is there potential in sme capital markets in asia

Is There Potential in SME Capital Markets in Asia?

ADBI-Bank Indonesia Workshop on Financing SMEs

15-16 October 2014, Jakarta

Shigehiro Shinozaki

Financial Sector Specialist (SME Finance)

Office of Regional Economic Integration (OREI)

Asian Development Bank

This presentation was prepared under the author’s responsibility. The views expressed here do not necessarily reflect

the views or policies of ADB, its Board of Directors, or the governments they represent. ADB does not guarantee the

accuracy of the data included in this presentation and accepts no responsibility for any consequences of their use.

YHA

Typewritten Text

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.

Agenda

I. SMEs in ADB Economies

II. Awareness of Issues

III. SME Capital Markets in Asia

IV. Demands on SMEs

V. Supply-Side Views

VI. Critical Factors Needed to Create an SME Market

VII. Brainstorming

VIII. The Ways to Move Forward

2

SMEs in ADB Economies

*manufacturing vallue-added for Japan, the Republic of Korea, the Philippines, and India.Sources: ADB (2014), Asia SME Finance Monitor 2013; S.Shinozaki (2012), ADB Working Paper Series on Regional Economic Integration, No.104.

3

� SMEs are the backbone of Asia’s economies. Further development can support inclusive growth.

4

Awareness of Issues

Value of Credit

Gap

($ billion)

Number of

Firms

(million)

With Deposit

Accounts

With Loans or

Overdraft

East Asia MSMEs 900–1,100 170–205 115–140 17–19

Formal SMEs 250–310[11%–14%]

11.2–13.6 7.6–9.1 2.0–2.5

South Asia MSMEs 310–370 75–91 47–57 15–17

Formal SMEs 30–40[29%–35%]

2.0–2.8 1.0–1.2 0.5–0.7

Central Asia &

Eastern Europe

MSMEs 215-260 18-22 13-17 8-10

Formal SMEs 105-130[16%-20%]

2.7-3.3 2.5-3.0 1.5-1.9

High-income OECD MSMEs 1,000-1,300 56-68 51-63 24-30

Formal SMEs 600-700[5-6%]

11-14 11-14 5-6

Total

excluding high-income OECD

MSMEs 2,100–2,500 365–445 240–290 75–90

Formal SMEs 700–850[21%–26%]

25–30 18–22 8–10

[ ] = gap as percentage of current outstanding SME credit, MSMEs=micro, small, and medium enterprises, OECD=Organisation for Economic Co-operation and Development, SMEs=small and medium enterprises.Note: Regional classification is based on the World Bank definition.Source: Shinozaki (2013). Recomposed data from IFC and McKinsey & Company. 2010. Two trillion and counting. Washington, DC: IFC.

� Supply-Demand Gap in SME Finance

Awareness of Issues

[ ] = legal basis; TNP2K = National Team for the Acceleration of poverty reduction, Office of the Vice President; SME Corp. = SME Corporation Malaysia; MSMED Council = Micro, Small and Medium Enterprise Development Council; OSMEP = Office of Small and MediumEnterprises Promotion.Source: ADB (2014), Asia SME Finance Monitor 2013.

5

Country SME Development Policy Responsible Agency

Outlines

Indonesia National Strategy for Financial Inclusion (2012)

TNP2K Increase public access to financial services among all layers of the population.Target groups: (1) Low-income poor; (2) Working poor/MSMEs; (3) Near poor

[…]

Malaysia SME Master Plan 2012-2020 SME Corp. - Innovation and technology adaptation- Human capital development- Access to financing- Market access- Legal and regulatory environment- Infrastructure

[SME Corp Act 1995]

Philippines MSME Development Plan 2011-2016

MSMED Council

- Enabling business environment- Access to finance- Access to markets- Increasing productivity and efficiency

[Magna Carta for MSMEs]

Thailand 3rd SME Promotion Plan OSMEP - Enabling business environment- Competitiveness- Balanced growth- Business capability

[SMEs Promotion Act 2000]

� Access to finance is a critical part of SME policies.

