Crowdfunding a lifeline for SMEs
Innovations that expand financial inclusion will ultimately boost the economy, according to Investree
Crowdfunding is a viable solution for small businesses at a time of economic uncertainty, but regulatory support is necessary to promote the growth of the segment, according to Investree, an Asean-based financial technology company.
Natsuda Bhukkanasut, the co-founder and chief executive of Investree, which holds a licence from the Thai Securities and Exchange Commission as a crowdfunding platform, elaborated on its role during a panel discussion on digital financing at the recent Asia-Pacific Economic Cooperation senior finance officials' meeting in Khon Kaen.
A vast financing gap exists in Thailand when it comes to micro, small and medium enterprises (MSMEs), she said. According to a 2017 report by the International Finance Corporation (IFC), only a fraction of Thai SMEs can access commercial loans, she said.
The SME financial gap in Thailand is estimated at roughly 10% of the GDP, or the equivalent of 1.4 trillion baht, said Ms Natsuda. Given the importance of SMEs and MSMEs to every economy, alternative digital fundraising is one of the tools regulators can encourage to help close this gap.
Financial technology has been widely adopted and is a growing trend worldwide. Asia-Pacific makes up 8% of the world market share and still has great potential for growth.
The IFC, the financing arm of the World Bank, has urged policymakers to push for financial innovations in order to champion financial inclusion. This includes creating a comprehensive credit database and making it accessible to non-bank service providers. This will help SMEs establish credit records and gain access to financial services in a fair and timely manner, while investors will also have more confidence in the companies they are funding.
In Malaysia, the government has helped promote digital fundraising platforms by investing alongside them, fostering trust in the new platforms among SMEs and investors alike.
Other measures recommended by the IFC include strengthening the legal, regulatory and institutional infrastructure for factoring and leasing.
"To a degree, Thailand is putting these recommendations into practice, but simply put, we still have a way to go," said Ms Natsuda. One example is an amendment to the National Credit Bureau Act that would allow crowdfunding platforms to become members of the bureau.
However, despite opening the door for new members to apply, there may be a requirement for members to have registered capital of 50 million baht, which is a prohibitively high level for startups. This requirement, if left unchanged, is a challenge for all non-banks including crowdfunding platforms.
Since the start of 2021, fundraising via crowdfunding in Thailand totalled around 2.7 billion baht, a tiny fraction of the 1.4-trillion-baht financial gap noted earlier, and insignificant compared to the size of the Thai capital market. Similar to other countries, the market size of the alternative funding sector poses little systemic to the domestic capital or debt markets.
"Tiny as it is, the 300%-plus growth in Investree's portfolio affirms that there is interest in this digital funding instrument from both SMEs and investors," said Ms Natsuda. "We exist because regulators created the licence for us, and we can only grow if we receive ongoing regulatory support."
This view was echoed by other panelists who represented platforms from Malaysia and Singapore.
"We hope platforms like ours can be invited to participate in policy discussions that involve us, and be a part of the policy making to help foster policies and rules that strike the right balance," Ms Natsuda said.
"Amid economic uncertainty arising from the Russia-Ukraine War, fuel prices, inflation, interest rates and digital currency fluctuations, investing in companies through crowdfunding offers an alternative for investors.
"When you invest in a crowdfunding note, you are investing in a genuine business," she continued. "Although a crowdfunding note may be less volatile than some other asset classes, there is a risk of delayed payment and default, which investors need to be aware of, and allocate only a fraction of their investable assets in these instruments. They should also diversify by investing in different companies to avoid portfolio concentration."
There are over 3 million registered companies in Thailand, of which 2.9 million or 99% are SMEs. Of those 2.9 million companies, more than 2 million are small businesses that do not have easy access to commercial funding, especially when credit underwriters focus purely on past credit history.
Unlike banks, crowdfunding platforms take into account future business and earnings, said Ms Natsuda. "And this is precisely why we can be a driving force in financial inclusion," she said.
"We see great potential for SMEs and at the same time, opportunity for investors looking to diversify their investment portfolios with this new asset class."