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ADB to Help Develop Better Business Environment for SMEs in Cambodia

MANILA, PHILIPPINES (17 December 2004) - The Asian Development Bank (ADB) is supporting the Cambodian Government's efforts to create a business environment more conducive to the development of small and medium enterprises (SMEs), through a US$20 million loan approved.

The loan, for the Small and Medium Enterprise Development Program, will support Government efforts to establish an SME development framework, carry out regulatory reforms, and enhance SMEs' access to finance.

SME development is considered a priority area given SMEs' major role in Cambodia's economy. Although accurate data on SMEs (with 30 to 100 employees) is difficult to obtain, as the sector is largely informal and unregistered, official figures suggest the SME sector has registered 12% growth since 1999.

SMEs account for 99% of the number of firms in the country and about 45% of employment, with textiles and apparel the most predominant sectors, and other enterprises specializing in food processing, chemicals, rubber, plastic, and fabricated metal.

"Given the importance of SMEs to the economy, significant reforms are needed to ensure that the sector can achieve the Government's goals for economic growth and poverty reduction," says Jin Cyhn, an ADB Economist.

Many enterprises still face major barriers in terms of the high cost of doing business due to the need to comply with a multitude of regulations, and their limited access to markets. Missing legal structures and institutions have left a high risk lending environment that limits SME access to key resources, particularly finance.

Meanwhile, the Government recognizes the need to develop a supportive regulatory environment, but it lacks a coordinated framework to take the necessary actions.

The program will provide a long-term strategic framework for SME development that promotes better policy coordination among key Government agencies and more public-private partnerships.

To improve the governance and regulatory system reform, it will address shortcomings in the business registration process by enhancing transparency and reducing costs through the elimination of unnecessary requirements. The business licensing system will be reformed and streamlined by establishing a one-stop information window to provide guidelines and information for SMEs.

It will also develop a credit information sharing system to help reduce the risks faced by banks in lending to SMEs, tailor accounts and tax filing to the needs of SMEs, and develop a framework for leasing as a potential source of longer term financing. With these reforms in place, financial institutions will be able to make more informed decisions, leading to a reduced cost of financing.

"Over a period of three years, the program will improve the environment for doing business, leading to greater economic activity, more jobs, and ultimately impact on poverty reduction in the country," Mr. Cyhn adds.

ADB's loan comes from its concessional Asian Development Fund, with a 24-year term, including a grace period of eight years. Interest is set at 1.0% per annum during the grace period and 1.5% per annum for the rest of the term.

Complementing the program is a technical assistance (TA) grant package totaling $850,000 cofinanced by ADB ($500,000) and the Government of Denmark ($350,000). The TA will focus on technical, legal, and policy related assistance to the reform agenda, institution building activities, and developing new approaches to training and information dissemination.

The executing agency for the program is Ministry of Industry, Mines and Energy.

ADB is dedicated to reducing poverty in the Asia and Pacific region through pro-poor sustainable economic growth, social development, and good governance. Established in 1966, it is owned by 63 members - 45 from the region. In 2003, it approved loans and technical assistance amounting to US$6.1 billion and US$177 million, respectively.

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