The Role of SMEs in Asia and Their Difficulties in Accessing Finance

Small and medium-sized enterprises (SMEs) make up more than 96% of all Asian businesses, providing two out of three private-sector jobs on the continent. Therefore, it is vital for Asian economies’ economic success that they have fully functioning support measures for SMEs. However, SMEs face major challenges in accessing cheap finance, mainly because of the asymmetric information problem between suppliers and demanders of funds and the high transaction costs. These lead to more collateral requirements for lending to SMEs with higher lending interest rates, which hinder their growth. As most Asian countries are bank-dominant economies, capital market financing is not a realistic option for SMEs. Therefore, we need to look for solutions that make bank lending to SMEs easier. This study will highlight the difficulties SMEs face in accessing finance and provide measures for mitigating them. The remedies proposed in this study are the development of credit information infrastructures for SMEs and the utilization of credit-rating techniques for SMEs. These approaches can help to address the asymmetric information problem and development of a sustainable credit guarantee scheme to solve SMEs’ collateral challenge, easing their assess to finance.

WORKING PAPER NO: 911