Strengthening the Chain

Supply ChainSmall to medium sized enterprises (SMEs) play a critical role in supply chains in Asia. While these companies are important drivers of growth in the region, they face major challenges when it comes to obtaining finance. The SWIFT Institute funded the Malaysia Institute for Supply Chain Innovation, part of the MIT Global SCALE (Supply Chain and Logistics Excellence) Network, to research this issue. An interim white paper was published on March 10, 2013, and the final working paper will be issued in mid-2013.

Most countries are trying to create policy frameworks, regulations, financial institutions and rating agencies to promote the growth of SMEs, and it cites several examples. Yet there are myriad limiting factors.

On the demand side, lack of education, motivation and entrepreneurship prevents business owners from seeking finance to grow their business. On the supply side, it’s hard for financial institutions to get accurate and detailed information about borrowers. Borrowers lack the documentation, bills and receipts to prove they have the cash flow to repay the loan. They tend to rent or lease assets, so they can’t demonstrate that they have collateral to ensure against default. Credit rating agencies often are unreliable. As a result, when financial institutions do lend, they charge high interest rates. Other deterrents include high transaction and loan administration costs, legal bureaucracy and restrictions, and the lack of systems to enforce and monitor the rules for lending and borrowing.

Some innovative lending models have been introduced at the product, process and institution levels. The paper mentions India’s Kisan Credit Card (KCC) scheme to reduce the cost and the administrative burden associated with small loans. Other initiatives in that country include crop insurance, warehouse receipt financing smart cards and Self-Help Groups (SHGs). Thailand’s Bank, Agriculture and Agricultural Co-operative introduced the Joint Liability Group (JLG) to streamline screening, administration and enforcement.  Meanwhile, governments are increasing financial resources for SMEs and writing off their bad debts. Some banks offer low interest rate loans and have dedicated funds for agriculture. Additionally, NGOs and private organization are providing support in the areas of credit, market access and the development of SHGs.

Financial institutions can help their multi-national customers by supporting their supply chain. And by providing finance to SMEs, hopefully these companies one day will grow into bigger customers. However, developing products that meet their unique needs is only one part of the equation. It’s critical to support the financial reform process and help build the necessary infrastructure that will enable companies to thrive and compete.

  • What do you think are the major barriers to SME lending in Asia?
  • What can financial institutions do to alleviate these problems?
  • Is there anything in the new banking regulations (Basel III etc.) that help or hinder progress?

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