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.

Finance for Start-up SMEs in face

with Fin Tech development
and Financial Education

Naoyuki YOSHINO
Dean, Asian Development Bank Institute
Professor Emeritus, Keio University, Japan
Farhad Taghizadeh-Hesary
Assistant Professor Waseda University Japan 1
Fin Tech Development and Financial Activities

Outlines
Development of Fin Tech will change Financing for
Start ups and SMEs
Big Data will enable SMEs’ credit rating
Access to Finance ---- Easy by individuals
Debt Overhang by households
Financial Education
Government Promotion of Program to promote financial
education

2
Barriers for SMEs in Accessing Financial Institutions,
Collateral, Higher interest rate, long term process

Source: ADB–OECD study on enhancing financial accessibility for SMEs: Lessons from recent crises.
Mandaluyong City, Philippines: Asian Development Bank, 2013 3
Basel Capital requirement:
Lending to Riskier Sectors and Lower Upper Lending Limit for Banks

1/14/2018 4
 Theoretical Model for Implementation of HITs
In this sub-section we will explain theoretically why banks are not able to lend to smaller-scale risky sectors such as green energy projects (e.g., solar
and wind).
Equation 1 and Equation 2 present the profit maximization behaviour of banks:

Max 𝑳 𝟏 𝑯 𝑯 𝑯 𝑫 𝟏 𝑯
Banks’s balance sheet 𝟏 𝑯 (2)
Equation 1 shows the profit equation of bank (𝜋). We are assuming there are two kinds of loans banks are providing—the first kind are zero default
risk loans (𝐿 ) which are ordinary loans provided at a lower interest rate (𝑟 ); the second kind are loans to risky sectors (𝐿 ) at a higher interest rate
(𝑟 ). We are assuming that the first group of loans are zero risk and the second group has risk of default (𝜌 ). In this equation 𝐷 denotes total
deposits and 𝑟 is the interest rate on deposits. In addition, banks’ profits is also a function of banks’ operational costs (𝐶) such as employee wages
and computer and equipment costs, which is a function of both groups of loans. The profit maximization of banks is subject to banks’ balance sheets
(Eq. 2) where 𝐴 is the banks’ capital.

(3)
Each bank has to have enough capital (A) to be able to cover its possible default loan losses ( 𝜌 . 𝐿 ). As the risk of default exists only for the
second group of loans (high risk loans), the total amount of default loan losses are 𝜌 . 𝐿 . Total lending to both groups is denoted by : 𝐿 = 𝐿 +
𝐿 .
We assume that banks are subject to capital requirement rules (Eq. 3), i.e., according to the Basel capital requirement there is an 8% capital
requirement ratio, (𝜃 = 0.08). Equation 3 means that the default amount needs to be less than 8% of the total loans (total assets) and banks
need to reserve at least an equal amount of capital. This means that based on the given amount of capital, if 𝜌 goes up, lending to risky sectors
(𝐿 ) should go down.
5
 𝐶 𝐿 ,𝐿 = 𝑎𝐿 + 𝑏𝐿 (4)
Equation 4 shows the cost function, which we assume to be a
simple quadratic type; it is a function of both groups of lending
(𝐿 , 𝐿 ) and applying first order conditions give us two loan supply
equations:

= 𝑟 − 𝑟 − 2𝑎𝐿 = 0 (5)

𝐿 = 𝑟 −𝑟 (6)

Equation 6 shows the loan supply equation for the first group of
loans, which are risk- free loans.
= 𝑟 − 𝜌 ́ − 𝑟 − 2𝑏𝐿 = 0 (7)

𝑺
𝑯 𝑯 𝑫
Equaion 8 shows the loan supply equation for the second group of
loans, i.e. the risky loans. For this group, as the default risk is
high, if 𝜌 ́ increases the loan supply falls.
𝐿 ≤ 𝐿 = (9)
Equation 9 shows the upper limit of loan supply to risky sectors
7/21/2018 6
due to the Basel capital requirements.
Declining Loans Supply to Risky Borrowers

7/21/2018 7
Start up businesses and farmers
Hometown Investment Trust Funds
(Springer)
--------------------------------------------------
A Stable Way to Supply Risk Capital
Yoshino, Naoyuki; Kaji Sahoko (Eds.) 2013,

Japan, Cambodia
Vietnam, Peru, Mongolia
Access to Digital Technology, Internet
(1) Purchasing Type of Hometown Trust
(2) Investment Type of Hometiwn Trust
8
 Internet On-line trade
Start ups
Internet Consumers
Farmers Company

Advertize
Innovators

FSA：Registration
9
10
 TRUST is important
1, Regular meetings with producers (every quarter)
2, Look for good products and advertise by
internet
3, Give advise to innovators
4, Order the products though internet
5, Payment and Delivery
6, Reputation
7, Trust of community, Trust by customers
11
(1) Purchase Type
(2) Investment Type
Roof top, solar Fund
300 $/ per person

