Session 1: SME financing in Asia and the Pacific and Latin America An overview SME financing in Asia and the Pacific An introduction to the workshop A presentation by Alberto Isgut, Financing for Development Section, Macroeconomic Policy and Financing for Development Division, ESCAP, Wednesday 27 September 2017
SME financing in Asia and the Pacific An introduction to the workshop Outline Why SME financing? A bird s eye view Issues to be discussed What is expected from this meeting?
SME financing in Asia and the Pacific An introduction to the workshop Why SME financing? UN mandates Economics
Why SME financing? 2030 Agenda for Sustainable Development Access to financing services SDG 1 (No poverty) for all (target 1.4) SDG 2 (Zero hunger) for small scale food producers (target 2.3) SDG 5 (Gender equality) for women (target 5.a) SDG 8 (Decent work and economic growth) for MSMEs (target 8.3) SDG 9 (Industry, innovation and infrastructure) for small scale industrial enterprises (target 9.3) Strengthen domestic financial institutions SDG 8 Strengthen the capacity of domestic financial institutions to encourage and expand access to financial services (target 8.10)
Why SME financing? Addis Ababa Action agenda Access Appropriate, affordable and stable access to credit to MSMEs (para 16) Regulation 1 Policy and regulatory environment supports financial market stability and promotes financial inclusion in a balanced manner (para 38) Regulation 2 Collateral substitutes, appropriate exceptions to capital requirements, encourage competition and allow MFIs to mobilize savings by receiving deposits (para 43) Credit evaluation Strengthen capacities of financial institutions to undertake costeffective credit evaluation, including through establishing credit bureaux (para 43)
Why SME financing? Addis Ababa Action agenda Development banks Promote finance for MSMEs through the creation of credit lines targeting those enterprises and technical assistance (para 43) Other financial institutions Microfinance institutions, agricultural banks, mobile network operators, agent networks, cooperatives, postal banks and savings banks (para 39) Innovative tools Mobile banking, payment platforms and digitalized payments (para 39) Peer learning, experience sharing, capacity development United Nations System, AFI, other regional organizations (para 39)
Why SME financing? Economics SMEs Largest number of companies in any country Employment creation Development of skills Diffusion of technological knowledge Accelerate economic growth and reduce income inequality and poverty Challenge Difficulties to access financing from the formal financial system Financial institutions, particularly commercial banks, often view providing loans to them as too risky or involving high transaction costs
SME financing in Asia and the Pacific An introduction to the workshop A bird s eye view on SME financing in Asia and the Pacific
A bird s eye view on SME financing in Asia and the Pacific Importance of SMEs in Asia and the Pacific (2014) 96% of all enterprises 62% of the national labour force 42% of the gross domestic product But they received 18.7% of the total bank loans And their access to loans had a decreasing trend since the 2008/09 global financial crisis Source: Asia SMEs Finance Monitor, ADB,2014
A bird s eye view on SME financing in Asia and the Pacific Percent of firms with a bank loan or line of credit 60% 50% 40% 30% 20% 10% MENA Sub Saharan Africa Latin America South Asia East Asia 0% 50 0 50 100 150 200 250 Number of MSMEs (Million) Bubble size = total credit gap Credit gap refers to the difference between the actual credit extended and the total credit needed by MSMEs. Source: IFC Enterprise Finance Gap Database.
A bird s eye view on SME financing in Asia and the Pacific Turkey Thailand Samoa Russian Federation Pakistan Myanmar Mongolia Malaysia Republic of Korea Indonesia India Georgia Fiji China Bangladesh Afghanistan 0 5 10 15 20 25 30 35 40 Percentage of GDP Source: IFC Enterprise Finance Gap Database.
SME financing in Asia and the Pacific An introduction to the workshop Issues to be discussed Financial access and financial stability Traditional and alternative business models for SME financing Lending infrastructure for SME financing The role of national development banks Fintechs
Issues to be discussed Financial access and financial stability A rapid expansion of credit to consumers or SMEs could result in overindebtedness and financial instability United States sub prime crisis of 2007 India s 2010 microfinance crisis Need well designed regulatory frameworks Risks that need to be considered by regulators Excessive indebtedness of low income borrowers, Illegal deposit mobilization, fraud, high transaction costs, and exploitation of customers Complementary measures Financial education to new users of financial services, strengthen consumer protection regimes, capacity building for setting and implementing financial regulations
Issues to be discussed Traditional and alternative business models Commercial banks often view loans to SMEs as too risky and involving very high transaction costs Alternatives Micro financial institutions (MFI) Lending to SMEs from public financial institutions Downside: Fragmentation Can there be better alternatives? Can market friendly business model be designed to help SMEs gain access to credit on a sustainable basis? New options Commercial banks intensified involvement with SMEs Partnerships between commercial banks and MFIs the latter are paid a fee for originating loans to SMEs
Issues to be discussed Lending infrastructure The asymmetric information problem is a major reason for SMEs insufficient access to finance Questions How can the financial structure in developing countries be improved in order to support the expansion of credit to SMEs? What are some of the main instruments that can be used for this purpose? What is the best way to set up SME databases, guarantee schemes and collateral registries so that they are most effective in enhancing SMEs access to finance? Could it be also useful to set up centralized databases of MFIs to reduce information costs for banks looking for viable MFIs as business partners?
Issues to be discussed National development banks National development banks can play a key role in improving financial inclusion for SMEs through innovative products directly or in combination with the private sector Questions How can they provide assistance to SMEs while not distorting existing market mechanisms and ensuring fiscal sustainability? What are some of the main types of innovations that national development banks can use to improve financial inclusion? Should national development banks complement or compete with private banks? Should the role of a national development banks be that of a plumber trying to patch market failures or of an architect trying to establish new markets and products?
Issues to be discussed Fintechs Fintech companies, which provide financial services by making use of software and digital technology, have enormous potential for improving financial access of SMEs Questions What are the opportunities and challenges posed by fintechs to facilitate access of SMEs to finance? Can fintechs help to fill some of the information gaps that prevent SMEs from accessing the formal financial system? Can fintechs provide new ways (such social networks) of gathering the required information to reduce lending/borrowing risk? How should fintechs be regulated to ensure that they serve productive development and not merely serve the interests of the financial system?
SME financing in Asia and the Pacific An introduction to the workshop What is expected from the meeting? A better understanding of the challenges and opportunities of developing countries to enhance access of their SMEs to finance Identify needs and areas for furthering regional cooperation in both Asia and the Pacific and in Latin America and the Caribbean to support developing countries implement effective policies and reforms to enhance SMEs access to finance Ideas for the preparation of detailed studies in selected developing countries covering the different areas considered in this workshop Set the basis for enhanced collaboration between ESCAP, ECLAC, AFI, ADBI, CIFC, TAF and UNCDF in future activities on SME access to finance
Session 1: SME financing in Asia and the Pacific and Latin America An overview SME financing in Asia and the Pacific An introduction to the workshop Thank you for your attention! A presentation by Alberto Isgut, Financing for Development Section, Macroeconomic Policy and Financing for Development Division, ESCAP, Wednesday 27 September 2017