1. Session 1 Shinozaki ADB PPT

ADB-OECD Workshop on Enhancing

Financial Accessibility for SMEs

2013/3/6 Session 1

1

A New Regime of SME Finance in Emerging Asia

The First ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

Session 1, 6 March 2013, ADB HQ, Manila

Shigehiro Shinozaki

Financial Sector Specialist (SME Finance)

Office of Regional Economic Integration (OREI)

Asian Development Bank

This presentation was prepared under the author‟s responsibility. The views expressed here do not necessarily reflect

the views or policies of ADB, its Board of Directors, or the governments they represent. ADB does not guarantee the

accuracy of the data included in this presentation and accepts no responsibility for any consequences of their use.

Agenda

I. SMEs in the Global Economy

II. Supply-Demand Gap in SME Finance

III. Bank Lending Efficiency

IV. Diversified Financing Mechanism

V. A New Regime of SME Finance

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I. SMEs in the Global Economy

Landscape of SME Sector

Roles of SMEs

Global Imbalances

Savings, Investment, and Credit

3

Landscape of SME Sector

Developing Countries

-No. of SMEs: 25-30 mil. formal SMEs

55-70 mil. formal microenterprises

285-345 mil. informal enterprises

-Employment: 45% of total (formal SMEs)

-GDP contribution: 33% of GDP (formal SMEs)

-Financial access: 45-55% of formal SMEs

28-35% of all MSMEs

ASEAN (10)

-No. of SMEs: over 96% of all enterprises

-Employment: 50-85% of total

-GDP contribution: 30-53% of GDP

-Exports: 19-31% of total values

-Financial access: n/a,

APEC (21)

-No. of SMEs: over 90% of all enterprises

-Employment: 60-80% of total

-Productivity: 50% of sales & added value

-Exports: about 30% of total values

-Financial access: n/a,

*

* Brunei, Indonesia, Malaysia, Philippines,

Singapore, Thailand, and Viet Nam

Sources:

Developing Countries: GPFI (2011), “Report to the Leaders”, G20 Leaders Summit, Cannes

APEC: official website (http://apec.org); APEC-SMEWG (2003), „APEC Informatization Survey for Small and Medium Enterprises‟, p.3 [productivity]

ASEAN: ASEAN (2010), “ASEAN Strategic Action Plan for SME Development”, p.2, Jakarta

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SMEs as a key driver of economic and social stability

1) Expected Roles at the National Level:

- create jobs

- encourage innovation, competition, and growth of national & rural economy

- division of labor (subcontracting with large firms)

2) Expected Roles at the Global Level:

- internationalization (esp. vitalize export-oriented business)

- encourage intraregional trade

- rebalance the global economy

- release countries from the ―Middle Income Trap‖

Roles of SMEs

5

-2.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

USA OECD EU PRC East Asia & Pacific (developing only)

-50

-25

0

25

50

-1.00%

-0.50%

0.00%

0.50%

1.00%

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

East Asia & Pacific (developing only) EU OECD High income Middle income Low income

6

Global Imbalances

Current Account Balance (% of world nominal GDP)

Source: World Bank Data (http://data.worldbank.org/)

Current Account Balance & Gross Savings

Gross savings (% of GDP) [right] Current account balance (% of world GDP) [left]

%



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Note: Based on the World Bank Analytical Classifications 2011, high income countries include Brunei Darussalam, Hong Kong,China, Japan, Republic of Korea, and Singapore; and

middle income countries include the People’s Republic of China, Indonesia, Malaysia, Mongolia, Philippines, Thailand, and Viet Nam. Source: ADB Key Indicators 2011

Notes: Credit refers to value of loans or lines of credit approved by a financial institution. Investment refers to value of fixed assets purchased by firms in a fiscal

year (machinery, vehicles, equipment, land, and building). SMEs = small and medium enterprises with 5 ≤ employees ≤ 99. Source: World Bank Enterprise Surveys 7


