The bank credit for small and mediums enterprises (smes): Rerspectives and challenges

Nội dung text: The bank credit for small and mediums enterprises (smes): Rerspectives and challenges

1. THE BANK CREDIT FOR SMALL AND MEDIUMS ENTERPRISES (SMES): RERSPECTIVES AND CHALLENGES Miss. Vongphakone VONGSOUPHANH vongphakone_bibol@yahoo.com The banking institute, the bank of the Lao PDR Mr. Sisomphou SINGDALA aksonephu@gmail.com The international cooperation department, the bank of the Lao PDR Mrs. Vanmany AMPHONEPHONG vanmany5599@gmail.com The financial institute, the ministry of finance, Lao PDR Abstract: This paper will provide the overall of banking credit for private sector and particularly for Small and Mediums Enterprises (SMEs). This paper also focus analysis what the challenges for the bank credit to SMEs in the pass and the future. In addition, this paper also explorer what the limitation for SMEs to access the bank credit. After that, this research will discuss and provide suggestions for Laos government, Bank of the Lao P.D.R and commercial bank as well as Small and Mediums Enterprises (SMEs) to promote the banking credit for private sector and particularly for SMEs in Laos for the future. Therefore, this paper divide in to 3 sessions like as: (1). Introduction, (2). Methodology, (3). The bank credit for Small and Mediums Enterprises (SMEs): Perspectives and Challenges The prospective and the challenges, (4). Discussion and Conclusion and (5). References Key words: bank credit, SMEs, private sector, bank, perspectives and challenges. Introduction The main purpose of this paper is to review and assess the bank credit for private sector especially for Small Medium Enterprise (SEMs) in the period of 2014- 2018. In the recent year, the private sector has importance for development national economic and become a largest contributor to economic growth accounted for 16 percent of GDP, state owned enterprise (SOC) became the second contributor to economic growth accounted for 8.2 percent of GDP and the last contributor was state -private joint ventures accounted for 7.3 percent (www.jclao.com). These figures demonstrate that the private sector has the more important role to drive economic growth and therefore bank credit related to promote the private sector’s high growth 159
2. and reduce the poverty of Laos in now day ( Sisomphou, Entitled “Lao PDR’s bank credit for private sector in the period of 1990-2017: Perspectives and Challenges”, 2018). To recognize the private sector’s role to push the economic growth, the Lao government focus to promote private sector for driving the national economic throughout reforms of national business environment like as: improve the legal system related enterprise areas like: amendment some legal related to enterprise areas: the promotion of investment law(2016), the accounting law (2013), the Value- added tax law (2018), tax law (2014), the enterprise law (2013), the promotion SMEs Law (2011), the commercial bank law (2006), the electronic transactions Law (2012), the competition enterprise law (2015), stock market law (2012), (www.na.gov.la). The 8th Five-Year National Socio-economic Development Plan (2016-2020) “8th NSEDP” also emphases the role of private sector to contribute for development economic and significantly contribute for reduction poverty and setup target to Reduce the household poverty rate to 5 percent and proportion of poor villages to 10 percent by 2020. To achieve the goal that set up in “8th NSEDP” so the total of investment in society will be achieved at approximately 30% of GDP (approximately 223 trillion kip) therefore (1) government budget financed investment 9-11% of total investment, (2) Loans and grants investment 12–16% of total investment, (3) Domestic and foreign private sector investment 54–57% of total investment, (4) Investment through bank credits 19–21% of total investment. According the above figure of target, the bank sector actively to improve and find the resolutions to reduce the barriers to promote the credit accession of society especially SMEs or Micro- enterprise to improve the management capacity and competitiveness. Implementation was in pursuit of the Resolutions of IX Party Congress, particularly stability building for the People’s Democratic Republic state and promoting local ownership. Therefore, the Party’s Central Politburo issued the Resolution No.03/PCP dated 15 Feb 2012 regarding “Building province as a strategic unit, district as a strong comprehensive unit and village as a development unit” and the Government issued the Prime Minister’s Instruction No.16/PM dated 15 June 2012 regarding identification of 15 ministries, 51 districts and 108 villages for piloting from 2012 to 2013. Through three years of the implementation, various sectors at central and local levels, together with the population, have put their attention to the practical side of the 3-builds, which are the contributing factors in the development of local infrastructure and overall change, which can be seen as follows: • Target ministries and all provinces developed legislation with regard to the division of responsibility between central and local levels, and between provinces, districts and villages, especially on benefit sharing on revenue and expenses management at the local level and budget allocation at the district level. There has 160
