In the Asia-Pacific region, the financial sector contains various financial institutions depending on the country's economic status. Some of the leading institutional providers of MSME financing consist of the following:241
- Development financial institutions (DFIs)242 DFIs are specialised development banks or subsidiaries set up to support private sector development in developing countries, mainly for long-term loans. Coordination between DFI’s and the local banks is vital, not only for support but also to ensure that lending practices remain relatively consistent across markets and don’t lead to further distortions that could lead to new problems in the long run. Under the current pandemic, DFIs are also offering free coaching or webinars to clients on cash management in crisis or protecting their workers.
- Commercial banks extending both long–term loans and short-term finance for daily operations;
- Specialized financial institutions (usually licensed for limited operations, activities, or services to differentiate them from full-service commercial banks), such as export and import banks that provide trade finance and export credit, as well as rural banks, microfinance banks and non-bank finance companies;
- Government programmes or agencies for rural finance, microfinance or MSME finance (MSME banks);
- Membership-based cooperative financial institutions (CFIs) is member-based deposit-taking financial institution owned and controlled by their members who have a common bond and choose to call themselves a Financial Co-operative, Credit Union, Savings and Credit Co-operative (SACCO), Financial Services Co-operative (FSC). These terms are often used interchangeably in the CFI sector.
- Postal savings banks (PSBs) or institutions were created in many countries to encourage, collect and safeguard low-income people’s resources and ensure financial deepening. They provide access to essential financial services and promote savings among less affluent groups. Many still lack access to bank accounts in Asia-Pacific, and domestic savings are often invested abroad, not domestically. Countries in Asia urgently need to explore new strategies to improve financial access. One important option is postal financial inclusion.
- Public credit guarantee institutions have been a critical force behind the propagation of credit guarantee schemes. Governments started to increase the use of guarantees to channel credit toward specific sectors, geographical regions, and MSMEs that tend to be financially constrained. Box 11 illustrates different types of public credit guarantee schemes implemented in various countries.
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Box 20. Types of public credit guarantee schemes Countries across the Asia-Pacific region and globally have adopted different models of public credit guarantees. In many countries, a single state agency provides the guarantees (examples include Indonesia, the Republic of Korea, Thailand, and the United States). In other cases, public schemes can operate in a more decentralized manner. For example, in Japan, there are 51 state-run credit guarantee corporations under the umbrella of the Japan Federation of Credit Guarantee Corporations (JFG). In some countries, the state is not directly involved in granting guarantees. In the United Kingdom, the British Business Bank (BBB), a state-owned development bank, sets the eligibility criteria for firms applying for a guarantee and provides the funding. However, the BBB does not decide on guarantees applications, which is done directly by financial institutions. Other countries have opted for public-private guarantee schemes with different degrees of government participation. For instance, in France, credit guarantees are offered through an organization owned 90 per cent by the state and 10 percent by banking groups. Source: Abraham, Facundo & Schmukler, Sergio L. & Abraham, Facundo & Schmukler, Sergio L., 2017. "Are public credit guarantees worth the hype?," Research and Policy Briefs 121486, The World Bank. |
In enhancing the support to the MSME sector, some Asia-Pacific countries have opted to set up apex banks, generally known as SME banks, exclusively cater to the needs of MSMEs. SME banks are essential, particularly as the government often runs them, so they are part of the policy. Government policy on creating SME banks is to create a conducive ecosystem for MSMEs, thus igniting growth. An early example of an approach to SME Banking is illustrated in box 12.
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Box 21. ICICI Bank of India ICICI Bank was initially founded as a development financial institution in India in 1955 and today it is the largest private sector bank in the country. ICICI is implementing its SME banking model in India despite a weaker environment and relatively poor financial infrastructure. ICICI’s model is based on an effective segmentation of the SME market by industry and business linkages, a proprietary 360-degree credit risk evaluation covering financial and non-financial parameters to compensate for SMEs’ lack of financial information, and a “beyond lending approach” that relies primarily on deposit products and other banking services for SMEs (95 percent of SME clients) rather than only on lending products (5 percent of SME clients). Client servicing is done though multiple channels: relationship managers, doorstep banking, branches, Internet, and automatic teller machines (ATMs), relying primarily on cost-efficient, technology-based channels. Source: https://www.icicibank.com |
Apart from financial institutions, non-banking/non-profit financial institutions and microfinance institutions have also cropped up to serve select sectors and categories of small borrowers. Some DFIs have also become more active in providing short-term loans and micro-lending in recent years.
Working in the veins of developing country economies, DFIs support a country’s sustainable transformation path. The significant global liquidity crash brought about by COVID 19 means DFIs must engage to an unparalleled degree to incentivize sustainable private investment. DFIs need to consolidate their portfolios and assist new clients, especially MSMEs, in the rebuilding and resilience of local, sustainable economies, helping address rising inequalities and the gender gap. Moving forward, as the situation gradually improves, DFIs will need to prioritise the development of a robust pipeline for post-crisis investments.
Separately, international financial institutions, such as the World Bank and ADB, also devote resources to specialized financial institutions lending to MSMEs. International financial institutions have become particularly active in the region. While financial institutions supporting the development of MSMEs in the Asia-Pacific region have become increasingly involved in the past few years, the banking sector remains the most important source of external financing for MSMEs.243 Banks offer diversified loans with different terms and various supplementary financing instruments such as export credit and discounts. Commercial banks in some countries also provide special loans targeted at priority sectors and critical segments of the population identified by the government, including MSMEs.
Financing instruments alternative to straight debt alter this traditional risk-sharing mechanism. Table 4 provides a list of external financing techniques alternative to straight debt, categorised into four groups, characterised by differing degrees of risk and return, whose main features (modalities/operational characteristics, enabling factors, trends, support policies.
Table 8. Alternative external financing techniques for MSMEs and entrepreneurs
| Low Risk/ Return | Low Risk/ Return | Medium Risk/ Return | High Risk/ Return |
| Asset-Based Finance | Alternative Debt | "Hybrid" Instruments | Equity Instruments |
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Source: OECD (2013), Alternative Financing Instruments for SMEs and entrepreneurs: The case of Mezzanine Finance, OECD, Paris, CFE/SME(2012)9/FINAL.
241 World Bank (2005). Financial Sector Assessment – A Handbook. Washington, D.C.
242 DFIs include multilateral development banks, national development banks, bilateral development banks, microfinance institutions, community development financial institution and revolving loan funds.
243 Park, J., B.I. Lim and J. Koo (2008). “Developing the capital market to widen and diversify SME financing: The Korean experience”. Seoul, Korea Institute of Finance.
