Strengthening SMEs Employment

and
Financial Education
Naoyuki Yoshino

Dean, Asian Development Bank Institute (ADBI)

Professor Emeritus, Keio University, Japan
nyoshino@adbi.org, yoshino@econ.keio.ac.jp
Farhad Taghizadeh-Hesary
Assistant Professor, Keio University, Japan
Peter Morgan
Research Consultant, ADBI, Japan
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.

SMEs in Japan

Indonesia: SME contribution to GDP

Small and Medium Sized Enterprise

(SME)
Venture business
Toyota, Honda, SONY, Seven-Eleven
HONDA had no support by the government
HONDA could not borrow money
Mitsubishi-bank made loans to HONDA.
How to finance start-up business ?
Human capital development in SME
5

Asian Financial Markets Main Features

1. Bank-dominated financial system
2. Small share of bond markets --->
Needs for long term financing
3. Lack of long-term investors such as
pension funds and Life insurance
4, Bench mark bond market (soverign bond)
Infrastructure bond, corporate bond
5. High percentage of SMEs
6. Large share or Microcredit (finance
companies); Lack of venture capital
7

High share of Deposits and Insurance

Diversification of Households Asset Allocation
Figure: Financial Asset Allocation of the US, Japan and Germany (Yen trillion)

Source: Yoshino (2013)

Very high savings rate in Asia

Access to Finance by SMEs and

Large Firms in Japan

10

Barriers for SMEs in Accessing Financial

Institutions, Collateral,High rate

Source: ADBOECD study on enhancing financial accessibility for SMEs: Lessons from recent crises.
Mandaluyong City, Philippines: Asian Development Bank, 2013

11

Borrower, Lender and Market

Borrower
SMEs
Individuals

Market

Lender
Banks
MicroCredit

Information Asymmetry
Especially SME market

12

Four Accounts by SME

1, Account to show Bankers
2, Account to show tax authority
3, His own account
4, Account to show to his wife
13

Regulation of Money Lenders in Rural Regions

1, Money lenders, Interest rate = 96% in Japan
2, License --- Banks
Registration --- Finance companies
3, New Finance Company Law
(i) Highest interest rate = 20%
(ii) Amount of borrowing < 1/3 of Income
(iii) Minimum Capital requirement
(iv) Paper test to run business
(v) Self regulatory organization was set up
two steps of monitoring and supervision
14
(vi) Consumers complaints (hotline)

15

Analysis of SME credit risk

using Asian data
Selection of the variables
Principal Component Analysis
Cluster Analysis

16

Examined Variable

17

Cluster analysis:
the average linkage method
Dendogram Using Average Linkage

18

Factor Loadings of Financial Variables

after Direct Oblimin Rotation

19

Credit Rating of SMEs using Asian Data

(i) Sales
(ii) Assets
(iii) Liquidity (Cash)
(iv) Total Debt

20

Grouping Based on Principal Component

(Z1-Z2) and Cluster Analysis

21

Credit Rating for SMEs

by Use of SME Database
1, Credit Rating is only applicable to large
companies
2, Credit Rating for SMEs based on SME Data
3, Three ranking of SMEs (Asian country)
Five ranking of SMEs (Japans case)
4, SME data can produce default risk ratio
5, Risk based Interest rate
22

Financial Education for SMEs

1, Bookkeeping
2, Daily revenue and expenses
3, Long-term planning
4, Accurate reporting of their business
5, Reduce default loan losses
SME database
6, Asset Management by SME
7, Pension Contribution by SME (50%)
Asset Management of Reserves
23

Financial Education for SMEs

Education Program and Textbooks
1, Financial Planners Association
Individual Borrowing
2, Central Bank of Japan
Text books, Educate School teachers
Regional Education Program
3, Various Financial Associations
Bankers Association, Stock Exchange
24

Possible Solutions
Start up businesses, farmers
Hometown Investment
Trust Funds
------------------------------------------------A Stable Way to Supply Risk Capital
Yoshino, Naoyuki; Kaji Sahoko (Eds.)
2013, IX, 98 p. 41 illus.,20 illus. in color
Available Formats:
ebook
Hardcover
Springer

25

Japan, Cambodia
Vietnam, Peru

Investment in SMEs and start up businesses

26

28

Bank-based SME financing and

regional financing to riskier borrowers
1. Bank Loans to relatively safer borrower
2. Hometown Investment Trust Funds/

E-Finance, Internet financing

Banking
Banking
Safer
Account
Account

SMEs
Riskier
Borrowers

Hometown
Investment

Trust
Funds

Depositors

Investors
29

Financial Education of Japan (1)

1, Purpose of financial education

To study economic and financial activities of
the society in order to be able to enhance
quality of life and well being.
2, Survey data from 4462 schools (by JSDA)
(Junior high school and high school of Japan)
2.1 Number of hours to be taught
<Junior high school>
1st year (Zero hours, 74.2%)
2nd year (Zero hours, 55.2%)
3rd year (1-5 hours,44.6%, 6-10 hours,37.2%)

Financial Education of Japan (2)