3. been a committee in charge of supervising piloting activities in each sector and locality, acting as a focal point for coordinating, supporting and monitoring the actual progress of target districts and villages, particularly the division of responsibility to each level that resulted in gradual increase in local ownership. • Fifteen target ministries have sent their officials for local visits, both short and long term, in order to build stronger localities, especially in the areas of administration, justice, district- and village-level fund management, and to build a socio-economic development plan and manage government invested projects at village level. • Patriotism competition was encouraged and development village built, to actively support the 3-builds works nationwide. • 943 government-invested projects were implemented at the 3-builds district and village levels, with total investment funding of 248 billion kip, to support and build conditions for various developments. • The Policy Bank has supplied loans to people for the amount of 261.65 billion kip to promote commercial productions. • Party organization and those at village level as well as other working units within the experimented 3-builds villages have been reorganized for the sake of all aspects, strengthening political thinking, leadership and management working styles, implementation of support policy towards unwaged staff and encouraging greater sense of ownership and responsibility of staff at village level. • The potential of localities has been explored and expanded, especially the increase in goods production; organization of production groups linking with professionals, bank credits and marketing also increased. Granting of ownership, responsibility and interest sharing to targeted districts and villages has been started; especially, the collection of income for the national budget increased in every district and the targeted 3-builds villages. • Poverty reduction of the population and the construction of development villages have progressed, as shown in poverty evaluation and development results from Decree 309/PM in 2014, that there remained only four poor villages (Saiphuttana village, Sing district, Bokeo province; Phienghong 8th FIVE-YEAR NATIONAL SOCIO-ECONOMIC DEVELOPMENT PLAN (2016-2020) 68 village, Nonghad district, Xiengkhouang province;Pajudon village, Taoy district, Salavan province; and Xiengluang village, Dukkung district, Xekong province). There are 1,322 poor families, 82 development villages, 109 crime-free villages and 98 traditional villages. Nevertheless, the actual implementation has been 161
4. slow and was not sufficiently effective due to the legislation on delegation of authority and responsibility of some central sectors still being too general, some localities did not take ownership at their local level and were waiting for instruction from the central level; there is limited capacity of district staff in developing financial management and a district staff plan; the identification of the pilot districts and villages was not in accordance with the conditions of the resolution and the instruction from the higher authorities; and, at the same time, the dissemination of the resolution and instruction at the local level was delayed, leading to weak practical implementation by local people (The 8th Five-Year National Socio-economic Development Plan (2016–2020) “8th NSEDP”). Therefore to ensure the implement of 3 built of Lao People's Revolutionary Party (LPRP) “Building province as a strategic unit, district as a strong comprehensive unit and village as a development unit” that the bank sector also become a necessary sector beside other sector. Particularly to supply credit for public project and private project as well as SMEs. Characters of private enterprise of Lao PDR is Small Medium Enterprise (SMEs), the most SMEs limit to access financial resource due to low governance - business operation and small asset that reason to challenge for credit to private sector or SMEs (Phouphet Kyophilavong, 2008) and according to report SMEs around more than 90 percent of total register firm were faced the obstacles to access bank credit (www.xinhuanet.com, news on 28/6/2018). In addition, 23rd August 2018, H.E. Thongloun Sisoulith, Prime Minister of the Lao PDR had enacted the Order NO: 12/PN related the implement of 8 measures to push economic growth. The 5th measure of the Order to promote SMEs and domestic production and the detail like: 1). Continues amendment the Degree of the promotion fund for SMEs to improve the policies, mechanism and measures for development SMEs to implementing effective SME policies to push inclusive growth. 