National SME Policies in Selected Asian Countries

Source: Compilation from data on ADB Asia SME Finance Monitor 2013. *central bank initiative. **funded by private and public sectors.

Awareness of Issues

6

� SME finance policies focus on bankability; more work needed on nonbank financing?

Region Country Refinancing facility

APEX financing facility

Direct lending

Public CG

Interest rate subsidy

Mandatory lending

Tax incentive

Public credit bureau

Secured transaction law

Central Asia

Kazakhstan ... ✓(Damu) ... ✓(Damu) ✓(Damu) ... ... ... ...

East Asia China, People’s Rep. of

... ✓(SME Development Fund)

... ✓ ✓ ... ... ✓ ✓(2007)

Korea, Rep of ✓(Aggregate credit ceiling)

... ... ✓ ... ... ... ... ...

South Asia

Bangladesh ✓(BB Fund, etc.) ... ✓(SME Foundation)

... ✓(SME Foundation)

... ... ... ...

India ✓(central bank schemes)

✓(SME Growth Fund, etc.)

✓ ✓ ✓(SBI) ... ... ✓** ...

Sri Lanka ✓(Revolving fund, etc.)

... ✓* ✓* ✓*✓(max.credit

exposure)

✓(for banks)

... ...

Southeast Asia

Cambodia ... ... ... ... ... ... ... ... ✓(2007)

Indonesia ✓(Revolving fund; KUR)

... ... ✓ ✓ ... ... ✓ ...

Malaysia ✓(central bank special funds)

✓(SME Investment Programme)

✓ ✓ ... ... ✓ ...

Philippines ... ... ✓(ASENSO Program)

✓ ✓✓(10% for

MSMEs)

... ✓ ✓(2013)

Thailand ... ... ✓ ✓ ... ... ... ✓** ✓(draft)

Viet Nam ... ✓(public funds) ✓ ✓(CGFs) ... ... ... ✓ ...

ThePacific

PNG ... ... ✓ ✓ ✓ ... ... ... ✓

Solomon Is. ... ✓(public funds) ✓* ... ... ... ... ✓(2008)

A. China, People’s Rep. of B. India 0% 20% 40% 60% 80%

Bank loan

Non-bank loan

Venture capital

MFIs

Family, relatives & friends

Credit among corporations

Public loan program

Informal loan

Corporate bond/debenture

Equity finance

Own fund

Present

Future

0% 20% 40% 60% 80%

Bank loan

Non-bank loan

Venture capital

MFIs



Public loan program

Informal loan


Equity finance

Own fund

Present

Future

C. Korea, Rep. of D. Malaysia 0% 20% 40% 60% 80%

Bank loan

Non-bank loan

Venture capital

MFIs



Public loan program

Informal loan


Equity finance

Own fund

Present

Future

0% 20% 40% 60% 80%

Bank loan

Non-bank loan

Venture capital

MFIs



Public loan program

Informal loan


Equity finance

Own fund

Present

Future

7

Funding Instruments: Present and Future

Note: Present = funding instruments accessed. Future = funding instruments desired in the future. Valid samples: the People’s Republic of China: 303; India: 40; the Republic of Korea: 28; and Malaysia: 60. [demand-side surveys]Source: S.Shinozaki (2014), ADB Working Paper Series on Regional Economic Integration, No.121. p.21.

� SMEs seek to access formal finance & diversified long-term funding instruments for stable growth of business, diminishing informal finance dependency.

Awareness of Issues - Funding Needs

8

Note: “Present” refers to provided loans; “Future” refers to desired loans. Valid samples: the People’s Republic of China: 303; India: 40; the Republic of Korea: 28; and Malaysia: 60. [demand-side surveys]Source: S.Shinozaki (2014), ADB Working Paper Series on Regional Economic Integration, No.121. p.22.