10

20

30

40

50

60

0 50 100 150 200 250 300

Gro

ss

Do

mest

ic S

avin

g (%

of G

DP

)

Domestic Credit by Bank (% of GDP)

High Income Countries

0

10

20

30

40

50

0 50 100 150

Gro

ss

Do

mest

ic S

avin

g (%

of G

DP

)

Domestic Credit by Bank (% of GDP)

Middle Income Countries

10

15

20

25

5 10 15 20 25

Investm

ent (

ln)

Credit (ln)

Indonesia - SMEs

15

20

25

30

15 20 25 30

Investm

ent (

ln)

Credit (ln)

Viet Nam - SMEs

Enhanced access to finance can contribute to adjustments in domestic savings or current account balance in high income countries, while this trend is reversed in middle income countries.

Positive correlation btw credit and investment by SMEs (INO & VIE). Increasing the depth of credit will accelerate SMEs’ investment.

Implications:

i. SMEs having access to formal finance contribute to higher domestic investment?

ii. Individual savings, rather than corporate savings, contribute to higher domestic savings? Informal MSMEs included in ―individual‖?

iii.SMEs having no access to formal finance keep profits as precautionary savings?

Expectation: Promoting SME status from informal to formal and improving financial access for formal SMEs will contribute to mobilizingexcess savings to investment in emerging Asia.


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II. Supply-Demand Gap in SME Finance

SMEs’ Access to Finance

Methodology: Case of Indonesia

Supply-Demand Gap in SME Finance - Indonesia

Implications

9

10

SMEs’ Access to Finance

Value of Credit

Gap

($ billion)

Number of

Firms

(million)

With Deposit

Accounts

With Loans or

Overdraft

East Asia MSMEs 900–1,100 170–205 115–140 17–19

Formal

SMEs

250–310

[11%–14%]

11.2–13.6 7.6–9.1 2.0–2.5

South Asia MSMEs 310–370 75–91 47–57 15–17

Formal

SMEs

30–40

[29%–35%]

2.0–2.8 1.0–1.2 0.5–0.7

Total

excluding high-income

OECD

MSMEs 2,100–2,500 365–445 240–290 75–90

Formal

SMEs

700–850

[21%–26%]

25–30 18–22 8–10

[ ] = gap as percentage of current outstanding SME credit, MSMEs=micro, small, and medium enterprises, OECD=Organisation for Economic

Co-operation and Development, SMEs=small and medium enterprises.

Note: Regional classification is based on the World Bank definition.

Source: IFC and McKinsey & Company. 2010. Two trillion and counting. Washington, DC: IFC.



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Disequilibrium Model of Credit Market:

Fair and Jaffee (1972), Rimbara and Santomero (1976), Laffont and Garcia (1977), Pazarbasioglu

(1997), Ghosh and Ghosh (1999), Agung et al. (2001), etc.

Data: Bank Indonesia’s Banking Statistics, Financial Statistics, and BPS statistics [Jan/07-Dec/11]

Credit Supply Function (Ls):

Lst = a + b1 capt + b2 rt + b3 yt + b3 nplt + ut (1)

where a and b = coefficients to be estimated; cap = banks’ lending capacity as local currency values calculated based on commercial banks’ balance sheets (total liabilities – equity capital – required reserves); r = average lending rate for working capital; y = value of real GDP; NPL = value of non-performing loans; t = observed point in time; and u = residual.

Credit Demand Function (Ld):

Ldt = a + b1 rt + b2 yt + ut (2)

where a and b = coefficients to be estimated; r = average lending rate for working capital; y = value of real GDP as a determinant of credit demand; t = observed point in time; and u = residual.

Supply-Demand Gap:

Lt = min(Lst, L

dt) (3)

where Lt = actual lending value observed at period t. L corresponds to Ls if Ld>Ls, while L follows Ld if Ls>Ld.

