Technology-Based Lending Promotes Entrepreneurship and Innovation in the Republic of Korea

One of the best practice case studies that came out of the Republic of Korea's technology-based lending approach is an innovative deicer system that uses starfish extracts. Photo credit: STAR's TECH.

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The technology credit rating system was integrated into loan application evaluations of technologically innovative SMEs.


History tells us that technological progress is a main driver of civilization and economic growth. However, having the technological edge does not necessarily translate to business sustainability and viability, especially for start-ups or small- and medium-sized enterprises (SMEs) that often have insufficient capital or lack business skills.

In a full-fledged capital market, investment is an ideal means to fund SMEs with angel investors or venture capitalists playing an active role in taking on the risk of supporting start-ups.

However, many developing member countries in Asia and the Pacific do not have well-functioning capital markets. In the region, the banking sector dominates the financial system. Therefore, it would be more effective for countries to develop a technology-based lending framework to promote SMEs' access to financing. 

The policy system and related measures adopted by the Republic of Korea (ROK) in 2014 provide useful implications. After a year of policy research and design, the ROK launched technology-based lending for SMEs in the banking sector where banks integrate technology credit ratings in the loan applications as supplementary indicators in the evaluation and approval process.

Setting Up Technology-Based Lending

The country regulator introduced five building blocks for the new lending approach:

  • technology credit ratings,
  • technology credit bureaus,
  • technology database,
  • technology-based lending performance review, and
  • policy incentives.

First, a technology credit rating system was created. It comprises a traditional credit rating and a novel technology rating. For example, a company rated BB (fifth highest rating out of 18 credit ratings) in the traditional credit rating system can receive an A+ (third highest rating out of the same 18 ratings) in the technology credit rating system because of its outstanding technology where it got a T2 (second highest rating out of 10 technology ratings).

Second, a new license for technology credit bureaus was created. The license authorizes existing credit bureaus and technology evaluation organizations to become technology credit rating producers for financial institutions. Financial institutions are allowed to use government approved/endorsed credit rating agencies or technology evaluators. Credit bureaus are required to hire minimum of 10 technology evaluation experts such as (i) patent attorneys, (ii) researchers with more than 3 years of experience in research institutions, and (iii) experts with more than 3 years of experience in technology evaluation. For technology evaluation organizations, they have to meet the requirements for establishing a credit bureau to be licensed as technology credit bureaus.

Third, a technology database was established by expanding the work scope of the Korea Credit Information Services, the country’s public credit registry. It was tasked to provide technology credit bureaus with information on the latest technology, gather data on technology credit ratings, and share the data with banks and technology credit bureaus.

Fourth, the Korea Institute of Finance prepared technology-based lending performance review criteria and conducts this review for all banks semiannually. These included various indicators, such as the outstanding volume of technology-based lending, its proportion out of the total SME loans, and the bank’s capability in terms of personnel and expertise.

Lastly, policy incentives were used to promote technology-based lending. For example, a bank’s contribution to two public credit guarantee funds is based on results of a technology-based lending performance review by the Korea Institute of Finance. High-performing banks contribute less, while the poorest performers give more.

Reaching More Entrepreneurs

After more than 8 years since its inception, the outstanding amount of technology-based lending has reached 341.7 trillion Korean won (KRW) or $283.5 billion[1], which is about 35% of total SME loans as of October 2022. The effectiveness of technology-based lending is empirically proven in terms of the lower interest rates and larger loan amounts:

  • The average interest rate of technology-based lending (4.27%) is lower than ordinary SME loans (4.37%).
  • The average outstanding amount of technology-based lending (KRW337 million) is larger than ordinary SME loans (KRW132 million).

A best practice case for technology-based lending is STAR’s TECH. It developed a deicer called ECO-ST using starfish extracts to mitigate environmental damage during artificial snow removal and reduce the harmful effects of starfish to fishery industries. STAR’s TECH is a start-up founded in 2017 by an undergraduate student of biochemical engineering at Seoul National University. After it was established through informal financing mostly from family and friends, STAR’s TECH benefited from a technology-based loan system thanks to the its high technology rating. As its business grew, the amount of technology-based loan also increased and helped the company’s performance. After 4 years from its establishment, STAR’s TECH penetrated into 16% of the local deicer market, ramped up sales six times to KRW17.4 billion in 2021, and expanded to the Canadian market in 2022.

Going Forward

In the medium- to long-term, the ROK plans to gradually introduce an integrated technology-based credit assessment model as part of the internal ratings-based approach of the Basel III regulatory framework for banks. This will give SMEs with technological competence an advantage in terms of their credit standing.

Until recently, banks used technology ratings as a reference in the loan approval process without modifying the credit rating of the borrower. Subject to the approval of financial authorities, banks are expected to incorporate technology ratings into their existing credit scoring models and adjust the credit rating based on empirical evidence. Consequently, these modified credit ratings are likely to change the calculation of regulatory capital with updated risk weights to the loan portfolio.

The beauty of technology-based lending lies in its potential to enhance financial inclusion for SMEs and catalyze other technology-related policy agenda such as fintech, environment-social-governance (ESG) investment and green finance. In the case of STAR’s TECH, technology-based lending acted as an innovative instrument of green finance.

Technology changes the world. Technology-based lending can facilitate that change.

[1] 3-year (2020–2022) average exchange rate ($1=KRW1,205.24)

Yoonhee Kim
Financial Sector Specialist, Finance Sector Office, Sectors Group, Asian Development Bank

Yoonhee Kim has over a decade of experience in financial sector development and global policy cooperation through her work with the G20, Financial Stability Board, and International Monetary Fund. Prior to joining ADB, she was a Senior Deputy Director/Deputy Director in the Republic of Korea’s Ministry of Finance and Financial Services Commission. She has a master’s degree from the University of Southern California and a bachelor’s degree from Seoul National University.

Asian Development Bank (ADB)

The Asian Development Bank is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance.

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