Loan Term: Present and Future

Awareness of Issues - Funding Needs

A. China, People’s Rep. of B. India

Present Future Present Future 0% 20% 40% 60%

Bank loan

Non-bank

loan

Venture

capital

Short-term ( <1y) Mid-term (1-5 y)

Long-term (>5 y)

0% 20% 40% 60%

Bank loan

Non-bank

loan

Venture

capital


Long-term (>5 y)

0% 20% 40% 60%

Bank loan

Non-bank

loan

Venture

capital


Long-term (>5 y)

0% 20% 40% 60%

Bank loan

Non-bank

loan

Venture

capital


Long-term (>5 y)

C. Korea, Rep. of D. Malaysia

Present Future Present Future 0% 20% 40% 60%

Bank loan

Non-bank

loan

Venture

capital


Long-term (>5 y)

0% 20% 40% 60%

Bank loan

Non-bank

loan

Venture

capital


Long-term (>5 y)

0% 20% 40% 60%

Bank loan

Non-bank

loan

Venture

capital


Long-term (>5 y)

0% 20% 40% 60%

Bank loan

Non-bank

loan

Venture

capital


Long-term (>5 y)

� Limit of bank financing for SMEs under the continuing global financial uncertainty.

i. The root causes of financial crisis will change as global financial system is advanced.

ii. Well-established SME finance policies will alleviate credit contraction, but cannot remove it entirely.

iii. Possible negative impact of Basel III.

� Diversification of financing modality is necessary.

i. No one-size-fits-all financing solution.

ii. Long-term funding needs will increase as SMEs grow further.

iii. A comprehensive menu of policy options on SME finance is needed, with innovation.

Awareness of Issues

9

Market Capitalization (% of GDP)

10

SME Board/PRC,

5.5

ChiNext/PRC, 1.7

GEM/HKG, 3.8

KOSDAQ/KOR, 8.6

ACE/MAL, 0.7

CATALIST/SIN, 2.0

mai/THA, 1.2

0.0

2.0

4.0

6.0

8.0

10.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

% of GDP

SME Board/PRC,

701

ChiNext/PRC, 355

GEM/HKG, 179

KOSDAQ/KOR,

1,005

ACE/MAL, 112

CATALIST/SIN, 139

mai/THA, 81

0

200

400

600

800

1000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Number

GDP = gross domestic product; SME = small and medium-sized enterprise.Note: Emerging Asia comprises the People’s Republic of China; Hong Kong, China; the Republic of Korea; Malaysia, Singapore, and Thailand.Source: S.Shinozaki (2014), ADB Working Paper Series on Regional Economic Integration, No.121. p.4.

Number of Listed Companies

SME Capital Markets in Asia - Equity

� A trial and error for creating an equity financing venue for high-end SMEs in Asia.

SME Capital Markets in Asia - Equity

� Challenges to Developing SME Capital Markets in Thailand

0

50

100

150

200

250

300

350

400

450

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

Market capitalization (B mil.) Trading value (B mil.)

Trading volume (mil. shares) mai index

(B mil.; mil. shares) (Index)

(4)

(2)

-

2

4

6

8

10

12

14

16

-

10

20

30

40

50

60

70

80

90

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

Initial public offerings Move to main board Move from main board

Delisted No. of listed companies

(No. of listed companies) (Number)

Market Performance - mai Number of Listed Companies - mai

Source: S.Shinozaki (2014), ADB Working Paper Series on Regional Economic Integration No.121. p.6.

11

12

SME = small and medium-sized enterprise. * SME bonds = SME Joint Bond issuance + SME Collective Note issuance.Source: S.Shinozaki (2014), ADB Working Paper Series on Regional Economic Integration No.121. p.7.

China, People’s Rep. of Korea, Rep. of

0.00

0.04

0.08

0.12

0.16

0.20

0

2

4

6

8

10

12

2007 2008 2009 2010 2011 2012

SME Joint Bond SME Collective Note SME bonds to total* (%)

(CNY bil.) (%)

0.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

SME bond issuance SME bonds to total (%)

(KRW tril.) (%)

SME Capital Markets in Asia - Bonds

� A new movement of creating an SME bond market.