2). To develop the SMEs fund and push the owned commercial bank and the commercial bank to contribute credit for SMEs. Thereby, authors chose to research “The bank credit for Small and Mediums Enterprises (SMEs) in the period of 2014-2018: Perspectives and Challenges” to explorer what perspectives and challenges as well as suggestions to promote bank credit to private sector in general and particularly to SMEs in future. 2. Methodology Authors will collect the statistic and figure about bank credit in the period of 2014-2018. The bank credit will collected from annually financial report of each 162
5. banks of Laos bank system but exclude the policy bank (PB). Author analyze and compare the amount of bank credit for SMEs to the total credit or to bank credit for public sector. To make clearly the trend of bank credit for SMEs in the future. Author focus to describe the status of bank credit for SMEs in the period of 2014-2018 like as prospective and challenges. 3. The bank credit for Small and Mediums Enterprises (SMEs): Perspectives and Challenges. 3.1. The prospective. The bank credit for private sector which increasing trend year by year. The bank credit for private sector not only contribute to a large enterprise but also Small Medium Enterprise (SMEs). The bank credit for private sector not only provide credit for the large city and large province but also contribute credit to rural areas forward facilitate for enterprise and households access formal financial services and reducing poverty (ADB, 2015). Furthermore, the bank credit for private sector contribute directly to private enterprises improve themself to enhance their efficiency, extend business operation and promote their competitive capacity on globalization context. Moreover, the bank credit for the private sector has the role in reduction of imbalance of economic structure ownership (between state owned enterprise and private enterprise) toward reducing monopoly in national economy and promote domestic competition. In period 1975-1986, economy of Lao P.D.R was the centrally planned economy which support from Soviet. There was only state owned enterprise and no private enterprise, the economy was dominated 100 percent by state owned enterprise (SOE). There was a less completion and none credit for private sector. Therefore, in period 1983-1986, GDP average was approximately 53.77 billion kip (US$ 6,437,978.93) and GDP growth rate average was around 4 percent (ADB, Key indicator, 1985-2017). In period between 1986 and 2017), Economic of Lao P.D.R had transited from the centrally planned economy to market-oriented economy under New Economic Mechanism (NEM). We recognized various of owned enterprise in economy. In this period, the bank credit for private sector had growth in every year. The bank credit for private sector contributed to promote private sector improve themself, enhance their competitive capacity and business operation, as well as promote Small Medium Enterprise (SMEs) and Micro Enterprise access formal financial services. Therefore, the private sector becomes a largest contributor to economic growth and plays a key role in creating economic. Average GDP increase as follow: 53.8 billion kip, 682,06 billion kip, 81,609.9 billion kip in 1982, 1992, 2012 and 2017 which growth rate average around 6.5 percent in period from 1990 to 2017 (ADB, key indicator, 1985-2017). 163
6. 3.2. The challenges for bank credit to Small Medium Enterprise (SME) 3.2.1. The challenges from the bank system The banking system of Lao P.D.R has been dominated by the state-owned commercial bank (SCOBs) in assets, deposits as well as credits. More than 7 years after banking system reforms initiated in 1988, the state owned commercial (SCOBs) had a large Non Performing Loans which collected from the centrally planned economy. On the other hand, SCOBs a large Non Performing Loans due to a weak cooperation, business operation, risk management, governance, etc. In early 1990s the SCOBs were insolvency seriously. At the time, BOL continued to extend credit to support the government irrigation project throughout budget in 1998 which significant credit volume to government 171 billion kip and to irrigation project 147 billion kip they were around a half of the new credit extend 1998. (IMF,2000,2002). Lao P.D.R always faces the a fiscal deficit and a current account deficit during in period between 1985 and 2017 which a fiscal deficit averaged approximately 5-6 percent of GDP and a current account deficit averaged approximately 300-350 percent of GDP (ADB, Key indicator, 1985-2017). In front of challenges, the government of Lao P.D.R used to intervene the banking system by lending direct to SOEs and refinancing budget by fund from banking