Asia's small firms in need of more non-bank financing: report

Small and medium-sized enterprises (SMEs) are the backbone of Asia’s economies, but they need better access to financing to grow and generate badly needed new jobs for the region, says a new Asian Development Bank (ADB) report.

Illustrative photo. Small and medium-sized enterprises in Asia need better access to financing to grow and generate badly needed new jobs for the region. Photo by cnbc.

“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 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.”

SMEs are defined differently from country to country but generally they all have a small workforce and limited assets. Still they make up 98% of all businesses and provide jobs for 66% of the labor force in Asia, but they represent only 38% of the region’s gross domestic product (GDP), indicating that governments could boost economic growth by developing SMEs.

However, small firms have trouble getting the financing 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.

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 highlights the example of the People’s Republic of China (PRC), where SMEs contribute 50% of tax revenues, 60% of GDP, and 80% 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 organisations.

However, given that the PRC defines SMEs differently than 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 policy and nurture these other options, such as increased use of asset-based finance and capital market instruments.

The 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.