Economy Regulators Laws and Regulations SME Markets Market Type

China, People’s Rep of

China Securities Regulatory Commission (CSRC)

• Law on Funds for Investment in Securities (2005)

• Law on securities (2005)• Regulation on the Administration

of Futures Trading (2007)• Securities Investment Fund Law

(2012)

SME Board/Shenzhen Stock Exchange (SZSE)

ChiNext (venture board)/SZSE

SME Private Placement Bond market

Equity/exchange market


Bond/OTC market

People’s Bank of China (PBOC)

National Association of Financial Market Institutional Investors (NAFMII)

— SME Collective Note market

Bond/inter-bank market

National Development and Reform Commission (NDRC)

— SME Joint Bond market Bond/inter-bank and exchange market

Hong Kong, China

Securities and Futures Commission (SFC)

• Securities and Futures Ordinance• Companies Ordinance

Growth Enterprise Market (GEM)/Stock Exchange of Hong Kong (SEHK)


India Securities and Exchange Board of India (SEBI)

• Securities Laws Ordinance (2013)• Depositories Act (1996)• SEBI Act (1992) and Regulations• Securities Contracts Act (1956)

SME Exchange/Bombay Stock Exchange (BSE)

Emerge/National Stock Exchange of India (NSE)



SME = small and medium-sized enterprise.Source: Author’s compilation from various laws and regulations, and stock exchange websites.

SME Capital Markets in Asia - Regulations

13

Economy Regulators Laws and Regulations SME Markets Market Type

Korea, Rep. of Financial Services Commission (FSC)

Financial Supervisory Service (FSS)

• Financial Investment Service and Capital Markets Act (2011)

• Act on External Audit of Stock Companies (2010)

• Certified Public Accountant Act (2011)

• Secured Bond Trust Act (2011)• Registration of Bonds and

Debentures Act (2011)• Asset-Backed Securitization Act

(2011)

KOSDAQ/Korea Exchange (KRX)

KONEX/KRX

FreeBoard/Korea Financial Investment Association (KOFIA)

Freebond/KOFIA



Equity/OTC market

Bond/OTC market (qualified institutional buyer [QIB] system)

Malaysia Securities Commission Malaysia (SCM)

• Capital Markets and Services Act (2007) and Amendments (2010, 2011, 2012)

ACE Market/Bursa Malaysia


MyULM (online trading platform)[concept launched in May 2013]

Unlisted securities/OTC market (not yet established)

Singapore Monetary Authority of Singapore (MAS)

• Securities Industry Act (1973) Catalist/Singapore Exchange (SGX)


Thailand Securities and Exchange Commission (SEC)

• Securities and Exchange Act (1992) and Amendments (1999, 2003, 2008)

• Securities Exchange of Thailand Act and Regulations

Market for Alternative Investment (mai)/SecuritiesExchange of Thailand (SET)


SME = small and medium-sized enterprise.Source: Author’s compilation from various laws and regulations, and stock exchange websites.

SME Capital Markets in Asia - Regulations

14

Demands on SMEs

Companies Willing to Utilize a Specialized Equity/Bond Market

Yes, 77%

No, 23%

Expected Benefits Reasons for Hesitating to Access

0% 20% 40% 60% 80% 100%

Funding alternative besides banks

increased

Social credibility of the company

increased

Easiness of funding increased

Opportunity of bank borrowing

increased (synergy)

Production level increased

Employee’s incentive to work

enhanced

More employees hired

Opportunity of intl. trade

increased

yes somewhat yes

0% 20% 40% 60% 80%

Procedures to issue stocks

complicated

Issuing stocks costly

Present lending instruments

enough

Own funds/retained profits

enough

yes somewhat yes

China, People’s Rep. of

Source: S.Shinozaki (2014), ADB Working Paper Series on Regional Economic Integration, No.121. p.25. Valid samples: 303. 15

