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Enabling SMEs for the New Economy
Posted on Friday, December 24, 2004 - 10:51 AM

The Economic Development Feedback Group and SME Feedback Group has put up their conference paper on 'Enabling SMEs for the New Economy' for consultation on the feedback website. As it is an important paper for SME (which form a large portion of our clients), we have also reproduced it on our website.
The consultation period is from 22 Dec 2004 to 07 Jan 2005.

The Paper:-

ENABLING SMES FOR THE NEW ECONOMY

INTRODUCTION
While Singapore's economy is on the rebound and unemployment rate looks set to improve, many small and medium enterprises (SMEs) do not see any signs of the economic recovery. The economy is now geared towards exploiting new opportunities in the region, tapping on emerging markets in China and India. With more Free Trade Agreements to be concluded with more countries, businesses are bound to benefit from the free flow of goods and services. However, many SMEs still find difficulties in keeping pace with the rest of the economy. Most find themselves inadequate in competing in this highly competitive new economy.

This conference paper, jointly put up by the Economic Development Feedback Group and SME Feedback Group, examines the challenges faced by the local SMEs, and proposes recommendations to better equip them to keep in pace with the economy.

SME FINANCING
Obtaining financing to fund expansion and daily operations remains a challenge for local businesses. The Feedback Group recognizes that there are still funding gaps for SMEs, hence it proposes recommendations in this conference paper to smoothen the rocky road that such firms traverse to get loans.

(i) Asymmetry of Information in SME Financing
One challenge in obtaining financing is the reluctance of many SMEs to open up to financial disclosure for fear of losing their competitive edge. However, a lack of transparency works against them in obtaining financing. Suppliers and lenders will demand higher interest rates and less favourable trading terms if they perceive the risk to be higher due to a lack of relevant information on the financial strength of the SMEs.

For SMEs to obtain financing from banks, they are required to produce the past 3 years' audited Financial Statements, among a list of other requirements. For better accountability, SMEs are encouraged to engage registered tax accountants to prepare their financial information. The disclosure of the accounts audited by certified public accountants would lend more professionalism to the borrowers, hence leading to smooth financing.

However, the Feedback Group expressed their worry that cash-strapped SMEs are still tightening their belts, and would not want to engage certified public accountant to keep their accounts. The hefty audit fees will only increase their operating costs.

To the much relief of many SMEs, the newly set-up SME credit bureau now provides transparent credit information and risk-profiling for SMEs, making it easier for lenders to assess firms, easing access to loans. While the SME Credit Bureau and SME credit rating system may seem to have helped SMEs gain access to more financing options, the FBG was concerned that the SME credit bureau would backfire and `kill off' entrepreneurs instead. An entrepreneur who defaults on one loan would find himself denied access to all the financing schemes offered by the banks.

(ii) Alternative Forms of Financing for SMEs
In the past years, the Feedback Group has been mooting the idea of a financial institution, adopting the principles of the Japan Finance Corporation (JFC) for Small Businesses. The SME financial institution could serve as a "one-stop shop" to offer services such as sector-wise database of SME information, problem-solving for subsequent reference, disbursement of long term and emergency funds. The proposed institution not only lends money to SMEs, but also provides expertise in the form of consultants to oversee the use of funds lent to SMEs.

Recommendations:
The Feedback Group understands that it may not be feasible to set up a similar model to cater to the financial needs of the small enterprises, hence it is also exploring alternative forms of financing for SMEs.

a) Resource Panel: FBG proposes the idea of having a resource panel to assess the credit worthiness of SME borrowers. The appointed panelists could comprise representatives from the respective Chambers, Association of SMEs or even retired entrepreneurs. If there were a panel of authority to determine the credit worthiness of the borrowers, it would be much easier for SMEs to obtain loans. The banks would liaise with the panel directly for advice on the credit worthiness of the borrowers.

b) More help with loan procedures from Chambers: It was also suggested that the Chambers be given a greater role to help SMEs with the procedures to obtain bank loans. SMEs may find the bureaucratic process of getting a loan too intimidating. Equipped with resources and a wealth of experience from retired businessmen, the Chambers are in a good position to hand-hold SMEs in asking for loans from banks, from preparing the financial statement to making the cash-flow projections.

c) Islamic banking: In the light of the Government's recent announcement that it plans to establish an Islamic financial centre in Singapore, the Feedback Group suggests that the government adopt the model of Islamic banking to provide financing for SMEs.

