More than 6 in 10 Hong Kong SMEs Sought Financing in the Last Year, Signalling Opportunities for Lenders

  • Hong Kong SME originations saw a rebound during the fourth quarter in 2022 as economic activity picked up after wider reopening
  • While virtual banks have recently entered the SME financing market, traditional banks continue to maintain a high market share
  • Credit appeared to be less accessible to newer SMEs compared to mature businesses with longer credit histories, presenting an opportunity to better serve emerging businesses

Small and medium-sized enterprises (SMEs) need greater lending support to recover from the economic disruptions of the past three years but many still lack access to financing, according to a study conducted by TransUnion (NYSE: TRU), a global insights and information company and Hong Kong’s leading consumer credit reference agency. The study aimed to gain an understanding of SMEs’ financing needs and challenges, and provide insights into how financial institutions can better serve this important business segment. The study was presented earlier at the TransUnion Hong Kong Financial Services Summit 2023.

The SME sector plays a pivotal role in Hong Kong’s economic rebound as it comprises 360,000 or 98% of all businesses and employs 44% of the private sector workforce1. Fostering a more financially inclusive ecosystem where small businesses can better access the financial services they need has never been more vital, with 61% of SMEs having needed greater access to credit to capture economic opportunities during the last year, including 25% needing more working capital.

Traditional banks are the primary source of loans

In Hong Kong, SME originations overall declined by 16% year-on-year (YoY) in 2022, possibly due to lenders’ tightened risk appetite during the pandemic and challenging macroeconomic conditions. Despite the first three quarters recording a decline, there was a strong rebound with 13% growth YoY in the last quarter of 2022, when Hong Kong began to reopen its borders and experience a revival of economic activity.

Traditional banks remained a key source of financing for SMEs, funding 70% of SME originations in 2022. At the same time, virtual banks gained some traction, with 4% of SME originations coming from this emerging group of lenders in 2022. At the same time, money lenders saw a gradual decrease in SME originations to 26% in 2022, compared to 28% in 2021 and 31% in 2020.

In terms of loan amounts assigned at origination, there was a significant shift from larger to smaller loans for SMEs, as lenders tightened their belts and pulled back on new loan originations during the protracted pandemic period. Among the SME loan originations in 2022, more than half (56%) were smaller loans of HK$500,000 or below, up nine percentage points from 2021; whereas less than a third (29%) were larger loans of HK$1 million or above, down six percentage points from 2021.

Nevertheless, virtual banks provided greater loan sizes for SMEs. Among new SME loans offered by virtual banks in 2022, more than half (58%) amounted to HK$1 million or above, a noticeably higher rate than traditional banks (35%) and money lenders (7%). In contrast, smaller loans of HK$500,000 or below only accounted for 15% of new SMEs loans from virtual banks in 2022, a significantly lower rate than traditional banks (49%) and money lenders (81%).

A recent TransUnion commissioned study showed that 32% of SMEs were unsatisfied with manual and lengthy application processes. The same study also showed 44% of financial institutions reported a lack of adequate analysis tools to assess SME creditworthiness.

“Despite being a major driving force in Hong Kong’s economy, many still feel that they lack sufficient access to the financial services they need,” said Jerry Ying, chief product officer at TransUnion Asia Pacific. “Even in today’s digital age, SME lending is often associated with lengthy and frustrating manual processes. To change the status quo, digital innovation is key. Financial institutions can adopt digital technologies and data analytics to optimise onboarding and credit assessment processes, contributing to a more financially inclusive ecosystem for emerging small businesses.”

Younger SMEs have relatively lower credit access

The study took a deeper look at SMEs’ credit access in relation to the length of their credit histories. The research showed that credit was generally more available to mature SMEs with longer credit histories than younger SMEs with shorter track records. Among SMEs that gained new credit in 2022, the majority (60%) were those with a credit history of five years or more, followed by SMEs with three to five year credit histories (16%), one to three year credit histories (15%), and less than a year of credit history (9%). This may indicate prevailing challenges in accessing credit among newer SMEs, presenting an opportunity for financial institutions to rethink their processes to better serve the growing needs of these customers.

While most SMEs obtained their financing from traditional banks, those with shorter credit histories increasingly turned to money lenders and virtual banks for financing. According to the study, 25% of SMEs with credit histories of less than five years obtained their financing from money lenders, and 6% from virtual banks in 2022. At the same time, SMEs with longer credit histories of five years or more were better served by financing from traditional banks (74%), and less likely to obtain their financing with money lenders (23%) and virtual banks (3%).

“Many SMEs and start-ups may be constrained from accessing the credit services they need by their limited credit history. Harnessing alternative data, such as telco and utility bill payments, helps gain additional insights into a SME’s creditworthiness, enabling financial institutions to better manage risk, potentially giving more small businesses access to credit,” Ying Said.

“Furthermore, including a holistic assessment of the SME owner in a dual scoring approach that combines commercial and consumer credit data to better predict SME performance offers a greater predictive power than a single score. This expands the opportunity for both the financial community and SMEs to grow their respective businesses as the economy rebounds,” Ying concluded.

Source: The data in this study was based on TransUnion’s Hong Kong Commercial Credit Database.

1 Hong Kong Trade and Industry Department, Support to Small and Medium Enterprises, March 2023