Demands on SMEs


Equity Bond

Yes, 73%

Somewhat yes,

10%

Neutral, 15%

No, 3%

Yes, 58%

Somewhat yes,

15%

Neutral, 20%

No, 8%


0% 20% 40% 60% 80% 100%


increased



increased


increased (synergy)



increased



enhanced

yes somewhat yes

0% 20% 40% 60% 80%


complicated



enough


enough

yes somewhat yes

India


Demands on SMEs


Equity Bond

Yes, 61%Somewhat yes,

21%

Neutral, 11%

Somewhat no,

7%

Yes, 57%Somewhat yes,

25%

Neutral, 7%

Somewhat no,

11%


0% 20% 40% 60% 80% 100%


increased



increased


increased



increased (synergy)



enhanced

yes somewhat yes

0% 20% 40% 60% 80%


complicated



enough


enough

yes somewhat yes

Korea, Rep. of


Demands on SMEsCompanies Willing to Utilize a Specialized Equity/Bond Market

Equity Bond

Yes, 22%

Somewhat yes,

32%

Neutral, 33%

Somewhat no,

3% No, 10%

Yes, 22%

Somewhat yes,

30%

Neutral, 32%

Somewhat no,

5% No, 12%


0% 20% 40% 60% 80% 100%


increased



increased


increased



enhanced


increased (synergy)


yes somewhat yes

0% 20% 40% 60% 80%


complicated



enough


enough

yes somewhat yes

Malaysia


19

Supply-Side Views0% 20% 40% 60% 80% 100%

China, People's Rep. of

India

Korea, Rep. of

Malaysia

yes somewhat yes

(Reasons)

A. China, People’s Rep. of B. India

0% 20% 40% 60% 80% 100%

Demands on SMEs

increased

Limits of bank financing

for SMEs require

A precautionary measure

against crises

SME growth accelerated

through providing

growth capital

yes somewhat yes

0% 20% 40% 60% 80% 100%

Demands on SMEs

increased


for SMEs require


against crises


through providing

growth capital

yes somewhat yes

C. Korea, Rep. of

D. Malaysia

0% 20% 40% 60% 80% 100%

Demands on SMEs

increased


for SMEs require


against crises


through providing

growth capital

yes somewhat yes

0% 20% 40% 60% 80% 100%

Demands on SMEs

increased


for SMEs require


against crises


through providing

growth capital

yes somewhat yes

Valid samples: the People’s Republic of China: 22; India: 37; the Republic of Korea: 20; and Malaysia: 26. [supply-side surveys,including regulators and policy makers].Source: S.Shinozaki (2014), ADB Working Paper Series on Regional Economic Integration, No.121. pp.10-11.

Is Developing Capital Markets for SMEs a Policy Priority?

A. China, People’s Rep. of B. India 0% 20% 40% 60% 80% 100%

Deregulation

New regulations & rules

A comprehensive policy/strategy

Tax incentive schemes for issuers &

investors

Policy measures to develop investor

base

Policy measures to develop the base

of professionals supporting SMEs

Market literacy for SMEs & investors

SME database

yes somewhat yes

0% 20% 40% 60% 80% 100%

Deregulation




investors


base




SME database

yes somewhat yes

C. Korea, Rep. of D. Malaysia 0% 20% 40% 60% 80% 100%

Deregulation




investors


base




SME database

yes somewhat yes

0% 20% 40% 60% 80% 100%

Deregulation




investors


base




SME database

yes somewhat yes

20

Supply-Side Views

Valid samples: the People’s Republic of China: 22; India: 37; the Republic of Korea: 20; and Malaysia: 26. [supply-side surveys,including regulators and policy makers].Source: S.Shinozaki (2014), ADB Working Paper Series on Regional Economic Integration, No.121. pp.11-12.

Policy Actions Necessary to Develop SME Capital Markets?

