“Financial Support Programs for SME in Cambodia: Lesson learnt from Japanese Cases.”
by
KONG Puthikar
A proposal submitted to in partial fulfillment of the requirements for the degree of M.A.
Graduate School of Asia Pacific Studies Development Economics Professor Yamamoto Susumu
I. Background to the Study:
Cambodia government has been initiating a strong effort to various reforms on its economy started from 1980s and reached a dramatic turning point in 1989, when State Economy transformed to Free Market Economy. Private property rights were restored and price control was abolished. State-owned enterprises were privatized and increased incentives were provided to local and foreign private investment. After a free election in 1993, large number of foreign direct investments, mainly from Asian countries following by Europe and USA, flourished in the country. And in October 2004, Cambodia successfully became a member of WTO after 10 years of negotiations and preparations legal frameworks to comply with the standard level (WTO, 2006).
Cambodian economy is generally composed of three main sectors-agriculture, industry and service. Industry and service sectors are strongly supported by exporting garment products to US and EU markets and the growing number of tourists visiting Cambodia, especially Angkor Wat. While the share of agriculture to overall economy has been declining, industry and service sectors have been growing their importance to the economy. Based on Key Economic Indicators produced by ADB in 2006, percentage of industry sector in Cambodia economy had increased from 17.9% in 1998 to 27.7% in 2004 while service sector had increased very slightly from 35.0% to 36.2% for the same period. Small and medium enterprises (including micro) account for 99% of firm and consuming 45% of employment from a labor force market (ADB, 2006).
Understanding the importance of SMEs contributing to solving both economic and social problems for the country, the government has been taking diverse actions to ensure the smooth growth of the sector. Rectangular Strategy, which was proposed by the government at the beginning of its third term on July 2004, stated enhancing SMEs as one of the action toward Private Sector Development and Employment Generation. Moreover, SME Subcommittee was established in August 2004 through Decision No. 46 SSR comprised of 9 ministries and Chamber of Commerce. The Subcommittee plays an important role in proposing necessary measure to promote the implementation of policy
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and program to comply with rectangular strategy of the government especially in the area of private sector development, developing competitive advantage for SMEs and proposing incentive policies, and developing activity plan to promote and develop SMEs.
Despites its importance and great efforts from the government to support the sector, SMEs are still facing a great deal of challenges and difficulties. ADB,2006, has pointed out four main barriers limited the growth of the sector. Those constraints are SME Development Framework, Business Registration, Business Licensing System, and Access to Finance.
In order to be able to study in detail and contribute more on the development of SMEs, this paper is going to focus only on one sector that is “Improving Access to Finance.” As of the end of 2004, only 10% of the nation’s population had access to finance, and bank loans to the private sector represented only 8.03% of the GDP-one of the lowest rates of banking intermediation in the world (ADB, 2006). There are many reasons proposed by both private and government agencies concerning low rate of banking intermediation in Cambodia. However, the common barriers are insufficient legal and regulatory framework, the ability of SMEs to provide a clear financial reports, and lack of reliable borrower information.
To overcome those problems, ADB has been working cooperatively with the government solving some issues such as strengthened banking supervision, support for money and interbank market development, a legal framework in support of corporate borrowing, including a body of civil and commercial laws and a system for secured transactions and accounting standards, support for investment in long-term development of human capacity (ADB, 2006). MPDF, a private organization supported by IFC, has also been conducting various research on SMEs in Cambodia and been helping contribute to the development of private sector not only in the capital city but also other provinces through numbers of programs. In addition, the government itself also has committed to many reforms and tried to create better business environment for all investors. As a result,
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various laws passed the parliaments and many others are being draft and sent to Council of Ministers for discussion and approval before sending out to parliament. By understanding the important role of SMEs in economic development activity in Cambodia, this paper is going to discuss various financing methods learning from the experiences of Japanese government in developing a well-structured financial support system to SMEs. There are many reasons to the question why should Cambodia learn from Japanese experience. The first reason is that SMEs in Japan have a long history of development, since the beginning of Meiji era. Moreover, this sector has gone through many difficulties, but has proven to be successfully making adjustment and modification for growth. Another reason is that, Japanese economy is depending very largely on SMEs sector, which constitutes of 99.7% of firms and 70.2% of employment (Small and Medium Enterprise Agency). Policies, rules and regulations related to SMEs have been continuously formulated and revised from time to time to ensure SMEs development and economic growth. Moreover, a very good framework has been built throughout the country as a strong basis to support and develop small and medium enterprises. Most of all, financial support system in Japan is mature enough and very strong to be learnt from.
