Access to credit: The silent issue hampering growth and development in emerging economies

Access to credit can be a major obstacle to success and meeting goals, whether for individuals or small and growing businesses. It also hinders the ability to plan for long-term goals and unexpected emergencies.

The problem becomes particularly acute in the developing world.

Take, for example, a developing economy like Pakistan. Pakistan is home to 241 million people, but less than 2 million people have access to formal credit. In contrast, as of 2022, 82% of adults in the US had access to credit, while 64% of UK adults held a credit card as of November 2023.

The limited access to individual credit and the wider financial system in the developing world has spurred the need for innovative financial products. For example, employers are increasingly turning to products like Earned Wage Access (EWA) as an added benefit for their workforce. EWA, a financial product offered through third-party providers, enables employees to access a portion of their earned salary anytime before their payday. It also empowers employers to manage their cashflows, increase employee retention, and improve productivity.

Since emerging in the 2010s, the market for EWA providers has been growing, with many new companies entering the field. Today, well-known market players from fintech companies, established banks and payment giants, including PayActiv, ABHI, Daily Pay, Refyne and others, offer the EWA facility. According to research conducted by EY in Pakistan, 85% of respondents expressed interest in using Earned Wage Access to meet their urgent financial needs.

The outlook for businesses is not much better. The International Finance Corporation (IFC) estimates that 40% of formal micro, small, and medium enterprises (MSMEs) in developing countries face an annual financing gap totalling $5.2 trillion.

Small and medium enterprises (SMEs) face substantial barriers when seeking essential credit. SMEs represent about 90% of businesses and contribute over 50% to global employment, with formal SMEs contributing up to 40% of GDP in emerging economies. Despite their pivotal role, high interest rates and the absence of collateral can hinder SMEs' access to essential financial resources.

SMEs constitute a significant portion of businesses in the Middle East, North Africa, and Pakistan (MENAP) region. Approximately 32% of firms in MENAP cite access to credit as a major business constraint. Traditional banks often perceive higher credit risks associated with these enterprises, leading to restricted lending capacity for SMEs.

To address the challenges SMEs face, financial technology companies have introduced SME working capital financing, offering instant credit solutions for businesses with limited or no access to formal credit. These initiatives help solve cash flow issues and enable businesses to grow. For instance, in Pakistan, fintech platforms like ABHI have partnered with Daraz and foodpanda to introduce platform-based financing, empowering thousands of merchants by providing quick access to working capital to scale their business operations.

With limited access to credit, individuals and businesses often face hurdles, and therefore, improved access to credit is essential for broader economic benefits in several ways:

Access to credit enables entrepreneurs and small businesses to invest in growth opportunities, expand operations and innovate. Firms in countries with better creditor rights tend to face fewer credit constraints, thereby facilitating entrepreneurship and economic expansion.

With better access to credit, businesses can expand and create more jobs and income opportunities. Easing credit access during economic downturns can help prevent permanent job losses and maintain consumer demand.

Financial inclusion diminishes poverty and economic disparities by providing marginalized groups access to financial services that help them manage their finances and invest in income-generating activities. Inclusive financial systems that serve all segments of society help reduce income inequality and promote shared prosperity.

In a constantly changing world where the future remains uncertain, certain truths endure. One such truth is the undeniable impact of financial stress on the lives of individuals. It extends far beyond the boundaries of bank accounts, penetrating various aspects of an individual's health and well-being. More than 40% of employees report that financial worries are the foremost source of their lack of productivity at work.

Financial wellness, akin to financial security, plays a vital role in overall well-being. That means that when employees gain control over their finances, they are less stressed and healthier. This, in turn, translates to increased focus, productivity and contentment, both personally and professionally. The connection between financial wellness and overall well-being emphasizes the significance of addressing financial strain for a healthier, more balanced life.

For businesses, financial wellness is equally crucial. With better access to financial resources, SMEs can invest in new technologies, expand their product lines and enter new markets. Moreover, financially healthy SMEs are better equipped to handle economic downturns or unexpected expenses. A healthy financial cushion allows them to weather storms without compromising their core operations or workforce. When SMEs manage their finances well, they build a strong credit profile. This improved creditworthiness makes it easier to access loans and other financial products on more favorable terms, further enhancing their growth prospects.

A significant portion of the global population, including individuals and SMEs, continues to face barriers to accessing essential financial services. By addressing the immediate financial needs of individuals and providing SMEs with the resources they need to grow and thrive, fintech companies are playing a pivotal role in reshaping the financial landscape.

As we move forward, the collective effort of financial institutions, technology providers and policymakers will be essential in ensuring that financial access truly becomes a reality for all.