Capital Formation Opportunities for Small Businesses

finviet01/07/2024

NGUYỄN THANH HIỂN

CEO of Finviet

The 2025 Comprehensive National Financial Strategy, with a forward-thinking vision for 2030, underscores the importance of ensuring access to financial services in all regions of the country. This strategy presents an exciting opportunity to create a thriving small-scale capital market, providing significant benefits to small and medium-sized enterprises (SMEs) and individual business owners.

Reducing Loan Costs Through Technology

Across the nation, approximately 5 million household businesses are playing a crucial role in boosting the economy. These encompass various enterprises such as retail, small-scale handicrafts, mechanical workshops, and providers of essential community services. Additionally, there are businesses involved in the production or processing of agricultural, forestry, and aquatic products. Household businesses are typically owned by individuals, groups, or families, and employ fewer than 10 workers. At a smaller scale, there are households engaged in agriculture, forestry, fishery, salt production, as well as street vendors and those involved in low-income, mobile businesses and services that do not require formal business registration.

This group currently faces significant challenges in accessing financial services. Financial institutions (FIs) often impose stringent appraisal processes and complex regulations to meet high safety standards. As a result, most household businesses find it arduous to access services from traditional financial institutions. Understandably, these institutions cannot risk lowering lending standards to accommodate this group, given the potential for heightened risk.

The issue of insufficient capital for household businesses is not unique to Vietnam but is common worldwide. A survey of 1,000 newly established small and medium enterprises (SMEs) globally, which sought loans within the past five years, found that the primary barrier to accessing loans for SMEs was a lack of collateral or insufficient collateral, accounting for 67%. Most of the operating capital for SMEs comes from personal networks, such as family and friends. Therefore, establishing a capital supply channel for this group is critically important.

How Have Other Countries Tackled This Issue?

Many countries have addressed the issue of providing capital to small and medium-sized enterprises (SMEs) by creating dedicated channels for funding through collaboration between financial institutions (FIs) and fintech companies. Traditional FIs offer strict operational processes, while fintech companies bring technological capabilities and diverse data sources, enabling a comprehensive ecosystem for quick, efficient, and secure credit decisions. Fintech involvement also introduces automated solutions and modern data technologies, significantly reducing loan costs.

According to research by Ernst & Young, the cost of processing a loan for an SME through traditional FIs ranges from $100 to $300 per loan, while using fintech platforms reduces this cost to between $5 and $35—an 85-95% reduction. In Vietnam, the number of bank branches serving every 100,000 people is relatively low, at only about 3.5 branches per 100,000 people, compared to 9-15 branches per 100,000 in South Korea and other neighboring countries. Therefore, improving geographic coverage is essential, and in the current context, technology is the key to effectively addressing this challenge.

"THE EXTENDED ARM" OF THE BANKING SECTOR

At Finviet Technology Corporation, we are wholeheartedly dedicated to revolutionizing distribution and retail systems with our innovative ECO e-wallet. Our primary focus is to empower small household businesses and retailers by providing them access to essential financial institutions (FIs) for small loans, typically ranging from 10 to 20 million VND per household. We have keenly observed the pressing need for capital among household business owners, small retail store owners, and convenience shop operators who are eager to expand their businesses. This realization has solidified our commitment to serving as the driving force for growth at Finviet. As the trusted “extended arm” of FIs, we are passionate about delivering advanced financial technology solutions to support communities and individual business households. Through our close collaboration with FIs, we facilitate seamless online account openings, eKYC customer identification, credit assessment, and network development, ensuring a brighter future for all.

Finviet has successfully partnered with several financial institutions to create financial products for individual and business households, allowing them to borrow between 20 and 50 million VND from banks. However, the rollout of credit for this group remains limited due to complex procedures, making it difficult to expand the model. From our practical experience, we have identified that financial institutions need to develop low-cost financial products tailored for SMEs and household businesses. This can be achieved by leveraging technology to optimize the appraisal process and shorten the time required for approval and disbursement.

With the recent issuance of Decree 52/2024/ND-CP by the Government, which replaces Decree 101/2012/ND-CP on cashless payments, along with the Law on Credit Institutions 2024, the legal framework for cashless payment activities has been updated. This includes the opening and use of payment accounts, cashless payment services, intermediary payment services, and the organization, management, and supervision of payment systems and fintech enterprises. However, we believe that the current regulations still do not fully meet market demands, nor do they fully exploit the potential of fintech development.

To date, existing regulations still do not fully meet market demands, nor have they tapped into the full development potential of fintech. Even the Law on Credit Institutions 2024, which took effect on July 1, 2024, has not yet addressed these issues in depth.

In order to make significant progress, state regulatory agencies should promptly develop and implement a controlled sandbox mechanism, allowing financial institutions to closely collaborate with fintech companies to support the national financial inclusion strategy. This would empower technology-capable, financially strong, and modern management organizations to participate in the small-scale capital market through digital banking models. Furthermore, financial institutions should be allowed to provide financial services through banking agent networks at levels suitable for small businesses and SMEs. As a result, these groups will have access to modern, comprehensive financial services at lower costs, which will help achieve the objectives of the national financial inclusion strategy.

Source: Saigon Financial Investment Journal – Issue 246 – 2024 – Monday, July 1, 2024

Institute for Digital Economic Strategy:

https://vienkinhteso.vn/chien-luoc-tai-chinh-toan-dien-quoc-gia-co-hoi-de-hinh-thanh-thi-truong-von-quy-mo-nho-15944.html

National Assembly Television: : https://www.quochoitv.vn/chien-luoc-tai-chinh-vi-nguoi-thu-nhap-thap-227979.htm