S-D gapt = Ldt – Ls

t (4)

Methodology: Case of Indonesia

11

12

Supply-Demand Gap in SME Finance- Case of Indonesia -

-0.10

-0.05

0.00

0.05

0.10

0.15

2011.1

2

2011.1

1

2011.1

0

2011.9

2011.8

2011.7

2011.6

2011.5

2011.4

2011.3

2011.2

2011.1

2010.1

2

2010.1

1

2010.1

0

2010.9

2010.8

2010.7

2010.6

2010.5

2010.4

2010.3

2010.2

2010.1

2009.1

2

2009.1

1

2009.1

0

2009.9

2009.8

2009.7

2009.6

2009.5

2009.4

2009.3

2009.2

2009.1

2008.1

2

2008.1

1

2008.1

0

2008.9

2008.8

2008.7

2008.6

2008.5

2008.4

2008.3

2008.2

2008.1

2007.1

2

2007.1

1

2007.1

0

2007.9

2007.8

2007.7

2007.6

2007.5

2007.4

2007.3

2007.2

2007.1

Total commercial bank lending SME lending

New Economic

Policy Package I

New Economic

Policy Package II

Public guaranteed loan program for MSMEs (KUR) started

MSME Law (Law No.20/2008)

enacted

Yudhoyono Administration (2004 -)

National Strategy for Financial Inclusion

(NSFI) announced (Jun.2012)

European sovereign debt crisis (late 2009 -) Lehman shock (Sep/08)2008/09 Global financial crisis



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Limit of bank financing for SMEs under the continuing global financial uncertainty.

i. The root of financial crisis will change as global financial system is advanced.

ii. Well-established SME finance policies will alleviate credit contraction, but cannot remove it perfectly.

iii. Possible negative impact of Basel III.

Diversification of financing modality is necessary.

i. No one-size-fits-all financing solution.

ii. Long-term funding needs will increase as SMEs grow further.

iii. A comprehensive menu of policy options on SME finance is needed, with innovation.

Implications

13

III. Bank Lending Efficiency

Financial Infrastructure for SMEs

Innovative Financial Product Design

Sustainable Credit Guarantee Systems

Public Finance for SMEs

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Credit data infrastructure

i. Reduce the cost of producing information for lenders and the supply-demand gap in SME finance.

ii. Control excessive competition among banks and excessive credit reliance among SMEs.

SME informatization

i. Timely availability of high quality financial and non-financial information on SMEs. Anonymous info sharing.

ii. Asia SME Finance Monitor at ADB (S-RDTA)

Legal infrastructure for secured transactions

i. Legal framework for establishing and operating collateral registries.

ii. Facilitate the use of movables for loans and minimize dependency on real estate security.

Financial Infrastructure for SMEs

15

Asset based finance (ABF)

Financing approach based on both firm’s credit worthiness and the value of its assets.

i. Asset based lending (ABL): finance secured by accounts receivable

and movables (inventory, machinery, and equipment).

ii. Factoring: short-term financing for suppliers, selling A/R.

iii. Financial lease: mid-term financial instrument, giving the right to use

owner’s assets for specific period.

iv. Structured finance/asset backed securities (ABS)

Credit score based lending/risk-based lending

SME cluster financing

Debtor-in-possession (DIP)/Exit financing

Finance for firms under bankruptcy/restructuring process.

Innovative Financial Product Design

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Roles of credit guarantee(i) Fill the supply-demand gap in SME finance; (ii) lower funding cost for SMEs; and (iii) alleviate financing constraints for SMEs, partially or fully released from collateral requirements.

Potential negative effects(i) Impact of Basel Capital Accords; (ii) adverse selection & moral hazard; (iii) a life-prolonging measure for SMEs; (iv) less incentive to improve SME management; and (v) bloating national budgets (public credit guarantee).

Challenge: business sustainability and soundness

A gradual shift from public-dependent to private-led business to effectively deliver guarantee benefits to SMEs.

