The views expressed in this presentation are the views of the author and do not necessarily reflect the

views or policies of the

Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they
represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any
consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.

Challenges and solutions for

SME financing in developing Asia
November 2016

By Dr. Bokhwan YU
Deputy Dean Asian Development Bank Institute

Contents
1. Overview
2. Obstacles for SMEs
3. Case studies of SME financing:
lessons and challenges
4. Solutions for SME financing:
analyzing the Korean case

1. Overview

1.1 Current status of SMEs in developing Asia

SMEs play a major role in the Asian economy
Over 90% of Asian firms are SMEs
Over 60% of Asias labor force work at SMEs
SMEs are particularly important for many developing countries
Indonesia, Thailand, China and the Philippines all have high
numbers of SMEs, contributing to employment and output
SMEs are a key source of poverty reduction

1.2 Why are SMEs important?

SMEs provide variety in the economy

SMEs have been successful in specialization and niche markets,
filling gaps in production networks
SMEs have flexibility in production and management

1.2 Why are SMEs important?

SMEs also encourage entrepreneurship and inclusive growth

The success of SMEs encourages people with ideas to start their own
companies, which also drives innovation
SMEs provide opportunities to all levels of the workforce, including
less educated workers and women

2. Obstacles for SMEs

1. Hard to define

Defining what an SME is necessary for implementing policies,

but deciding on the appropriate criteria is difficult
Problem of Peter Pan Syndrome
2. Hard to attract talented workers
Young and talented workers may favor larger companies over SMEs
3. Hard to market
Face high marketing costs: distribution channels favor larger suppliers

4. Hard to conduct R&D activities

SMEs cannot invest in large R&D projects
SMEs usually work on short timeframes incompatible with R&D activities
5. Hard to finance
SMEs struggle with finance
Banks tend to favor large companies over SMEs
Banks charge SMEs high interest rates

3. Case studies of SME

financing: lessons and
challenges

11

3.1 SMEs in Philippines

SMEs have grown impressively in
Philippines
99.6% of firms are SMEs,
employing over 60% of the labor
force
Development of SMEs has
occurred under the Magna Carta
for MSMEs, implemented in 1991
Under this framework, 8% of bank
loans must be provided to micro
and small enterprises, and 2% to
medium enterprises

12

3.1 SMEs in Philippines

Despite these SME financing policies,
there still has been a lack of funding
Bank loans to micro and small
enterprises have been below the
mandatory 8% since 2010 some
banks are paying a fine instead to
avoid extending credit to these
SMEs
The majority of loans for SMEs
still come from informal sources
such as friends and family

13

3.1 SMEs in Philippines

Why do some banks prefer to pay fines than extend credit to
SMEs?
Credit information is a big reason for this
Banks do not know enough about the SMEs
Even when banks do make loans to SMEs, interest rates are
typically very high (Philippine Institute for Development Studies)

14

3.2 SMEs in India

India has the second most SMEs in the world
SMEs in the country have benefitted from a developed
microfinance sector
SMEs still face problems
India defines SMEs based only on their capital, which may
cause unequal treatment and an inefficient allocation of funding
Like many other countries, owners of SMEs in India have
significant personal liabilities should their business go bankrupt
In India, even company directors and senior staff are said to be
very concerned by the personal implications of company
problems and failure (Ernst and Young)

15

3.3 SMEs in Fiji

Fijis SME sector lacks quality data and
financial support
Financial data on SMEs is poor while
the country does have a credit bureau,
data is only taken on defaults and
payment arrears
Only 40% of SMEs have access to
finance
SMEs which do have access to finance
have to pay interest rates as high as
15% to receive loans from banks

16

3.4 Company specific case: Airbnb

Airbnb is a successful accommodation

website started in the U.S.
The company operates in 191
countries including a number of
Asian countries, and has expanded
rapidly since its creation in 2007

17

3.4 Company specific case: Airbnb

Airbnb began as a startup looking for
funding
Banks and other financiers refused
to provide funding to the company
the business plan was considered
to have too many risks
In the beginning, the company was
only able to survive by selling
novelty cereal based on famous
politicians to pay for its core
business - accommodation

18

3.4 Company specific case: Airbnb

The Airbnb case provides an important lesson
Even in a market as developed and transparent as the U.S., a
bright startup with a profitable idea was unable to receive funding
Financing problems in Asia are even more severe
Airbnb was able to survive and finally flourish, but many other
promising SMEs may fail as a result of funding constraints

