ARYZE spoke to Stine Kirstein Junge, Global Head of SDG Accelerator for SMEs and Private Sector Advisor at UNDP. We discussed the SDG Accelerator for SMEs program and the role that digitalization plays in advancing the SDGs. At the same time, there was also a focus on how companies, particularly Small Medium Enterprises (SMEs), can build resilient economies that foster financial inclusion and how financial service providers can do well by doing good.
When asked about the Accelerator for SMEs program, she described it :
We initiated an innovation program in UNDP that can unlock SMEs ’ potential to contribute to development. The program is called the SDG Accelerator for SMEs, and it was developed and tested in Denmark with 32 industrial SMEs in 2018 and 2019. We have also done SDG Accelerator pilots in Bosnia and Herzegovina and Moldova. As we speak, we are implementing a Fintech SDG Accelerator pilot in partnership with Copenhagen Fintech Center. In a cross-regional setup (Nordic/ASEAN), we work with 4 Nordic Fintech companies and bring them to the ASEAN region. In the set-up, we partner with UNDP’s Center for Technology, Innovation and Sustainability, commercial partners (City Bank and DBS), and the Danish Embassy in Singapore.
The digital world’s importance is now more relevant than ever in a post-Covid 19 scenario with millions confined in their homes. Digitalization and SMEs play an increasingly important role in advancing the SDGs. Accounting for 70% of employment globally, SMEs represent over 50% of GDP in most OECD countries. Consequently, they embody an important economic force and significantly affect advancing the SDGs, particularly in sustainable economic growth, gender equality, and climate impact.
Based on research from the Business and Sustainable Development Commission, achieving the Global Goals opens up an economic prize of at least US$12 trillion by 2030 for the private sector. It also points to where the vast amount of the prize is located: developing countries.
Reducing poverty and inequality with financial services
The World Bank established a connection between reducing poverty and inequality with providing access to financial services. Facilitating access to financial services for poor households and micro, small, and medium-sized enterprises has multiple beneficiaries. On one side, for poor households, it gives the benefit to successfully manage their limited income adjusted to their daily needs, whereas, for SMEs, access to financing and a better understanding of how the basic fundamentals of risk and finance will enable them to engage in business opportunities.
Stine described the impact of digitalization on SDGs:
Through digitalization, SMEs facilitate the shift from in-store cash payments to digital payments, driving a lower carbon footprint of transactions. Digitalization can also solve the information asymmetry gaps that make lending to SMEs difficult ($5 trillion financing gap a year today). Digital innovations such as a digital stock exchange in Zimbabwe or algorithmic lending using payments and e-commerce data allow for greater accounting of risks and impacts in financing decisions, resulting in more financing for SME businesses. MYbank in China, for example, has used such data to perform data-driven ratings and disburse $300 billion to 17 million SMEs.
The need for innovation in the financial sector
According to a report performed by PWC Global, mobile financial services (MFS) are emerging rapidly in the developing world due to digitalization. In fact, all over the globe, mobile phone operators provide services to 4.8 billion people, and this number is only predicted to increase remarkably in the developing nations compared to the developed nations. Mobile payment platforms have turned mobile phones into interfaces with the financial system and are now used by over 1 billion people worldwide. For example, in Sub-Saharan Africa, over 60 percent of the adult population has mobile money accounts.
Africa, Southeast Asia, and other places focus on innovation and entrepreneurship with forward-thinking new approaches. For example, Kenya is spearheading the path to financial inclusion in Sub-Saharan Africa. From 2014 to 2017, the country’s population experienced a 15% growth in mobile money accounts, as seen in the graph above. Mobile money account is services that can be used without an account at a financial institution. As of January 2021, Kenya had 66.6 million registered mobile money accounts and counting. The reason for Kenya’s success in mobile money banking is M-pesa, a mobile banking service that allows users to store and transfer money, simplifying access to banking for everyone with a mobile phone.
M-pesa is an ideal example of how the telecommunication and banking sectors worked together to aid the financially excluded, thus greatly improving Kenya’s living standards. Their business model proved that countries can successfully start on a new platform, rather than using what was used before, becoming trailblazers of untapped markets.