Supply-Side Views

Domestic Market AIM/Intl. Market for

Professional Investors

Organized OTC

(SRO-Operated)

Market for Unlisted

SME Shares (Non-

SRO-Operated)

China, People's Rep. of 72.7% 50.0% 63.6% 45.5% 31.8%

India 67.6% 40.5% 24.3% 32.4% 24.3%

Korea, Rep. of 75.0% 45.0% 45.0% 50.0% 25.0%

Malaysia 50.0% 53.8% 42.3% 65.4% 23.1%

Why Your Selected Market(s) Appropriate for SMEs?

Ammendment of

existing laws and

regulations possible

Cost efficient market

structure

Risk control easy Appropriate as a

preparatory market for

SMEs before tapping

regular markets

Contribute to social

welfare enhancement


India 67.6% 70.3% 43.2% 40.5% 24.3%

Korea, Rep. of 50.0% 35.0% 70.0% 55.0% 10.0%

Malaysia 50.0% 61.5% 53.8% 69.2% 26.9%

Sopcial Capital Market

Exchange Market Non-Exchange Market

What type of market would be appropriate for SMEs?

Valid samples: the People’s Republic of China: 22; India: 37; the Republic of Korea: 20; and Malaysia: 26. [supply-side surveys, including regulators and policy makers].Source: S.Shinozaki (2014), ADB Working Paper Series on Regional Economic Integration, No.121. p.15.

21

Supply-Side Views

What type of market would NOT be appropriate for SMEs?

Valid samples: the People’s Republic of China: 22; India: 37; the Republic of Korea: 20; and Malaysia: 26. [supply-side surveys, including regulators and policy makers].Source: S.Shinozaki (2014), ADB Working Paper Series on Regional Economic Integration, No.121. p.15.

Domestic Market AIM/Intl. Market for

Professional Investors

Organized OTC

(SRO-Operated)

Market for Unlisted

SME Shares (Non-

SRO-Operated)


India 16.2% 21.6% 32.4% 45.9% 35.1%

Korea, Rep. of 20.0% 25.0% 25.0% 30.0% 40.0%

Malaysia 34.6% 15.4% 15.4% 11.5% 26.9%

Why Your Selected Market(s) NOT Appropriate for SMEs?

Still lack of SMEs'

ability to tap capital

market

No profitable business

for underwriter/

broker/dealer

No potential SME

issuers

No potential investor

base

No professionals for

supporting SMEs

Establishment of

new market costly

China, People's Rep. of 22.7% 4.5% 9.1% 36.4% 27.3% 18.2%

India 29.7% 29.7% 29.7% 70.3% 40.5% 35.1%

Korea, Rep. of 25.0% 30.0% 5.0% 60.0% 20.0% 5.0%

Malaysia 42.3% 30.8% 19.2% 42.3% 23.1% 26.9%

Sopcial Capital Market

Exchange Market Non-Exchange Market

22

Critical Factors Needed to Create an SME Market

China, People’s Rep. of

23

Supply-Side Demand-Side

0% 20% 40% 60% 80% 100%

Well-established regulatory & supervisory

framework

A mechanism supporting SMEs to prepare

disclosure documents

Simplify listing procedures

A mechanism enhancing liquidity of SME

stocks/bonds

Small amount funding available for SMEs

Information dissemination of SME capital

markets


investors

Raising fund speedily for SMEs

Low cost for establishing & operating

SME markets

Low cost for listing & maintenance for

SMEs

Simplify disclosure requirements

Exclude foreign issuers

Exclude foreign investors

yes

somewhat yes

0% 20% 40% 60% 80% 100%

Raising fund speedily

Small amount funding available


Low cost for listing & maintenance





investors


framework


stocks/bonds


markets


Exclude foreign investorsyes

somewhat yes

Valid samples: [supply-side] 22; [demand-side] 303.Source: S.Shinozaki (2014), ADB Working Paper Series on Regional Economic Integration, No.121. p.17.