sector (IMF, 2000, 2002, 2004). These problems increased significantly in recent years when slower economic growth due to government of Lao P.D.R conducted policies limit investment in forest and mining sector so the revenue may significantly affect. Therefore, the government could not play for public project then enterprise default with the commercial banks and SOCBs dominated and main contributor a credit to government project then SOCBs are faced insolvency seriously this situation authors call “Triangular debt” it mean that the government was debt to enterprise (contractors) and enterprise (contractors) were a debt to commercial banks. Before 2014, the situations occurred a lot, and now day Lao government of Lao P.D.R commitment to stop using baking refinancing the budget or limit lending direct to SOEs. Although, in practice the SOCBs provided credit to the private companies were contractor of the government project, but the real borrowers were the government. This situation call “Disguised fiscal deficit financing by the banking sector” (IMF,2017; JACA, 2005). The above challenges always affect directly and indirectly to the bank credit for private sector. On the other hand, the banking system of characterize of the Lao P.D.R that the bank of the Lao PDR (BOL) less autonomy. According to previously BOL law (Enacted in 1990 and first amendment in 1995), BOL’s all key monetary policies, action plans and strategy before implementation it should be approved by the government normally this process take long time. To improve this situation, BOL law in 2018, as amended by the Second. However, BOL has less autonomy because the governor is a member of the Council of Ministers and is responsible before the 164
7. government for success and shortcomings in the implementation of his/her duties in accordance with the Law on the Government of Lao P.D.R. BOL has duties state management of monetary policy and banking sector across the country (BOL law, 2018). The domestic banking market were dominated by SCOBs the from 1988 to date, so the banking system has less competition inefficient therefore it will limit or challenge to contribute credit to economy and specifically credit to private sector. The above situation, it deems the main cause to explain why the banking system of Lao PDR is uncompetitive and inefficient. The banking system was dominated by SOCBs over banking areas as follow: asset, deposit and credit. In practice the asset of SOCBs to total asset of banking system ratio has downtrend but still too high ratio (more than 40 percent). When compared between the state owned commercial banks (SOCBs) and the non state owned commercial banks (private bank, joint venture bank and foreign bank branch) about number bank, asset, deposit and credit as follow: SOCBs have only 3 banks but market share of asset, deposit and credit are over 50 percent and none SOCBs have 38 banks but market share of asset, deposit and credit are less than 49 percent. Table1: Summary ratio of asset, deposit and credit of different type of ownership bank in 2005 and in period 2012-2017. (Unit: percent to total) 2005 2012 20013 2014 2015 2016 2017 Asset 100 100 100 100 100 100 100 SCOBs 57 56 53 52 46 44 43 Private bank 13 18 19 17 19 18 18 Joint venture bank 7 9 11 10 10 10 10 Foreign bank branch 23 17 18 21 26 28 28 Deposit 100 100 100 100 100 100 100 SCOBs 66 64 62 59 59 59 59 Private bank 16 17 22 20 21 21 21 Joint venture bank 7 7 8 8 8 8 7 Foreign bank branch 11 12 8 9 12 12 14 Credit 100 100 100 100 100 100 100 SCOBs 67 65 59 54 47 5 49 Private bank 14 15 19 19 21 20 20 Joint venture bank 6 7 9 9 14 13 13 Foreign bank branch 13 13 14 17 17 17 17 (www.bol.gov.com.la) 165
8. Figure 1: Ratio of asset of bank in 2005 and in period 2012-2017. 57 60 56 53 52 46 50 44 43 40 30 20 10 0 2005 2012 20013 2014 2015 2016 2017 SCOBs Private bank Joint venture bank Foreign bank branch Figure 2: Ratio of deposit of bank in 2005 and in period 2012-2017. 70 66 64 62 59 59 59 59 60 50 40 30 20 10 0 2005 2012 20013 2014 2015 2016 2017 SCOBs Private bank Joint venture bank Foreign bank branch Figure 3: Ratio of credit of bank in 2005 and in period 2012-2017. 80 67 70 65 59 60 54 47 49 50 40 30 20 10 5 0 2005 2012 20013 2014 2015 2016 2017 SCOBs Private bank Joint venture bank Foreign bank branch However, the non performing loans (NPLs) increased main from state owned commercial banks account for 60% in 1999 and reduce to 35% in 2005 (Asian Pacific Rural and Agricultural Credit Association- APRA, 2006) 166
