Financial reform's effect on SMEs<\/p>\n
By Sahala Sianipar<\/p>\n
JAKARTA (JP): The recent Asia Pacific Economic Cooperation
\n(APEC) Ministerial meeting in Christchurch, New Zealand issued a
\njoint statement on the need to empower member countries' small
\nand medium enterprises (SMEs) to take more proactive roles in the
\ncontext of the region's economic recovery process. Governments in
\nthe Asia-Pacific region have begun considering ways to increase
\nthe level of SMEs' participation in the economic recover process.<\/p>\n
Governments argue that SMEs have higher degrees of resilience
\ncompared to large business, thus policy options during the crisis
\nshould include measures that place greater priority on SMEs. The
\ndebate on the role of SMEs has intensified in the context of the
\nimpact of Indonesia's economic crisis. Many parties point out the
\nneed for greater government involvement to empower SMEs, so they
\ncan emerge as \"main economic pillars\" postcrisis.<\/p>\n
The Indonesian government's plan to reposition Bank Rakyat
\nIndonesia (BRI) to serve SMEs, and the establishment of PT
\nPermodalan Nasional Madani (PNM) illustrate some of the
\ngovernment's measures to develop stronger SMEs. On the other
\nhand, experts and many SMEs argue that a lower degree of
\ngovernment intervention will contribute more positively to the
\ndevelopment of competitive SMEs, such as the creation of a
\nconducive business environment with lower transaction costs.<\/p>\n
Despite the continuous debate on the role of the government
\nrelating to SME development, there is one critical area that
\ndeserves greater attention by SME policy planners, that is, the
\nimpact of Indonesia's financial reform on the development of
\nSMEs. To what extent have policy planners considered the
\nimplications of the banking restructuring program on SMEs? To
\nwhat extent have policy planners searched for \"alternative\"
\nfinancing mechanisms for SMEs that will not jeopardize the
\nmacroeconomic stability for many years to come?<\/p>\n
Indeed, most of the government's current measures on SMEs have
\nfocused on the financing issue (for example, the introduction of
\n17 subsidized credit schemes for cooperatives and small
\nbusiness). However, they have not answered the fundamental issue
\nat hand, which is SMEs' access to financing mechanisms.<\/p>\n
Before the economic crisis, SMEs faced obstacles to obtain
\nequal and fair access to capital. The central bank's requirement
\nto allocate 20 percent of all commercial banks' loan portfolio to
\nSMEs was not implemented effectively due to the high cost of
\nfunds to channel SME loans. SMEs relied heavily on self-financing
\nor other \"independent\" capital generation mechanisms (for
\nexample, supplier credit or friends and family).<\/p>\n
Consequently, SMEs' exposure to the current banking crisis has
\nbeen minimum. By the end of 1996, Indonesia's foreign loan
\n(public and private) constituted 73 percent of the country's GDP,
\ncompared to the Philippines, 64 percent, Thailand, 63 percent,
\nMalaysia, 56 percent, Singapore, 15 percent, and Taiwan, 12
\npercent (Far Eastern Economic Review, March 1999). Large
\nenterprises in Indonesia and other Asian countries contributed to
\nthe high level of foreign loan exposure in the region. These
\ncountries, including Indonesia, must undertake a massive banking
\nrestructuring program that will cause major downsizing in the
\nindustry.<\/p>\n
The current banking restructuring program in Indonesia should
\naim to create a transparent, efficient and fair banking industry
\nfor all economic actors, including SMEs. Should the banking
\nrestructuring effort lead to the creation of a special bank
\nservicing only SMEs? What will it take to enhance SME access to
\nthe banking sector?<\/p>\n
An important outcome to the banking restructuring program
\nshould be a higher degree of transparency, efficiency and
\nfairness in the banking sector. Having said that, the creation of
\na special bank to service SME clients only may not bring the
\ndesired long-term result. Banking executives know that SME loans
\nare more expensive than other commercial-lending programs.<\/p>\n
Commercial banks should not be forced to channel funds to SMEs
\n(as in the past) because banks do not necessarily have the
\ncapacity to do so. Commercial banks should decide, based on their
\nown research and recommendations, to extend loans to their SME
\nclients. A transparent and fair banking industry is a
\nprerequisite to improve SME access to banking services.
