Why Asean needs a regional SME bank

Sathish Govind

Multinational corporations, with their global advantage and financial heft, could potentially gobble up the market share of Asean SMEs unless a regional bank steps into the picture.

Multinational corporations, with their global advantage and financial heft, could potentially gobble up the market share of Asean SMEs unless a regional bank steps into the picture. SMEs in the region are plagued by their reluctance to expand from their original base into other countries. They are bogged down by several factors.

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The fear of foreign markets (though the Asean is an extension of their existing base), their inability to adopt modern technology at a rapid pace, the difficulties they will face ahead of the adoption of the industrial revolution 4.0 standards, coupled with the fact that most of them are yet to offer card payments or online sourcing, are among the factors that increases Asean SME vulnerability.

They are in dire straits facing the MNC onslaught, and they need the necessary financial framework to keep their market share.

In this aspect, would an Asean SME bank be the answer to their growing woes?

An SME banking framework, to facilitate Asean integration and the consolidation of the entity’s industrial chain, could help regional SMEs beat the odds.

MNCs are bound to benefit from the Asean’s financial and investment framework, facilitating the ease of doing business in the region.

But regional SMEs are still struggling in keeping up with the MNCs despite the implementation of the Asean Economic Community, a landmark intra-trade community devised to empower regional businesses.

Besides, the MNCs have a global advantage as international corporations that are strong enough to gobble up the market share of the local SMEs, with their superior technology and better marketing skills. Not to mention, they also have huge financial backing.

The AEC, with its marketplace of 600 million individuals, is an investment powerhouse that has seen a massive boost in foreign direct investment. But how will the SMEs survive by remaining out of touch of the regional supply chain while big players with global links continue to invade the region?

The SME banking integration framework

With the AEC in the making, analysts and political leaders are pressing SMEs in the region to seize opportunities by migrating and integrating into the region or perish in the sidelines.

The AEC is one of the three pillars to achieve a cohesive Asean community, incorporating political, security and social-cultural pillars.

It is destined to create a single market and production base, fully integrated into the global economy.

It boasts five core elements that would allow free flow of goods and services, investment, capital and skilled labour. Considering 97 percent of the Asean landscape is made by SMEs, it is imperative that action starts now.

However, SMEs in the region are plagued by their reluctance to expand from their original base into other countries where the grass could be greener. They face many challenges that have to be addressed, and they need to move from their current state of affairs – that is being small and local – by taking advantage of the AEC.

An Asean SME banking framework could support them by making it easier for the SMEs to get necessary funding and expand regionally.

The fact is, a local SME in Cambodia will not get the same treatment it gets from local banks or from an SME bank in Phnom Penh if it relocates to Malaysia or even Vietnam.

There are limitations and since they are not known in the foreign markets, their chances of securing funds abroad is scarce.

The force of the EIB

An Asean SME bank could follow the lead of the European Investment Bank (EIB), which provides smaller businesses in difficulty, accessibility to finance, adapting to the changing needs of SMEs and mid-caps, in the European Union (EU).

While 90 percent of EIB lending occurs within the EU, 10 percent occurs in outside markets such as Southeast Europe and Iceland.

According to Bloomberg, in 2018, the bank reportedly had over 3,500 employees, thus it has the potential to create jobs in the financial sector.

Its power base has increased substantially and in 2015, the EIB Group lent EUR 84.5 billion to support infrastructure, SMEs and innovation, and climate-related projects.

It is the largest multilateral climate financier in the world and has an AAA credit rating.

The EIB has also forged a strategic partnership with the European Commission under the ‘Investment Plan for Europe’, with plans for initial funding of EUR 21 billion in total investment in strategic projects of at least EUR 315 billion from 2015 to 2017, thanks to the fund’s potential to mobilise private investment.

In 2017 alone, the EIB Group financed SMEs and mid-caps across the globe at a record EUR 29.6 billion (EIB Group), supporting 285,800 smaller companies, which employ 3.9 million people.

The AEC is nearing the completion of its Asean Banking Integration Framework, with the immediate objective to achieve a more integrated banking sector in the Asean.

This framework will be strengthened with a SME facilitation system, making it easier for them to get funding and loans to spearhead their businesses outside their country of origin.

Regional SMEs are basically family-based businesses or smaller corporations, though some are public-listed.

While the public firms may find it easier to survive in this modern day and age, due to the extent of the support they get from banking institutions in their countries of origin, the smaller enterprises may face impending doom.

Expanding within the AEC will increase sales, offering greater economies of scale, driving down the cost of production and increase profitability.

Aside from this, by going regional and international, they will have easier access to supplies, labour and funding.

The relative importance of SMEs in terms of contribution to GDP of the various Asean countries underscores the need to galvanise an action plan that would ensure the economic wellbeing of these nations.

Time for a Task Force

This is salient in the wake of the onslaught by powerful multinationals that would appear on the horizon, in the near future, to replace these industries.A task-force must be established to coordinate the activities of these various SMEs.

Another way to move forward will be for SMEs to collaborate with other SMEs in the region in order to expand their financial muscle and market share. It is through such sheer strength that regional SMEs will be able to match the power of multinationals, thus increasing their existing market share.

Integrating into the regional supply chain would also provide them an opportunity to limit their risk of being too dependent on one country.

This will protect them from political upheavals, similar to the situation in Thailand. SMEs would have greater access to the talent pool and educated skilled professionals, altogether. CapCam

Sathish Govind
Analyst

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