Finance vs. Other Constraints Facing SMEs in Asia

Paul Vandenberg Senior CBT Economist

ADBI, Tokyo

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.

SME promotion

• SMEs are an important part of any economy in terms of output and employment – 98% of enterprises, 66% of labor force, 38% of GDP and

30% of exports on average 2007-2012 in Asia (ADB 2014) • How to promote the development of competitive,

highly productive, growth-oriented SMEs • Need to understand their major constraints • This workshop focuses on finance as a constraint • How important is it relative to other constraints facing

SMEs in Asia?

Evidence • How to judge how important the constraint is • Two approaches

– Levels of access to different types of finance • Survey responses

– Enterprise owners’ feeling of finance’s importance as a constraint • Perception survey responses

• Both provided by World Bank/IFC Enterprise Surveys – About 500-1,000 enterprises surveyed in each country – Small (5-19 workers); Medium (20-99 workers) – Not every year – Ranges from 2006 (India) to 2014 (Myanmar)

30 countries surveyed (and year)

East and SE Asia South Asia Central AsiaPRC 2012 India 2006 Afghanistan 2014Mongolia 2013 Pakistan 2007 Armenia 2013Cambodia 2007 Bangladesh 2013 Azerbaijan 2013Lao PDR 2012 Sri Lanka 2011 Kazakhstan 2013Myanmar 2014 Bhutan 2009 Kosovo 2013Malaysia 2007 Nepal 2013 Tajikistan 2008Philippines 2009 Pacific Kyrgyz Rep. 2013Viet Nam 2009 Fiji 2009 Turkey 2008Indonesia 2009 F.S. Microne 2009 Uzbekistan 2008

Timor-Leste 2009Tonga 2009Vanuatu 2009Samoa 2009

15 Possible SME constraints (As suggested to enterprises surveyed)

Political stability Access to finance

Corruption Transportation

Crime, theft and disorder Electricity

Courts Access to land

Tax rates Inadequately educated workforce

Tax administration Labour regulations

Business licensing and permits Practices of the informal sector

Customs and trade regulations

Overall country rank of “Access to

Finance” as the key constraint among 15

possible SME constraints

No. of countries at given ranking levels

for the 3 enterprise sizes

Small

enterprises

Medium

enterprises

Large

enterprises

1st to 3rd 10 11 6

4th to 6th 6 6 10

7th to 10th 6 8 8

11th to 15th 8 5 2

Total countries 30 30 26

Summary – Finance as constraint across Asia

• Small enterprises and medium enterprises tend to rank access to finance as a major constraint in approximately the same number of countries in our sample of 30 countries

• Finance considered a constraint for large enterprises (100+ workers) but less likely to be the main constraint.

Regional breakdown

• Number of countries where finance was a Top 3 constraint among small enterprises: – E and SE Asia 6/9 countries – South Asia 3/6 – Central Asia 1/9 – Pacific 0/6

– No. 1: Bhutan, Indonesia, Myanmar, Viet Nam – No. 2: Philippines, PRC, Sri Lanka, Azerbaijan – No. 3: Lao PDR, Bangladesh,

Regional breakdown

• Number of countries where finance was a Top 3 constraint among medium enterprises: – East and SE Asia 6/9 countries – South Asia 2/6 – Central Asia 2/9 – Pacific 1/6

– No. 1: Azerbaijan, Bhutan, PRC, Indonesia, Viet Nam – No. 2: Afghanistan, Fiji – No. 3: Bangladesh, Lao PDR, Myanmar, Philippines

Summary – Regional differences

• Finance a major constraint in East and Southeast Asia

• Middling constraint in South Asia • Not considered a main constraint in most of

Central and West Asia and Pacific Region

Finance vs. other constraints

• SMEs may face a range of constraints to sustain and growth their businesses

• Is our assumption of the importance of finance relative to other constraints justified?

• Finance may be of equal importance across countries or regions but may appear as less important (from survey results) because some regions have more problems in other areas – infrastructure, regulations, political environment

Finance vs other constraints (% of small enterprises marking it as greatest constraint)

First: pink Second: green Third: yellow

Finance vs other constraints (% of medium enterprises marking it as greatest constraint)

First: pink Second: green Third: yellow

Summary of other constraints • Finance is a top constraint in East and Southeast Asia

– and to some extent for small enterprises in South Asia • Other constraints dominate in other regions (Central Asia and the

Pacific where finance not among the top five constraints – Small and Medium

• Political instability in Central Asia and Pacific • Electricity and lack of skilled workers in South Asia • Corruption, licensing, tax administration also important

• Not so important – Transport, courts, labour regulations, crime and theft, access to land – For small enterprises: customs/trade regulations and tax rates not

such a concern – For medium enterprises: customs/trade regulations and tax rates

more important

Methods of finance

• Significant reliance on internal funds for investments especially for countries at lower level of development and less developed financial systems

• Bank access varies • Working capital an important financial need

and provided through banks and supplier credit

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20.0

40.0

60.0

80.0

100.0

120.0

% of Small Enterprise Investments Financed Internally

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80.0

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120.0

% of Medium Enterprises Investments Financed Internally

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% of Small Enterprises Using Banks to Finance Investments

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% of Medium Enterprises Using Banks to Finance investments

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35.0

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% of Small Enterprises' Working Capital Financed by Banks% of Small Enterprises' Working Capital Financed by Supplier Creidt

Sources of Working Capital - Small

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% of Medium Enterprises' Working Capital Supplied by Banks

% of Medium Enterprises' Working Capital Financed bySupplied Credit

Sources of Working Capital - Medium

Not wanting finance

• Need to remember that not all SMEs want to borrow from banks

• May not be growth oriented • May rely on internal funds or other sources

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% of Small Enterprises Not Needing a Loan

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% of Medium Enterprises Not Needing a Loan

Thank You

Paul Vandenberg ADBI, Tokyo

pvandenberg@adbi.org