MSMEs Go Digital

Concept Note

UNCDF is interested in furthering our existing partnership with AFTECH and other partners to develop
projects that use innovative digital finance solutions to bridge the credit gap experienced by micro, small
and medium enterprises (MSMEs). Encouraging the adoption of digital solutions by large Fast-Moving
Consumer Goods (FMCG) distributors, sub-distributors, wholesalers and micro merchants has the
potential to remove the traditional barriers to credit experienced by MSMEs in emerging markets.

Background

MSMEs play a crucial role in creating employment, encouraging entrepreneurship and promoting
economic growth in a country. Despite the positive impact of MSMEs, they are still under-funded in most
countries and there exists a financing gap that needs to be addressed. Technological advances have made
it possible for digital platforms to close this financing gap by bringing borrowers and lenders closer. In
doing so, they are working towards achieving SDG 8, which aims to promote decent work and economic
growth by achieving higher levels of economic productivity through diversification, technological
upgrading and innovation, including, through a focus on high-value-added and labour-intensive sectors,
and strengthening the capacity of domestic financial institutions to encourage and expand access to
banking, insurance and financial services. Digital platforms offer particular benefits for those who struggle
to geographically access sources of traditional financing, such as rural MSMEs, and for those
demographics which are frequently financially excluded, such as MSMEs run predominately by women
and youth.

There are an estimated 487 million formal and informal micro and small enterprises in emerging markets,
predominately in Africa and Asia.1 These MSEs have an estimated US$ 4.9 trillion unmet credit demand,
meaning that 61% of emerging markets MSEs’ credit need is left unmet.2 This is predominately due to:

 High cost of customer acquisition and assessment

 Insufficient (or inaccurate) data availability to make accurate credit assessments
 Low lifetime customer value due to small loan amounts and short loan tenors
 Limited cross sell opportunities
 High costs of distribution and servicing

According to PwC’s “The World in 2050: Will the shift in global economic power continue?”, Indonesia is
projected to be the fourth largest economy. However, one of the key elements to leverage this economic
potential is by facilitating better access to financing. Last year, Indonesia’s low loan disbursement per
Gross Domestic Product (“GDP”) left 74% of the middle to lower1 individuals and 74% of micro, small and

1
Bridging the credit gap for Micro and Small Enterprises through digitally enabled financing models, CGAP and
Dalberg, 2019
2
Bridging the credit gap for Micro and Small Enterprises through digitally enabled financing models, CGAP and
Dalberg, 2019
 medium enterprises (“MSMEs”) with a lack of financing access. Given the scale of how financing access
can boost consumer spending and the widening effect that it has to facilitate economic growth across all
segments of Indonesian society, better access to financing is a must.

Concept

UNCDF is looking to expand its work in digital financial inclusion by developing innovative fintech solutions
that can assist unserved and underserved MSMEs in accessing financing for business growth. In particular,
UNCDF would like to identify and support:

 Digital platforms that can produce bankable data for MSMEs and enable financial service
providers utilize the data to develop customized products and services for this segment

 Digital platforms that can enhance customer outreach and profitability through offering efficient
business and finance management opportunities for MSMEs

 Digital solutions that can be passed down the FMCG value chain by partnering with major FMCG
players, resulting in improved financing and financial inclusion for MSMEs

Digital tools such as merchant payment systems, online inventory ordering, digital bookkeeping and e-
invoicing systems offer a significant opportunity to expand the amount of credit that is available to
MSMEs in emerging markets. The use of these digital tools is being increasingly explored by FinTechs to
increase the efficiency and reduce the risk of delivering and collecting credit from MSMEs, and although
the amount of credit is currently small, the solutions have the potential to scale to meet the enormous
unmet credit needs of MSMEs in emerging markets. Given the diversified nature of MSMEs, there is no
one-size-fits-all financing solution. The improvement of lending efficiency and the diversification of
financing modalities can help expand MSMEs’ access to finance, particularly given the large bank-centred
financial system in Asia.

Digital solutions are able to address many of the challenges that traditional Financial Institutions face in
offering credit to MSMEs, enabling the credit industry to open up the huge untapped market of MSME
finance, as well as enabling the millions of MSMEs in emerging markets to obtain the credit necessary for
business operation and expansion. Digital tools can offer benefits throughout the entire financing chain:

 Sourcing capital
 Customer acquisition
 Credit assessment
 Disbursement
 Monitoring and servicing
 Collection

Window Title MSMEs Go Digital – Indonesian FinTech Association (AFTECH) and UNCDF Shaping Inclusive
Finance Transformations (SHIFT) Innovation Fund on Digital Technology Solutions for MSMEs
in Indonesia
Key Dates  23rd September 2019 – Indonesia Window launch
 31st October 2019 23:59 EST (New York time) - Closing date for proposal submission
 25th November 2019 - Selection of successful applicants
 January 2020 - Pilot testing begins
 31st July 2020 - Pilot testing ends

The Problem Although a very significant share of firms in Indonesia are MSMEs, a limited use of digital
business solutions among this segment results in the limiting of opportunities for growth and
restricting a potential increase in financial inclusion for them and their customers. The present
lack of usage of such services serves as a missed opportunity, with inefficiencies spanning the
scope of the business value chain, from payments procedures, the supply chain integration,
book keeping, financial capabilities, and through to credit markets leaving microenterprise
holders unable to grow their businesses and with greater vulnerability to shocks.

Innovation Fund Window The target of this digital solutions Innovation Fund Window is to promote and accelerate usage
Goal of digital technology solutions for MSMEs in Indonesia that result in increased usage of financial
services, productivity, efficiency, income and/or employment, etc. for this segment, increasing
actors’ ability to expand and upscale their business operations. The Innovation Fund is looking
to provide co-funding to FinTech companies that are ready to pilot test an innovative
technological solution that addresses the above-mentioned challenges.

