Asia’s SMEs need more growth capital to be competitive: ADB

Sep 03, 2015 (LBO) – Sri Lanka’s and the rest of Asia’s small and medium sized enterprises (SMEs) need finance to help them grow into dynamic, internationally competitive companies, an Asian Development Bank (ADB) report said.

This is key to strong, sustainable growth in Asia as the world recovers from the recent global economic slowdown, says a new report from the Asian Development Bank (ADB). “Asia has millions of SMEs but few of them are able to grow to the point where they can innovate or be part of the global supply chain,” Noritaka Akamatsu, Senior Advisor in ADB’s Sustainable Development and Climate Change Department, which produced the report said.

“To do this, they need more growth capital and opportunities to access various financing channels.” As of the end of 2013, Sri Lanka had 132,483 SMEs, which contributed a third of the country’s gross domestic product, 30 percent of its value-added manufacturing output, employed 35 percent of Sri Lanka’s labor force and provided 20 percent of the value of the country’s exports. The island nation has a further 880,066 micro enterprises, the report said. “Banks in Sri Lanka have taken steps to assist SMEs by providing not only credit but also advisory services,” “The top 13 commercial and development banks provided 54.6 billion rupees in loans to SMEs in 2013, up 106 percent from 2012.” However, very few mid sized firms are listed on the Colombo Stock Exchange and venture capital funding is of a small scale, the report said. The Asia SME Finance Monitor 2014, which assesses 20 countries in developing Asia, noted that SMEs make up an average of 96 percent of all registered firms and employ 62 percent of the labor force. However, they contribute only 42 percent of economic output.

Regional integration and trade liberalization the report says means firms need to shift from being domestically focused to being more globally targeted.

“This also offers opportunities for smaller firms to explore offshore markets while exposing them to increased competition,” “Governments in the region need to help SMEs become more competitive and able to participate in global value chains.” This includes governments making it easier for SMEs to access new financing, such as supply chain finance. Also according to the report limited access to bank credit is a persistent problem in Asia and the Pacific. “Lending to SMEs has declined over the course of the global financial crisis and in 2014, they received only 18.7 percent of total bank loans,” “Several countries have made progress tackling this.” Papua New Guinea and the Solomon Islands have made it easier for companies to borrow using movable assets as collateral, Indonesia and the Philippines have introduced mandatory bank lending quotas to and Kazakhstan and Mongolia have encouraged loan refinancing schemes. However, the region needs to further develop credit bureaus, collateral registries, and credit guarantees to expand financial outreach, particularly in low-income countries, the report said.

The nonbank finance industry—which typically includes finance companies, factoring and leasing firms, for example— in Asia and the Pacific is still too small to meet the financing needs of SMEs, with its lending only one tenth of total outstanding bank loans in the region. Governments need to put in place a comprehensive policy framework to help nonbank financial institutions expand their SME financing options. Ongoing efforts to open up the equity markets to SMEs would also help provide SMEs with the long-term financing they need to mature.