9. 3.2.3. The challenges from Small Medium Enterprise (SMEs ) Characters of private enterprise of Lao PDR is Small Medium Enterprise (SMEs), the most SMEs limit to access financial resource due to low governance - business operation and small asset that reason to challenge for credit to private sector or SMEs (Phouphet Kyophilavong, 2008) and according to report SMEs around more than 90 percent of total register firm were faced the obstacles to access bank credit (www.xinhuanet.com, news on 28/6/2018). However, in 2000, the commercial bank law was enacted to promote commercial bank. Impractical, the Lao financial - banking sector are dominated by state owned enterprise and state owned commercial bank and they are not active provide credit in rural areas nor microfinance (APRACA, 2006). Therefor, Small Medium Enterprise (SMEs) limit to access the formal financial sources as well as the bank’s credit. It also reflected from Lao P.D.R was rank 116 of 189 rated countries in the category “getting credit” when some Asian countries like Cambodia, Thailand and Vietnam rank 12, 89, 36, respectively (Kristina Spang, 2015). Authors summary the main characters of SMEs in Laos: (1). Poor cooperation, (2) Limit Marketing & Advertising, (4). The low value added goods, (5), The low skill, (6). Asset Limits, (7). The family business. 4. Discussion and Conclusion To promote bank credit for private sector, Lao government should develop economy which sustainable growth. Try to reduce budget deficit, current account deficit and inflation. Making policies focus on promotion of production goods and export and promote import goods/material for reproduction. Implement of commitment to stop lending direct to SOEs completely and refinancing budget deficit by banking system. Lao government should review the prudential regulator related promotion of SME access financial fund from the banking system to increase the bank’s credit to private sector. The bank of the Lao PDR (BOL) should consider to increase the autonomy in higher level to operate the monetary policy and continually improve inspection, supervision and credit risk management. As well as restructure early as possible for two state owned commercial banks (SOCBs) by privatization to enhance the bank’s efficiency - operation and also promote more competitor in the banking market furthermore to promote the bank commercial contribute credit to private sector. To ensure SMEs could access the financial fund from the banking system, BOL should facilitate environment for SMEs development and improve their competitive capacity to ensure support consumer goods/service for domestic market and export in order to reduce import also improve the payment of balance (POB) as well as reduce current 167
10. account deficit in the future that the most challenge for the exchange rate and international reserve. Also, actively promote credit to rural area and private sector. Specially, the commercial banks should have a credit policy in order to promote the loan for SMEs. The enterprise play the role of promotion credit to private sector because if the enterprise have a good performance or a good business operation, it would increase the enterprise’s rating and let the enterprise access the bank’s credit smoothly in particular and in general the private sector. Therefore, enterprise should develop and improve themself to meet the minimum credit criteria of the bank to enhance their efficiency and limit the non performing loan (NPL). Avoid using the credit which a wrong purpose, continually improve governance, internal management, credit management in order to more competitive capacity and profit capacity and it also contributes to promote the bank’s credit to private sector. 5. Conclusion Based on The Eighth Five-Year National Socio- Economic Development Plan (2016-2020), April, 2016, author realized that Lao government has a priority for promotion of Small Medium Enterprise (SMEs) in order to be strengthening, development, more competitive and more contribute to socio-economy of Lao P.D.R in the future and to promote SMEs to access a financial sources is the priority framework. On the other hand, to achieve the goal of The Eighth Five-Year National Socio- Economic Development Plan (2016-2020), the total of investment is worth 223,000 trillion kip approximated 30 percent of GDP. Base on financial market context, Lao P.D.R is bank -based. Therefore, the bank system be main supply credit channel to investment so to ensure contribution credit to economy smoothly and efficiency the country need the bank system perform in a full function and more competition. To day, private sector increase efficiency and contribute economic growth beside state owned sector reveal the negative inside their operation. However, private sector still weak and enterprise is major small medium enterprise account for 90% of total enterprise (Soukvina Philavanh, 2016). So authorities believed that through this paper will provide general of economic and banking reforms and evidence related credit to private sector about advantages and disadvantages will contribute more understanding of background of bank system and characteristic to help policy maker issue the policy and measure to promote bank credit for private sector as well as SMEs. 168
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