India

24


0% 20% 40% 60% 80% 100%




markets


stocks/bonds


SMEs




framework



SME markets



investors



yes

somewhat yes

0% 20% 40% 60% 80% 100%






investors


stocks/bonds


framework





markets



somewhat yes



Korea, Rep. of

25


0% 20% 40% 60% 80% 100%



SMEs


SME markets


stocks/bonds



framework


investors


markets







yes

somewhat yes

0% 20% 40% 60% 80% 100%


framework


investors



markets




stocks/bonds







somewhat yes



Malaysia

26


0% 20% 40% 60% 80% 100%


investors


SME markets



stocks/bonds




markets


SMEs


framework






yes

somewhat yes

0% 20% 40% 60% 80% 100%






investors


framework


markets


stocks/bonds






somewhat yes


� What is the “Exercise” market?

i. Equity market for unlisted SMEs that are willing to raise growth capital

ii. Independent from the regular market of stock exchange

iii. Learning venue on market rules & responsibility for SMEs before tapping the regular market (preparatory market)

iv. A mechanism supporting SMEs in equity finance from various angles

v. Channel investment capital into “smaller but growing” firms

vi. Lead high-end SMEs to business growth cycle

Brainstorming 1: “Exercise” Equity Market for SMEs

27

� Benefitsi. For SMEs:

• improve corporate culture, learning market rules (disclosure) & the importance of increased “corporate value” for growth

• take a funding alternative besides borrowing• strengthen capital necessary to achieve further growth, balancing debt• enhance social credibility of business & employee’s incentive to work• promote easiness of bank borrowing

ii. For the market side:

• increase the depth of capital market through involving a new layer of potential issuers to the market, i.e., SMEs

� Challengesi. Demand creation mechanism:

• fostering investor base/VC industry• supporting professionals (e.g., CPAs)• government support (e.g., tax incentive)

ii. Sustainable market mechanism:• liquidity enhancement (e.g., market making and stock valuation)• cost management for market operation

Brainstorming 1: “Exercise” Equity Market for SMEs

28

� What is the social capital market?

i. Stock market for social enterprises & impact investors

ii. Social enterprises: business-oriented not-for-profits, or mission-oriented for-profits, having a social and/or environmental mission at the core of their work but seek to operate in a financially sustainable manner

- e.g., MFIs, SMEs in education, energy, health & agro-business, etc.

iii. Impact investors: investors seeking to make investments that create positive social and environmental impact beyond financial return (J.P. Morgan, 2010).

- e.g., social VC funds, microfinance investment vehicles, pension funds, mutual fund managers, institutional fund managers, sovereign wealth funds, endowments/family foundations, etc.

Brainstorming 2: Social Capital Market

29

Sources: ADB (2011), Impact Investors in Asia; ADB (2012), India Social Enterprise Landscape Report.

� Investment opportunity (est.)

� $400bil.-$1tril. over the next decade in housing, rural water delivery, maternal health, primary education, and financial services (J.P. Morgan, 2010)

� Demand for a social stock exchange� 74% of investors who are not currently impact investing would

consider transacting on a social stock exchange (ADB Survey, 2011)

� Social stock exchanges� A platform where social enterprises can raise capital through offerings of

shares, bonds, or other financial instruments

� Impact Exchange [Asia & Africa] and UK Social Stock Exchange (2013)

Brainstorming 2: Social Capital Market

30

Source: ADB (2011), Impact Investors in Asia, pp.10, 12, 21 & 26.

� New environment requires new financing solutions for SMEs.

� Economic integration (e.g., AEC in 2015) and the increasing trend of intraregional FDI flows stimulate the structural change of SME business models in Asia.

� A globalized economy will bring more SME internationalization, particularly in the supporting industry, and bring new financing demands from SMEs, e.g., funding in offshore currencies.

� Increased importance of supply chain finance and trade finance to involve SMEs in value chains, expecting SME productivity enhancement.

