Improving ASEAN’s Access to Finance with Digital Banknotes
Micro, small and medium-sized enterprises (MSMEs) are an integral part of ASEAN economies, but they have not been able to access sufficient financial resources to unlock their growth potential.
The possibility of ASEAN member states adopting central bank digital currency (CBDC) is raising hopes of improving businesses’ access to finance in the region. CBDC is a national digital banknote issued and controlled by a country’s central bank. This is different from cryptocurrencies, which are unregulated and decentralized. CBDCs can be used in the same way as circulating national fiat currencies, except that they are entirely in digital form and allow individuals and businesses to hold CBDC accounts directly with central banks. As of June 2022, eight of the ten ASEAN member states – namely Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam – had conducted research on CBDCs, launched pilot projects or even started to introduce CBDCs.
Micro, small and medium-sized enterprises (MSMEs) are an integral part of ASEAN economies, but they have not been able to access sufficient financial resources to unlock their growth potential. Across the region, MSMEs represent on average 98.0% of the total number of enterprises and 66.2% of the workforce. However, limited access to bank loans, already a chronic problem for MSMEs, has intensified in some ASEAN member states during the pandemic.
MSME access to commercial loans varies from country to country, but remains generally low, with a few countries having recently experienced a downward trend – and a steeper decline in 2020 as a result of the pandemic. The share of MSME bank loans in total bank loans increased from 30.9% in 2015 to 19.8% in 2019 and 17.1% in 2020 in Laos. The Philippines recorded 7.9% (2015), 6.1% (2019) and 5.1% (2020); Thailand simultaneously experienced a larger drop, from 33.5% to 30.9% and 22.4%.
The ability of MSMEs to obtain bank loans is limited by the high collateral requirements to secure the loans. Additionally, they typically lack the necessary business transaction records to assess performance and potential. The traditional assets used as collateral are land, buildings or machinery, which micro and small businesses particularly struggle to acquire. Newly created MSMEs also struggle to get start-up loans to grow.
The deployment of the CBDC in ASEAN is expected to improve MSMEs’ access to finance in two ways. First, it should improve the business performance of MSMEs with an online presence by increasing the number of digital consumers. The implementation of the CBDC, by gradually replacing the national physical banknote and expanding digital payment systems, will enable unbanked populations in poor or remote areas to buy, sell, save and invest. more easily than before. This could lead to the expansion of ASEAN markets, as an analysis of World Bank data on account ownership shows that more than half of the population aged 15 and over in Cambodia, Myanmar, Laos, Vietnam and the Philippines does not have an account. from a financial institution or from a mobile money service provider.
New money lending models based on digital data are emerging in ASEAN economies. CBDCs potentially provide a more comprehensive database of business transactions that can be leveraged to provide financing to underserved MSMEs.
For example, Cambodia’s CBDC – called Bakong – reached about half of its population within a year of its launch in October 2020. Users do not need a bank account to register for Bakong, but they need a smartphone with a Cambodian mobile phone number to transmit funds. More digital consumers and broader digital payment systems are expected to incentivize MSMEs to participate in e-commerce and increase their income, which will increase MSMEs’ chances of obtaining bank loans.
Second, data on digital business transactions – partially supported by the use of CBDC for online payment – can be used to assess MSME credit risk for bank lending. Usually, commercial banks cannot access reliable financial statements of MSMEs because business owners do not pay much attention to financial records due to their limited knowledge of accounting. This situation changes when MSMEs switch from cash-based commerce transactions to online transactions. All digital transactions are logged and can be used as an alternative source of data to develop credit risk models that reflect the financial capacity and business prospects of MSMEs.
New money lending models based on digital data are emerging in ASEAN economies. In Indonesia, for example, Grab provides loans to MSMEs by using data on their business income earned through the Grab app and customer reviews to determine the credit risk of its borrowers. Lazada uses its transaction database to assess the eligibility of MSMEs for e-commerce finance. CBDCs potentially provide a more comprehensive database of business transactions that can be leveraged to provide financing to underserved MSMEs.
However, the increased adoption of CBDC by businesses and consumers increases the risk of cybercrime. E-commerce businesses typically store credit card information, email addresses, mailing addresses, usernames, and passwords of customers. In ASEAN, one of the top cyber threats to online shoppers is e-commerce data interception, which hinders the transmission of consumer data to and from their devices and alters messages remotely. This reduces consumer confidence in the security of online payments, as cybercriminals can use online data to steal credit card information or personal CBDC data. To mitigate this risk, ASEAN governments need to strengthen data protection.
The implementation of the CBDC in ASEAN economies is expected to improve MSMEs’ access to finance through better business performance and better information to assess credit risk. To realize the potential benefits, ASEAN governments need to invest more in digital infrastructure, especially cellular network coverage, digital ID systems and cybersecurity, while raising awareness and building business confidence and of consumers in CBDCs.