Small and medium 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, a new Asian Development Bank (ADB) report says.
SMEs—defined differently in different countries but generally with a small workforce or low assets—make up 98 percent of all businesses and provide jobs for 66 percent of the labor force in Asia. However, they represent only 38 percent of the region’s gross domestic product (GDP), indicating that governments can boost economic growth by developing SMEs.
“Most of Asia’s smaller firms are faced with difficulties in obtaining finance,” said Noritaka Akamatsu, deputy head of ADB’s Office of Regional Economic Integration, which produced the inaugural edition of Asia SME Finance Monitor, released yesterday. “SMEs need to be able to tap a wider range of non-bank financing options in addition to bank loans, including capital markets if they are to realize their potential.”
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 tried to avoid 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, implemented transaction reforms in the Pacific region, refinancing schemes in Bangladesh and Malaysia, and mandatory lending in the Philippines.
In the Philippines, micro, small, and medium-sized enterprises (MSMEs) totaled 816,759, representing 99.6 percent of total enterprises in 2011. Nearly half, or 47 percent, of the MSMEs are in the trade and repair of motorcycles and motor vehicles, followed by the services sector, which has the largest MSME contribution to employment at 46.1 percent of the total MSME employment. Banks are reluctant to lend to smaller firms, which they consider as risky.
The Philippine central bank requires all banks to allocate at least 8 percent of their loan portfolio to MSMEs but say some large commercial banks would rather pay the annual P500,000 fine than set aside funds for lending to borrowers deemed risky, such as MSMEs.
More measures need to be done across the region to incorporate non-bank financing options into national policies and nurture other options, such as increased use of asset-based finance and capital market instruments.
The ADB report, which includes 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.