II. Research Questions: This research paper is going to clarify the following questions: 1/. To what extent can Cambodia adopt the financial support programs from Japan? 2/. What Cambodia government should prepare to successfully apply those lessons from Japan? 3/. How can we ensure that those policies adopted from Japan are applicable in Cambodia?
However, before answering to the above main questions, this research paper is going to collect all necessary information and answering to the following basic questions: 1/. What have been done to promote SMEs sector in Cambodia? 2/. What are the Cambodian government’s current policy frameworks concerning SMEs development?
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3/. How could Japan deal with obstacles when implementing financial support programs to SMEs? 4/. What are the Japanese government’s policy frameworks toward SMEs development?
III. Research Goals: The ultimate goal of this paper is to diversify financial support program for SMEs in Cambodia. I am planning to accomplish several sub-objectives in order to build a solid support for the main objective. First step for my study is going to focus on the general Japanese financial support programs for SMEs. This study not only concentrates on the current available financial support programs, but I will also search for the past practice in the history of Japanese financial support policies. Within this first sub-objective, comprehensive understanding on the sector will be built. In connection with the first objective, this research paper is going to explore both successful and unsuccessful cases from Japanese SMEs to draw lessons and learn from the past failure to prepare preventive measures for future application in Cambodia. By the way, general situation of SMEs in Cambodia will also be studied such as characteristics, laws and regulations, source of finance, and so on. Further more, this study is going to explore all difficulties related to accessing to finance for SMEs in Cambodia. After achieving these sub-objectives, the next crucial step is to determine the Japanese’s financial support programs suitable for the Cambodia context. This is not an easy task. Therefore, Japanese financial support programs should be studied critically and, of course, they should be carefully selected. In fact, to ascertain that those adopted programs are applicable in Cambodia would be the last and most complicated sub-objective. A set of criteria to determine the success of each program will be developed to compare with Cambodia situation. However, it would be more helpful to discuss those adopted programs with policy makers, bankers, entrepreneurs, and other related agencies in Cambodia. Again, by achieving all those sub-objectives, I certainly believe that this research paper will be able to discuss the main objective very critically; hence, contributing to the development of more financial accesses for small and medium enterprises in Cambodia.
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As a result, it might contribute to the development of SMEs sector thus boost the economic growth and generate more jobs for numerous fresh graduates. IV. Literature Review: It would be necessary to look at the definitions of SME of each country before further study of this sector. Despites definition for SMEs are being given differently by various agencies, it seems to be more appropriate to follow the definition set out by Ministry of Industry, Mines and Energy (MIME) Cambodia because MIME has long been developing policies, laws and regulations, development frameworks for SMEs. More importantly, Subcommittee on SMEs, which was established by Decision No. 46 SSR dated 11th August 2004, chaired by the minister of MIME. According to SME Development Framework, which was published by SME Secretariat for SME Sub-committee in 2005, small and medium enterprises are defined based on number of employees and value of fixed asset. Any firms that employ between 11-50 employees and have fixed asset from $50,000 up to $250,000 would be categorized as “small firm”. Medium firms would have employees range from 51 to 200 and fixed asset from $250,000 to $500,000. Based on Ministry of Economy, Trade and Industry of Japan, SMEs are also defined by amount of capital and number of employees. SMEs are defined as manufacturing industry with capital less than 300 million yen and less than 300 employees, wholesale trade must have capital less than 100 million yen and employ less than 100 workforces, service and retail trade must have capital less than 50 million yen and less than 50 employees. Small enterprises are categorized by any firms which employ full time workforce not exceed 20 for manufacturing, wholesale and retail industry and less than 5 for commerce and service industry. A book entitled “Evolution of Policy for Changing Condition of Small and Medium Enterprises in Japan”, which was published by JICA Osaka International Training Centre, provides very good information on the history of SMEs development in Japan since Meiji ear (1868-1912) up to 1970s. This book will be a useful source for understanding how Japan cold build up a policy to support the expansion of SMEs sector.