12
 Government Financing (Externality Effects)

1, Measure the negative external effects of CO2 and NOX

2, Levy Tax on CO2 and NOX
 Transfer subsidies to renewable energy
3, Provide subsidy to renewable energy projects
 Injection of tax revenues to investors in renewables
 R&D (renewable energy sector)

1/14/2018 14
 Financing Scheme for Renewable Energy
Projects Using HITs and Carbon Tax

Subsidies
From TAX on CO2
Spillover Tax revenues
HIT = Hometown Investment Trust Fund.
Source: Authors.
1/14/2018 15
 Possible Solutions
by use of community funds
For Risky businesses

Hometown Investment Trust Funds

-----------------------------------
A Stable Way to Supply Risk Capital
1/14/2018 16
Yoshino, Naoyuki; Kaji Sahoko (Eds.), 2013,
Hometown investment trust funds a new way to finance for
Wind power generators, solar power panels etc.

10/14/2016 17
5, Financial Education for SMEs
1, Bookkeeping
2, Daily revenue and expenses
3, Long-term planning
4, Accurate reporting of their business
5, Reduce default loan losses
SME database
6, Asset Management by SME
7, Pension Contribution by SME (50%)
Asset Management of Reserves

18
19
20
21
22
 Development of Financial Technology
1, Access to financial products through mobile
phone
2, Financial products can be supplied from
overseas
3, Households can shop around various financial
products through mobile phone
4, Easy for individuals to access to credit
Households’ Debt Overhang
5, Financial education will be very important23
Financial
Education

Naoyuki Yoshino
and
Peter Morgan
(ADBInstitute)
Household debt level in South Korea
and
USA Housing Loan
Korea: HHs/NPISHs/Small Pvt Ents Outstanding Debt to Disposable I... US: Ratio of Household & Nonprofit Debt to SAAR Gross Disposable...

% %

170 170 130 130

160 160 120 120

150 150
110 110

140 140
100 100
130 130

90 90
120 120

110 110 80 80
06 07 08 09 10 11 12 13 14 15 16 00 05 10 15
Source: Bank of Korea/Haver Analytics Source: Federal Reserve Board/Haver Analytics

South Korea: HH debt to disposable income (%) US: HH debt to disposable income (%)

26
Consumers’ Debt Overhand in Japan

27
28
Theoretical Model
rL t 1  C t  Yt   L t .......... .......... (1)
C t  cY t
Yt  (1  a )Yt 1
Y p y
a  
Y p y
From (1), we can get -
rL n 1  cY n  Y n  ( L n  L n 1 )
 L n  (1  r ) L n 1  (1  c )Y n
 L n  (1  r )(1  r ) L n  2  (1  c )Y n 1  (1  c )Y n
.......... ...
 L n  (1  r ) n L 0  (1  c ) (1  r ) n 1 (1  a )  (1  r ) n  2 (1  a ) 2    (1  a ) n Y0
(1  c )(1  a )
 L n  (1  r ) n L 0 
(r  a)
(1  r ) n  (1  a ) n Y0

(1  c )(1  a )
L n  (1  r ) n L 0 
(r  a)
(1  r ) n  (1  a ) n Y0  0

L  n
0  (1  c )(1  a ) 1   1  a  
 
Y (r  a)   1  r  
0   29
 L  n 
0  (1  c )(1  a ) 1   1  a  
 
Y (r  a)   1  r  
0  

1, L0/Y0 = [ Initial Loan/Income]

ratio
2, r = Interest Rate
3, n = number of years of borrowing
4, a = growth rate of income
5, c = marginal propensity to
consume
30
Case of India: (L/Y) and loan
maturity
Fixed ‘r’ per curve
8
6
4
2
0

0 10 20 30
n

ratio_05 ratio_10
ratio_12 ratio_15
ratio_20

X-axis: Years (n)

Y-axis: Ratio (L0/Y0) MPC (c) =0.80, a=7% 31
Loan/Income Ratio of Japan
L
O
A
N
＝ Mat
I urity
N
C
O
M
E Interest
Rate
ＭＰＣ=0.70, Income
Growth=1.6%
 Policy Recommendations
• If income is not high and lending
is short-term, the debt to income
ratio should be very low
• Importance of Financial Education
for households and SMEs
New Money Lenders ‘ Law
(JAPAN)
1, Maximum interest rate = 20%
2, Require License (FSA)
3, Paper examination
4, Prepare minimum Capital
5, L/Y < 1/3
33
Financial Education Promotion Council
What kind of subjects and items should be taught at each
level of school education ?
Chair Person, Naoyuki YOSHINO
Central Bank of Japan
Financial Services Agency (FSA)
Ministry of Education
Consumer Protection Agency (Government of Japan)
Bankers Association of Japan
Securities Dealers Association
Insurance Association
Trust Bank Association
Investment Trust Association
Financial Planners Association 34
For the Students
1, Subjects are nothing to do with their daily life,
72.9 %
2, Difficult to understand, 62.6 %
3, Lack of textbook material 26.6 %
Teachers’ awareness
1, Teachers admit importance of financial
education in order to become wise consumer,
73.5%
2, Students need to understand how financial
activities are related to economy and society,
44.6%
I, Mechanisms of finance and economy
A, Understanding the function of money and finance
B, Understanding the mechanism of the economy
II, Rights of and risks to consumers and prevent of
financial trouble
A, Acquiring basic skills for independent and
appropriate decision making to live better
B, Preventing consumer trouble concerning
financial transaction and multiple debt problem
C, Understanding Business cycles and the need
for economic policies
D, Understanding various economic problem
 III, Financial Education to prepare for old age

