How Informal Employment in Emerging Markets is Boosting Fintechs in Alternative Lending
The low unemployment rate characteristic for most developing countries can be attributed to the utter lack of unemployment benefits available. That’s what makes people ready for any job to satisfy the need in finance.
Fintech companies are developing actively all over the world. This is true in particular for alternative lending services that demonstrate the highest momentum in the Asian emerging markets distinguished for insufficient financial inclusion. However, the growing use of digital financial services steadily improves the situation in these countries. What are the reasons and characteristics of the local labour markets that drive the rapid development of alternative lending in Southeast Asia?
The informal sector, which official GDP does not reflect, holds a significant share in the economies of developing countries. At the same time, if the volume of goods and services produced informally is rarely more than 40 percent of the official GDP, then the share of people employed off the books can be incomparably higher. In some countries, more than 50 per cent of the working population are to some extent involved in the informal sector. The reason is that this kind of income is usually additional to the earnings at the official place. Workers can produce a particular product to be counted in official GDP but have small official wages and the rest paid in an envelope. Therefore, the IMF estimated the share of the shadow economy in Indonesia at only 14.8 per cent of GDP in 2015 that was close to the level of many Western countries, while polls conducted by BPS-Statistics Indonesia showed incomparably larger figures. Thus, it stated that 38.5 per cent of the urban population working in the non-agricultural sector had unreported employment in 2017. In rural areas, their share amounted to 54.8 per cent.
There is a comparable situation in the Philippines and Vietnam. Agriculture holds a significant share in the economy, thus, predetermining a large number of people who live off the informal trade of farm goods. Moreover, there are many self-employed and family enterprises in the service industry. For example, the Philippine Statistics Authority reported that 56.2 per cent of all self-employed were active in the service sector and 39.1 per cent in agriculture in April 2018. As for family enterprises, 60.9 per cent were involved in agriculture and 30.3 per cent in the service industry.
Informal Earnings Relieve the Social Strain
The low unemployment rate characteristic for most developing countries can be attributed to the utter lack of unemployment benefits available. That’s what makes people ready for any job to satisfy the need in finance. As a result, there is a situation when nearly all the population is employed, many of them have official jobs and earnings but low that make them seek additional work and source of income.
Therefore, informal employment should not be considered a disadvantage only. In this sense, unofficial earnings serve as a kind of social protection and an essential part of the developing markets. The phenomenon will diminish as reforms and economic growth accelerate creating more well-paid official jobs. Further, the share of the informal sector will inevitably decrease, but the process can last for decades. In this regard, now it is particularly important to develop sufficient methods to estimate the financial solvency of borrowers regardless of their official employment to keep sustainable socio-economic growth.
Fintech Promotes Financial Inclusion
Indeed, the assessment of real earnings of borrowers is a common problem for lending in emerging markets. Following traditional methods, banks principally estimate borrower’s financial reliability and credit history. Specifically, they ask for the confirmation of the official income and address credit bureaus for information about the applicant's repayment discipline. As a result, when facing traditional methods of assessment, a lot of people become simply considered as insolvent and cannot access finance.
The approach of fintech companies providing alternative lending implies the use of artificial intelligence, big data and machine learning. The focus is on the analysis of borrowers' digital footprints. Scoring programs are looking for all sorts of data about the person on the Internet and various sources studying data from social networks, search history etc. As a result of the analysis of many unstructured and scattered pieces of information, companies understand the probability of debt repayment.
Alternative Lending Drives Growth in Asia
Altogether, the high level of the informal employment in the developing countries and the adaptation of fintech companies to the specifics of the scoring of borrowers under such conditions drive explosive growth of the alternative lending industry in Asia-Pacific. According to the Cambridge Center for Alternative Finance, the issued lending volume increased by 53 times from 2013 to 2016 in the region. At the same time, in Europe, where shadow economy is less spread and the bank lending is strong, the figure for the period grew only sevenfold.
Therefore, fintech companies developing new methods of assessment of borrowers' solvency are surely creating a promising market niche. Moreover, this is the very case when the interests of business coincide with the need of society: people access finance that allows them to use lending products and have a credit history. In its turn, this helps to overcome the paradox when the population cannot borrow because of any credit history, which they also cannot accumulate due to the inability to have a loan. Speaking long-term, the expansion of fintech in Asia will both significantly boost financial inclusion and accelerate subsequent economic growth by increasing the penetration of financial products into people's lives.