At a time of much global uncertainty and economic slowdown, building internal resiliency is becoming increasingly important. Small and medium-sized enterprises (SMEs) play a central part in this, via its role in enhancing economic dynamism and creating employment opportunities in a country. SMEs usually make up a huge proportion of all businesses around the world. In Thailand, they account for as much as 99.7% of all enterprises, hire 80.3% of total labor force, and contribute 26.3% of export value.
Given this landscape, it is not surprising that policy makers all over the world widely recognize the SMEs’ contribution to enhanced economic growth and employment opportunities. Since one of the main obstacles for SMEs is the lack of adequate access to financial services, the government has made subsequent attempts to help finance this important sector.
In Thailand, the SME financing environment is characterized by a strong political culture that supports the financial needs of the poor and rural population. As a result, the government has made extensive arrangements to provide financial assistance to this group of people. This has been done mainly through large and influential government specialized financial institutions (SFIs) and village and urban revolving funds (VRFs). These SFIs and VRFs, which are subsidized and closely controlled by the government, are basically policy tools to help lower-income clients through various programs such as loans, savings, and insurance policies.
So far, government efforts—such as low-interest loans, money for village funds, and subsidized loan guarantee fees via these institutions—may be well-intended ideas, but there are questions about the sustainability of such public support in the long run. On the banking side, attempts have been made to make bank lending compulsory to sectors such as small or agricultural enterprises; or to create new types of financial licenses for specialized microfinance institutions. Generally, these attempts have not led to sustainable credit provision to SMEs, and regulators who are already burdened with regulating commercial banks can find it difficult to take on the extra responsibility of monitoring new types of financial institutions.
Despite substantial government support, Thailand’s SMEs still have not been able to catch up with larger enterprises. SME contribution to gross domestic product (GDP) has been declining, with its share in 2015 (39.6% of GDP) still lower than it was 20 years ago (44.2%). The constraints to SME financing remain the main topic of policy discussion today. In this environment, the use of loan sharks (or moneylenders) that charge cutthroat interest rates of about 15%–20% per month is widespread. The real issue for Thailand, therefore, may not be lack of financing per se but how to design appropriate business models and market-friendly supporting schemes to help SMEs gain access to credit on a sustainable basis.
In fact, there are vast opportunities for a more market-friendly approach in involving mainstream commercial banks in SME financing—because these institutions usually have extensive branch networks as well as the competitive advantage such as strong branding, infrastructure, systems, and low cost of funds.
Despite the perceived high risk of microfinance, banks around the world have engaged profitably in this sector, often using two types of strategies to enter this market: the direct and indirect approach. The direct approach is used when banks set up internal units within the banks to serve small clients or those who wish to establish their own separate companies. The indirect approach is used by commercial banks to work with existing microfinance institutions (MFIs). This approach usually takes the form of outsourcing retail operations, lending to MFIs, or providing infrastructure and services to MFIs.
In countries such as Mongolia (Khan Bank), Haiti (Sogebank), Lebanon (Jammal Trust Bank), India (ICICI Bank), and Turkey (Garanti Bank), commercial banks enter the microfinance market successfully directly or indirectly by partnering with MFIs. Where banks choose to partner with MFIs, the partnership has enabled the MFIs in these countries to use the banks’ infrastructure, cut costs, and expand their market. At the same time, banks benefit from the MFIs’ knowledge of local clients and the opportunity to learn about and access untapped markets.
Although the costs of assessing small clients may be high for banks, with the right partnership, banks can readily bring these customers into the banking system at little or no cost. In this regard, banks may start with the lowest level of engagement by providing infrastructure to MFIs such as cashier services, an ATM network, or office rental in return for fees or rents. Providing these services should allow banks to learn more about small clients and their transaction patterns. This learning process would eventually enable banks to progress as appropriate toward the highest levels of engagement in the microfinance business, where they outsource retail operations or set up their own internal units or subsidiaries.
The responsibility of financing SMEs need no longer rest with the government. It is time to leverage on the strength of Thailand’s commercial banks and the MFIs’ relationship-lending skills in bringing financial services to small clients. Instead of providing subsidized loans or setting up an entirely new institution specializing in microfinance, the government should provide the necessary infrastructure and incentives to encourage commercial banks to become more active players in this market. This can be done by developing a better credit information platform of SMEs and MFIs such as centralized credit information and credit ratings to help reduce information costs for banks looking to partner with MFIs. Government financial support schemes as well as interest rate ceilings for micro loans should be gradually phased out to enable commercial banks to compete in this market on cost. Such shift in policy thinking would be a welcome change and would make lending to SMEs more market driven, not a burden to the government, and sustainable in the long run.
Commercial Banks and SME Financing