Policies and Programs of ADB to
Enhance Access to Finance for SME
Joint Regional Symposium: Best Practice Regulatory
Principles Supporting MSME Access to Finance
Manila, 27 June 2011
Qifeng Zhang
Principal Financial Sector Specialist
Asian Development Bank
The views expressed in this presentation are the views of the author and do not
necessarily reflect the views or policies of the Asian Development Bank (ADB), its
Board of Directors, or the governments they represent. ADB does not guarantee the
accuracy of the data included in this presentation and accepts no responsibility for any
consequences of their use. Unless otherwise noted, $ refers to US dollars.
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Outline
• Introduction: about ADB
• ADB’s Policies on SME Finance
• ADB’s Operations on SME Finance
• Good Practice for SME Finance (Financial
Intermediation Program)
• Two Examples of ADB Project for SME Sector
Development
• Final Remarks and Recommended Reading
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Introduction: About ADB
More info: <http://www.adb.org/About/>
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ADB: a Regional Development Bank
• Established in 1966
• 67 members (48 regional, 19 non-regional)
• Vision: Asia and Pacific free of poverty
• Capital increase in 2009: from $55 billion to
$165 billion
• AAA rated
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Major Financial Instruments
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Loans
Multitranche financing facility (MFF)
Technical assistance (TA)
Grant
Equity investments
Guarantees
More info: <http://adb.org/documents/policies/financialinstruments-procedures/default.asp>
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Departments in ADB
Working on SME finance
 Public sector operations
• Central and West Asia Department (CWRD)
• East Asia Department (EARD)
• Pacific Department (PARD)
• South Asia Department (SARD)
• Southeast Asia Department (SERD)
 Private Sector Operations Department (PSOD)
 Office of Regional Economic Integration (OREI)
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2010 Approvals
Loans: $11.5 billion, for 118 loans
TAs: $175.5 million, for 243 projects
Grants: $982 million for 40 projects
Equity investments: $243 million, for 8
projects
 Guarantees: $982 million for 5 projects
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Note: the foregoing consists of total approvals for all sectors.
ADB’s Policies on SME Finance
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2001: Private Sector Operations (PSO)
– Strategic Directions and Review
Four Major Elements of the PSO Strategy
• Focus primarily on existing strengths in infrastructure and
capital markets
• Extend country and sector reach in new areas
(New sector areas include: SME, IT and social
infrastructure)
• Make wider use of innovative financial instruments
• Build strategic alliances and partnerships with other
institutions
More info: < http://www.adb.org/Documents/Policies/PSO/strategicdirections.pdf?bcsi_scan_7823DFCE46415F3E=IboKGwqcKeintJ6cw25bDgMAAABdW2kD&bcsi_scan_filenam
e=strategic-directions.pdf >
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2001: Private Sector Operations (PSO)
– Strategic Directions and Review
Policy Guidance on SME Finance under PSO
• Acknowledged key role of SMEs for economic
prospects of most DMCs
• Assistance to SMEs to be provided mainly through
investment funds or local institutions (i.e., financial
intermediation) instead of direct lending
• Other appropriate models to be explored
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2008: Long-Term Strategic
Framework
Five core areas of operations under this
strategy (also called Strategy 2020)
• Infrastructure
• Environment
• Regional cooperation and integration
• Finance sector development (FSD)
• Education
More info: <http://www.adb.org/strategy2020/>
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FSD Under Strategy 2020
• FSD is essential to ensuring sustainable private sector-led
economic growth
• Support financial sector at the regional and national levels
• Develop financial infrastructure, institutions, and products
and services
• Create enabling environment for microfinance, rural finance
institutions, and SMEs
• Explore the use of technologies to expand the reach of the
formal financial system
• Continue to help build the capacity of financial institutions—
and of their regulators—by introducing international best
practices
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2011: Financial Sector
Operational Plan
Two priority areas for FSD under FS
Operational Plan
• Financial inclusion (including SMEs’ access to
finance)
• Capital markets for infrastructure finance
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2011: Financial Sector
Operational Plan
Major focus for SMEs’ Access to finance
• Access to credit
• Financial infrastructure (secured transaction regime, contract
enforcement mechanism, and credit information system)
• Leasing
• Credit guarantee
• Factoring
• Insurance
• Capital markets
• Trade financing
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ADB’s Operations on SME Finance
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ADB SME Finance Projects Approvals
(as of 14 March 2011)
 Public sector loans: $840 million, for 18
projects
 Non-sovereign operations (loan, equity
investment, and guarantee): $543.2
million, for 49 projects
 TA: $6.64 million for 16 projects
 RETA: $0.33 million for 2 projects
 Grant: $2.54 million for 1 project
Total approvals: $1.39 billion
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Good Practice for SME Finance (Financial
