Spurring Small Business to Secure a Prosperous Future

Small and medium-sized businesses are essential to Timor-Leste’s long-term prosperity but they need more help if they are to flourish.

A significant proportion of the country’s workforce is engaged in small-scale livelihood activities; in 2010, 80% of the labor force worked in places that employed less than five people, with a further 9% in workplaces employing between five and nine people. Most are subsistence farmers or work in informal agricultural activities that yield only a very small excess produce for sale.

Incomes among this large part of the population are very low, with many living in poverty. With some support, these workers could build their businesses and significantly improve their standard of living.  But if critical obstacles are not dismantled, Timor-Leste will pay a heavy price. Not only will the current generation miss an opportunity for a better life but future generations will also suffer if a home-grown private sector is unable to take over when the country’s petroleum wealth runs out.

Most importantly, access to finance must be expanded. Timor-Leste has enjoyed admirable progress in providing microfinance, in establishing its first local commercial bank and in putting in place the legal and regulatory environment needed to attract commercial banks to operate in the country. However, much more needs to be done to make sure that everyone can get the finance they need to establish or expand their businesses.

One way would be to encourage mobile banking. Transferring money or conducting other banking activities by mobile phone instead of traveling long distances to banks has been extremely popular in other developing countries with far-flung populations. Liberalization of the country’s telecommunications industry is key to this and to helping link people to markets and the opportunities they provide. Timor-Leste’s communication charges are currently far too high and mobile coverage far too low.

Allowing borrowers to use moveable property such as cars, machinery, livestock or crops as collateral for loans would also allow small businesses in Timor-Leste to get access to crucial finance. Other countries where banks have adopted the so called “secured transactions” model, based on the above concept, instead of taking the risk of uncollateralized lending to an unknown borrower, have seen considerable success. With strong partnership between the government and the private sector, a secured transactions system could potentially be set up within 12 months and unlock millions of dollars of financing that could be put to work by small businesses across Timor-Leste.

But having the right skills is also important. Without them, would-be businessmen and women will struggle to identify business opportunities, start up businesses, expand into new areas or markets, or start exporting. The Asian Development Bank recently signed a $12 million grant to introduce mid-level skills training in the construction and automotive trades but this should be expanded to other areas as well, to help the country’s young and fast-growing population with business and employment opportunities.

Particular attention should be paid to the aspirations of women of Timor-Leste. Traditionally, they have struggled to make their presence felt in business – depriving the country of a huge amount of business acumen and economic growth. However, when they have been allowed to run businesses, banking statistics show their firms to be among the most successful in the country.

Last but not the least, physical infrastructure and power services need to be improved to support small and big firms alike. Bad roads are already stymieing efforts to get goods to market or to connect with potential business partners. Projections show that if the past under-funding of roads continues, most of the national roads will only be usable by four-wheel drive vehicles within five years. The government’s Strategic Development Plan 2011-2015 sets out a bold plan to fix this. Sustained follow through is essential. Similarly, new sea and airport facilities are needed to prevent freight charges from soaring, and ensure that firms receive and fill orders in a timely way.

With swift and sustained action on all these fronts, Timor-Leste’s small private businesses will germinate and blossom and ensure the country has a prosperous long-term future.