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Annually, Ministry of Economy, Trade and Industry of Japan publishes White Paper on small and medium size enterprises in Japan. They provide abundant information on an overview of Japanese economy, situation and changing of structure and policies related to SMEs. More importantly, White Paper highlights the diverse sources of financing for SMEs. Thus, my research will depend very much on this valuable source. In addition, other published materials from various entities or organizations would be necessary to accumulate more ideas and understanding to the sector. Arito Ono and Iichiro Uesugi, 2005, had published a paper on “The Role of Collateral and Personal Guarantees in Relationship Lending: Evidence from Japan’s Small Business Loan Market.” By assessing on the data of Japan’s small business loan market, they investigated the role of collateral and personal guarantees in small business lending. They found out that the higher the risk; the more likely the borrowers are pledged to collateral. And, banks would monitor borrowers more often if they demand either collaterals or personal guarantees from the borrowers. Thus, the empirical evidence suggests that collateral and personal guarantees are complementary to relationship lending. Iichiro Uesugi et al, 2006, studied on the effectiveness of credit guarantee program that set out by Japanese government between 1998 and 2001. They concluded that the program increases the use of long-term loans and the program proved to be more efficient except high-risk firms. Besides, SME Development Framework, 2005, published by SME secretariat on behalf of SME Sub-committee provides an overview of Cambodia’s economy, the challenges and constraints for SMEs, and a suggested framework to improve the condition. And, it also outlines the government initiatives to reform laws and regulations to ease the development of SMEs. Moreover, “Financial Sector Blueprint 2001-2010,” which was prepared by the Minister of Economy and Finance and Governor of National Bank of Cambodia with the assistance of economist experts from Asian Development Bank (ADB), highlighted the key issues in the financial sector and proposed blueprint to develop the financial sector including banking, rural financing and so on. ADB also published a report in 2006 on “Cambodia: Small and Medium Enterprises Development Program.” The report stated the government progress in establishing an SME development policy framework, developing business registration and licensing reform
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and improving SMEs’ access to finance under the support from ADB. A part from ADB and Cambodian government sources, Stephen M. Harner, 2003, had done a research on financing to SMEs by conducting various interviews with general managers, credit managers and credit/lending officers from 17 banks in Cambodia. Based on the study, banks in Cambodia prefer to provide short-term loans rather than medium or long-term loans because of weak legal system, high funding costs, less access to long-term capital by the banks themselves, lack of information, high liquidity ratio requirement from National Bank of Cambodia (NBC), lack of experience and skills. The study also provided some recommendation to improve SMEs financing in the future.
V. Research Methodology: A/ The study design This research paper is to look for financial support programs from Japan and decide on which programs are applicable to Cambodia. Therefore, this paper is basically going to adopt the retrospective-prospective study design to find out the past and current financial support programs which have been practicing in Japan; and, at the mean time, SME situation and related issues in Cambodia will also be examined. I am going to take Oita Prefecture as a case. Thus, I will find out all the financial support programs implemented by the prefecture government to support the growth of its SME sector. Hence, the challenge is to develop a set of criteria to judge whether those programs can be adopted. We understand that programs set out by the government would cause the development of SMEs. Therefore, those programs are independent variables and the positive or negative effects on the development of SMEs are dependent variable. However, not only those programs alone would effect on SME sector, there might be intervention factors-extraneous variables-that also contribute to the development of SMEs. The characteristics of SMEs, the business environment, macro-economy, et cetera, are examples of extraneous variables. This study is going to explore all those extraneous variables and investigate the level of their impacts on the outcome of each financial support program on SMEs carefully. Thus, those programs and extraneous variables will serve as criteria to determine the success or failure of the programs. The next step, I am going to do a comparative study between the criteria developed above and characteristics,
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laws and regulations of SME in Cambodia as well as macro-economic and business environment, etc. Consequently, adoptable programs will emerge and any modifications needed on Cambodia existing policies will also be clearly appeared. To be more precise, this research paper is also going to include the comments and opinions obtained from interviews with policy makers, bankers, related agencies and SME entrepreneurs in Cambodia.
B/ Sampling Since this study seems to bee more on proposing policies to the government, group of sample is limited to policy-making level. Thus, I am planning to interview with one officer in the National Bank of Cambodia, one person from secretariat to Subcommittee on SMEs in Cambodia, one person in Ministry of Economy and Finance; an officer, in charge of SME sector, working for ADB in Cambodia; an officer, in charge of SME sector, working for Mekong Project Development Facilities in Phnom Penh. In addition, I am also scheduling to select some SME entrepreneurs and bankers in Cambodia for interview. Due to time and budget constraint, I am going to choose 5 entrepreneurs and about 10 bankers to be my sample for private sector. The reason why I choose to include policy makers in my study sample because I am planning to include their opinions and constructive criticism regarding my proposed programs, which adopted from Japanese experience, in my dissertation as well. And those selected people and organizations are best fitted for my study since they are working very closely in developing framework, proposing reforms on laws and regulations, and applying those to improve the SME sector in Cambodia. Moreover, private sector, like banks and entrepreneurs, will also be a good source of information for this paper.
