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Friday, August 28, 2015, 15:40

Seeking new sources of finance

By KRISHNA KUMAR VR in New Delhi
Seeking new sources of finance
A lion dance ushers in the Chinese New Year at the Philippine Stock Exchange on Feb 18. The stock exchange launched a SME Board in 2001 but only four firms have listed due to a lack of preferential rules for firms applying for listing. (AFP)

If small businesses are the backbone of economies in the Association of Southeast Asian Nations (ASEAN), easy and adequate finance is the lifeblood of their growth.

However, most small and medium-sized enterprises (SMEs) are faced with poor access to finance in the region, and this is one of the underlying factors hampering their development, according to the Asian Development Bank (ADB).

SMEs in ASEAN account for more than 96 percent of all businesses and provide around 85 percent of employment in the region. They also contribute 50 percent of the regional GDP and 30 percent of exports.

Zhu Ying, director of the Australian Centre for Asian Business at the University of South Australia Business School, says getting loans from commercial banks is always a challenge for SMEs in the region.

The International Finance Corporation, a member of the World Bank Group, says that some $900 billion to $1.1 trillion of SMEs’ credit requirements are unmet in East Asia and Southeast Asia.

The ADB maintains that the new environment will require new financing solutions for SME exporters and importers, as Southeast Asia will be exposed to further liberalized trade and investment after the establishment of the ASEAN Economic Community (AEC) by the end of this year.

Through the formation of the AEC, ASEAN will become a unified market and production base with free movement of goods and services.

“They need more financial support for business expansion, so specific institutions and banks can easily support SMEs by providing credit loans and incentives,” Zhu tells China Daily Asia Weekly.

“In addition, tax incentives should be provided to SMEs engaged in exports in order to reduce production costs.”

According to the Jakarta-headquartered Economic Research Institute for ASEAN and East Asia (ERIA), the proportion of SMEs in Southeast Asia enjoying good access to finance averages 5 to 6 percent for micro enterprises, 12 to 15 percent for small firms and 17 to 21 percent for medium-sized companies.

Venkatachalam Anbumozhi, senior economist at ERIA, says the gap in access to finance is worsened by a poor land survey system, stringent collateral requirements and inadequate protection of credit rights.

In Myanmar, for instance, very few SMEs have access to finance from formal institutions because of strict collateral rules and higher interest rates, according to a survey conducted last year by the Organisation for Economic Co-operation and Development and the United Nations Economic and Social Commission for Asia and the Pacific.

Poor access to banks and other formal financial institutions in the less developed economies is also pushing many to turn to unreliable and costly informal financial services. The survey showed that 80 percent of SMEs source their working capital from personal savings. Those who access funds from banks tend to borrow for a short term.

To fund SME growth without excessive interest cost burden, companies can look to capital markets such as equity finance, corporate bonds and venture capital, says Anbumozhi. “Integrated diversified financing models can be developed in ASEAN for SMEs,” he says.

Although still in the early stage of economic development, countries like China, India and South Korea have turned to capital market financing for SMEs.

The Shenzhen Stock Exchange established the SME Board in 2004 and the venture board, ChiNext, in 2009 as an equity financing venue for high-growth SMEs.

In addition to equity finance, China has launched three types of bond instruments for SMEs: The SME Joint Bond (traded in the interbank and exchange markets), the SME Collective Note (traded in the interbank market) and the SME Private Placement Bond.

In South Korea, the Korea Financial Investment Association (KOFIA) began managing in July 2005 an over-the-counter market called FreeBoard, which allowed SMEs to trade unlisted stocks.

In May 2012, KOFIA launched the qualified institutional buyer system for SME bonds. A little more than a year later, in July 2013, South Korea introduced a specialized stock market for startups and SMEs, called the Korea New Exchange, or KONEX.

In India, two dedicated SME exchanges were launched in 2012: The SME Platform under the Bombay Stock Exchange and Emerge under the National Stock Exchange.

In the ASEAN region, the Philippines launched the SME Board on the stock exchange in 2001. But so far, only four firms had been listed on the board due to a lack of preferential treatment for firms applying for listing.

Malaysia and Thailand have no dedicated SME capital markets. However, there are markets that SMEs could tap. For instance, the ACE Market under Bursa Malaysia and the Market for Alternative Investment under the Securities Exchange of Thailand are sponsor-driven alternative markets for emerging companies.

In Vietnam, the Hanoi Stock Exchange has a trading venue for unlisted public companies, named UPCoM, which was established in 2009. But there is yet no dedicated SME market in the country.

Indonesia has no SME capital market either. But so far 10 enterprises, regarded as SMEs according to the capital market rule, have conducted initial public offerings on the Indonesia Stock Exchange.

In providing basic financial services to SMEs, the disparities are great between the six more developed economies in the region, collectively called the ASEAN-6 — which comprises Singapore, Brunei, Indonesia, Malaysia, the Philippines and Thailand — and the CLMV economies — Cambodia, Laos, Myanmar and Vietnam — considered the least-developed countries in the regional bloc.

While Singapore is a global financial center, fellow ASEAN member Cambodia has just less than three out of every 100 adults with a bank account, while in Vietnam the ratio is about one in six.

Barring a few countries, the ASEAN financial sector is still not mature and interconnected enough, says Ho Meng Kit, CEO of the Singapore Business Federation.

“When this happens, it will be easier for SMEs to access financing across borders,” he says.

Speaking at the recent ASEAN SME Conference 2015 in Kuala Lumpur, Zeti Akhtar Aziz, governor of Bank Negara Malaysia, the country’s central bank, said the availability of cross-border financing will enable SMEs to innovate, invest and further expand within the region.

Greater financial integration in the banking, insurance and capital markets will be an important contributor to the development of SMEs in ASEAN, she added.

In March, ASEAN finance ministers and central bank governors signed a pivotal ASEAN Banking Integration Framework (ABIF), allowing regional banks to operate freely in other countries within Southeast Asia.

The deal, which has been in the works for several years, is a significant part of the drive toward a more fully integrated AEC.

The banking integration framework makes it easier for any two ASEAN countries to enter into reciprocal bilateral agreements that provide qualified banks with greater market access and the ability to operate as domestic banks.

Beyond financing, SMEs can also leverage the extensive networks and advisory services of regional banks to facilitate matching with regional clients and entry into new markets.

Chris Devonshire-Ellis, founding partner of consultancy Dezan Shira & Associates, says the ABIF will make transactional payments easier, which in turn will facilitate sourcing and bilateral trade, a lot of which is carried out by SMEs.

“There will be opportunities to absorb. There will be winners and losers in this (ABIF). The best and smartest will survive and prosper,” says Devonshire-Ellis.

krishna@chinadailyapac.com
 
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