1, Government Support --- Pension System

401K (Self protection for asset allocation)
2, Life Insurance --- long term savings by individuals
3, long term institutional investors
infrastructure investment (long-term funding)
4, Various financial products will be sold in Asia
5, Risks and Returns, individual financial education
Bank of Japan survey of adult financial literacy
• Representative sample of 25,000 individuals aged 18 to 79
• Chosen in proportion to Japan’s demographic and
economic structure
• Survey questions
• Includes respondents’ age, gender, level of general
education and financial education, income, occupation
and the frequency of reading financial and economic
news
• 25 true/false questions, including 18 questions on
financial knowledge and 7 on financial decision-making
skills
• Experience of buying stocks, investment trusts (mutual
funds) and foreign currency

39
Naoyuki Yoshino, Peter Morgan and Trin Long (ADBI discussion Paper)
(1) Score of Male and Female, Age
(2) US-Japan Comparison
Proportion of those who had high score (21/25-25/25), roughly top 20% (as figure 35 in BoJ book)

All Male Female

All 20.9% 26.5% 15.5%
Age<30 10.1% 12.9% 7.2%
Age>=30&Age<40 16.6% 22.7% 10.3%
Age>=30&Age<40 20.7% 26.6% 14.8%
Age>=50&Age<60 25.8% 30.8% 20.9%
Age>=60&Age<70 28.1% 35.1% 21.9%
Age>=70 23.9% 31.8% 16.8%

40
 10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%

0.0%
5.0%
Hokkaido
Aomori
Iwate
Miyaki
Akita
Yamagata
Fukushima
Ibaraki
Tochigi
Gumma
Saitama
Chiba
Tokyo

% buy at least one product

Kanagawa
Niigata
Toyama
Ishikawa
Fukui
Yamanashi
Nagano
Gifu

% buy stock
Shizuoka
Aichi
Mie
Shiga
Kyoto
Osaka

% trust
Hyogo
Nara
Wakayama
Tottori
Shimare
Okayama
Hiroshima
Financial literacy and financial product purchased

Yamaguchi
Tokushima
% foreign currency

Kagawa
Regional Disparities in Japan

Ehime
Koichi
Fukuoka
Saga
Nagasaki
Kumamoto
Fin. Literacy

Oita
Miyazaki
Kagoshima
Okinawa
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
Cluster Analysis of Prefectures
Dendrogram from cluster analysis
4
3
L2 dissimilarity measure
2
1
0

1 2 3 8 6 5 7 4 32 35 37 41 9 13 12 14 11 10 15 17 21 20 16 22 18 19 23 30 31 39 34 36 38 33 40 24 25 28 27 43 42 44 47 45 46 26 29
 Group 1 Group 2 Group 3 Group 4 Group 5
Yamagata Wakayama Nagano Hyogo Okinawa
Yamanashi Miyazaki Okayama Saitama
Tottori Koichi Tokushima Osaka
Ishikawa Akita Nara Fukuoka
5 groups Nagasaki Yamaguchi Kumamoto Miyagi
Of Tochigi Shimane Gifu Chiba

Prefectures Toyama
Ibaraki
Kagawa
Kagoshima
Aichi
Shiga
Based on Hokkaido Shizuoka Kanagawa

Cluster Gunma Fukui Tokyo

Fukushima Oita
Analysis Niigata Kyoto
Of Ehime

JAPAN Mie
Saga
Aomori
Hiroshima
Iwate

43
Distribution of financial literacy, product
purchases and education by income

Source: Authors 44
Distribution of purchases of financial
products by financial literacy score Stock,
Trust, Foreign Currency

Source: Authors
45
Transmission of Financial Education
1, Efficient allocation of assets by households
2, Long-term perspectives of households
3, Enhance wellbeing of individuals
4, Diversify corporate fund raising
5, Efficient cash management of corporations
6, Transparency of SMEs (small enterprises)
7, Promotion of start-up businesses
8, Enhance economic growth
9, Efficient time allocation of financial
institutions
46
 Financial Technology (Fin Tech)
1, FinTech and Easy Access to Finance
2, Opening of Accounts, Identification
3, Access to various financial products
4, Regulation of FinTech companies
Registration of Fin Tech industries
5, Easy access to various financial products of
all over the world by mobile phone
6, International regulation
47
48