UNDP Urges Easier Access to Capital and Increased Institutional Support to Boost the Crucial SME Sector

Nov 24, 2011

Kuala Lumpur, 24 November 2011 – Across the region, SMEs continue to be the leading economic drivers, often providing more than half the labour force employment in individual countries and accounting for the majority of their exports. Despite these facts, SMEs continue to struggle for resources and support.

With that reasoning, the United Nations Development Programme organized a two day workshop titled Integration, Competition, and Access: How Asia can promote and sustain SME growth through policy and Institutional Reforms. The workshopwas officiated by Mr. Kamal Malhotra, Resident Representative, United Nations Development Programme for Malaysia, Singapore and Brunei Darussalam together with Mr. Shigeru Nakamura, Ambassador of Japan and Mr. Denis Nkala, Chief, Regional South-South Unit (Asia Pacific) UNDP, Asia Pacific Regional Centre in Bangkok.

The workshop, attended by 40 participants brought together senior level policy makers who are responsible for SME, trade, business, and cooperative development to discuss and share their experiences in supporting SME development.

The workshop was rich in ideas sharing, focusing on SME challenges in the Southeast Asian region which are seen as critical to address in the future. These include the impact of Regional Integration and Coordination on SMEs, the need for institutional support and the need for Financial Mechanisms including the development of new tools to increase and improve SME access to capital.

Mr. Kamal Malhotra, Resident Representative, United Nations Development Programme for Malaysia, Singapore and Brunei Darussalam said, “SMEs are the work horse and backbone of the global economy. They provide the bulk of employment, income and GDP generating activities in developed as well as developing countries. SMEs are essential for economic development and poverty reduction in terms of job creation, innovation, higher productivity, and greater social equality. Additionally, SMEs often provide key services and goods that are needed by larger enterprises, without which such large enterprises would find it difficult to function efficiently.

SMEs, regardless of sector and region, have one key element in common, which is their challenge in accessing capital. Throughout the region, countries have attempted to use specific tools both to ease SME access to financing and provide financial incentives for SME development. Among the reasons cited for difficulties in accessing SME financing are financial sector policy distortions, lack of know-how on the part of banks, information asymmetries and perceived high risks inherent in lending to SMEs.”

The importance of capital access for SMEs is important because they play a crucial role in Malaysia and other developing countries. There are at least three areas that showcase their importance:

Jobs for the people:SMEs in Malaysia and other developing countries contribute to economic development by virtue of their sheer numbers and increasing share of total national employment and Gross Domestic Product.

Poverty reduction and gender considerations:SMEs provide the majority of the jobs and income for poor people. Therefore, support for SME growth and development can be viewed as essential to reducing poverty. Women and children in developing countries are often the most disadvantaged in terms of social and economic status and SMEs provide the only employment and income source for many poor women, thereby providing much of the consumption needs of their children. As a result, policies which perpetuate SME disadvantages are not gender neutral since they have a disproportionally negative impact on women and children. 

Investment in SME’s have high returns on investment:High and sustained rates of economic growth in developed economies such as Taiwan, Singapore and even Japan, the Republic of Korea, the People’s Republic of China and Germany and many others, have been significantly generated by SME activities. As of 2006, the percentage contribution of SMEs to GDP or total value added ranged (TVA) from 50% (GDP) in the Republic of Korea to 55.3% (TVA) in Japan, 57% (GNP) in Germany, 60% (GDP) in China compared with 47.3% (TVA) in Malaysia.

According to the Asian Development Bank, regional production and distribution networks continued to broaden and become more integrated in 2008, representing an opportunity for SMEs to participate as suppliers of products and / or services to and / or through such networks. In the context of these trends, five sectors that provide substantial opportunities for SMEs were identified. These are Information technology (IT), Tourism, Textiles, Food processing, and Auto parts and components.

To better compete in the mentioned industries, Mr. Malhotra said “SMEs should increase their investment in R&D; and improve quality control and their skills-mix. They should also upgrade their production processes and capture a larger share of value-added in their respective industries. The government should also promote the development of local parts and supplier industries. Investments in SMEs and improvements in marketing will lead to high returns in an increasingly important tourism industry in a fast globalizing world. Increased regional integration should not only result in reduced transition costs but will also increase competition among SMEs. However, strategic clustering will help create advantages in production and help reduce such costs.

To overcome the challenges which SMEs face, it is vital that institutional support is provided for their continued growth. Among the priorities are the creation of supportive legislation, regulations, and tax treatment, i.e. the development of legal and regulatory frameworks which support different forms of financing, reduce legislative and bureaucratic barriers to SME creation and create judicial and legal frameworks that ensure fair and transparent property rights which encourage investment.

Furthermore, it is also essential to increase SME access to financing. One reason why SMEs have problems accessing financing is because the bulk of their assets are found in movable assets. Some laws exclude movable assets, such as machinery, vehicles, and livestock from being used as collateral. Since movable assets often account for a greater share of the assets of smaller firms than larger ones, the impact on access to credit is unfavourable for SMEs. Laws and registries permitting the collectivization of movable assets can offer and provide great benefits to small firms.”

Furthermore, education of lenders as well as borrowers must also be significantly enhanced.SMEs typically require relatively small loans compared with large firms. The transaction costs associated with processing and administering loans are, however, fixed, and banks often find that processing small SME loans is inefficient and more costly. They lack techniques such as credit scoring to increase volume and lower costs. Improving the use of new tools by lenders will help lower transaction costs and benefit SMEs.

“Malaysia and many other countries now have a significant services sector. Governments should implement policies which are most appropriate to support SMEs in the services sector in addition to providing the tools required, especially if these tools are different from those needed by manufacturing sector SME’s which they are likely to be.” concluded Mr. Malhotra.

Among those in attendance were SIRIM Berhad, Federation of Malaysian Manufacturers (FMM), The Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM), Japan International Cooperation Agency (JICA), Japan Overseas Development Cooperation (JODC), Industrial Enterprise Development Institute (IEDI) of Nepal, National Agency for Scientific and Technological Information of Vietnam, Women Chamber of Commerce and Industry of Bangladesh, Association of Development Financing Institutions in Asia and the Pacific and the Federation of Indian Micro, Small and Medium Enterprises of India.

This workshop is a precursor to a larger project that will produce two publications; one on SME Development in the ASEAN region and another on the South Asian Association for RegionalCooperation (SAARC).

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