\nCommercial banks will realize the profitability of servicing SME
\nclients only if they have the capacity to administer such
\nprograms.<\/p>\n
An alternative to SME financing is the capital market
\nindustry. The capital market (i.e. The Jakarta Stock Exchange as
\nthe main equity market) should aim to position itself as an
\nalternative capital generating vehicle to all economic actors
\nincluding SMEs. The restructuring of the capital market industry
\nshould contribute to enhance the level of transparency, fairness
\nand liquidity in the market.<\/p>\n
While capital market authorities have joined the intensive
\ndebate on ways to service SMEs, such as through the establishment
\nof two-board trading system, it is still premature to state that
\nthe capital market can fulfill its intended mission as an
\nalternative financing institution. There are a series of
\nfundamental issues at hand, namely listing costs, structure of
\nownership, market liquidity and efficiency and financial
\ndisclosure requirements, that need to be considered as part of
\nthe capital market restructuring effort. Can we attribute the
\nrecent gain of share prices in Jakarta to the fundamental
\nrecovery of listed companies? While there are fundamental reasons
\nfor those listed firms' shares with export potential, such as in
\nagribusiness, to increase, there have not been any significant
\nchange to many listed companies' fundamentals that can explain
\nthe recent gain in the stock exchange.<\/p>\n
The majority of listed companies are still saddled with a high
\nlevel of foreign debts that have not been restructured
\nsuccessfully. Information on these companies foreign exposure
\n(e.g. currency and derivative losses) has not been fully
\ndisclosed, which has prohibited successful debt restructuring.<\/p>\n
The absence of accurate information also suggests that the
\nmarket efficiency level in the country's equity market remains
\nlow. The low level of market efficiency increases risk level in
\nthe market that ultimately imposes additional costs to potential
\nlisted firms and investors. Indonesia's capital market
\nauthorities should gradually transform the market to be more
\nefficient and transparent through concrete measures, such as the
\nimprovement of financial disclosure and listing requirements to
\nmatch other international capital markets.<\/p>\n
The capital market needs also to diversify its listed
\ncompanies portfolio, which is currently dominated by
\nmanufacturing, property-related and financial services firms.<\/p>\n
While the capital market industry goes through major
\nrestructuring, policymakers should also consider ways to enhance
\nthe growth of venture capital industry. Venture capital plays an
\nintermediary role for SMEs wishing to tap into the capital market
\nbut need management and financial assistance in their early
\nstages of development.<\/p>\n
Taiwan's venture capital industry has grown to be the largest
\nin Asia, with clients ranging from computer chip manufacturers to
\nbiotechnology firms all over the world. A key element to a
\nthriving venture capital industry is a business environment with
\nlower transaction costs that will encourage a greater level of
\nentrepreneurship and risk-taking behavior. Indonesia has many
\npotential entrepreneurs, but the high level of transaction costs
\n(due to burdensome licensing procedures, excessive levies,
\nlimited access to capital, poor competition environment and a
\ndiscriminatory tax regime) has hindered their growth potential.<\/p>\n
The current financial restructuring program in Indonesia
\nshould address such policy constraints if the ultimate objective
\nis to promote efficient and transparent financial industry
\nincluding venture capital, for the benefit of economic actors,
\nparticularly SMEs. The growth of venture capital will have
\nsignificant contribution to the development of the Indonesian
\ncapital market industry and SMEs.<\/p>\n
In closing, successful financial reform will need concrete
\nlong-term objectives, and if one of the objectives is to enhance
\nthe growth of competitive SMEs, then the creation of a conducive,
\ntransparent and efficient business environment is urgently
\nneeded.<\/p>\n
The writer manages small medium enterprise and economics
\nprograms for a nonprofit organization in Jakarta. Opinions
\nexpressed are his own.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/financial-reforms-effect-on-smes-1447893297",
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"sponsor": "Okusi Associates",
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