Intermediation Program)
More info: <http://www.adb.org/Documents/SES/REG/SES-REG-2008-71/SES-REG-200871.pdf>
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Creating a Conducive Policy and
Regulatory Framework
To ease constraints on SME finance:
• Lack of institutional interest in financing SMEs
• Lack of property right or mechanism to enable SMEs
pledge assets for borrowings
• Lack of loan guarantee arrangement
• Lack of competition in banking
• Lack of credit information registries
• Regulatory and institutional barriers for entry to capital
markets
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Financial Sector Policy
To promote financial sector development:
• Maintain macroeconomic stability
• Deregulate interest rates for adequate spreads to
cover lender’s cost
• Reduce barriers to entry to create a more competitive
banking environment
• Enhance legal, regulatory, and prudential supervision
framework
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Prudential Standards Affecting SMEs
Appropriate prudential norms for:
• Capital adequacy
• Portfolio quality
• Loan classification
• Loan provision
• Risk assessment systems
• Risk control capability of financial institutions
management, staff, and supervisory agencies
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Adequate Debt Recovery Systems
• Clear legal title to property
• Creation of security interests (permitted to pledge a
variety of assets for borrowing)
• Perfection of security interests (accurate registries)
• Enforcement of security interests (permitted to agree
to rapid, nonjudicial enforcement of loan contracts)
• Bankruptcy law and regulations
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Information Collection and Use
• Regulatory framework for establishment and
functioning of credit bureau
• Collection of positive as well as negative credit
information
• Comprehensive information to include not only loan and
credit card, but also payment history (trade creditors,
retailers, utilities), lawsuits, and bankruptcy
• Enable sharing of data while protecting the rights of
borrowers
• Protect the credit bureau in respect of their bona fide
acts
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Capacity Building for SME Lending
Imparting international good practices is important for
new or small SME financing institutions, to improve
credit skills and operating processes
• Ownership of capacity building program
• Clear capacity development targets
• Proper sequencing of interventions
• Adequate incentive systems
• Recognition of local value
• Flexibility of the program
• Fitting the program into the bank’s overall strategy for SME
finance for sustainability of the training
• Integrating the training into the bank’s plan and procedures
(such as credit assessment methods)
• Interactivity, continuous refinement and improvement
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Key Lessons for Profitable SME Lending
• Strong strategic approach and commitment
• Proper risk management framework
• Defined market segments, with core tailored
products
• Cross-selling of deposit and fee-based products
• Separate department / division for SME lending
• Network and customer relationship with SMEs
• Centralized processing, with field marketing,
origination, monitoring, and collection
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Key Ingredients of Service Delivery
Approach
• Strong sales culture, responsiveness, and
dedication to efficiency
• Strong SME financing policies and procedures
• Strong decision-making and control mechanisms
• Lending officer made responsible throughout the
entire lending cycle
• Performance-based compensation
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Credit Guarantee Scheme
• Should be independent legal corporation,
operated by the parties involved, and open to
competing lending institutions
• Needs to prevent moral hazard and not to
affect incentive for banks to monitor and
retrieve loans
• Defines clearly the conditions that will trigger
claims and repayment in the contract with
lender
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Two Examples of ADB Project for SME
Sector Development
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PAK: SME Sector Development Program
Basic Info
• Country: Pakistan
• Year of ADB approval: 2003
• Instruments:
 OCR loan: $152 million equivalent
 ADF loan: $18 million equivalent
 Partial credit guarantee: $65 million
 TA grant: $0.25 million
• More info on this project:
<http://www.adb.org/projects/project.asp?id=34327>
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PAK: SME Sector Development Program
Major components in project design
• Key Result Area (KRA) 1: Improve SME policy environment
 Develop SME policy
 Establish effective labor protection and inspection
policies
 Enhance effectiveness of SME Development Authority
• KRA 2: Improve market-based SME access to business
development services
• KRA 3: Improve market-based access to and delivery of
SME finance
 Improve regulatory and credit information
infrastructure
 Build private financial institutions’ capacity
 Restructure and privatize the SME Bank
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PAK: SME Sector Development Program
Major outputs delivered under KRA for improving
regulatory and credit information infrastructure
• Central bank issued prudential regulations for SME finance to
support non collateral-based lending for SMEs
• Central bank improved asset classification and risk provisioning
requirements
• A study was completed on strengthening the Secured
Transactions Framework (establishing a system to create
