UNDP partners with central banks to fill MSME financing gaps

The United Nations Development Programme (UNDP), alongside central banks and other partners, has launched the open global initiative, Universal Trusted Credentials (UTC), which aims to enable MSMEs to better access financing.

The initiative was launched on 14 November 2023 at the Singapore FinTech Festival.

UNDP has partnered with the Monetary Authority of Singapore (MAS) and Bank of Ghana (BOG), as well as global organisations such as the Global Legal Identifier Foundation and the SME Finance Forum for the initiative.

Despite accounting for a significant part of national GDP and labour force, MSMEs around the world have trouble accessing credit from traditional lenders, due to their lack of collateral.

The UTC now allows MSMEs to build trusted credentials from alternative data sets, which could then make it easier for them to be accepted by financial institutions to access the capital they need.

GovInsider speaks with Aiaze Mitha, the Global Lead of Digital Finance and Sustainable Development Goals (SDGs) at the UNDP, to find out the role of central banks in this initiative, and UTC’s ambitions to further bridge the MSME financing gap moving forward.

Central banks as ‘thought leaders’

According to Mitha, the UNDP wants to tap into the networks and thought leadership of central banks and regulatory authorities in scaling up the UTC initiative.

MAS has helped UNDP connect with other financial stakeholders and programmes that would build upon the initiative. BOG, on the other hand, has implemented UTC in Ghana and is sharing lessons learnt from early experiments as a knowledge partner for other central banks.

Beyond UTC, MAS has been long-time partner of UNDP on multiple capacity-building initiatives, such as developing digital tools ease access to financing and another credentials initiative to help simplify ESG reporting processes for MSMEs.

In an earlier press release, MAS and BOG pointed to the global consensus aspect of UTC driving cross-border trade opportunities, and innovative FinTech and financing models. These benefits extend beyond merely bridging the MSME financing gap.

“In every market that we engage, the financial regulator is an important entry point,” said Mitha, who added that regulations set the foundation by building trust, integrity, and stability of the local financial market infrastructure.

While the type of data points may differ across contexts, standards and protocols should be consistent, Mitha said. He cited the example of Africa where mobile money is widely used and therefore, data points from mobile payment systems would hold more weight than other sources.

“We really need to be flexible about tailoring the UTC framework to different contexts, but at the same time establish the standards that need to be implemented to ensure the robustness and trust in the system.”

‘Global starts local’: Targeting local data infrastructure

UNDP aims to first tackle the challenges faced by MSMEs in accessing finance within local markets, before tapping into international opportunities for additional financing sources.

“We need to first establish local proofs of concepts. Local implementations that build trust and utility. For something to be trusted globally, there needs to be the same level of trust in local operations. On the local or national level, you need something to be functioning, trusted, relevant, useful, and consistent over time,” Mitha said.

Aside from in Ghana, UNDP is also piloting UTC in Indonesia and Cambodia, and plans to initially target Southeast Asia, Africa, and Latin America, given the prevalence of MSMEs in these regions.

“In many different contexts, the level of informality and the lack of reliable information about small businesses in those economies is penalising for MSMEs access to finance,” Mitha explained.

UTC is tackling the data infrastructure problem by partnering with central banks, financial institutions, and multilateral agencies to identify trusted data source providers and vet international UTC issuers.

Some of these alternative data sets include data from utility providers, trade platforms, and national registry; as well as additional indicators, such as an MSME’s willingness to upskill itself in financial literacy and past repayment behaviour to assess the MSME’s credit worthiness.

In more developed economies in Europe, the local implementation of UTC would matter less than the cross-border trade and financing opportunities.

UTC is hoping to tap into the trade corridors between Europe and the identified regions to increase the pool of financing sources for MSMEs in those regions.