Asia’s $2.5tn credit access gap is costing us dearly

May 20, 2024 | By Ari Sarker

This article was first published in Financial Times.

With so much at stake, why is SME financing still just too expensive?

The Asia-Pacific region (Apac) is widely accepted as the growth engine of the world. But that engine is not firing on all cylinders. 

While Apac has grown its middle-class and clocked tremendous gains in terms of increasing access to formal banking services and digitizing its commercial environment, one critical metric has not improved. For many small and medium enterprises (SME), they still lack access to credit—the fundamental resource that could catalyze their growth, and in turn, the growth of the economies that they’re shouldering.

With so much at stake, why has the code not been cracked? In large part, it is because SME financing is just too expensive. So expensive, in fact, that the region has a $2.5tn credit access gap that lenders are simply not filling — comprising over half of the global shortfall in small business financing1.

A big problem for small businesses

This is a particularly acute problem for Apac because SMEs account for over 97 per cent2 of all enterprises and typically contribute between 40 and 60 per cent3 to the GDP of the region’s economies. They also employ over half of Apac’s workforce4 and form part of the fabric that weaves together communities.

Yet despite most of the region’s businesses falling within this category, figures from the Asian Development Bank indicate that financing for SMEs only accounts for 22 per cent of all bank loans in Apac’s developing economies5. In India, where the government has made incredible inroads with financial inclusion, less than 11 per cent of the country’s SMEs have access to formal credit6.

Given this situation, it’s no wonder so many businesses in the region fail within their first five years: from 30 per cent in Singapore to 60 per cent in Malaysia.

If inclusive growth is really going to be inclusive, closing the SME funding gap needs to be a focus for both the public and private sectors.

This is not just a missed opportunity for fledgling businesses and the communities and economies they support, it is a missed opportunity for banks and financial institutions, too. Historically, the main hurdles in lending to SMEs has been the “thin file” problem, where these businesses have limited credit histories, coupled with the high operational expenses associated with serving them.

Zeroing in on cost-cutting and risk reduction

To overcome these barriers, it will take nothing less than an obsessive focus on two things: reducing risk for lenders and driving down the cost to serve. Only then will it be possible to truly scale credit access for Asia’s SMEs.

Fortunately, things are moving in the right direction. The digital transformation of economies, coupled with governments’ increased investment in Digital Public Infrastructure (DPI), offers new pathways for tackling these challenges.

Perhaps the best example of this is India's Jan Dhan-Aadhaar-Mobile (JAM Trinity) program that connects individuals’ mobile numbers with their Aadhaar national ID cards and bank accounts, providing a foundation for building robust digital profiles for SMEs based on transaction data driven insights.

Similarly, India’s investments in DPI are helping to power the Open Credit Enablement Network (OCEN). This thinktank-led initiative provides the necessary digital infrastructure for banks to offer loans through widely used digital platforms and apps, while also unifying the processes for applying, approving, and disbursing funds, helping to lower the cost-to-serve.

Emerging tech for an entrenched problem

Another tool that should be in our arsenal is smart contracts. These can be deployed to make SME lending more dynamic. Enabled by blockchain technology and Generative AI, smart contracts work by ensuring that credit access only increases when stipulated conditions are fulfilled.

The blockchain can offer a secure, scalable method for sharing credit information, enhancing transparency and trust among market participants. Meanwhile, Generative AI can analyze vast swathes of non-traditional credit data to make risk assessments for lenders and enhance credit scoring models, making them more dynamic and adaptive to changing business conditions.

In summary, a sustainable, profitable approach to widespread SME financing is achievable, but it demands serious investments in time and resources—with all the trial and error it will involve—to converge previously discrete, high- and low-tech moving parts into a system where they work together seamlessly. Once this inflection point is reached and lenders are incentivized, the growth opportunity for banks and SMEs alike will be massive.

Giving credit where credit is due

The irony of all this is that the avenues for small businesses to expand have never been greater. Yet, the enormous chasm between the haves and have-nots of financing means that some businesses will have the wherewithal to capitalize on opportunities while many will not. Of the “have-nots”, a significant number will turn to family and friends for funds, or worse, predatory grey market lenders.

Given that SMEs employ more than half of the region’s workforce, an inability to raise funds will only widen the yawning inequality gap. So, will technology further exacerbate existing inequalities, as we’ve heard time and again?

In this case, no. Technology is one of our best tools for narrowing the divide that prevents countless businesses across Asia from reaching their full potential, with all the knock-on effects to families, communities and economies that that entails. To be sure, the credit access challenge will be costly to solve, but the costs of not doing so are higher.

1 SME Finance Forum – MSME Finance Gap

2 SME Finance Forum, “The Role of SMEs in Asia's Economic Growth”, also UNDP, “Building SME resilience in Asia”, March 2024, also APEC report, April 2020

3 APEC – Small and Medium Enterprises


5 Asia Development Bank, “Asia Small and Medium-Sized Enterprise Monitor 2023,” October 2023


Photo of Ari Sarker
Ari Sarker, President, Asia Pacific, Mastercard