Role of Central Banks in Promoting Small and Medium Scale Enterprises

This collaborative project aims to present and compare the latest developments and policies concerning small and medium scale enterprises (SMEs) in SEACEN member economies. In doing so, the focus is placed on central banks¡¯ initiatives and involvement in national policy to promote SME. The paper presents major country-specific issues, including definition of SMEs, comparison of various financing schemes, and highlights of best-achieved financing policy measures in member economies. There is a variation in the definition of SME used in the individual SEACEN economies, reflecting differences in policy emphasis and SMEs¡¯ level of development. As a group, the sector dominates business establishments in SEACEN economies, accounting for 98 percent of total business establishments. It is also the biggest employer as it employs almost 70 percent of labour force. Thus, fluctuations in SME business lead to fluctuations in overall employment. In term of value added to GDP, the SME contributes to less than half of total GDP. It is also observed that the SME¡¯s contribution to GDP has not improved significantly over the years even though they employ more labour than before. In general, SME business is clustered in the commerce and agricultural sector. While financing continues to be one of the major problems in the SME sector, current measures to channel fund to the SMEs tend to be mostly market-based, via official financial intermediaries or banks. Efforts are focused on completing market by providing information, encouraging banks to specialise on small loans, organising meetings between banks and SMEs, and simplifying regulations and procedures to make it easier for SMEs to apply for loans. Although banks are the main provider of financing for SMEs, they have not been the major player in financing high-tech start-up and restructuring of SMEs. In this respect, bank financing may have to be supplemented by access to capital market, venture capitalist and business angels networking. Most SEACEN member central banks are generally active in supporting SME, with the measures being directing more toward strengthening and enhancing lending capacity of banks to the SMEs. These include obligatory loan portfolio share requirements, lowering risk weight on SME loans, building infrastructure for swift funding to SMEs, providing consultancy to the SMEs in applying for loans, enhancing SMEs credit information by establishing a credit information bureau, and providing credit guarantee. The study recommends that central banks should assist the SME sector through sustainable financing channel to help support profitable growth of SMEs. Market completing and promotional policies are preferred to protective and subsidy based or directed lending. In our opinion, there are three main areas where central bank should be involved in promotion of SME. They are: i) financial market infrastructure development; ii) enhancing availability of credit information; and iii) swift, safe and secure banking for small borrowers.