(i) Cost efficiency; (ii) profitability; (iii) management & staff capacity; (iv) operating system; (v) diversified & demand-driven product design; (vi) self-funding; and (vii) country context & needs.

Sustainable Credit Guarantee Systems

17

Roles of public financial institutions

i. Public intervention: (i) direct lending; (ii) interest subsidy; and (iii) credit guarantee & insurance.

ii. Reduce social opportunity costs (outreach to the underserved).

iii. Timely response to external shocks, e.g., financial crisis and disaster.

Debates

i. Supplementary or suppression of private businesses?

ii. Bloating national budget with no risk conscious?

iii. Political bias, addressing ―save the weak‖?

Challenges

i. Balance between fiscal cost and macroeconomic benefit.

ii. Ex post facto evaluation of public intervention.

Public Finance for SMEs

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IV. Diversified Financing Mechanism

Non-Bank Financial Institutions

Trade Finance & Supply Chain Finance for SMEs

Capital Markets for SMEs

Brainstorming: ―Exercise‖ equity market for high-end SMEs

19

Diverse players for financing SMEs, besides banks

i. Specialized financiers: credit cooperatives, credit unions, pawnshops,

finance companies, leasing companies, factors, etc.

ii. Market organizers: securities dealers & brokers

iii. Risk-taking/contractual savings institutions: venture capital, monoline,

hedge funds, pension funds, mutual funds, PE funds, etc.

iv. Financial conglomerates/investment banks

Debates

i. Stimulate sound competition in financial systems?

ii. Provide financing alternatives for growth-oriented SMEs?

iii. Shadow banking & regulatory arbitrage as a potential risk?

Challenges

i. Establish sound competitive environment among players.

ii. Balanced macro- & micro-prudential regulation.(if systemic risk is identified)

Non-Bank Financial Institutions (NBFIs)

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Importance of supporting industries

i. SMEs can contribute to intra- & extra-regional trade through subcontracts with large firms.

ii. As large firms expand their business to overseas, SMEs have a chance to entering foreign markets.

Instruments to stimulate internationalization of SMEs

i. Trade finance: documentary credit, documentary collection, etc.

ii. Supply chain finance: ―a combination of trade finance and a technological platform which connects trading partners and financial institutions and provides various services related to some supply chain events‖ (IFG). e.g., Intl. factoring.

Challenges

i. Product design & combination to supplement disadvantages on conventional trade finance (e.g., process time & cost)

ii. IT infrastructure/electronic trade data exchange

iii. Product literacy for SMEs

Trade Finance & Supply Chain Finance for SMEs

21

A trial and error for creating an equity financing venue for high-end SMEs

i. Exchange market: e.g., SME Board & ChiNext (SZSE/PRC), SME Exchange (BSE/India)

ii. Organized OTC:

e.g., FreeBoard (KOFIA/Korea)

iii. Alternative Investment Market (AIM):

e.g., CATALIST (SGX/Singapore), ACE (KLSE/Malaysia), mai (SET/Thailand)

iv. Market for unlisted SME stocks: e.g., Pink Sheets/USA

A new movement of creating an SME bond marketi. QIB (Qualified Institutional Buyer) market for professional investors/Korea (2012)

ii. SME Collective Note, SME Joint Bond & SME private placement bond/PRC

Challenges

i. Demand creation mechanism: (i) fostering investor base/VC industry; (ii)

supporting infra building; (iii) government support (e.g., tax incentive)

ii. Sustainable market mechanism: (i) liquidity enhancement

(e.g., market making); (ii) cost management for market operation

Capital Markets for SMEs

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What is the ―Exercise‖ market?

i. Equity market for unlisted SMEs that are willing to raise growth capital, separated from the regular market of stock exchange

ii. Learning venue on market rules & responsibility for SMEs before tapping the regular market (preparatory market)

iii. A mechanism supporting SMEs in equity finance from various angles

iv. Channel investment capital into ―smaller but growing‖ firms

Benefitsi. For SMEs: (i) improve corporate culture, learning market rules (disclosure) &

the importance of increasing ―corporate value‖; (ii) take a funding alternative besides lending; (iii) strengthen capital necessary to achieve further growth, balancing debt; (iv) enhance social credibility of business & employee’s incentive to work; and (v) promote easiness of bank lending.

ii. For the market side: increase the depth of capital market through

involving a new layer of potential issuers to the market, i.e., SMEs.


