Handbook for SME Access to Alternative Sources of Finance in ASEAN

In the ASEAN region, they account for 96 per cent of all enterprises and between 50 and 85 percent of domestic employment outside the agricultural sector in ASEAN Member States (AMSs). Compared to the larger firms, MSMEs have long been significantly under-served financially, with very limited access to the traditional funding from formal banking institutions. Some 85 per cent (or 365 million to 445 million) of MSMEs in emerging markets have suffered from credit shortage, estimated in the range of US$2.1 trillion to US$2.5 trillion within the developing world. Of this, 45 per cent (US$900 billion to US$1.1 trillion) is estimated to occur in East and Southeast Asia. One of the challenges in MSME financing is that their financial requirements are too large for microfinance, but are too small to be effectively served by corporate banking models. Another factor that limits MSMEs access to credit is their large geographical dispersion around the region. ASEAN's growth story thus far has been centred in its capital cities and financial centres such as Bangkok, Jakarta, Kuala Lumpur, Manila, and will likely revolve around developing capitals of Ho Chi Minh City, Naypyidaw, Phnom Penh and Vientiane as well. While 13-22% of MSMEs are still concentrated in the capital cities, the remaining are fragmented across other cities in the rest of the country. These 'secondary' cities play an equally important role in contributing to the country's economic growth and development. The lack of access to financing is constantly cited by MSMEs as one of the main barriers to growth. Ensuring improved and adequate access to finance for MSMEs has long been a concern in ASEAN, hence the directive of the ASEAN Strategic Action Plan for SME Development 2016-2025 to encourage greater access to more diversified sources of financing. An ancillary goal to improve financial inclusion and literacy becomes imperative in order for MSMEs' increased engagement in the financial system. Indeed, financial inclusion is one of the three strategic, finance-related objectives in the “AEC Blueprint 2025” which is an integral part of the ASEAN Community blueprint “ASEAN 2025: Forging Ahead Together”. Such inclusion is to be achieved through expanding the number and scope of financial intermediary facilities to benefit a wider circle of underserved communities, including MSMEs. Several key factors impede MSME lending and result in poor financial inclusion of MSMEs. These include low MSME coverage by credit bureaus/registries, inadequate reach of traditional banks, internal banking regulations that dictate higher risk weights to MSMEs loans, lack of cash flow visibility, and information asymmetry between demand and supply sides. An analysis of individual countries in ASEAN reveals that the support MSMEs receive from financial institutions to help finance their businesses does not reflect their contributions to their country's GDP and employment, despite being the critical drivers for growth. With the exception of Thailand, MSME loan volumes in the region are less than 60% of their contribution to GDP, and constitute less than 20% of total loans. This presents a sizeable opportunity to alternative financiers in the MSME market segment as well as an untapped resource for the MSMEs with regards to their financial needs. Currently, there is very limited information tailor-made to MSMEs in their search for, and access to, investment finance in ASEAN. Of the available information, the focus is largely on the traditional sources of finance on the supply side. There is virtually no information on alternative sources of loan and equity funding potentially suitable to the financing needs and requirements of the regional MSME. While the big traditional banks remain broadly averse or unable to offer credit to SMEs, the alternative financing industry has been growing. Alternative financing options available in ASEAN include peer-to-peer lending, venture capital, private equity, crowdfunding, and social impact investing. These options have the potential to address the financial needs of MSMEs, particularly those that are underserved by traditional financial institutions. However, there is a need for more information and guidance on how MSMEs can access these alternative sources of finance. The ASEAN Strategic Action Plan for SME Development 2016-2025 aims to encourage greater access to more diversified sources of financing for MSMEs. This includes promoting alternative financing options and improving financial inclusion and literacy. The plan also aims to develop and expand the lending and investing network, improve policy and regulatory frameworks to enable access to alternative capital, and enhance financial literacy and alternative financing awareness programs. In order to achieve these goals, it is essential to address the key factors that impede MSME lending and result in poor financial inclusion of MSMEs. This includes improving MSME coverage by credit bureaus/registries, expanding the reach of traditional banks, and improving internal banking regulations to reduce risk weights on MSMEs loans