Southeast Asia as an economic region under the flag of the Association of Southeast Asian Nations (ASEAN) continues to fulfill its potential as one of the major players in today’s global economy. Micro small and medium-sized enterprises (MSMEs) are the backbone of ASEAN economies. They generate jobs and contribute to inclusive economic growth and prosperity of households and communities. As an integral part of the economies of South-east Asia, they make significant contributions to regional economies from many perspectives — business numbers, output, growth, employment, exports, entrepreneurial activity, poverty alleviation, economic empowerment, wider distribution of wealth. With a combined GDP of US$2.7 billion (3.5% of the world GDP) in 2017, the Asian economy is projected to grow over 5% per year and become the fourth largest economy in the world by 2030.
Southeast Asia has broadly embraced a growth model based on international trade, foreign investment and integration into regional and global value chains. This approach opens up an important window of opportunity for MSMEs, but it also means that they must increase their competitiveness if they are to survive and grow in a highly competitive marketplace.
MSMES’ DIFFICULTIES IN ACCESSING FINANCE
Globalization and regional economic integration through ASEAN membership, has presented MSME’s with many opportunities but despite their contributions and importance to the region’s economy, MSMEs continue to face significant barriers that prevent them from achieving their full potential.
Almost 70% of the Indian, 80% of the Chinese, and 90% of the Malaysian financial system consists of bank loans (Yoshino and Taghizadeh-Hesary 2014). Researchers often characterize Asian economies as having bank-dominated financial markets and underdeveloped capital markets, in particular venture capital. This is even true for Japan and the Republic of Korea, where the venture capital market is not developed. This means that banks are the main source of financing. Although the soundness of the banking system has improved significantly since the Asian crisis, banks have been cautious about lending to SMEs, even though such enterprises account for a large share of the economic activity. Start-up companies, in particular, are finding it increasingly difficult to borrow money from banks because of strict Basel capital requirements. Riskier SMEs also face difficulty in borrowing money from banks. It is difficult for banks to evaluate SMEs, since they often do not have solid accounting systems. Many SMEs in Asia borrow money by paying high rates of interest or offering costly collateral. Many banks prefer to lend to large enterprises rather than SMEs. The reason for this is that, for large enterprises, the financial statements are clearer and audited.
The insufficient collateral of SMEs and as a result the higher interest rates for lending to them present a major hindrance to the expansion of SME credit. In 2010, the Japan International Cooperation Agency (JICA) and the Indonesian Capital Market and Financial Institution Supervisory Agency (Bapepam-LK), in cooperation with the Ministry of Industry, the Ministry of Cooperatives and SMEs, the Central Java Provincial Government, and leading Indonesian venture capital firm PT Bahana Artha Ventura, conducted a survey on a sample of 622 micro, small, and medium enterprises (MSMEs) across Indonesia. The findings from the survey show that around half of the samples (54.2%) accessed banks for finance, while just under half relied on their own capital and a quarter (25.1%) borrowed funds from family, relatives, and friends for future funding.
SOLUTION AND CONCLUSION
A solution comes in the unlikeliest of places. Tokoin, a platform that establishes digital business identity and reputation of MSME as an acceptable credibility scoring for suppliers and financial institutions. Tokoin aims to build a digital business identity in the form of credit scoring that complies with the standard to apply business loans. A trust solution that will expedite financial assistance from finance institutions for MSME’s.
References
Yoshino, N., and F. Taghizadeh-Hesary. 2014a. “An Analysis of Challenges Faced by Japan’s Economy and Abenomics.” Japanese Political Economy 40 (3–4): 37–62. DOI: 10.1080/2329194X.2014.998591.
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