MSMEs In ASEAN: Addressing The Financing Gap – OpEd

Micro, Small, and Medium Enterprises (MSMEs) are the life blood of ASEAN’s economy. They make up for over 97% of all businesses, provide nearly 70% of employment, and contribute around 40% to the region’s GDP. These businesses could be big or small – they could be the street-side food vendors in Bangkok, the family-owned coffee processors in Vietnam, and the tech startups emerging in Singapore’s bustling ecosystem. Yet, despite playing a critical role in driving growth and innovation, they face a persistent, almost enigmatic problem: financing. 

Governments, banks, and even fintech platforms are pouring in funds to address this gap. Hence one would assume that it would be much easier for MSMEs to access the funds they need. But it may not be true. As per a report by ADB, there is a significant financing gap across ASEAN that exceeds a staggering $300 billion annually. It leaves many asking: Why, after so many initiatives and so much support, do MSMEs continue to struggle for financing? 

Governments of ASEAN member states are making strategic moves to tackle this issue. An example would be Indonesia’s recent loan forgiveness program. The initiative was just recently launched in November 2024, which allows MSMEs with debts under 500 million Indonesian rupiah to clear their bad loans with state banks. The aim is to have over three million of these businesses get a fresh start and a second chance to succeed. On the private sector front, financial giants, HSBC, unveiled a $1 billion ASEAN Growth Fund which would also support MSMEs desiring to scale up digital platform businesses. Although the idea is simple, it is transformative. The initiative will empower MSMEs to embrace technology and thrive in the digital economy. 

Fintech platforms have got a head start and are rewriting the rules of MSME financing. Funding Societies is one of Southeast Asia’s largest MSME digital finance platform and it has already disbursed over $3 billion in loans. Partnerships with traditional banks are further amplifying this impact. 

Maybank is one of the large banks in southeast Asia that has recently invested in the platform and has commended the fintech firm for bridging the financing gap. The rise of digital lending and crowdfunding platforms has helped MSMEs immensely as now they can now bypass the cumbersome paperwork and collateral requirements of traditional loans. Yet, even with all these new developments in the finance landscape, many MSMEs are still deprived of the finances they so badly need to both start and grow their businesses.

When starting an enterprise, MSMEs are unable to provide adequate collateral or formal financial records needed for securing loans from banks. Historically banks perceive MSMEs as high risk, which limits MSMEs access to resources.  Fragmented regulatory environment across ASEAN further complicates the situation. Each country in the ASEAN region has its own definitions and rules for MSMEs and this creates unnecessary hurdles for regional financing initiatives. This lack of consistency often makes it challenging for cross-border financiers to introduce uniform lending products. 

Some MSMEs, despite running their businesses successfully for over a decade, are repeatedly denied loans just because they are unable to provide formal collateral. Banks often need land deeds or large deposits as collateral making it even harder for the MSMEs.  Without access to formal financing, they often turn to informal lending where the interest could be exorbitant. Some MSME report that they are charged 2% to as high as 20% per month as interest from these informal lending channels. Without proper financing MSMEs cannot grow and the alternatives too are exploitative. These highlight the glaring mismatch between what MSMEs need and what is currently available. Indeed, the government programs and fintech platforms have made progress but there’s still a long way to go. 

Policymakers and financial institutions must rethink their strategies and address the root causes of these challenges. One immediate solution could be to develop a centralized credit database for ASEAN. Such a system would aggregate and share MSME credit information from across the region, thus, making it easier for banks and fintech platforms to assess risk and provide loans confidently. 

Harmonizing MSME definitions and regulations across ASEAN through a standardized framework would simplify cross-border financing and make regional initiatives more effective. Financial literacy programs tailored for MSMEs provide small business owners the much-needed guidance on managing finances and effectively using digital tools. Singapore’s SkillsFuture program and Malaysia’s SMECorp serve as strong examples of how targeted training can empower small business owners.

ASEAN’s digital economy is projected to grow to $1 trillion by 2030 and this offers immense opportunities for MSMEs to integrate and thrive. MSMEs are the backbone of ASEAN economies. Although these businesses are small, their impact on economies and societies is massive. Hence the effort should be to not just to close the financing gap but to unlock the full potential of MSMEs as drivers of inclusive and sustainable growth.