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Financing SMEs in ASEAN, the case of Cambodia

Financing SMEs in ASEAN, the case of Cambodia

Small and medium-size enterprises (SME) are the backbone of the economic development of the ASEAN group of countries, because they create jobs.

In the region, SMEs account for more than 56 per cent of all enterprises and generate 50 to 98 per cent of employment. Yet, the ability of SMEs  to contribute significantly to economic growth in the region faces one main challenge: the access to formal sector financing.

Although there are differences between the ASEAN countries, this aspect remains true for most of the developing economies of the region where the SME sector provides the main source of jobs and income after subsistence agriculture.

In Cambodia, the fact that a majority of the population live in rural areas and depend on agriculture and informal sector activities, combined with a banking sector that has not yet reached a sufficient degree of sophistication makes access to finance difficult for a majority of the population.

A major issue for the development of SMEs: the access and the cost of finance

Providing finance for companies in countries like Cambodia, (which is still in the category of Least Developed Countries) is generally rated as riskier than finance in more developed countries.  Also, providing finance for small firms is globally rated as riskier than for large firms.

The result is that the Cambodia banking sector faces both high risk and high transaction costs in lending to SMEs. On top of that, they do not need to develop the business of lending to small firms when they operate more safely and profitably by lending to large firms. This aspect precludes many SMEs  access to formal finance. One notable exception is the case of ACLEDA which, with its microfinance background, has kept a methodology and focus to address the SME financing needs.

The situation is even more challenging when considering risk capital as it is even more difficult to raise than debt. Startup investment companies, venture funds or “business angel” investors are almost non-existent in the country. The informal and family organization of most SMEs in Cambodia constitutes a barrier for potential investors that find the lack of information and professionalism in Cambodian SMEs to be a major constraint.

The solution: an improved legal framework and a support to SMEs

The issue of SME financing must be addressed in a comprehensive manner: setting up the appropriate framework which requires the improvement of the availability of information,  legal protection of lenders and investors, as well as the support to the SMEs so they can upgrade and have access to bank loans and investments by professional investors.

To that extent, the recent creation of a credit bureau providing information to the lenders on the credit situation of a borrower is a key development with regards to the development of better information.

Also, the initiative towards a reliable system for collateral, land and credit guarantees in order to provide more security to creditors needs to be continued. It is still a lengthy and difficult process to recover credit or realize guarantees in Cambodia and this explains why banks remain cautious when selecting borrowers and continue to have high collateral requirements.

The unavailability and cost of having hard titles in Cambodia in order to be able to use titles as collateral is still to be addressed as well. In view of the heavy taxation and costs they are subject to (tax on profit, VAT, and formal accounting), it is obvious why SMEs prefer to remain in the informal sector.

Yet a formal legal and accounting framework can help them gain easier access to funding and can help them do business with bigger customers.

A strategy to support SMEs would therefore include a process to help them transition from informal to formal status and provide them with a management and governance support to better understand and improve their businesses. The use or set up of dedicated companies to provide that support would definitely be crucial.

The road to develop access to credit remains challenging but examples in other ASEAN countries indicate that appropriate reforms towards more accurate information, adequate accounting standards, product diversification and contract enforcement for collateral recovery are the road to success.

As ASEAN integrates, regional initiatives aiming at facilitating cross-border financing for SMEs will be very important in the future, and the diversity in economic development of the member countries is a real opportunity.

Before the implementation of regional measures and cross border financing, capacity building, training and information exchange from more developed ASEAN members to other members should be the first step towards a higher level of integration, and a better one then addressing land disputes.

Opinion by Christophe Forsinetti, CEO, DEVENCO


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