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24

Investors

Sophisticated investors

Liquidity enhancement

Government

Tax incentive scheme

Socialization

Regulation on investment by SOEIncorporation support Monitoring(Indirect supervision)

Internal Rules on

- Stock Exchange

- Securities firms

- Sophisticated investors

Private Sector

Disclosure support

SME recruiter

RegulatorSelf-regulatory rule

Exercise MarketSMEs

Securities firms

CPA Network

Stock Exchange

/Dealers Assoc.

Venture capital

Banks

SME consultants

VC Fund

Financial

institutions

Institutional

investors

Government (LP)

Bi/Multi donors (LP)

State owned enterprises

(LP)

Large companies

(business partners)

Angel investors

Venture capital (GP)

Private sector (LP)

Primary market Secondary market

Market

making

system

Obligatory

shareholder

allotment

Valuation system

of

unlisted stocks

Tax

Agency

Ministry of

Industry

Ministry of

TradeCentral Bank Capital Market

Regulator/FSA

SME/

Cooperative

Agency

Ministry of State

Owned

Enterprises

Ministry of Justice

Universityspin-off

venture

Other

relevant

Ministries



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V. A New Regime of SME Finance

A Big Picture

Brainstorming: Possible Donor Support Areas

25

Financial Infra

Regular Markets

Government

Sophisticated

Investors

NBFIs

26

A Big Picture

Factors Leasing

Firms

Securities

dealers/

brokers

Venture

CapitalMonoline

Finance

Firms,

etc.

Banks

Bond

Market

Equity

Market

Credit

Guarantee

Corps.

Consolidated SME Information

Sharing Platform(financial & non-financial data)

Public

Financial

Institutions

SPC

FSA/MOFCentral

Bank

SME/Coop

Agency

Other Line

Ministries

“Exercise”

Equity

Market

Collateral

Registry

Credit

Bureau

Growth-

oriented

SMEs

Supporting professionals(CPAs, audit firms, SME associations,

SME consultants, banks, VCs, etc.)SME Development Policy

(access to finance, etc.)

Growing with innovation & competitiveness SMEs’ internationalization & promotion of

intraregional trade

Financial

Education

Large

Firms

-Regulation & supervision

-Policymaking for financial inclusion

(inc. improving SMEs’ access to finance)

Statistics/data Policy implication

Anonymous data

Evidence-based policymaking

Innovative products

(ABL, credit score finance,

DIP finance, etc.)

Trade finance/SCF

Guaranteed loans

National

budget

(National

budget) Credit infoCredit among

corporations

Insurance



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Brainstorming: Possible Donor Support Areas

Financial Infra

Regular Markets

Government

Sophisticated

Investors

NBFIsFactors Leasing

Firms

Securities

dealers/

brokers

Venture

CapitalMonoline

Finance

Firms,

etc.

Banks

Bond

Market

Equity

Market

Credit

Guarantee Corps.

Consolidated SME Information

Sharing Platform(financial & non-financial data)

Public

Financial Institutions

SPC

FSA/MOFCentral Bank

SME/Coop Agency

Other LineMinistries

“Exercise”

Equity

Market

Collateral Registry

Credit Bureau

Growth-

oriented

SMEs

Supporting professionals(CPAs, audit firms, SME associations,

SME consultants, banks, VCs, etc.)SME Development Policy

(access to finance, etc.)

Growing with innovation & competitiveness SMEs’ internationalization & promotion of

intraregional trade

Financial

Education

Large

Firms

-Regulation & supervision

-Policymaking for financial inclusion

(inc. improving SMEs’ access to finance)

Statistics/data Policy implication

Anonymous data

Evidence-based policymaking

Innovative products

(ABL, credit score finance,

DIP finance, etc.)

