The role of digital technology in SME funding by Commercial Banks in South Africa

Abstract

SMEs are the backbone of developing economies, playing an integral role in GDP growth and job creation. South Africa, inclusive of an informal sector, presents a wider SME market, which through adequate support, can contribute significantly to the economy. With the future growth of the economy and improved employment prospects majorly dependent on the contributions of the SME sector as avowed by the South African Government, the success of these constrained businesses is most important. SMEs in South Africa have an average age of five years, with lack of access to financing noted as one of the key inhibiting factors. Although the advent of technology has introduced new financial intermediation players, offering innovative products necessary to drive accessibility to financial services, optimising traditional banks’ larger resources could yield mass benefit. Unlocking the full funding potential of banks through modern technology is therefore critical to support the survive and thrive prospects of SMEs. This study endeavoured to understand existing relationships and the extent to which digital technology can be exploited to improve accessibility to bank funding by SMEs, using literature insights pertaining to information opacity and innovation challenges which stifle progressive SME lending. The study was underpinned by the Disruption Innovation Theory and Information Asymmetry Theory. Following a quantitative approach, structured survey questionnaire data collected from SMEs in South Africa was statistically analysed. SMEs that attempted (whether successfully or not) to obtain funding from traditional banks were of particular interest. Although innovation and technology adoption seemed to drive accessibility to bank funding whilst lack of engagement with innovation activities hindered it, both showed weak correlations and had no statistical significance. Intriguingly, ‘age of business’ showed a statistically significant correlation with accessibility to bank funding, a result that is pertinent to the survival factors of SMEs and warrants further exploration. Whilst SMEs provide a reliable proxy to improved SME lending by banks, it is imperative that perspectives of the banks are included in such a study to make a meaningful contribution to academic research aimed at unearthing relationships that start to edge closer to an optimal SME lending model. In the meantime, the onus lies with SMEs to minimise information opacity and improve fundability through technology as they navigate a somewhat rigid traditional bank system.