1

Dubai International Conference of Endowments on

Innovative Sources to Finance Small and Medium-Sized Enterprises

Dubai, United Arab Emirates

Financial Support for SMEs

in Japan

Principal Economist

Japan Finance Corporation Research Institute

Tokyo, Japan

Hikaru FUKANUMA

February 17th 2010

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Definition of SME in Japan

Type of Industry

Small and Medium Enterprise

( to fulfill either of the criteria) Small Scale Enterprise

Capital Stock (Yen) Employees Employees

Manufacture and Others 300 mil. or less 300 or less 20 or less

Wholesale 100 mil. or less 100 or less

5 or lessRetail 50 mil. or less 50 or less

Service 50 mil. or less 100 or less

Definition in SME Basic Law

Number of SMEs (2006)Large Enterprises: 12,351 (0.3%)

SMEs: 4,197,719 (99.7%)

Small Scale Enterprises: 3,663,069 (87.0%)

Ministry of Internal Affairs and Communications of ”Establishment and Enterprise Census of Japan”

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Bank of Japan, “Short term Economic Survey of Enterprise”, JFC Research Institute, “Quarterly Survey on Small Businesses in Japan”

Note: DI = Percentage for “Easy” - Percentage for “Difficult”

Financial Position of SME

-50

-40

-30

-20

-10

0

10

20

＜ Financial Position DI＞

Large Enterprises

SMEs

Micro Businesses

98 99 00 01 02 03 04 05 06 　　　 07 08 　　　 09

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1. Information Asymmetry

2. Insufficient Collateral

3. Economies of Scale of Lenders

Financial Constraints of SME

Why do SMEs have difficulties to obtain fund?

5

External Finance Measures for SMEs

Direct Finance

StockPublicly-offered

Privately-offered

BondPublicly-offered

Privately-offered

Commercial Paper

Indirect Finance Borrowings(Loans)Private financial institutionsPolicy-based financial institutionOthers

Credit Supplementation System Credit Guarantee Corporations

Trade CreditDeferred payment creditBills payable, Account payable, Others

Capital Lease

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Fund-raising Structure

Small Companies

Large Companies

Equity Capital (Direct Finance) 12.6 % 39.4 %

Borrowings(Indirect Finance)

Financial Institutions 39.1 % 17.3 %

Others 23.9 % 4.1 %

Trade Credit (Bill Payable, Account Payable, etc.), Other Debt 24.4 % 39.2 %

Total 100.0 % 100.0 %

Small Companies: Capital stock is less than \2 mil.

Large Enterprises: Capital stock is more than \1,000 mil.

Ministry of Finance, Financial Statements Statistics of Corporation by Industry

(As of March 31, 2008)

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Financial Institutions for SMEs

SMEs

City Banks

Regional Banks

Other Banks

Credit Associations

Credit Cooperatives

Non-banks

LoanGuaranteeInsuranceDepositBanks

Finance CompaniesFactoring CompaniesCredit Card Companies

PrivatePrivate

Policy-basedPolicy-based

Cooperatives

Japan Finance Corporation

(JFC)

Micro Business and Individual Unit

Small and Medium Enterprise (SME) UnitCredit Guarantee

Corporations

Local Government

Shoko Chukin BankSpecial Company

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Bank of Japan, Monthly Financial and Economic Statistics and other sources. Non-banks and local government’s lending are excluded.

(As of the end of March, 2009)

Loans Outstanding to SMEs

Type of Financial Institutions Balance (billion yen)

Share (%)

Private Financial Institutions 243,167 95.2

BanksCity Banks, Regional Banks, Other Banks 182,233 71.3

Cooperative Financial Institutions

Credit Associations 42,715 16.7

Credit Cooperatives 9,407 3.7

Special Company (Shoko Chukin Bank) 8,812 3.5

Japan Finance Corporation (JFC) 12,161 4.8

Micro Business and Individual Unit 6,533 2.6

Small and Medium Enterprise (SME) Unit 5,628 2.2

Total 255,328 100.0

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Profile of JFC(1)

StatusPolicy-based financial institution

100% owned by the Japanese government.

