Using technology to help businesses in developing economies

Author: Sauradeep Bag, Observer Research Foundation

Micro, small and medium-sized enterprises (MSMEs) are the backbone of emerging economies — driving entrepreneurship, creating jobs and driving economic growth with modest capital investment. While lack of access to financial resources continues to hinder the prosperity of these enterprises, advances in digital public infrastructure such as India’s Open Credit Enablement Network (OCEN) offer hope to MSMEs seeking funding.

MSMEs have historically played a crucial role in the development of emerging economies by driving innovation and economic expansion. In India, they account for more than 29 percent of GDP and are responsible for half of the country’s total exports. They also contribute to one-third of India’s manufacturing output, employing over 110 million people, with a target to increase this number to 150 million in the near future.

There are currently 64.2 million MSMEs in Indonesia, accounting for 61 percent of the country’s GDP. These businesses employ a huge portion of the country’s workforce, with approximately 97 percent (119.6 million) employed in the MSME sector. However, only about 17.5 million MSMEs in Indonesia have gone digital and taken advantage of e-commerce opportunities.

Bridging the gap in access to finance is imperative to unlocking the true potential of MSMEs in emerging economies. Financing plays a key role in the growth and sustainability of MSMEs, but they are usually excluded from mainstream credit channels. Traditional financial institutions, such as banks and non-bank financial companies, often struggle with high operating costs that make it impossible to serve borrowers with smaller credit requirements. MSMEs are forced to turn to informal moneylenders and expensive microfinance institutions.

Recent advances in India’s digital public infrastructure offer a glimmer of hope for MSMEs seeking credit. Digital public infrastructure is the digital foundation that enables various technology-driven solutions to flourish. India’s experience with digital public infrastructure, exemplified by the India Stack, provides valuable insights and digital solutions that can benefit countries around the world, especially those struggling with similar challenges in internet accessibility and digital literacy.

OCEN stands as a transformative force in India’s financial landscape, offering a potential solution for MSMEs. OCEN aims to address the credit gap of around Rs 2-2.5 trillion (US$350 billion) in India’s MSME sector by enabling remote lenders to operate in remote regions and offering short tenures and small loans. OCEN is intricately woven into India Stack’s open application programming interface.

OCEN democratizes access to affordable credit, positioning itself as a beacon for financial inclusion. This innovation simplifies access to credit and adopts the principles of embedded financing. It acts as a universal language connecting lenders and intermediaries to craft scalable financial products.

Non-financial service providers, especially credit service providers, are empowered to create the building blocks of the credit cycle. Credit service providers act as digital agents for borrowers, safeguarding their interests by providing access to cost-effective credit. By simplifying the lending process, OCEN makes financial products more attractive to both borrowers and lenders, furthering the cause of economic growth and prosperity for all.

OCEN is reimagining the lending value chain, enabling non-financial service providers to transform into fintech-enabled markets. For example, a logistics company can seamlessly offer credit products to MSMEs within its platform, eliminating the need for MSMEs to go outside the logistics ecosystem to secure credit.

This innovative framework, empowered by digital public infrastructure, is having a ripple effect across industries, from logistics and neo-banks to payment gateways and agri-tech platforms. Entities in these industries can harness OCEN to become credit service providers. These credit service providers bridge the gap between lenders and borrowers, enabling lenders to offer more attractive financial products while reducing their operating costs.

OCEN’s impact should not be limited to India alone—it can potentially transform the financial ecosystems of developing nations around the world, laying the foundation for a more inclusive and prosperous global economy. As a member of the G20, India envisions itself as a catalyst for global change, offering OCEN as a guiding light for other developing nations seeking to take their MSMEs to new heights. Emerging economies often share similar characteristics, including internet penetration, smartphone ownership, and the significant contribution of their MSME sectors to their economies. OCEN, combined with digital public infrastructure, can offer a transformative solution for these nations.

The G20 Leaders’ Declaration in New Delhi underscores the importance of making a commitment to promote the responsible, sustainable and inclusive use of digital technologies by MSMEs. Although the declaration did not mention OCEN, perhaps due to its early stage of development, there is precedent for India exporting fintech innovation. In India, the UPI payment system has gained immense popularity for digital retail payments and its adoption is rapidly spreading globally. France, UAE and Singapore are collaborating with India on emerging fintech and payment solutions. Through the strategic use of digital public infrastructure, nations can similarly move toward equitable access to credit, financial inclusion, and economic prosperity.

OCEN has the potential to be a global game changer, offering MSMEs in emerging economies the access to credit they deserve. These economies must recognize the role of MSMEs in driving economic growth and commit to removing obstacles to their prosperity. Digital public infrastructure and the determination of nations to empower their MSMEs can lay the foundation for a more inclusive, fair and prosperous global economy.

Sauradeep Bag is an Associate Fellow in FinTech at the Observer Research Foundation.

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