Overview o of C Cha halle lleng nges i in S n SME F Fina nanc nce Sothea ¡Oum ¡ Asia ¡Growth ¡Research ¡Centre, ¡Ngee ¡Ann ¡– ¡Adelaide ¡Educa<on ¡Centre, ¡Singapore ¡ The ¡University ¡of ¡Adelaide ¡ ¡ Building Linkages: Expanding Options for ASEAN SME Finance 21 September 2015 Anantara Siam Bangkok Hotel Bangkok, Thailand
Introduction Financing is one of the most important domains of doing any business. The key to successful SME development is the strong financing strategies that secure Small and Medium Entrepreneurs (SMEs) the access to financial resources. Given the lack of development of the financial markets in the rural sector and the high risks involved in lending to the industries located in rural sector, private banks are generally reluctant to give loans to rural entrepreneurs . Classic issue: credit rationing for SMEs, because of greater opaqueness and risks.
Financial Inclusion - World Bank 160 140 140 120 112 107 102 97 100 82 80 80 60 36 40 33 32 32 30 29 28 28 26 26 23 23 20 20 16 16 16 15 15 20 14 14 13 13 9 7 2 0 0 0 0 Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Thailand Singapore Viet Nam Account at a financial institution (% ages 25+) Borrowed to start, operate, or expand a farm or business (% ages 25+) Borrowed from a financial institution (% ages 25+) Domestic credit to private sector (% of GDP)
Getting Credit - World Bank’s Ease of Doing Business (Ranking out of 189 economies) 2014 2015 171 169 157 116 104 99 89 89 86 86 71 67 36 30 23 19 17 14 12 10 Brunei Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam Darussalam
SMEs’ Access to Finance Start-up and expansion mainly from internal finance. There are evidences of credit rationing, or risk premium exercised by financial institution on SMEs Larger SMEs in more developed economies tend to get bigger loans, with longer terms and at a lower interest rate than those in less developed economies Net worth, collateral, business plan, and cash flow are necessary to get favorable terms of financing. Financial access significantly affect innovative and export capability of SMEs.
Source of Finance for Business Start-up in Selected ASEAN Economies 56% 53% 36% 33% 18% 17% 16% 11% 10% 5% Loans from Retained Commercial Trade credit Leasing Loans from Personal Government Micro-credit Other friends or earnings or personal owing to individuals savings of funding, sources of relatives of loans and suppliers unrelated to business grants financing business lines of credit the firm or its owner(s) owner(s) from owner financial ("angels") institution including credit cards. Source: ¡Oum ¡et ¡al. ¡(2012) ¡
Source of Finance for Business Operations in Selected ASEAN Economies 72% 65% 50% 33% 33% 23% 19% 16% 12% 6% Personal Loans from Government Commercial Retained Trade credit Loans from Leasing Micro- Other savings of individuals funding, or personal earnings owing to employees credit sources of business unrelated to grants loans and suppliers financing owner(s) the firm or lines of its owner credit from ("angels") financial institution including credit cards. Source: ¡Oum ¡et ¡al. ¡(2012) ¡
SME Finance Coverage Source: ¡IFC ¡(2010) ¡
Access to finance – ASEAN SME Policy Index Legal and regulatory Sound and diversified financial markets framework Availabil Credit Collat Microfi ity of bureau Cadast nance Risk eral / re Credit Capital Faciliti and Acces (e.g. (inclu guaran registr Credit es provisi Leasin Factor s to venture tee ies ding or (includi oning g ing capital, stock ng land rights schem (not private requir market Credit es limite use equity ement Unions funds, right) d to s ) business SME) angels) Policy Objectives Deepening and broadening financial markets, greater competition, reducing the cost of borrowing, and stimulating greater provision of finance Source: ¡ERIA ¡-‑ ¡OECD ¡(2014) ¡
Access to Finance - ASEAN SME Policy Index 6.0 5.0 4.0 3.0 2.0 1.0 0.0 BRN CAM IND LAO MMR MYS PHL SGP THA VNM ASEAN 4.1 Legal and regulatory framework 4.2 Sound and diversified financial markets 4. Access to Finance Source: ¡ERIA ¡-‑ ¡OECD ¡(2014) ¡
“Death Valley Trap” Source: ¡hOp://jordan.smetoolkit.org/jordan/en/content/en/54286/Capital-‑Providers-‑and-‑the-‑Valley-‑of-‑Death-‑ ¡
“Death Valley Trap” The uncertainty associated with SME-industrial projects often causes SMEs to face financing problems during the start-up ‘death valley’, where financing becomes particularly difficult. Innovative financing mechanisms need to be identified and attracted to the SMEs to overcome the death-valley. Mostly, this “lack of funds to start or run a business” is because of the inability of the entrepreneurs to articulate and present ideas to appropriate financiers, failure to attract enough customers or poor management of finances. Nevertheless, it is a reality that there exists a wide gap between the existing financial intermediation frameworks and the reality of SMEs. Most SMEs fail during the startup “death valley”, where financing becomes particularly difficult
Need Strategies “Death valley” could be largely overcome by various financing channels once the firms achieve a certain threshold level of operations that allows them to push past the “death valley” such as innovative micro-financing models, project financing, non-banking financial institutions, and the banking sector’s interest in promoting social development through industrial clusters, incubating centers etc. But the trouble is that the market is not social or environmentally conscious and financing is only concerned with profit.
Concluding Remarks Na<onal ¡Level ¡ Different ¡types ¡of ¡business ¡financing ¡could ¡help ¡to ¡integrate ¡ social ¡ and ¡ economic ¡ objec9ves ¡ of ¡ the ¡ firms ¡ such ¡ as ¡ government ¡supported ¡business ¡funds ¡and ¡venture ¡capital ¡ Risk ¡insurance, ¡guarantee ¡ ¡ Credit ¡bureau ¡ ASEAN-‑wide ¡SME ¡Trade ¡and ¡Investment ¡Financing ¡Mechanism ¡ ¡ SME ¡Investment ¡and ¡Development ¡Fund ¡ Direct ¡finance ¡(trade, ¡projects) ¡ ¡ Supply ¡chain ¡finance ¡ ¡
Thank ¡You ¡ Ngee Ann – Adelaide Education Centre, Singapore www.naa.edu.sg
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