Trade finance/SCF

Guaranteed loans

National

budget

(National

budget) Credit info

Trade finance/supply

chain finance support

SME

capital market

development

support

Credit guarantee

infrastructure

development

support

Secured

transaction

reform support

SME

information

platform

development

support

Social capital market

development support

Capacity building on

innovative SME

financing modality

(for financial institutions &

policymakers)

Thank you for your attention.

For further questions:

Shigehiro Shinozaki

Financial Sector Specialist (SME Finance)

Office of Regional Economic Integration

Asian Development Bank

Email: [email protected]

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Annex

About ADB:

The Asian Development Bank (ADB) is dedicated to reducing poverty in the Asia and Pacific region

through pro-poor sustainable economic growth, social development, and good governance. Established in 1966, it is owned by 67 member nations—48 from the region—who have committed $167.1 billion in loans to the vision of a region free of poverty. With headquarters in Manila, ADB has 30 offices around the world with 2,833 staff from 59 members as of 31 December 2010. (As of end 2010)

About OREI:

OREI traces its roots to the Regional Economic Monitoring Unit (REMU)—established in the

aftermath of the 1997/98 Asian financial crisis. It was upgraded and renamed OREI in April 2005, as ADB expanded its role in promoting regional cooperation and integration (RCI) throughout Asia and the Pacific.

OREI assists its developing member countries in pursuing open regionalism that serves as a building block to global integration. OREI works toward building a regionally integrated and

globally connected Asia and the Pacific by

Promoting regional economic policy dialogue in Asia and the Pacific and providing policy advice;

Supporting capacity building and institutional strengthening to help ADB member countries integrate both within the region and with the rest of the world;

Conducting research and serving as a knowledge and information center on RCI; and

Acting as ADB’s focal point for regional infrastructure and financial sector development and developing partnerships with regional forums and international institutions.

29

Case of Indonesia

- MSMEs seek to access formal finance & diversified long-term funding instruments for stable growth of business, diminishing informal finance dependency.

30

0% 20% 40% 60% 80%

Bank loan

Non-bank loan

Venture capital

MFIs

Family, relatives & friends

Credit among corporations

Public loan program

Informal loan

Corporate bond/debenture

Equity finance

Own fund

Present

Future

0% 10% 20% 30% 40%

Bank loan

Non-bank loan

Venture capital

Short-term ( <1y) Mid-term (1-5 y)

Long-term (>5 y) n/a,

0% 10% 20% 30% 40%

Bank loan

Non-bank loan

Venture capital

Short-term ( <1y) Mid-term (1-5 y)

Long-term (>5 y) n/a,

Funding Instruments: Present and Future

Note: Present = funding instruments accessed. Future = funding instruments desired in the future.

Source: Author’s compilation from JICA-Bapepam-LK Survey on Funding Environment for MSMEs in 2010.

Loan TermPresent

Future

Valid data: 622 MSMEs

Ref. Demands and Constraints on SME Finance



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Case of Indonesia

- Collateral/guarantee requirements & high borrowing rate are the most critical barriers for MSMEs to access formal financial institutions.

31

Source: Author’s compilation from JICA-Bapepam-LK Survey on Funding Environment for MSMEs in 2010.

65.6%

64.8%

52.3%

48.7%

40.8%

37.1%

20.4%

21.2%

28.1%

28.0%

29.3%

30.7%

0% 20% 40% 60% 80% 100%

Collateral/guarantee

High lending rate

Complicated procedures

Short-term loan period

Exclusive lending attitude of FI

Lending policy of FI

yes somewhat yesValid data: 622 MSMEs

Barriers to Accessing Financial Institutions

Ref. Demands and Constraints on SME Finance

1. Session 1 Shinozaki ADB PPT

Documents

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