Since MSMEs differ in terms of sector, business model, working capital cycle and scale of
operations, it is necessary to ensure that the products and services being supported through the
Fund are appropriate to the respective needs of MSMEs. Innovation Fund grant funding will
focus on projects which can deliver customized products and technological solutions, catering
to the diversified business needs of MSMEs and aimed at improving their ability to expand and
upscale. In addition, the Innovation Fund is committed to expanding the role of women
entrepreneurs in MSMEs, and so will give preference to projects specifically focusing on women-
owned and/or led MSMEs.

Eligible applicants are welcome to submit a proposal to pilot test an innovative technological
solution that seeks to address a potential challenge as highlighted in this document related to
MSMEs.

Support Offered by AFTECH The Innovation Fund is targeted at solutions that are ready for pilot testing and will provide up
and UNCDF to $50,000 of co-funding for 5-7 selected projects. Selected applicants will be expected to fund
at least 30% of the total project cost. AFTECH, UNCDF and other partners will provide technical
assistance and an early-stage grant to successful applicants, after which they may be eligible for
additional grants or financing from UNCDF.

The grant fund will be based on agreed milestones and provided as reimbursement for project
costs incurred. The payment schedule will be as follows:
 80% subject to completion of interim milestones.
 20% final payment subject to completion of final milestones.

Support will also be offered to Grantees in the form of mentoring and tailored support from
individual experts from private sector companies, to ensure the winning proposals are market
ready.
Who can apply?
Proposal Evaluation Criteria
Presentation to Investment
Committee
Commitments Expected
from the Applicant
Project Implementation
Eligible applicants who can apply for the Innovation Fund Window include: regulated Financial
Institutions (Banks, MFIs); Payment Service Providers; Agent Banking Aggregators; Mobile
Network Operators; technology providers; E-commerce platform providers; Manufacturing and
trading related companies; FinTech companies and tech start-ups.
 Companies with an innovative technological solution for the microenterprise sector
that is ready for pilot testing in Indonesia.
 The applicant can be based anywhere globally, but the project must be implemented
and target MSMEs in Indonesia.
 Joint proposals between market players with a technological solution for MSMEs are
encouraged to apply.
 The applicant must be a registered entity.
Applicants will be invited to submit an online application outlining how the project will promote
and accelerate the use of digital technologies for MSMEs in Indonesia that results in the
improved performance of this particular segment and present the implementation and technical
details of the proposed pilot testing. Shortlisted applications will be invited to develop a
presentation on their proposed digital solution.
Shortlisted applicants will be requested to deliver a pitch on the business model and
implementation activities to the Investment Committee. The Investment Committee will then
score the applicants according to:
 The innovation of the solution proposed
 The practicality of implementation
 The sustainability of the solution proposed
 The positive impact of the solution on MSMEs
 The experience of the applicant
 The proposal’s impact specifically on women-owned and/or led MSMEs
The Investment Committee may also consider additional factors when scoring the applicants.
If selected, successful applicants must commit to the following in order to be eligible for grant
funding from AFTECH and UNCDF SHIFT:
 We strongly encourage sharing of anonymized customer and transaction data with
UNCDF SHIFT for big data analysis.
 Participating in monitoring and evaluation activities, in particular the measuring of
direct and indirect beneficiaries:
 Direct beneficiaries: MSMEs interacting actively and directly with the
applicant’s solution during the contract period.
 Indirect beneficiaries: MSMEs who develop some socio-economic
value via the direct beneficiaries who are using the applicant’s
solution during the contract period.
 Participating in lesson learning and experience sharing activities for internal and public
audiences.
 Participating in UNCDF SHIFT annual review process.
 Providing a demonstration of the product or service.
Once Performance Based Agreements (PBAs) have been signed between AFTECH, UNCDF SHIFT
and the successful applicant, the implementation of the project will begin.
 The PBAs will set out the targets for the pilot testing of the selected solutions. Up to $50,000 of
co-funding will be offered to each project in order to allow pilot testing to check the viability
and potential uptake of the microenterprise financing solution. This will occur over a maximum
duration of 6-7 months, from January 2020 until 31 July 2020.

Following the conclusion of the pilot testing, successful projects may be offered additional
financing, technical assistance and mentorship by AFTECH and/or UNCDF to further refine and
scale up their technological solutions, in order to have a greater impact on increasing available
finance and/or business support services for MSMEs.

Disclaimer:
 All grants will be given at the sole discretion of UNCDF SHIFT.
 Due Diligence of the winners will be carried out and if any violation of the terms & condition is noted during the due
diligence, the grant will not be given.
 Submission of application does not guarantee funding.
 Any expense incurred by the applicants for the submission of the proposal, including travel, accommodation etc. will
be borne by the applicants.
 Only shortlisted applicants will be invited to present their business model to the Investment Committee.
 Shortlisting will be at the sole discretion of UNCDF SHIFT Challenge Fund Investment Committee.
 The grantee must not be involved, and their parent group must have minimal exposure to the following exclusionary
list of activities:
o Manufacture, sale or distribution of weapons or their components including replica weapons marketed to
children,
o Tobacco or tobacco products,
o Substances subject to international bans or phase-outs,
o Wildlife or products regulated under the Convention on International Trade in Endangered Species of Wild
Fauna and Flora (CITES),
o Pornography,
o Gambling including casinos, betting etc. (excluding lotteries with charitable objectives),
o Violation of human rights or complicity in human rights violations,
o Use or toleration of forced or compulsory labour or child labour.