� Long-term financing for investment, including SMEs, is key for sustainable growth and job creation in Asia.

� Globalization will encourage Asia’s policy makers to use more flexible and holistic policy approaches for SME financing beyond measures already established.

The Ways to Move Forward

31

� Developing SME capital markets can be a priority policy area as part of national growth strategies.

� A comprehensive policy to create investor base and enhance market literacy for SMEs is needed to develop a new market.

� Appropriate market type for SMEs (exchange market or organized OTC) is different by country.

� Securities firms & investors having interest in SMEs exist, while size & cost issues create a barrier to involve them in the SME market.

� Investors see social enterprises as promising SMEs for investment, while a perception gap exists btw investors & market organizers in social capital market.

� Critical factors to create an SME market: (i) simple, (ii) low cost, (iii) fast transaction, (iv) liquidity, (v) supporting professionals, (vi) policy framework, and (vii) market literacy


32

33

Seed/Start-up/Early Expansion Steadily growing

Founders, family

& friends

Sophisticated investors

-VC funds

-Financial institutions

-Institutional investors

-Listed large firms with sufficient

investment experiences, etc.

Venture capital

Size of

investment

capital

Growth

capital

needed

Firms’

life

cycle

Exchange markets

IPO

Organized OTC

Private equity,

mezzanine finance,

etc.

Angel investors

Formal & informal

lending

-Domestic market for

emerging corporations

(SME board)

-International market for

smaller growing firms

(AIM)

-Trading venue for

unlisted SME shares

(non-exchange markets)

Source: Author’s illustration.

Growth Capital Funding and Risk Capital Providers



34

Exchange market Non-exchange market Exchange market Non-exchange market

(OTC) (OTC)

S M S M

Existing exchange

platform to be utilized

Newly created trading

platform but small scale

Existing exchange

platform to be utilized

Newly created trading

platform but small scale

S S M S

Existing capital market

regulations and

amendments

Self-regulatory rules and

amendments✓ Existing capital market

regulations and

amendments

Self-regulatory rules and

amendments

✓ Regulatory coordination

between the capital

market regulator and line

Ministries

Policy Cost - - L L

✓

✓

✓

✓

✓

✓

Subsidies for application and listing fees

Socialization/market literacy/training for potential SME issuers

and investors

Supporting infrastructure: e.g., increased CPAs, outsourcing to

SMEs for disclosure support

Fostering sophisticated investor base and venture capital

industry

(Business Aspect) (Social Aspect)

Infrastructure

Cost

Regulatory

Cost

Policy coordination betw een the capital market regulator and

line Ministries

Tax incentive schemes for SME issuers and investors

SME Capital Market

A. Private Initiastive B. Public Initiative

Private Sector Development Financial Inclusion

National Growth Strategies

SME = small and medium-sized enterprise. Notes: S = expected small costs, M = expected medium costs, L = expected large costs. Source: Author’s compilation.

Cost Structure of SME Market


35

Source: Author’s illustration.

Core Elements to Develop an SME Market

Asian Development Bank (ADB) and Organisation for Economic Co-operation and Development (OECD). 2014. ADB-OECD Study on Enhancing Financial Accessibility for SMEs: Lessons from Recent Crises. Manila: ADB. [http://www.adb.org/publications/adb-oecd-study-enhancing-financial-accessibility-smes-lessons-recent-crises]

ADB. 2014. Asia SME Finance Monitor 2013. Manila: ADB [http://www.adb.org/publications/asia-small-and-medium-sized-enterprise-sme-finance-monitor-2013]

References

36

Thank you for your attention.

For further questions:

Shigehiro Shinozaki

Financial Sector Specialist (SME Finance)

Office of Regional Economic Integration

Asian Development Bank

Email: [email protected]

37

is there potential in sme capital markets in asia

Documents

formal smes

sme marketvii

asian development bank

policies of adb

asia sme finance monitor

sme capital markets

adb economiesii

sme financeawareness