Session 1: Emerging Trends in SME Finance and Policies

Abstract A New Regime of SME Finance in Emerging Asia

Shigehiro Shinozaki, Financial Sector Specialist (SME Finance) Office of Regional Economic Integration Asian Development Bank, sshinozaki@adb.org
Asias rapid growth is increasingly influencing the global economy and positioning the region as a global growth driver. The recent global financial crisis has depressed demand from the developed countries, a problem rooted in global imbalances to which Asia contributes. To address this situation, Asian countries need to rebalance their economies by promoting intra-regional trade and mobilizing domestic demand, areas in which small and medium-sized enterprises (SMEs) can play a pivotal role. SMEs stimulate domestic demand through job creation, innovation, and competition; thus, they are a driving force behind a resilient national economy. In addition, SMEs involved in global supply chains have the potential to encourage international trade. Prioritizing SME development is, therefore, critical for promoting inclusive economic growth in most economies in Asia and the Pacific. Adequate access to finance is crucial for SMEs to survive and eventually grow beyond SME status. In Asia, the reality is that SMEs have poor access to finance, which is one of the core factors impeding their development. As the global financial system has become increasingly advanced, the root causes of financial crises become more complex as well. Amid continuing global financial uncertainty, stable access to appropriate funding sources has become even more difficult for SMEs to attain. These conditions are restricting the regions development of resilient national economies. Among Asian and Pacific countries, fostering a supporting industry for and promoting the internationalization of SMEs is key to stimulating inclusive economic growth and escaping the middle income trap. Given the diversified nature of SMEs, there is no one-size-fits-all financing solution. Supplydemand gap analysis suggests the limits of bank lending in safely and sustainably raising funds for businesses. The global regulatory response to the recent global financial crisis, the Basel Capital Accord (Basel III), may further constrain bank lending to SMEs. Basel III requires banks to have tighter risk management as well as greater capital and liquidity. The resulting asset preferences and deleveraging of banks, particularly European banks with a significant presence in Asia, could further limit the availability of funding for SMEs in the region. Lessons from the recent financial crisis have motivated many countries to consider SMEs access to finance beyond conventional bank credit and to diversify their domestic financial systems. Both the improvement of lending efficiency and the diversification of financing modalities can help increase SMEs financial access, given the largely bank-centered financial systems in Asia and the Pacific. The discussion on bank lending efficiency focuses on (i) the financial infrastructure in place for SMEs (SME informatization and legal frameworks for secured transactions); (ii) innovative financial product design (asset based finance, credit score based lending, SME cluster financing, and DIP/exit financing); (iii) sustainable credit guarantee systems; and (iv) the roles of public financial institutions. The discussion on diversified financing mechanisms addresses (i) the roles of non-bank financial institutions in SME finance; (ii) trade finance and supply chain finance for SMEs; and (iii) capital market financing for SMEs. A review of these issues is needed to contribute to the design of a new regime of SME finance in emerging Asia.