by Victor Aboh
In Nigeria, Micro, Medium, and Small Enterprises (MSMEs) have an outsized impact on the nation’s economic health. They “contribute 48 percent of national GDP, account for 96 percent of businesses and 84 percent of employment”1. MSMEs face numerous challenges when doing business, including securing capital to grow their businesses, protecting their businesses from fire, theft, and flood through insurance products, cashflow management, lack of trained employees, lack of electricity, and other infrastructure issues.
While Open Banking does not represent a panacea to all these issues, it does help bridge the gap on several of the above and will help MSMEs thrive financially in Nigeria. Open Banking provides the framework for consumers (individuals or businesses) to permit Financial Institutions to share their data with Third Party Providers (TPPs) to provide a plethora of services to these Consumers. Below are some ways Open Banking can help increase financial access for MSMEs in Nigeria.
Planning for the Unforeseen – Insurance
Only 0.5% of Nigeria’s MSMEs have insurance coverage2 to withstand fire, flooding hazards, health issues, or other improbable events such as a pandemic. There are numerous reasons why the insurance adoption rate among MSMEs is so low. Still, the outcomes can be disastrous and incredibly difficult to recover from for these businesses leading to a high rate of business failure amongst Nigerian MSMEs3. Open banking can help bridge this gap by enabling MSMEs to securely share their data with Insurance TPPs, allowing quicker and more customized insurance underwriting.
For example, Open Banking APIs can allow insurance TPPs to access real-time data on a business’s financial transactions, revenue, and other relevant metrics to assess risk better and offer tailored insurance products that meet the specific needs of MSMEs – products such as fire, theft, or flood insurance, health insurance for employees, or other types of business interruption insurance. In addition, insurance TPPs could further customize underwriting by using factors such as type of business, geolocation data, and other non-conventional data sources to ensure that the business gets the best rate possible.
48 trillion and counting – Credit
MSMEs’ dearth of credit severely dampens these businesses’ growth potential. They are routinely unable to access working capital or credit to grow their businesses, leading to stagnation and numerous lost opportunities.
The CBN estimates that the MSME funding gap in Nigeria is at 48 trillion Naira4 – This number represents an estimate of the latent value that MSMEs could provide if their credit needs were met. Open Banking allows businesses to aggregate their banking data across multiple institutions and securely prove their creditworthiness to Lending TPPs. By sharing their data with Lending TPPs, businesses can improve their creditworthiness and get access to funds that they might not have been able to access previously. This can significantly help businesses with a limited credit history or poor credit ratings. In addition, by allowing TPPs to access their banking data, businesses can reduce the time it takes for loan applications to be approved. Lenders can use this data to make quicker, more informed lending decisions, resulting in faster turnaround times for loan applications. All these improvements work together to provide a conducive credit environment that supports new and budding entrepreneurs in their quests for business success. In the US, Stripe Capital found that customers who took advantage of their revenue-based financing grew their revenue “114 percentage points higher than peer companies not on on Stripe Capital.”5 This sort of growth is music to any entrepreneur’s ears.
MSME Digitization – Business Process Improvements
MSMEs come in many shapes and sizes, ranging from the small wooden shack that serves the basic needs of a small community to businesses with millions of naira in monthly revenue. Unfortunately, many MSMEs in Nigeria still track their inventory, run accounting, or keep records with pen and paper. Many businesses need proper systems to maintain inventories, track sales, report cash flow and support more streamlined business processes.
African MSMEs are willing to take this kind of help as over 86% of those surveyed during the Covid-19 pandemic stated that they “need additional support from their financial institutions going forward. This can either be financial support in terms of restructured loans or short-term capital or non-financial support in terms of business advice as they continue to navigate a shaky reality and an uncertain future in the wake of the pandemic.”6
The benefits of such synergy are already being reaped in the UK, where they are finding that cloud accounting works much better than the alternative, allowing company bank data to be “automatically matched to your invoices, payments, and purchases – saving time, improving data accuracy, and importing historical data.”7
In conclusion, Open banking has the potential to increase financial access for MSMEs in Nigeria. It can help address critical issues such as insurance and credit gaps while supporting digitization and business process improvements. Open Banking has the potential to support credit funding gaps for MSMEs in Nigeria by improving creditworthiness, speeding up loan processing, and ultimately reducing the cost of credit.
Open Banking can also support the insurance needs of MSMEs in Nigeria by enabling more tailored insurance underwriting, helping protect these vital businesses from unforeseen events that could otherwise derail their operations.
MSMEs can also benefit from the digitization and improved efficiency of business processes such as accounting, inventory management, and tax keeping which Open Banking enables.
The benefits of Open Banking for small businesses are too significant to ignore. As more Nigerian Fintechs and Financial institutions embrace Open Banking, MSMEs will experience more financial innovation, leading to a more prosperous economy.