New Innovative Tools for SME Financing

1. New Innovative Tools for SME Financing Datuk Mohd Radzif Mohd Yunus Group Managing Director, SME Bank, Malaysia

2. Table of Content • Traditional SME Financing and Key Challenges • Rise of Fintech • New Innovative Tools: • The Way Forward • Proposed Method for Adoptions by Financial Institutions • D. Conclusion

3. Traditional SME Financing and Key Challenges Source: SME Masterplan • Bank lending is the most common source of external finance for many SMEs and entrepreneurs. • Spectrum of funding alternatives available to SMEs is constrained compared with large enterprises. • Fifty percent of formal SMEs don’t have access to formal credit and the financing gap is even larger when micro and informal enterprises are taken into account. (World Bank) 15 February 2017 New Innovative Tools for SME Financing

4. Issues of Financing SMEs: Financier Vs SMEs Risk of High NPLs Lack of Proper Business Plan FINANCIAL PROVIDER Uncertainty over long-term position Higher Risk-Return Profile Lack of Proven Track Record Lack of Know-How & Resources Lack of Data for KYC Purposes SMEs Want a Fast yet Clean Financing Poor Credit-worthiness Lack of Financial Asset High Interest Rate Charged Information Asymmetry • Financing SMEs also been challenges by the immersion of Gen-Y into the SME Market which comes up with new business model and higher adoption of technology. • Need for new approaches in understanding the Gen-Y immersion and new business model. 15 February 2017 New Innovative Tools for SME Financing

5. Rise of Fintech to address the Present Needs of SMEs Fourth Industrial Revolution • Characterized by a range of new technologies . • Impacting all disciplines, economies and industries, and even challenging ideas about what it means to be human. Source: Professor Klaus Schwab, World Economic Forum • Referring to companies that provide or facilitate financial services by using technology. • Financial technology (Fintech) leading the way in disruptive innovation in financial services. • Helping to bridge a $2 trillion funding gap for millions of small and medium-sized enterprises (SMEs). • Rise of Fintech has led to the introduction of solutions that are efficient and effective at lower scale. What Fintech Offers Big Data Software Financing Payments Branding & Marketing Compliance 15 February 2017 Source: WE Forum: The Future of FinTech, A Paradigm Shift in Small Business Finance New Innovative Tools for SME Financing

6. New Innovative Tools: The Way Forward • Practice of lending money to individuals or businesses through online services that match lenders directly with borrowers. Peer-to-Peer Lending (P2P) Financing • People (i.e. the 'crowd') invest in an early-stage unlisted company (a company that is not listed on a stock market) in exchange for shares in that company. Equity Crowdfunding (ECF) Fintech • Small businesses can turn unpaid invoices into fast cash with invoice factoring and invoice financing companies, including online lenders. • FinTech embodies a new set of products tailored to the needs of small businesses. • New tools in term of financing and making the operations more effective and efficient. Online Invoice Financing (OIF) • The harvesting of insights from vast quantities of data. Big Data Efficient and Effective Operations • Business Solution Software, Accounting software, Apps to help SMEs. Software Payments • Growth in e-commerce has both facilitated and encouraged the further development of digital payments experiences. Compliance • Standard checks can be performed automatically and are more reliable than manual checks to extract the most important data needed for AML/KYC . 15 February 2017 New Innovative Tools for SME Financing

7. Method of Adoptions for FIs to Adopt & Embrace Fintech Strategy Issues of Collaboration IP Strategy Cybersecurity • Big data brings big reputational risk, and there is increasing public interest in IT security arrangements. • Issues of who own the Intellectual Property (IP) right after the collaboration. Acquisition Organic Growth (R&D) Establishing innovative, agile teams to develop new offerings rapidly, with an emphasis on digital features, such as mobile, social media, and data analytics. For many firms, acquisitions are the only way to obtain a new technology or product and remain a competitive player in the marketplace. Tech-Renewal- legal resourcing Data Privacy • Roadmap for the integration of data which should include a primary data management system. • Legal resourcing can be a big challenge, given that tech renewal is likely to absorb key people in the business for a very long time Collaboration Collaborations present a great opportunity for banks not only resulting in increase of revenue, but most importantly innovation 15 February 2017 New Innovative Tools for SME Financing

8. As a conclusion… Fintech is shaping Financial Institutions (FIs) from outside in Where traditional FIs have failed, Fintech is succeeding Time to get off bench: Over 20% of FIs business at risk to Fintech Disintermediation: FinTech’s most powerful weapon New untapped technology is rewriting the FIs rulebook The free lunch is over: FIs must leverage Fintech 15 February 2017 New Innovative Tools for SME Financing