Purpose

To contribute to the sound socio-economic development of Japan and the international community, and to improve the lives of Japanese citizens.

Not to Maximize Profit

EstablishmentOctober 1, 2008

(Oldest Predecessor NLFC was Established in 1949)

Capital 3,391 billion yen (as of Aug. 6, 2009)

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Profile of JFC(2)Branch Offices

152 (in Japan, as of Feb. 1, 2010)

Employees 8,117

Outstanding Loans(as of Mar. 2009)

Micro Business and Individual Unit

7,539 billion yen

Small and Medium Enterprise Unit

5,814 billion yen

Agriculture, Forestry, Fisheries, Food Business and Consumers Unit

2,823 billion yen

Japan Bank for International Cooperation　 (JBIC)

7,313 billion yen

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JFC

JFC Bonds

Source of Fund

FILPSpecial Account

Loan

FILP Bonds

Government-guaranteed

Bonds

General Account

EquitySubsidy

FILP: Fiscal Investment and Loan Program

Dividends, etc. Deposit

Loan

Government

Special AccountSurplus Reserve, etc

Industrial Investment

Special Account

Financial MarketGovernment Own Stocks

FILP

Bond IssueMoney Flow

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International Financial operations

ODA operations

JICA

National Life Finance Corporation (NLFC)

Japan Bank for International Cooperation (JBIC)

Japan Bank for International Cooperation (JBIC)

Small and Medium Enterprise (SME) UnitSmall and Medium Enterprise (SME) Unit

Japan Finance Corporation (JFC)

Japan Finance Corporation (JFC)

Micro Business and Individual UnitMicro Business and Individual Unit

To be privatized

To be privatized

Abolished

Shoko Chukin Bank

Development Bank of Japan

Japan Finance Corporation for Municipal Enterprise

Japan Finance Corporation for Small and Medium Enterprise (JASME)

(After 2012)Okinawa Development Finance Corporation

(Oct 1, 2008)

Agriculture, Forestry, Fisheries and Food Business Unit

Agriculture, Forestry and Fisheries Finance Corporation (AFC)

Establishment of JFC

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SME Finance Units of JFC Micro Business and

Individual UnitSmall and Medium

Enterprise (SME) Unit

PredecessorNational Life Finance Corporation (NLFC)

Japan Finance Corporation for Small

and Medium Enterprise (JASME)

OperationBusiness loans

Education Loans, etc

Business loans Securitization SupportCredit insurance

Target SMEs micro and small medium

Maximum loan amount

72 million yen 720 million yen

Average Loan amount

6.87 million yen 58 million yen

Employees 4,700 2,000

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Attribute of SME finance by JFC (1)

BorrowersSME/ Micro and Small businesses Wide range

LoansHuge number / Small amountMid and long termLess collateral

(No Deposit Service) Special Loans with Political Aims

(e.g. Environment Equipment Loan)Supporting Business Start-ups

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Attribute of SME finance by JFC (2)

Difficult for private sector to deal with

Lisk and CostHigher RiskMore Cost

Complementary Roles

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SMEs

Well Performing SMEs

Micro Businesses

Badly Performing SMEs

SMEs making Socially Needed Investment

Business Startups

Ordinary SMEsPrivate

Financial

Institutions

(PFIs)

JFC

Complementary Roles of JFC (1)JFC complements private financial institutions by bridging the gap

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<Growth Rate of Loans Outstanding to SMEs>

Policy-based Financial Institutions

Private Financial Institutions

Sources: Bank of Japan, Monthly Financial and Economic Statistics and Other Sources.

Complementary Role of JFC (2)

-10.0

-5.0

0.0

5.0

10.0

15.0

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

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Loans Outstanding for SMEs (Year-over-year growth rate)

Bank of Japan, Monthly Financial and Economic Statistics and other sources.

