The Utopian Ecosystem
October 22, 2020
Whilst the UAE Government is doing its best to support the continued development of SME sector, we feel a more cohesive effort involving the public and the private could yield accelerated results. We need a fundamental change in our approach to nurturing SME businesses. Lack of transparency, unavailability of accurate information and overall trust deficit on genuineness of the business, are often quoted as key reasons for financial institutions not extending adequate credit to this sector. We are still stuck with collateral-based lending for SMEs and not many banks are keen to consider cashflow based lending. SMEs on the other hand struggle to meet their basic working capital needs, given this finding an encumbrance free collateral to offer in the UAE is a far cry. This is a classic Catch 22 situation. Unless this root cause is addressed, we will not be able to experience any significant improvement in this sector.
So, how does one augment and build trust in the system overnight...
Mandate all the SMEs to go for mandatory statutory audit.... Perhaps, compel them to adopt ERP.... Well, even for argument sake we say we are able to achieve it, that might just solve the data and information part of the equation, but then, how do we enhance the overall trust in the business environment. Now, this requires the intervention and active contribution of all the key stake holders viz., administrators, regulators, vendors, service providers, financial institutions, Govt agencies, technology providers, tax authorities, credit rating agencies, credit bureaus, payment solutions etc. Just imagine, if all the above stake holders are accessing a single common platform, which we are terming as - the Utopian Ecosystem - for all of their data needs and information requirements.
In the present age of cutting edge technology, using block chain, distributed ledgers and APIs, one can definitely capture the complete customer commercial journey right from registration, to leasing, to labor approvals, vendor details, service providers, stock movements, receivables, payments etc. If we are able to capture this information for every single SMEs in the country, current and new, through a common platform, which then becomes the primary record for complying with regulatory reporting, financial reporting, assessing tax, remittances and payments, we would have resolved 90 per cent of the problem. To add more credibility, if the same data base is used by third party credit rating agencies, credit assessment and credit bureau monitoring, then we have practically won the trust battle. Of course, the level of information access to various stake holders will purely depend on their need to access and degree of criticality. This will address the issue of data privacy and customer confidentiality concerns. However, the biggest benefit of this Utopian Ecosystem is independent verification of data with complete end to end history using block chain. Hence, very little room for any kind of malpractice or manipulation from external source or by any interested parties. When each of the key stake holders are able to independently access the information, they need from an unbiased source, it adds a lot of credibility to the whole ecosystem.
For example,
a commercial bank opening a bank account for the customer is able to access the same set of KYC documents submitted by the client to the Economic Department while registering the company.
A credit rating agency is able to view the entire debt owed by the company from the same data shared by the banks, which the credit bureau has access to.
The tax authorities are able to independently view the client’s sale and purchase transaction from the source to match with its tax returns.
A regulator, in case of need, is able to monitor any large movement of funds in and out of the company’s account and more importantly understand the source from which such transfers originated or the ultimate destination where it reached.
Bankers and auditors are able to enquire about the genuineness of the business or a transaction to ensure it is not a paper trade or a circular trade.
Finally, a debt collector is able to access information about all the assets, both moveable and immovable, held by the customer from click of the button.
These are just examples of some basic benefits, there can be much more value-added information which we can extract from this ecosystem.
For instance...
- The total amount of goods and services transacted in a year, origination, destination, local consumption, re-exports, traders involved, brokers involved etc.
- What is the total number of actual employments created, by industry, by company, by emirate, nature of job, skill sets imported, extent of nationalization etc.
- Total quantum of funding reaching this segment, which banks are actually supporting SMEs, nature of facilities offered, recovery rate, default rate, collateral available etc.
- Assess the impact of any policy-based lending to SMEs or monetary concessions /grants to certain sections of the economy and track it all the way to the grass root level.
Given the fact that multiple stake holders are involved with varying degree of involvement and data access, it would be ideal to have a single nodal agency, to spearhead the development of this mother of all block chain solution.
We would like to end this note with a quote we recently came across in an article - 'In the world we live today, data is king. Many economists believe that ‘data to this century is what oil was for the last century’—a driver for growth, change, and success'.