Small and medium enterprises (SMEs) that need investment financing borrow more from nonbanks than banks because they generally lack the financial documents required by banks.
Dr. Ganeshan Wignaraja, an advisor to Asian Development Bank, said banks consider the firms age, export participation, financial standing, ISO certification, among others, when granting loans to small businesses.
SMEs typically resort more to internal sources [of funds] rather than external to finance their activity. For external finance, SMEs typically use nonbank sources more than banks, he said.
SMEs that borrow from banks undergo financial audits and tend to be older and also exporting, he added.
In a report, entitled SME Internationalization and Finance in Asia, he underscored the need to have a sound and effective financial system to address SME financing.
His analysis pools the firms’ observations across China, Malaysia, Thailand, Indonesia, the Philippines and Vietnam.
He said the so-called SME credit gap is severe in Asia.
The credit gap is the difference between formal credit provided to SMEs and total estimated potential need for formal credit.
Citing the International Finance Corp. (IFC) report on Closing the credit gap for formal and informal micro, small and medium enterprise in 2013, he said the country’s credit gap was estimated at $2 billion, while the average credit-value gap per enterprise is $59,000.
Credit gaps were higher in Singapore, $7.1 billion; Brunei Darussalam, $7.2 billion; Malaysia, $8 billion; and Thailand, $11.8 billion.
The SMEs were defined as firms with less than 100 employees.
Economist Mario Lamberte said banks don’t lend to SMEs because they don’t know how to evaluate projects and SME ventures.
Lamberte also said banks often require business plans and financial plans, but that many of the SMEs that really need credit don’t have the capacity to prepare these plans.
He said SMEs typically have single-entry accounting systems, yet banks expect to see something more complex. He said the solution comes down to educating and designing programs to educate SMEs and improve their capabilities to scale up.
On the other hand, banks must take some innovations which may include relaxing the laws and using nontraditional collateral like non-fixed collateral.
Wignaraja expressed support for bank privatization and facilitation of the entry of reputable foreign financial firms. He said, there is no one-size-fits-all-solution to SME internationalization and financing in Asia.
There is no panacea for the market failures. There’s a lot to be done, such as expand banking, making financial access more inclusive, invest in financial literacy and education, improve banking systems, and develop better linkages for SMEs, Wignaraja said.