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Financing the SME Value Chains

Asia’s economic miracle is often associated with large, multi-national companies. While these organizations have been important drivers of the region’s growth, small and medium enterprises (SMEs) accounting for more than 98% of the enterprises have played a key role. These SMEs contribute around 40% to their country’s GDP in the ASEAN region. In developed nations such as the USA, UK, France, and Singapore, SMEs contribute more than half of the country’s GDP.

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Addressing SMEs’ needs for finance, it is assessed that formal financial lending organizations represent a weak link in the financial supply chain for SMEs in the region. The problem also hinders the physical supply chain in that SMEs are key drivers of business growth in the region. This paper proposes a framework for financial lending to allow formal lending organizations to compete with the alternate sources of finance SMEs seek.

This research work is built upon case studies from Malaysia and India, and surveys conducted on the supply and demand of SME finance in Malaysia. A lack of collateral and limited access to venture and growth capital are some of the obstacles that SME owners face when seeking finance for their businesses. Cash flow shortages caused by long or delayed payment cycles exacerbate the problem. On the supply side, a number of issues including high transactions costs, inadequate information about borrowers, and weak governance deter large banks from developing SME lending portfolios.

In the absence of bank lending options, many SMEs turn to other sources of finance such as unregistered money lenders that charge high interest rates. It is realized that the local money lenders are accessible and understand the SME business model better. They are also able to keep a tight rein on costs and have developed ways to make sure that investment funds are used by borrowers for profit-making purposes.