19

3.5 Specific problems for SME financing

1. SMEs struggle with financing
There may be millions of SMEs meaning high administrative
costs of loans banks tend to favor larger company
2. SMEs are charged high interest rates
Information on SMEs is not as detailed as for larger companies:
they represent greater credit risk banks charge SMEs high
interest rates

20

3.5 Specific problems for SME financing

3. Start-ups and high risk SMEs have even bigger funding problems
Companies without a history of sales are considered risky
young companies have problems when seeking funding
4. There are no safety nets for SME entrepreneurs
SME owners are required to provide some collateral when
applying for loans SME owners are forced to risk their
personal assets

4. Solutions for SME

financing: analyzing the
Korean case

22

4.1 Solution for finance: policy direction of financial support

Finance is a key challenge for
SMEs in developing countries
Financial policies for SMEs are
moving from loan to interest
gap support, credit guarantee
and investment

23

4.2 Solution for SME finance: loans

SME often struggle to get loans from commercial banks
The government decided to establish Industrial Bank of Korea,
specifically designed for SMEs
In addition, the Bank of Korea set mandatory ratios for
commercial banks (over 45%) and regional banks (over 60%)
to provide loans to SMEs
The government also established SBC (Small and Medium
Business Corporation)

24

4.3 Solution for SME finance: interest gap support

Owing to deeper financial
markets, SMEs are able to
receive finance from the
private sector however,
interest rates for SME loans
are still high
The government solution is an
interest subsidy

25

4.4 Solution for SME finance: credit guarantees

Banks have difficulties in assessing SMEs, which often have short
histories and small balance sheets
Government built credit guarantee institutions to help financial
institutions overcome these issues
< Credit Guarantee >
Government
Funding and monitoring

Credit guarantee
institution
Guarantee
application

SME

Funding
Acceptance
ofguarantee

Contract
ofguarantee

Loan application

Financial institution
Guaranteed loan

26

4.5 Solution for SME finance: direct investment

Start-up SMEs and high risk SMEs get little access to commercial
bank loans and investors
So the government established the Korea Venture Investment
Company to overcome this problem
High risk but high potential SMEs are carefully selected to be
transformed into high growth businesses
< Direct investment >

Korea Venture
Investment
Company
Investment

Returns

Government

Investment

SME
Returns

27

4.6 Solution for SME finance: safety net solutions

Institutions have been created to act as safety nets

* Typically, SME CEOs shared risks with family members, so if they
went bankrupt all family members were liable for the financial
consequences
* The government introduced a mutual aid program to address this
problem
* Yellow Umbrella Mutual Aid is a globally unique safety net system
for SME CEOs

28

4.7. New solutions for tech-SMEs

The government introduced new solutions for tech-SMEs (April 2016)
Tech SMEs are at the frontier of technological innovation
Banks have a limited understanding of the future profitability for
such technologies they have no technical experts to accurately
estimate future cash flows
Banks tend to be conservative and prefer low risk when faced with
such uncertainty

29

4.7. New solutions for tech-SMEs

Investment purpose technology appraisal system
When finance companies request a technology appraisal, TCB
appraises the SMEs technology and certificates its value
This facilitates a better understanding of the technology

4. Invest

Tech
SME

Bank
Venture Capital

Any finance Corp.

1. Request
Appraisal
3. Appraisal
Outcome

2. Appraisal: field investigation, expert survey etc.

TCB(Tech Credit Bureau)

Korea Technology
Finance Corporation
Korea Enterprise Data
E-credible

30

4.7. New solutions for tech-SMEs

Example
1. Biotech-SME A has no sales record. This SMEs wants
investment or a loan. However, there are no finance companies
or investors which understand the SMEs biotech business
2. Venture capital company B wants to invest in the biotech
industry
3. The investment purpose technology appraisal system helps the
venture capital company B to understand biotech-SME As
future value. As a result, the venture capital company is able to
invest in SME A

31

Conclusion
Financing is one of the most
important ways to stimulate SME
growth
There are many challenges to
financing
Our case studies show that SME
finance markets may be
incomplete and may fail to provide
sufficient access to SMEs

32

Conclusion

Building institutional capacity is

important to support SME
financing
The right balance between
protection and promotion matters
SME policies must keep pace with
industry and technological
developments

Thank You

Sources: KOSBI, SMBA, SBC, Kotra, K-Sure