security interest on moveable and immovable assets to facilitate
access to formal financial intermediations by small borrowers)
• New system was developed to enhance the Credit Information
Bureau (CIB), by expanding coverage to all credit transactions
(threshold eliminated) and shortening reporting period from
within 15 days after the month of transaction to within 10 days
from the date of settlement
• Credit information reports could be generated on consumer and
corporate borrowers as essential credit information for lending
decisions
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PAK: SME Sector Development Program
Assessment made by the Program Completion
Report (PCR) as validated by Independent
Evaluation Department (IED)
• Design and formulation of the program: relevant
• KRA 3.1 on improving regulatory and credit
information infrastructure: fully satisfactory
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PRC: Development of Financing Policies
and Mechanisms for SME
Basic info
• Country: People’s Republic of China (PRC)
• Year of ADB approval: 2000
• Instrument: TA grant for $700,000
• More info on this project:
<http://www.adb.org/Documents/TARs/PRC/R294-00.pdf>
<http://www.adb.org/Documents/TACRs/PRC/tacr_prc_3534.pdf>
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PRC: Development of Financing Policies
and Mechanisms for SME
Scope of the project
• Provide advice on suitable SME finance policies and
mechanisms
• Survey and review existing SME credit guarantee fund
operations in PRC
• Identify suitable strategies and conditions for SME finance
from equity investors
• Design a pilot equity support scheme for SME finance
• Disseminate TA findings
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PRC: Development of Financing Policies
and Mechanisms for SME
Major outputs delivered - a comprehensive three-volume
TA report comprising:
• Review and assessment of the SME-related policy in PRC,
including major government support program
• Review of major laws and regulations in PRC in relation to SME
financing
• Identification of major impediments
• Presentation of international practices (e.g., USA, Australia, etc)
on government support to SMEs
• Provide model legislation, regulations, and operating procedures
• Recommendations on a broad range of issues, including
establishment of a credit reporting system
More details on TA consultant’s report:
<http://www.adb.org/Documents/Reports/Dev_SME_Fin_System/default.asp>
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Final Remarks and Recommended
Reading
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Final Remarks
• Access to finance alone is not the magic bullet for SME
development. Holistic approach and synchronized
efforts are needed to ease constraints in other areas,
such as licensing, land/property title, judicial system,
levies and taxes, etc.
• SME access to finance could not be addressed only
through credit expansion. A financial eco-system is
required, which includes suitable financial infrastructure
(e.g., credit bureau, creation and enforcement of
collateral) and mutually reinforcing financing channels
(guarantee scheme, equity funds, venture capital,
capital market)
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Final Remarks
• Commercial banks may have natural tendency to
shy away from SME lending. Tightening capital and
liquidity rules may further disincentivize bank
lending to SME. A balance is needed to continue
supporting SME lending while maintaining financial
stability (in particular avoiding systemic risk)
• Microfinance, SME finance, and corporate finance
serve different market segments, and have
distinctive features. Hence, the approach and focus
of their regulation and supervision should also be
tailor-made
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Final Remarks
• Consumer protection and responsible finance are
conducive to healthy financial sector development
and should be properly incorporated in the structure
of regulatory and supervision system for SME finance
• Country context differs. It is important to carefully
examine key conditions for regulatory and
supervision rules to be relevant, implementable, and
effective
• Broad consultations with all stakeholders is a
necessary step in the process of establishing/
improving regulatory and supervision rules
• Success lies in details and in coordination for
implementation
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Recommended reading
•
ADB: Enterprises in Asia-Fostering Dynamism in SMEs (2009)
http://www.adb.org/documents/books/key_indicators/2009/pdf/KI2009-SpecialChapter.pdf?bcsi_scan_7823DFCE46415F3E=b3Zj4fQw3bTkwVcQRmM+YwMAAACwzokD&bcsi_scan_filename=KI2009-SpecialChapter.pdf
•
AFI: Financial Inclusion and Financial Stability: Current Policy Issues
(2010)
http://www.adbi.org/files/2010.12.21.wp259.financial.inclusion.stability.policy.issues.pdf
•
IFC: Scaling-Up SME Access to Financial Services in the Developing
World (2010)
http://www.ifc.org/ifcext/gfm.nsf/AttachmentsByTitle/G20SMEFinanceStocktaking/$FILE/G20_Stocktaking_Report.pdf?bcsi_scan_7823
DFCE46415F3E=l73R9+A+ooEPdXkg6LdsEQMAAAADWo0D&bcsi_scan_filename=G20_Stocktaking_Report.pdf
•
Korea Capital Market Institute: Financial System Architecture for
Effective SME Financing (2010)
http://www.aric.adb.org/pdf/seminarseries/SS37ppt_Financial_System_Architecture.pdf
•
KPMG: BASEL III: Issues and Implications (2011)
http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/basell-III-issues-implications.pdf
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Thank you.
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