Overview o of C Cha halle lleng nges i in S n SME F Fina - - PowerPoint PPT Presentation

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

Overview o

• f C

Cha halle lleng nges i in S n SME F Fina nanc nce

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

• paqueness and risks.

13 36 28 82 26 33 80 97 29 14 13 7 26 16 14 2 9 30 15 20 23 20 15 16 16 23 28 32 112 32 140 107 102

20 40 60 80 100 120 140 160

Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Thailand Singapore Viet Nam

Financial Inclusion - World Bank

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)

86 10 67 157 19 169 99 14 86 30 89 12 71 116 23 171 104 17 89 36 Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam

Getting Credit - World Bank’s Ease of Doing Business (Ranking out of 189 economies)

2014 2015

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.

56% 53% 36% 33% 18% 17% 16% 11% 10% 5%

Loans from friends or relatives of business

• wner(s)

Retained earnings Commercial

• r personal

loans and lines of credit from financial institution including credit cards. Trade credit

• wing to

suppliers Leasing Loans from individuals unrelated to the firm or its

• wner

("angels") Personal savings of business

• wner(s)

Government funding, grants Micro-credit Other sources of financing

Source of Finance for Business Start-up in Selected ASEAN Economies

Source: ¡Oum ¡et ¡al. ¡(2012) ¡

72% 65% 50% 33% 33% 23% 19% 16% 12% 6%

Personal savings of business

• wner(s)

Loans from individuals unrelated to the firm or its owner ("angels") Government funding, grants Commercial

• r personal

loans and lines of credit from financial institution including credit cards. Retained earnings Trade credit

• wing to

suppliers Loans from employees Leasing Micro- credit Other sources of financing

Source of Finance for Business Operations in Selected ASEAN Economies

Source: ¡Oum ¡et ¡al. ¡(2012) ¡

SME Finance Coverage

Source: ¡IFC ¡(2010) ¡

Access to finance – ASEAN SME Policy Index

Legal and regulatory framework

Cadast re (inclu ding land use right) Collat eral and provisi

• ning

requir ement s Credit

• r

rights

Sound and diversified financial markets

Credit guaran tee schem es 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) ¡

0.0 1.0 2.0 3.0 4.0 5.0 6.0 BRN CAM IND LAO MMR MYS PHL SGP THA VNM ASEAN

Access to Finance - ASEAN SME Policy Index

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

• perations 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 ¡

¡

Ngee Ann – Adelaide Education Centre, Singapore

www.naa.edu.sg

Thank ¡You ¡