D/ Analysis of data The study design stated above demanded this research to cover historical records, currently published materials and information obtaining from interviews. Therefore, it would be very helpful for the research to use Software Package for Social Science (SPSS) to do the analyzing job on statistical records. Moreover, since part of information will be
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in the form of description such as laws, regulations, policies and information obtaining from interview, other analyzing methods other than computer will be utilized.
Projected Outcome: This research paper is going to recommend more financial accesses for SMEs in Cambodia based on lessons drawn from Japan. As a consequence, I expect that this paper will contribute to the development of SMEs sector as more financial accesses provided. Some SMEs will be able to fulfill the expansion plan and young firms are allowed to join the industry. This will contribute to the increase of national economy and reduce the unemployment rate. Moreover, as Cambodia is now a member of ASEAN and WTO, it is even more necessary for the country to increase its competitive advantage through generating the growth and strengthening the ability of SMEs.
Proposed Structure of the thesis The dissertation will be divided into the following chapters: Chapter 1: Chapter 2: Chapter 3: Chapter 4: Chapter 5: Introduction Literature Review Comparative Studies between Cambodia and Japan Policy Assessment and Analysis Conclusion and Recommendation
Problems and Limitations The research study is expecting to encounter some problems such as the availability of data, obtaining permission from the agencies/organizations to carry out the study, communicating problem. Limited data from both countries could be a major problem restraining the research to analyze more deeply to the topic. Information is not well documented and statistical data is also very limited in Cambodia. As well, the availability of document in English Japan is also scarce in Japan. In addition, lack of Japanese proficiency restricts the paper from accessing valuable sources which printed in Japanese. However, there are also numerous documents have been translated to English which can be accessible through websites. Anyway, uncertainty of obtaining permission
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from government offices and other agencies in Cambodia is also another challenge for this paper. Therefore, this paper decided to include only few respondents in the sample. On top of this, time and resource constraints are also part of the concerns.
Work Schedule
To be completed by (week)
Task/Week Proposal Chapter I Chapter II Contacting Interview Analysis Interpret Chapter III Chapter IV Chapter V First Draft 2nd Draft Final Draft Literature 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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References
Asian Development Bank (2006). Cambodia: Small and Medium Enterprises Development Program. Progress Report on Tranche Release. Arito Ono and Iichiro Uesugi (2005). The Role of Collateral and Personal Guarantees in Relationship Lending: Evidence from Japan’s Small Business Loan Market. Research Institute of Economy, Trade and Industry Discussion Paper Series 05-E027. Byoung-Jo Chun et al. (2001). Cambodia: Financial Sector Blue Print 2001-2010. Hun Sen (2004). Rectangular Strategy: For growth, Employment, Equity and Efficiency. Phnom Penh. Iichiro Uesugi, Koji Sakai and Guy M. Yamashiro (2006). Effectiveness of Credit Guarantees in the Japanese Loan Market. Research Institute of Economy, Trade and Industry Discussion Paper Series 06-E-004. Mekong Project Development Facility (2003). A Review of Constraints to SMEs Financing. Phnom Penh: Makara. Ministry of Economy, Trade and Industry (2005). White Paper on Small and Medium Enterprises: Structural Change in Japanese Society and Dynamism of Small and Medium Enterprises. (Retrieved from http://www.chusho.meti.go.jp/pamflet/hakusyo/h17/download/2005hakusho_eng. pdf on December 2005) Ministry of Economy, Trade and Industry of Japan (2006). Small and Medium Enterprises Basic Laws. (Retrieved from http://www.chusho.meti.go.jp/sme_english/outline/08/01.html on December 02, 2006) Small and Medium Enterprise Agency, Share of SMEs in Japanese Economy, (Retrieved from http://www.chusho.meti.go.jp/sme_english/outline/07/01.html#top on
December 11, 2006) SME Secretariat (2006). Small and Medium Enterprises Annual Report 2006. SME Secretariat (2005). SME Development Framework.
Stephen M. Harner (2003). Financing SMEs in Cambodia: Why do Banks Find it so Difficult? Report of a study commissioned by Mekong Project Development Facility (MPDF). Yamamura, H. (1978). Evolution of Policy for Changing Conditions of Small and Medium Enterprises in Japan in View of its Possible Application to Developing Countries. Osaka, Japan: Japan International Cooperation Agency. World Trad Organization (2006). Cambodia and WTO. (Retrieved from http://www.wto.org/english/thewto_e/countries_e/cambodia_e.htm on December 03, 2006).
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