Source: M-Pesa Youtube Channel
If we look at another country in the list of mobile phone adoption in Subsaharan countries, we must set our eyes on Tanzania. Conforming to a Case Study done on Mpesa´s impact on the country, before the launch of MPesa in Tanzania back in 2008, 54% of people didn’t use any financial service form, not even informal. However, In 2014 around 32% of adults had a bank account, rising to 39 % in 2017, according to Findex. Today, nearly six in 10 adults (56%) in Tanzania are financially included, almost all through mobile money accounts (55%). The Bank of Tanzania granted these numbers to innovation in the financial sector and mobile phones to access financial services like those offered by MPesa.
SMEs struggle with financing
The difficulties of borrowing money for SMEs are evident in some parts of Asia, exposing the need for innovation in the financial sector. For example, based on a survey performed by the Asian Development Bank Institute (ADBI), half of the Philippines’ population does not make enough money to be included in the financial system. According to the ADBI surveys, micro, small and medium-sized enterprises account for 99.6% of this region’s industries. At the end of 2012, micro-loans represented a share (less than 1% or P8.4 billion) of total banking loans in the country (P3,622 billion). Hence, addressing this opportunity can increase Gross Domestic Product (GDP) by between 9% and 14% in the Philippines economy.
Opportunities presented by e-commerce platforms or social commerce drive the adoption of digital payments both by SMEs/MSMEs and individuals, which advances financial inclusion. Mobile phones and digital platforms will reach the financially excluded and people in rural areas without the need for physical bank branches.
But what can be done to strengthen banks’ lending efficiency to SMEs?
The biggest challenge, as mentioned before, is the information asymmetry gap, which results in higher due diligence costs, perception of risks, and higher interest rates to SMEs. Digitalization helps address this issue by making visible transactions (and other data) that facilitate credit rating. Digitalization supports more effective lending to SMEs throughout the entire lifecycle, from online acquisition (for example, through e-commerce platforms) to automated credit rating and non-collateralized lending, digital disbursement, and repayment.
All in all, technological innovations, when combined with good policy and a market-oriented business model, can serve as a strong tool for accessing financial services. Regulatory changes and deployment of digital mobile tools that enable savings and liquidity for lending can also strengthen banks’ lending efficiency to SMEs and deliver an analysis of transactional and digital footprint data to create insights that improve credit risk assessment.
Source: Canva Premium
Women-owned SMEs: an untapped market segment
Women entrepreneurs in the SME market as a fast-growing and untapped market. Conforming to the 2017 Global Findex data, 65% of women worldwide have a financial account, compared to 72% of men. Hereby, another relevant indicator is that over 70% of women-owned small and medium enterprises (SMEs) have inadequate or no access to financial services. Women-owned SMEs are therefore an underserved segment. Anecdotal evidence points to a perception of higher risk from banks and likely cultural bias amongst loan officers when setting up targeted lending programs for women-owned SMEs.
On another note, public and private sector institutions can substantially create programs specifically designed to promote women entrepreneurs’ growth. Commercial banks targeting women entrepreneurs in the SME market as a fast-growing and untapped market segment have found these programs financially rewarding. The image below is extracted from a report made by the Global Banking Alliance for Women(GBA) and supported by McKinsey & Company, exploring how banks can profit from the multi-trillion dollar female economy, which is a fast-growing, potentially lucrative market for banking services and other financial services providers alike.
Source : Global Banking Alliance for Women
SDGs mean better business
Alignment with the SDGs increases efficiency, ignites innovation, and enhances reputation. According to Kasper Ulf Nielsen, Executive Partner at the Reputation Institute, people’s willingness to buy, recommend, work for and invest in a company is driven 60% by their perceptions of the company and only 40% by their perceptions of their products. Conforming to data by The Business And Development Commission, sustainable companies around the globe are thriving and delivering attractive returns to shareholders because they have the capacity to attract and retain employees, consumers, B2B customers, and investors, and they secure their license to operate.
