Jacopo Dettoni in Almaty -
Small and medium enterprises (SMEs) in Central Asia and across the whole continent still struggle to access adequate banking and non-banking financing despite their major contribution in terms of employment and, to lesser extent, economic output, ADB’s Asia SME Finance Monitor 2014 shows.
“Asia has millions of SMEs but few of them are able to grow to the point where they can innovate or be part of the global supply chain,” Noritaka Akamatsu, senior advisor in ADB’s Sustainable Development and Climate Change Department, said in a statement. “To do this, they need more growth capital and opportunities to access various financing channels”.
SMEs make up an average of 96% of all registered firms in Asia and employ 62% of the labor force. However, they contribute only 42% of economic output, the report shows. Besides, lending to SMEs has declined over the course of the global financial crisis and they received only 18.7% of total bank loans in 2014.
Despite some improvement in bank and microfinance lending, Central Asian countries are no exception.
In Kazakhstan active SMEs – mostly in the retail, services and transport sectors – make up 54.7% of total registered companies and employ almost one third of the Kazakh workforce. They recorded a sharp increase in their contribution to the national output over the last few years, with their share of GDP growing to 26% in 2013 from 17.3% a year earlier, following government programmes to address SME competitiveness, the report noted.
The Kazakh government plans to further increase their contribution to GDP to 40% by 2030 and 50% by 2050 within the framework of a programme denominated “Increasing Competitiveness and Performance of SMEs” launched in 2011.
SME loans grew by 32.4% y/y in 2014, but their share of total loans remain low at 13.9%, against 20.7% in 2007 before the global financial crisis hit. “High interest rates and strict collateral requirements are major obstacles for SMEs to access bank credit,” the report noted. At the same time, non-bank financial institutions (NBFIs) are not well developed in Kazakhstan, although many players are operating in the country with no comprehensive regulatory frameworks and little capacity to support SME development.
Besides, there are a number of additional factors that risks further limiting credit to SMEs. Kazakhstan decided to introduce Basel III for banking supervision, which requires tighter risk management for banks, “and may constrain their lending to SMEs”, the report reads.
The steep depreciation that the Kazakh tenge has suffered over the last two years highly increased the debt burden of SMEs holding their liabilities to banks in foreign currency, while keeping their revenues mainly in local currency – the tenge was devaluated by 20% against the dollar in February 2014 and definitely let free to float in August, which prompted an additional fall of the exchange rate to the current KZT240 to the dollar from a previous limit of the fluctuation corridor set at KZT197 to the dollar.
And even the country’s upcoming entry in the WTO, which will be definitively ratified in October, may pose risks as there is a widespread consensus that local SMEs will struggle to adjust to the rules and competition of the WTO bloc, at least in the short term.
Another economic bloc, the Eurasian Economic Union in this case, risks putting out of business many SMEs in Kyrgyzstan.
“Typical SMEs in the trade sector enjoy cheap goods from the People’s Republic of China, and export to other countries, generating profits in the sector,’ the ADB report read. “However, after admission to the EEU, such business model of SMEs in the trade sector will not work due to customs restrictions, and may result in putting many SMEs in the sector out of business.”
Kyrgyzstan reported that SMEs, which are concentrated in the business services and wholesale and retail sectors, contributed only a 4% share of the country’s total employment - this was attributed to the aftermath of global financial crisis, but also the country’s practice of not counting farm workers and individual entrepreneurs in SME statistics, the report noted. SMEs made up only 12% of 2013 GDP.
Although high interest rates still limit SMEs’s access to traditional bank lending, microfinance institutions (MFIs) partly make up for that, with MFIs outstanding loans quickly growing by 25.5% y/y in 2013 and 17.7% y/y to KGS20.8bn (€289mn) in 2014, against outstanding bank loans of KGS76.9bn. MFI non-performing loans (NPLs) remains low at 5.1% of total MFI loans.
The microfinance sector is, to some extent, filling gaps left by the banking system in Tajikistan too, where SMEs give work to approximately half of the national workforce.
In particular, microfinance provides a vital lifeline to SME in rural areas where banking penetration is much lower, the ADB report noted.
Total loans disbursed by MFIs increased by 40.4% y/y to TJS4.4bn (€622mn) in 2013, against total bank loans for TJS7.5bn. Despite such accelerated growth, the NPL ratio remains low compared to the banking sector, at 3.2% in 2014 for deposit-taking microcredit organisations, the report noted.
However, some challenges still remain in the sector. “Many MFIs are facing liquidity and funding shortages as not all of them are allowed to perform deposit-taking activities. The high level of dollarisation is also posing a threat to MFIs and their clients, as a large number of loans are denominated or indexed in foreign currency (usually US dollars), exposing them to the increasing foreign exchange risks,” the report reads.
Mongolia’s economy is oriented around natural resources and is greatly influenced by commodity price fluctuations and external factors. Economic growth in Mongolia has been slowing since 2012, with persistent high inflation and sluggish inflow of foreign direct investment. “As a priority, it is critical to establish a base of growth-oriented firms toward a resilient national economy, rather than depending on mining and mineral-based economic growth, where SMEs play a key role in driving sustainable economic growth in the country,” the ADB report reads.
However, “Mongolia’s SMEs [they make up 55.1% of total registered businesses] are too small in size and have the same problems of access to finance, management capacity, and business development as in other countries […] and their lack of business records and credit history typically makes it difficult to access to bank credit”, it added.
SME loans outstanding in banks have been increasing, standing at MNT2,176bn (€124.3mn) in the fourth quarter of 2014, a 20.6% growth from a year earlier. However, the share of SME loans to total bank lending has remained low at 17%–19% since the fourth quarter of 2008.
On the other hand, the nonbank finance sector is small in scale in Mongolia - as of the end of 2013, total assets of licensed NBFIs accounted for 1.8% of total banking sector assets.
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