expansion stage. However, compared to the banking sector, non-bank financial institution industry (A financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency) and capital markets in many countries are still too small to meet the financing needs of SMEs taking into consideration that NBFIs do not have full banking licences implying that their borrowing capacity is not big enough.

One of the important reasons for underdeveloped NBFIs in the region is that many countries do not have comprehensive regulatory and policy frameworks for NBFIs at the national level. However, a holistic policy and regulatory framework for NBFIs is needed to establish a sound competitive environment between banks and NBFIs. To develop SME capital markets, strategies should be developed to expand the investor base for an SME market and promote market literacy for SMEs and investors. The active SME markets also need professionals that support SMEs in capital markets, such as a disclosure support by consultants and certified public accountants (CPAs). Establishing policy measures is therefore important to build the base of professionals that support SMEs in capital markets. From the regulatory perspectives, a well-established regulatory and supervisory framework including a mechanism that supports SMEs in preparing disclosure documents and simplified listing procedures should be a priority for policy makers to develop SMEs capital markets.

SMEs are a critical component of economic and social stability in a country. Improving financial access for SMEs is expected to bring many benefits, including enhancing production quality, increasing new business opportunities, stimulating investment and consumption at the national level, and mobilizing excess corporate savings, as well as improving the country’s economic sector as a whole. Financing the SME cluster will improve the business efficiency of smaller export-oriented manufacturers. Enhancing access to finance for subcontracted SMEs will promote intraregional trade. These policy oriented measures at the national level are expected to indirectly accelerate global rebalancing. Furthermore, establishing financial infrastructure to support micro start-ups and microenterprises will stimulate income gains in low-income households and thus contribute to poverty alleviation, social welfare enhancement, and even the development of the corporate base. Financial technology can help SMEs cut down costs as most transactions can be done digitally and should be encouraged as it helps to financially include them. Financial technology has really evolved to meet the needs of SMEs to a point that one does not a smart phone to do their financial transactions even a simple phone can do hence breaking barriers and increasing financial inclusion. All the above stated reasons can be seen throughout this review as tools to enhance financial inclusion.

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