Asia’s small firms need more nonbank financing to grow, create jobs
Small- and medium-sized enterprises (SMEs) are the backbone of Asia’s economies, but they need better access to finance to grow and generate badly needed new jobs for the region, said a new Asian Development Bank (ADB) report.
"Most of Asia’s smaller firms are faced with difficulties in obtaining finance,” said deputy head of ADB’s Office of Regional Economic Integration Noritaka Akamatsu. The office has produced the inaugural edition of Asia SME Finance Monitor that is released today.
"SMEs need to be able to tap a wider range of nonbank financing options in addition to bank loans, including capital markets if they are to realise their potential," it added.
SMEs – defined differently in different countries but generally with a small workforce or low assets – make up 98 per cent of all businesses and provide jobs for 66 per cent of the labour force in Asia, but they represent only 38 per cent of the region’s gross domestic product (GDP), indicating that governments can boost economic growth by developing SMEs.
However, small firms have trouble getting the finance they need to grow. They lose out to larger companies where bank loans are concerned, particularly with banks cutting back their lending to SMEs in the wake of the 2008-2009 global financial crisis as they avoided risk and sought financial stability.
Although many governments have developed comprehensive policy frameworks to promote SME growth, most measures focus on helping SMEs get loans from banks, such as public credit guarantee schemes in Indonesia and Thailand, secured transaction reforms in the Pacific region, refinancing schemes in Bangladesh and Malaysia, and mandatory lending in the Philippines.
The report highlighted the example of the People’s Republic of China (PRC), where SMEs contribute 50 per cent of tax revenues, 60 per cent of GDP, and 80 per cent of urban jobs, and where alternative sources of funding are provided via SME equity markets on the Shenzhen Stock Exchange, SME bond instruments, and microcredit firms.
However, given that the PRC defines SMEs differently to other countries, further study is needed on the link between the wider availability of finance and SME growth.
More needs to be done across the region to incorporate non-bank financing options into national policies and nurture other options, like increased use of asset-based finance and capital market instruments. The report, which included data on SMEs in 14 countries in the region, found that as the world economy becomes increasingly interlinked, SMEs that are part of intricate global supply chains will need access to further trade finance, supply chain finance, and innovative funding models that enable them to expand their business globally.
The new report is being launched in tandem with a joint ADB-OECD study on SME access to finance, which looks at lessons for the industry from the 2008-2009 global financial crisis and Europe’s sovereign debt troubles.