Information Economy Report 2005 says small and medium-sized firms can benefit greatly from trade credit, working capital available through Internet
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Small and medium-sized enterprises (SMEs) in developing countries have a major opportunity to grow and compete internationally by using credit and working capital available rapidly through the Internet, a new UNCTAD report says - but to take advantage of this opportunity their nations must bring domestic laws and financial-service systems up to modern standards for credit information, credit-risk assessment, accounting, and transparency.
The Information Economy Report 2005 (1) (IER 2005) says there are unprecedented opportunities for firms to get access to short-term trade and working capital finance and e-finance on reasonable terms. For SMEs in most developing and "transition" nations - which often face high costs for official financial intermediation, or which are trapped in the informal economy - this is a window that can lead to rapid growth and the capacity to compete more effectively on world markets. Putting in place regulations and systems enabling credit information and credit ratings through the active use of information and communication technology may greatly improve the access of such firms to other services as well, such as credit insurance, factoring and leasing. But in most developing countries, financial service providers are not in a position to use modern credit-risk management techniques and provide capital - particularly trade finance capital - to local enterprises on competitive terms.
The problem, the report says, is often rooted in the fragility of the financial-service sectors, a shortage of the necessary skills, and the inability of creditors to assess borrowers´ risks due to a lack of credit information - that is, information on a company´s financial state and its payment record on previous loans. Typically, such countries need to develop effective registration and bankruptcy laws, including public and court registers; acceptable reporting and disclosure standards for businesses; international accounting standards and standards for auditors; adequate public data dissemination and publishing requirements; and procedures for transferring informal businesses into the formal sector. Such steps can clear the way for public credit registries and credit bureaus to operate and provide sufficient up-to-date information for banks and other lenders to allow decisions on loans based on modern electronic credit-risk assessment techniques and e-credit scoring or rating.
The experience of e-trade finance platforms in selected developing countries shows that such a transformation is possible, the report says - many developing nations may be able to build up the capacity to compete with providers of financial services overseas. That capacity involves being able to use sophisticated web-based technologies. The ability of financial-service sectors in other developing countries to apply state-of-the-art technologies may be constrained by limited financial resources, and the report says such countries may need well-targeted technical assistance during the initial stages of their modernization efforts.