Overview of Challenges in SME Finance

Transcription

1 Overview of Challenges in SME Finance 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

2 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.

3 Financial Inclusion - World Bank 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)

4 Getting Credit - World Bank s Ease of Doing Business (Ranking out of 189 economies) Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam

5 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.

6 Source of Finance for Business Start-up in Selected ASEAN Economies 56% 53% 36% 33% 18% 17% 16% 11% 10% 5% Loans from friends or relatives of business owner(s) Retained earnings Commercial or personal loans and lines of credit from financial institution including credit cards. Trade credit owing to suppliers Leasing Loans from individuals unrelated to the firm or its owner ("angels") Personal savings of business owner(s) Government funding, grants Micro-credit Other sources of financing Source: Oum et al. (2012)

7 Source of Finance for Business Operations in Selected ASEAN Economies 72% 65% 50% 33% 33% 23% 19% 16% 12% 6% Personal savings of business owner(s) Loans from Government Commercial individuals unrelated to the firm or its owner ("angels") funding, grants or personal loans and lines of credit from financial institution including credit cards. Retained earnings Trade credit owing to suppliers Loans from employees Leasing Microcredit Other sources of financing Source: Oum et al. (2012)

8 SME Finance Coverage Source: IFC (2010)

9 Access to finance ASEAN SME Policy Index Legal and regulatory framework Cadast re (inclu ding land use right) Collat eral and provisi oning requir ement s Credit or rights Credit guaran tee schem es Sound and diversified financial markets Credit bureau / registr ies (not limite d to SME) Microfi nance Faciliti es (includi ng Credit Unions ) Leasin g Factor ing Availabil ity of Risk Capital (e.g. venture capital, private equity funds, business angels) Acces s to stock market Policy Objectives Deepening and broadening financial markets, greater competition, reducing the cost of borrowing, and stimulating greater provision of finance Source: ERIA - OECD (2014)

10 6.0 Access to Finance - ASEAN SME Policy Index 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)

11 Death Valley Trap Source: hop://jordan.smetoolkit.org/jordan/en/content/en/54286/capital- Providers- and- the- Valley- of- Death-

12 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

13 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.

14 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

15 Thank You Ngee Ann Adelaide Education Centre, Singapore