Financing Small and Medium-Sized Enterprises: A Priority for Asia-Pacific
Small and medium-sized enterprises (SMEs), which account for 80 to 90 per cent of Asia-Pacific businesses, have played a crucial role in stimulating domestic demand and international trade in the region through innovation, job creation and technology.
But even as their role in strengthening national economic growth seems to have received much attention, lack of access to finance has been a key constraint on the growth of SMEs. Financial systems in Asia and the Pacific have improved in the past two decades, however, inadequate infrastructure, weak networks of financial institutions and poor coverage of banking facilities inhibit the timely availability of trade finance to SMEs.
As world leaders gather in Addis Ababa this week for the 3rd International Conference on Financing for Development to support the implementation of post-2015 development agenda, the United Nations Economic Commission for Asia and the Pacific (ESCAP) is calling on policymakers in the region to enhance the use of trade finance to the benefit of businesses, especially SMEs.
The latest study from ESCAP Financing for Transformation: From Agenda to Action on Sustainable Development in Asia and the Pacific shows that limited access to trade finance has made it difficult for SMEs in the region to engage in international trade or to participate in the international supply chain.
ESCAP analysis highlights that SMEs in least developed countries, in particular, are faced with more challenges in accessing affordable trade finance. This is gradually resulting in a “trade finance divide” between the least developed and developing economies of Asia and the Pacific as the banking sector is generally wary of entertaining credit proposals in least developed countries. Other barriers that prevent SMEs from accessing finance include high transaction costs, imperfect information, high default risk and limited collateral.
Our research notes that these challenges remain despite trade finance facilitation programs by global and regional development organizations. The Asia- Pacific region, for instance, has the second highest share of World Trade Organization’s Aid for Trade commitments after Africa, while on an individual basis countries such as India, Turkey and Viet Nam were the largest recipients of benefits in 2012 with $4.0 billion, $3.3 billion and $2.6 billion, respectively. In contrast, commitments to least developed countries in the region have fallen 2% from 2011 and are often left behind.
This situation calls for urgent attention to the development of innovative trade financing mechanisms, including supply chain and non-bank financing, as well as better ways to assess risks in developing and least-developed country markets.
Setting up of an Asia-Pacific trade fund that can provide support for trade finance-related resources and tackle constraints on trade is one of the proposals highlighted in the ESCAP study. Furthermore, it urges policymakers to establish credit rating institutions to monitor trade financing and promote cooperation among regional development partners.
The study also stresses on the need to develop appropriate institutional frameworks and regulations that are critical to develop trade finance for SMEs. Such frameworks require models of export credit insurance, for which countries need to undertake measures to build capacity of SMEs. Additionally, there is an opportunity to learn from successful lessons of microfinance to devise similar micro trade finance programs.
In its final recommendation, the ESCAP study emphasizes the importance of active government participation and the creation of a financial system in which financially excluded people get access to finance. The Asia-Pacific region needs to create an enabling environment for SMEs and developing countries to have better access to trade finance and to overcome wider constraints to trade.