<High school>
1st year (Zero hours, 19.5%, 1-5 hours 60.9%)
2nd year (Zero hours, 34.5%, 1-5 hours 49.3%)
3rd year (Zero hours, 21.9%, 1-5 hours 47.7%)
<Overall teachers evaluation>
Absolutely Not enough time to teach, 12.1%
Lack of time to teach financial education, 48.9%
2,2 Reasons for time shortage in financial
education
(1)Allocate much more time to other subjects
84.7%
(2)Teachers do not know the subject well, 32.5%
(3) Short statements in the textbook, 24.3%

Teachers specialty and background

Junior high and high school of Japan
1, Department of Education 27.3 %
2, Department of Households living 28.8 %
3, Department of Economics & Business 13.1%
4, Department of Literature
13.1 %
5, Law School
7.7 %
5, Department of Sociology
4.8 %
6, Department of Science and Engineering2.4%

3, For the Students

3-1, Subjects are nothing to do with their
daily life
72.9 %
3-2, Difficult to understand,
62.6 %
3-3, Lack of textbook material
26.6 %
4, Teachers awareness
(1)Teachers admit importance of financial
education in order to become wise consumer,
73.5%
(2) Students need to understand how financial
activities are related to economy and society
44.6%

Financial Education in Schools (Japan)

1, Secondary School and High School
taught in the courses of Civics, Home
economics
- Many teachers are not well trained.
2, Financial education in primary schools
is taught in Homemaking courses.
3, Very few hours are allocated to financial
education
4, It is regarded as a shame to make money
by financial investments
5, Retirees from financial institutions could teach
financial economics to students (Video lectures)
34

Financial Education to prepare for old age

1, Government Support --- Pension System
401K (Self protection for asset allocation)
2, Life Insurance --- long term savings by individuals
3, long term institutional investors
infrastructure investment (long-term funding)
4, Various financial products will be sold in Asia
5, Risks and Returns, individual financial education

Population Ageing of Japan

36

History/projections of dependency ratio (age

65+/age 15-64)highest in the Asian NIEs,
followed by PRC and Thailand
70

60

PRC
Hong Kong,China

50

India
Indonesia
Japan

40

Korea
Malaysia

30

Philippines
Singapore

20

Thailand
Taipei,China

10

Viet Nam

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

Sources: World Population Prospects: The 2010 Revision of the United Nations Population Division, available at:
http://data.un.org/Data.aspx?q=dependency+ratio&d=PopDiv&f=variableID%3a44 and Council for economic
planning and development (Taipei,China), available at: http://www.cepd.gov.tw/encontent/m1.aspx?sNo=0001457,
accessed 28.12.2012

37

Macroeconomic Effects of
Financial Education
(1) Households Asset Allocation (Diversification)
Y-T = S + C = (D + B) + C
(1)
(2) Aggregate Supply Curve (SME and corporation)
Y-Yf = a1Pe-P) + a2 L + a3 (B + v)
...(2)
(3) Aggregate Demand Curve (Corporate fund raising)
Y = b1 + b2 L + b3 (B + u) + b4 G
(3)
(4) Increase of Expected Outputs
dE(Y)= -b2 dE(S) + b3 (dE(S) + du)
....(4)
(5) Risks V(y) = b3 V(S+u)
.(5)

38

Transmission of Financial Education

1, Efficient allocation of assets by households
2, Long-term perspectives of households
3, Enhance wellbeing of individuals
4, Diversify corporate fund raising
5, Efficient cash management of corporations
6, Transparency of SMEs (small enterprises)
7, Promotion of start-up businesses
8, Enhance economic growth
9, Efficient time allocation of financial institutions
39

Analytical Framework for

ASEAN SMEs

1. Human resource development

(skills, entrepreneurship)
2. Financial market development (SME financing)
3. Technology policy and R&D
4. Marketing SMEs products and services
(market access)
YSME = AF(N, K) where (K = Kp+ Kg)
Kp = Banks, Bond Markets, Stock Markets, Own Capital
Kg = Infrastructure
Also Important

Business-enabling environment and entry barriers for new firms

Presence of industrial clusters/production networks

Networking and dissemination of information

40

Credit Guarantee Mechanism

1, Credit Guarantee System
100% guarantee
Partial guarantee (80%, 20%)
2, Differential guarantee ratio to each bank
based on their past performance
3, How to avoid moral hazard ?
4, To reduce information asymmetry
5, Temporary downturn of business
6, Structural downturn of business
7, Costs and Benefits of Credit Guarantee

41

Optimal Credit Guarantee for SMEs

42

E-banking, E-commerce
Trade Credit
high cost of sending money to overseas
New Entry to Transaction service
traditional banks are so expensive
SONY and YEON retail store enter the business
Finger print identification by mobile phone
Individual identification SS number
Start up Business --- Internet disclosure
43

References

Yoshino N. Kaji, S. (2013) Hometown Investment Trust

Funds, Springer, March 2013

Yoshino, N., Taghizadeh Hesary, F. (2015), Analytical

Framework on Credit Risks for Financing SMEs in Asia.
Asia-Pacific Development Journal. United Nations
Economic and Social Commission for Asia and the Pacific
44
(UN-ESCAP)