Topics of the workshop included fostering SME participation in sustainable global value chains, the role of fintechs in SME development, the role of development banks in enabling SME access to finance as well as the role of the policy environment for SME finance. The outcome of this workshop will feed into discussions in the G20 going forward.
International large corporations increasingly want their suppliers to comply with sustainability and social standards such as workplace safety, mainly due to increased customer awareness of environmental and social consequences of their consumption choices. Therefore, SMEs who want to participate in global value chains need to ensure their production processes comply with international standards. Necessary investments are difficult to finance out of current earnings. Participants highlighted several approaches to improve SME participation in global value chains, including a cloud-based payment solution where suppliers receive advance payments for their invoices (reverse factoring), while rewarding them with lower financing costs if they adhere to sustainability standards; a smartphone app for farmers connected to a database that allows a better use of performance data to inform financing decisions in SMEs; as well as improved training on environmental, social and governance requirements. Research on best practices to integrate SMEs into sustainable global value chains through better access to financial services will be further pursued during the German G20 presidency.
Another topic explored at the workshop was the role that innovative digital financial solutions (fintechs), such as lending platforms and payment apps, can have for SME financing. Fintechs can serve as matchmakers between SMEs and investors. Especially in emerging markets, fintechs can help to leapfrog towards financial inclusion through enabling digital payments. It was emphasized that technology goes a long way – but that the personal element is often still indispensable, especially when it comes to building trust. Following the presentation of four fintech business models, Parliamentary State Secretary of the Ministry of Finance Jens Spahn, Parliamentary State Secretary of the Ministry for Economic Cooperation and Development Thomas Silberhorn, as well as Member of the Executive Board of KfW Dr. Ingrid Hengster engaged in a discussion with the fintechs. Parliamentary State Secretary Jens Spahn said: “Every bank needs to also be a fintech today; it is all about cooperation”. He predicted that big data would become a major issue soon. There was broad agreement that the benefits of fintechs in SME finance prevail. At the same time, financial stability, cyber, and consumer risks have to be monitored closely. When asked about fintech regulation, Spahn emphasized: “Don’t regulate technology, but business models – a bank is still a bank.”
Based on the important role that development banks play in SME access to finance, members of the G20 development banks (D20) and the International Development Finance Club (IDFC) shared their experiences in ensuring SME participation in Global Value Chains. The Small Industries Development Bank of India and the Central American Bank for Economic Integration contributed their insights on financing SMEs including the importance of diversifying financial products. KfW and the Agence Française de Développement (AFD) reported on their experiences in de-risking SME finance via guarantee programs and structured funds. Local currency funding and combining financial services with capacity development, also in SMEs themselves in order to make projects fundable, were mentioned as other important areas of engagement. Crowding in private capital is important.
The workshop further underlined the important role of policy and regulation for SME finance. An example of how policy reforms can be converted into tangible action plans was provided by Turkey. The participants stressed the importance of the G20 work on effective implementation approaches of the G20/OECD High-Level Principles on SME Financing. Also the G20 Action Plan on SME Financing was highlighted as an important element for improving SME finance. The Action Plan focuses on 1. Improvements of the credit reporting framework for SMEs, 2. Reforms that allow banks and non-banks to lend to SMEs against movable collateral, and 3. Insolvency reforms. G20 members are currently taking steps to implement this action plan. Other interesting examples of helpful policies were provided from the UK and Kenya.
The event also gave voice to representatives of B20 – businesses from the G20 countries – and to angel investor Peter Jungen, who emphasized the importance of entrepreneurial culture as a precondition for startups to thrive.