ADB's supply chain finance program provides a low-cost credit lifeline to Asia's small businesses that are struggling to make ends meet.
In Asia and the Pacific, small and medium enterprises (SMEs) were among the hardest hit by the recent global financial crisis, particularly those serving as subcontractors for large companies. Though the region's finance sector withstood the crisis well, the slump in demand in major markets affected the trade and real sectors of Asian economies. Small players that make up the supply chain sought to stretch their working capital to cover day-to-day operations as large buyers delayed payments to preserve cash. And unlike the big players, these small enterprises do not have a ready line of credit that they can tap in times of uncertainty.
"In Asia, the reality is that SMEs have poor access to finance. It is one of the core factors impeding SME development."
- Shigehiro Shinozaki, SME Finance Specialist, ADB
"Adequate access to finance is crucial for SMEs to survive and eventually grow beyond their SME status. In Asia, the reality is that SMEs have poor access to finance. It is one of the core factors impeding SME development," says Shigehiro Shinozaki, a specialist on SME Finance at ADB, in a working paper.
"Due to high costs for transactions and information collection, as well as immeasurable risks, financial institutions generally hesitate to finance SMEs," writes Shinozaki. "To mitigate such risks and reduce the cost burden, financial institutions oblige SMEs to fulfill steep collateral and guarantee requirements, and apply high interest rates. Not surprisingly, SMEs tend to regard these measures as serious supply-side barriers."
What is supply chain finance?
Supply chain finance is an innovative approach to financing. Financial institutions work in collaboration with buyers and suppliers in ensuring that there is a steady flow of working capital to continue production and help ensure stability in the supply chain.
Supply chain finance frees the financial resources tied up in the supply chain. Many small companies currently face lags of 30 to 180 days between the time they deliver goods and services, and when payments are received. Under supply chain financing, a bank offers to advance cash to the supplier for a fee. Receiving payment even just 30 days earlier could help small suppliers maintain production capacity, retain staff, and ultimately expand operations and employ more people.
The development of SMEs is critical for promoting inclusive growth in most economies in Asia, says Shinozaki. "SMEs stimulate domestic demand through job creation, innovation, and competition; thus, they can be a driving force behind a resilient national economy. In addition, SMEs involved in global production supply chains have the potential to encourage international trade."
Sharing the risk
In 2012, ADB created a supply chain finance program to help cash-strapped SMEs in the region access capital that can help them grow. ADB has partnered with Standard Chartered Bank to share risk in financing more than $800 million in supply chain transactions over the next 3 years, most of which will be directed through SMEs that are supplying large companies with materials for intermediate and final production, as well as retail sales. This will in turn support the development of intra-Asia supply chains as well as supply chains between Asia and other regions of the world.
The supply chain finance program closes market gaps in support of SME development and job creation in developing Asia, says Steven Beck, ADB's Head of Trade Finance.
The program complements ADB's successful trade finance program. While trade finance fills market gaps by providing guarantees and loans to banks, ADB's supply chain finance program will take commercial corporate risk and improve liquidity within the supply chains.
Unlike traditional risk assessments that focus almost exclusively on financials and collateral, supply chain financing evaluates the strength and longevity of a supply chain and the mutual dependence between buyer and supplier.
With major export markets still recovering from the crisis, strengthening SMEs in developing Asia during this period can provide the impetus to promoting domestic consumption and enhance intraregional trade to sustain growth.