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The Government this week launched “Empower,” its latest effort to assist Small and Medium Enterprises (SMEs) access funds on the capital market. This is a laudable move and could be assisted with other measures that are practiced around the world.
According to the latest UNESCAP Economic and Social Survey of Asia and Pacific 2018, credit-granting institutions should consider different methodologies to assess creditworthiness. Credit scoring and risk measurement have traditionally been very difficult for the unbanked in general, because no data exists about their financial history, which in turn prevents them from getting credit.
The report advocates FinTech solutions for credit scoring, which can ameliorate the lack of credit data as they include decentralisation and less intermediation, and promote efficiency, transparency and competition. All these elements lower the cost of supplying credit to SMEs, which then enables them to develop a credit history.
An alternative for lending institutions is to accompany their SME debtors and advise them on entrepreneurship ideas and training on basic financial reporting practices. This effectively would make the borrowers and the lenders partners, and has been shown to succeed in some cases.
For example, Damu Entrepreneurship Development Fund, established by the Government of Kazakhstan in 1997, has supported entrepreneurs in 18 rural areas by establishing service centres to provide such training and business support, together with financial assistance, such as interest rate subsidies and loan guarantees.
It is also vital to diversify the supply of financing options available to SMEs. Financial support by governments and international financial institutions, such as subsidised interest rates, tax exceptions and direct loans, are increasing in North and Central Asia. For instance, the Russian-Kyrgyzstan Development Fund is an example of intergovernmental cooperation for SME development in this subregion.
Since its establishment in 2015 as a form of Russian financial assistance to modernise the Kyrgyzstan economy, the fund has approved 624 projects and financed more than $ 82 million through partner banks to foster SMEs in priority sectors of Kyrgyzstan, such as agricultural processing and textile industries. Rates are set 2.5-3 times lower than the market average among commercial banks; the fund imposes an interest rate of 12% for loans denominated in Kyrgyz currency and 5% for loans denominated in United States dollars. The fund also developed several financial instruments, such as providing working capital financing to help borrowers in their day-to-day business.
Governments should try to stimulate equity financing as much as possible. An institutional format that has worked well in many countries, especially when accompanied by venture capital and advice on entrepreneurship, is business incubators.
An active role of the Government would also be recommended for promoting competition in the financial sector, for example, by privatising State-owned banks or promoting the entry of foreign banks. As most banking sectors in North and Central Asia are still relatively closed, more competition would promote efficiency gains, innovation and the shrinking of interest rate spreads.
Perhaps most importantly, policymakers should work towards achieving a legal and regulatory framework where recovery of assets by lenders is much easier than it is currently. This should push down the value of collateral requirements and facilitate matching the supply of and demand for credit.