Crowdfunding for SMEs
Tok Yoke Wang - IMF-Singapore Regional Training Institute;
Tan Swee Liang - Singapore Management University;
Thitipat Chansriniyom - IMF-Singapore Regional Training Institute
-- Fintech has transformed all segments of financial services from payments, savings, lending to managing risks. Our recent paper, “Do Innovations in Lending Help SMEs?”, focuses on peer-to-peer lending or crowdfunding. Crowdfunding is a platform business that matches investors with borrowers. It deploys data analytics and innovative algorithms (such as fraud detection) to identify credit worthy borrowers by relying on non-traditional data such as those from social media, mobile phone usage and utility payments. Data is the “new collateral” under this new business model which helps fill the financing gaps of SMEs who are lacking in both collateral and credit history. Is there evidence that crowdfunding helps SMEs? What are the key drivers of crowdfunding around the world? What regulatory challenges do they pose? These are three key questions we explored in our paper. For our research, we supplemented limited data with first-hand interviews and survey of crowdfunders in Singapore.
What makes crowdfunding attractive to SMEs compared to bank borrowing? Crowdfunders can provide smaller quantum, shorter duration and non-collaterised loans. According to our survey, crowdfunders can process a loan within a few hours instead of days (45 to 60 days for banks) and price it at very competitive rates. Our empirical analysis showed that crowdfunding has filled the financing gaps of SMEs and improved their cashflows. Anecdotal evidence also showed that there is a positive spillover effect from such financing as it eventually induced banks to finance the SMEs who were previously rejected.
Globally, the crowdfunding industry has grown rapidly in recent years and in terms of crowdfunding volume. China, U.S. and U.K. are the largest markets. In Asia, the industry is also growing rapidly, including in Singapore which has seen exponential growth over a short period of time to become one of the top 20 in the world and the second in South-East Asia in terms of crowdfunding volume. Our empirical analysis showed that the key drivers behind this rapid growth are its higher GDP per capita, higher level of financial sector development and greater availability of venture capital. For less developed countries, lack of financial access could spur the growth of the crowdfunding industry.
For the crowdfunding industry to continue to thrive, a robust and clear regulatory framework will provide regulatory certainty and foster confidence in the market. How should regulators go about regulating crowdfunders? There are currently no internationally agreed standards on regulatory approaches to crowdfunding. The risks posed by crowdfunding fall largely on investors. To this end, most regulators have adopted a proportionate approach to regulating crowdfunding, aiming to strike a balance between the benefits and risks. This means regulating in a risk-focused manner, according to the activities of the crowdfunders.
For instance, crowdfunding platforms that deal with debt and equity are required to obtain Capital Market Services (CMS) licenses to operate in Singapore. They are subjected to prospectus requirements under the Securities and Futures Act (SFA) because an invitation to lend to a corporation in Singapore is considered as an offer of debentures. Regulators in Singapore have also enhanced the disclosure requirements of crowdfunders and strengthened the practices and controls, such as due diligence conducted on issuers, management of defaults and cessation of business. Regulation will have to adapt to the rapidly evolving financial landscape, notably, policy issues beyond the scope of prudential supervision such as safeguarding data privacy, cyber-security, consumer protection, fostering competition and compliance with AML/CFT. In addition, industry-led initiatives to promote best practices and raise awareness about the industry could also complement top-down regulation to safeguard financial stability.
The Covid-19 pandemic is both a threat and an opportunity to crowdfunders. While the demand for efficient and contactless services is a boon for crowdfunders, the deep economic downturn is a real stress test and many of them have seen a rise in borrower defaults, falls in returns and investor funding. Only the strongest will survive.
We thank the Cambridge Centre for Alternative Finance for providing us with the data for our analysis.