MPFD Working Paper on A Review of Access to Finance by Micro, Small and Medium Enterprises and Digital Financial Services in Selected Asia-Pacific Least Developed Countries

Working paper5 May 2020

Micro, Small and Medium Enterprises (MSMEs) are key to the economies of various countries. Their numbers and contribution towards employment is well documented and there is acceptance amongst policy makers that these enterprises are critical for economic development. Increasingly, access to finance has been recognised as a major hurdle in their development or growth.

Amongst, the countries reviewed in this paper - Bangladesh, Bhutan, Cambodia, Lao People’s Democratic Republic, and Nepal – Bhutan is the only target country where the supply of finance to MSMEs is favourable with nearly 68% of the demand being met. Cambodia has the highest finance gap followed closely by Lao Peoples Democratic Republic and Nepal. While examining the finance gap of microenterprises and SMEs, the gap revealed in Bhutan, Cambodia, Lao People’s Democratic Republic and Nepal are not substantial. However, in Bangladesh the differences are much larger between microenterprises and SMEs with only 14% of microenterprise demand being met.

The review also explores the number of women owned MSMEs (WMSMEs) in the countries and the access to finance for such enterprises. It shows that the finance gap is amongst the lowest in Bangladesh (6%), Bhutan (19%) and Nepal (9%). In Cambodia and Lao People’s Democratic Republic, the share is higher at 32% and 42% respectively. But in both South East Asian countries women owned MSMEs also are a larger proportion of MSMEs.

There are a number of demand and supply reasons or constraining factors leading to issues in access to finance. The common factors pertain to awareness, risk, knowledge, and products and processes. Women owned enterprises too face these challenges, but these may be more severe as they are often entrenched in gender stereotypes, limited education opportunities and restricted mobility, perception that women cannot manage businesses or lack leadership skills, and women are also often required to perform the dual role of business women and homemakers. Most of the countries are still in the process of framing laws pertaining to contract enforcement and resolution of insolvency. Specifically, on the demand side, enterpreneurship is not viewed as a career option and risk acceptance is overall low.

While these constraints exist, there are several policy initiatives undertaken by regulators and governments in these countries to increase access to finance. These approaches involve a mix of regulatory and financial approaches, including efforts to develop the financial infrastructure, such as, secured transaction laws, creation of collateral registries, developing credit bureaus, and payment and settlement systems. Other actions include interest subsidies, dedicated funds and institutions. But these are in various stages of enactment and implementation. Cultural shifts in terms of acceptance of entrepreneurship have also been observed in many of these countries, with governments adopting policies to encourage entrepreneurship.

While Digital Finance Services (DFS) initiatives specifically linked to increasing MSME access to finance are few, and there are no specific policy initiatives (in the target countries) linking the two, development of DFS and its spread is likely to positively affect MSME access to finance. This is because DFS helps to create a digital footprint that when combined with other accumulated data can yield business intelligence to make decisions related to credit risks, for example.

In all the countries reviewed, there is a notable push in terms of policy and mobile connectivity that favour the growth of digital payments. Number of bank and non-bank agents in all the five countries has shown significant increase as has the adoption of payment services by populations. This has in part been supported by the high levels of 2G and 3G mobile service penetration.

A lot of the policy and regulatory effort by the target countries is in the right direction which requires further encouragement and a more nuanced approach towards MSMEs. Policy makers need to continue to build their own capacity on MSME access to finance. In terms of financial infrastructure, what matters is that it is effective and reliable. This should be the continued focus of policy makers and regulators in the target countries. Alternative source of finance should be encouraged, but with the understanding of the varied sources and their applicability to different stages of enterprises. It is vital that women owned MSMEs be treated as a distinct category and attempts made to use data and training to remedy the perception issues. Finally, DFS offers immense potential and efforts need to be made move beyond payments and into digital lending, savings and insurance simultaneously building up consumer protection policies related exclusively to DFS.