Islamic banks do not pay interest, but instead pay a dividend, viewing depositors as capital owners and the bank as their partner and manager of the capital. Returns cannot be fixed in advance, but must be a proportion of profits derived from their partnership venture. The bank then pays the depositor a set proportion of any profits in the form of dividends based on a profit-sharing ratio. This is viewed as being advantageous to both sides.

d) Incentives to banks to lend to SMEs: The Feedback Group suggests that the Government should offer incentives to financial institutions to lend to SMEs. This approach would be more effective than sinking the funds into the assistance schemes which not many SMEs are aware of. The incentives should be substantive enough to cover the risks involved in lending to SMEs.

e) Open up SME banking to foreign competition: Finance is the backbone for industry survival and development and entrepreneurship. As the local banks merger is unable to open up more financing channels for the SMEs, the Feedback Group proposes that the Government opens up the banking sector further and to allow foreign banks to provide financing for SMEs, increasing competition to the local banks. In this way, the SMEs can benefit from more efficient banking services and lower borrowing rates.

f) Securitization of loans to SMEs: The capital market has traditionally been viewed as the exclusive marketplace for large corporations to raise funds through the issuance of stocks and bonds. With the growing sophistication of structured finance transactions, loan securitisation now makes it possible for small and medium-sized enterprises (SMEs) to access the capital market too.

The SME loan securitisation pilot programme provides an alternative financing option for enterprises that generally do not qualify for existing loan schemes. Loans granted to a diverse range of SMEs will be pooled together and turned into tradeable bonds that offer competitive yields to investors.With a broader lending criterion, the programme will reach out to a wider base of SMEs, potentially including those with no established track record.

The Feedback Group recognized the usefulness of this programme, and hoped the Government could lend further support to introduce the programme to a wider base of SMEs.

REVIEW TAX POLICIES FOR SMES
(i) Annual Values of properties: With the fluctuation of property market, the gap between property market value and annual value (AV) for property tax purposes is becoming wider. There is a need to reflect the actual market value of properties, or adjust the AV promptly to reflect the market value of properties accurately.

For instance, the AV of a HDB retail outlet in non-central location of Clementi was pegged to that of shop houses in the central area of Clementi town. The using of the central area as point of reference and applying this annual value across the entire residential estate is not a fair method. The SME Feedback proposes that IRAS review such an assessment criteria, and called for a more transparent and fairer system to assess the AV of property.

(ii) GST input tax claims: Most SMEs were not GST-registered and they found that they could not claim for the input tax on their purchases. The SMEs avoid applying for GST registration because they could not afford the administrative work of keeping the records and submitting GST returns every three months. One reason was the cost of setting up proper accounting system.

The SME Feedback suggests IRAS to consider simplifying the procedure by allowing input tax claims on all purchases without the need to have proof of tax paid on them. In this way, more SMEs would be encouraged to apply for GST registration.

STRONGER ROLE FOR TRADE ASSOCIATIONS
In order for SMEs to poise for stronger growth, not only do they need effective management policies and progressive upgrading, they also require related guilds and trade associations to help set the pace for their development and build business relationships with other parties.

Recommendation: The SMEs Feedback Group had suggested that the Government legislate every company, including SMEs to join their relevant trade associations or chambers of commerce. The Government should also initiate guilds or trade associations to establish industry standards for the respective sector. This would raise the levels of professionalism in the industry, and make essential services, such as market information, financing channel, training incentive and skills upgrading, more readily available to SMEs.

GREATER SYNERGY FOR SMALL RETAILERS
The SME Feedback Group felt that more needs to be done to help neighbourhood small retailers survive in the face of competition from giant retailers.

Recommendation: To tackle the situation, entire blocs of HDB retail shops could be leased, say for 20 years, to property developers. This would leverage on the management capabilities of the developers to upgrade the retail mix in HDB estates.

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