Stine weighed in on the business opportunities embedded in the SDGs :
Companies need the most talented employees on board to survive in a highly competitive world. The workforce is composed more and more increasingly by Millenials, and they are more purpose-driven and are more likely to work for companies with a strong SDG profile. Companies need to transmit their positive impact globally, and it is also an increasing trend amongst investors when considering their future investments. They ask the companies they invest in how they are working with the SDGs.
Innovation and entrepreneurship
As mentioned above, Mpesa proved that countries can start on a new platform, rather than using what has been used before. New approaches in Africa, Southeast Asia, and other places worldwide focus on innovation and entrepreneurship as tools for increasing financial inclusion and fighting corruption. Nigeria, Kenya, India, the Philippines, and more places have innovative fintech labs, and also, Akon is building the new Akon City, a $6 billion cryptocurrency-run futuristic smart city in Senegal. While it is certain that many people are getting mobile phones; Nonetheless, most companies’ services are still legacy solutions, such as the Western Union app, Paypal App, or other expensive and exclusive solutions. Hence why Bitcoin and other cryptocurrencies are so popular amongst people in some of these places.
AKON City in Senegal (Prototype) Source: Bitcoin.com
ARYZE is a major game-changer
ARYZE will transform the financial ecosystem and reduce financial inclusion. Our products MAMA and MAMA business, a Multi-Asset Modular App, enables users to have unique payment experiences tailored to each user and include rewards. Like how a physical wallet can hold physical cash or coins, MAMA is a digital wallet that will let users receive, send and store Digital Cash. Deposits held in MAMA are fully backed in their preferred sovereign currency. Digital Cash can also be sent to open-source blockchains like Ethereum and exist in the form of a “stablecoin” backed one-to-one by real underlying Fiat currencies issued by governments.
Whenever users use Digital Cash on an Open Source system or transfer deposits directly from MAMA to MAMA, ARYZE collateralizes with assets backed by government guarantees. We’re essentially insuring working towards drastically reducing credit risk by placing user funds into central-banks deposits or through the purchase of short-term government bills and bonds. Next-generation DeFi or distributed finance solutions require assets that are not extremely volatile, and that is where interoperability comes into play.
ARYZE Digital Cash, issued as a stablecoin, can exist as a cryptographically secure token, linked to national money that will benefit from quick and immutable transactions through distributed ledgers, yet also the non-volatility of fiat currency, providing the best of both worlds. Moreover, ARYZE collateralizes stablecoins by incorporating government risk. Digital Cash is based upon the notion of full-reserve banking. The collateralization method is based upon insuring deposits through short-term government bonds and bills and direct deposits into central banks, reducing credit risk. All MAMA deposits are Digital Cash and are shown and represented as USD, EUR, GBP in the app.
Source: Robin Gonzalez Kristensen
ARYZE will onboard millions of corporate clients and individuals
ARYZE estimates to have more than 1.4 million corporate clients and 31 million individual users within three years after launch. This is achieved by building a banking platform intended to be used by most people and businesses. We have developed a full reserve bank so that our revenue streams are not dependent on lending and credit activities. We are also building a multilevel KYC approach that will enable us to reach even the citizens with the most minimal identification documents.
Because of our Go-To market strategy, which entails working together with large-scale NGOs and humanitarian aid agencies, we can identify potential end-users and have the means of reaching these individuals and businesses.
Source: ARYZE Deck 2021
Although there is a growing trend amongst investors engaging in SDGs, financial and capital markets still fail to take SDG impacts into account at large. It is clear that as the tides are changing towards a more sustainable inclusive economic development, we still need to see a shift in mentality within certain sectors. We asked Stine about the reasons behind it and, more importantly, what can be done to create a shift in this mentality?
There are many reasons for it: disparities in impact disclosure and reporting requirements, weaknesses in standardization and taxonomy frameworks, and huge data gaps, essential for large adoption of ESG practices across financial and capital markets. The Future of Sustainable Data Alliance precisely attempts to address such data gaps. UNDP’s SDG Impact Initiative works on empowering investors with clarity, insights, and tools to achieve the Sustainable Development Goals (SDGs). Many other initiatives are on-going on the regulatory front (NGFS) and standardization front (European taxonomy for sustainable activities).