DI of “Cash Flow Situation”

JFC Research Institute, Quarterly Survey on Small and Medium Enterprises in Japan

Complementary Role (3)

- 50

- 40

- 30

-20

-10

0

10

J an.-Mar.2007

Apr.-J un.2007

J ul.-Sep.2007

Oct.-Dec.2007

J an.-Mar.2008

Apr.-J un.2008

J ul.-Sep.2008

Oct.-Dec.2008

J an.-Mar.2009

Apr.-J un.2009

SMEs

Micro Businesses

(%)

- 10.0

- 8.0

- 6.0

- 4.0

- 2.0

0.0

2.0

4.0

6.0

2007 2008 2009

Private Financial Institutions

JFC

Lehman Shock !

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Characteristics of SMEs

(1)Insufficient & Poor Financial Data

(2)Depend on Manager’s Character & Ability

(3)Sensitive to changes of Environment

(1)Insufficient & Poor Financial Data

(2)Depend on Manager’s Character & Ability

(3)Sensitive to changes of Environment

(compared with large enterprises)

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？？・Poor financial data(PL/BS)

・ Some SMEs don’t have enough data.

(e.g. bank accounts, account books, etc.)

Most SMEs don’t have audited financial data. We are not sure if those are correct or not.

(1)Insufficient & Poor Financial Data Characteristics of SMEs

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ambition

human network reliabi

lity

accounting

knowledge

foresight

career

health conditi

on

knowledge for the business

In SME, a manager handles almost everything related to a company, and its success highly depends on manager’s character and ability.

(2)Depend on Manager’s Ability Characteristics of SMEs

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Easily affected by unexpected changes of environment.

SMEs

depression

Manager’s disease

Retirement of employees

Bankruptcy of business partners

Emergence of competitors

Trends

(3)Sensitive to Changes of Environment Characteristics of SMEs

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Credit Analysis Keypoints

Qualitative Analysis

Quantitative Analysis

Credit Analysis

Human Aspects

Management Skill

Management Ability

Operation of Organization

Managerial Circumstances

Future Prospect of the Industry

Location

Career, Rank in the Industry

Managerial Operations

Foundations of Sales

Competitiveness of Products

Ability to Get Fund

Financial Situation

Safeness

Profitability

Future Growth

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(1)Document Investigation(2)Interview(3)On-site Investigation (4)Other Investigation

(1)Document Investigation(2)Interview(3)On-site Investigation (4)Other Investigation

JFC’s approach for the Credit Analysis

Decision by Branch ※Approval of the Head Quarter　 (Option)

Decision by Branch ※Approval of the Head Quarter　 (Option)

Loan ContractLoan Contract

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Official Name Managerial Improvement Loan (Established in 1973)

TargetCommerce and service / 5 or less employees

Manufacturing and other / 20 or less employees

Eligibility Recommendation of Chamber of Commerce and Industry (CCI) or Society of Commerce and Industry (SCI) .

Requirements for the recommendation

More than 6 months managerial consulting by CCI/SCIMore than a year business in the same areaPay up taxes

(As of Oct. 2009)Cooperation with Chambers / Societies of Commerce and Industry

Small Business Loan (1)

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Terms and conditions

Maximum amount

15 million yen (= $150,000)

PeriodEquipment: 10 years or less

Working: 7 years or less

Interest rate 1.95% per annual

Remark Collateral or a guarantor is not necessary.

(As of Oct. 2009)

Small Business Loan (2)

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JFC-Micro

Analysis

Approval

CCI or SCI Members

Managerialguidance

(1) Application (2)

Recommendationfor loan

(4)

Credit Committee

Consulting Managers

Evaluation(3)

CCI or SCI

Approval by Chairman

Procedure

(5) Loan

Small Business Loan (3)

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CCI / SCI

Consulting Managers

JFC

Branch offices

Keep close contact

Teaching how to evaluate SMEs from financial aspect

Providing useful information on member SMEs

Giving information

Training & Meeting

SMEsBusiness Support

Financial Support

Close collaboration with CCI/SCI makes it possible to provide loans without collateral or a guarantor.

Small Business Loan (4)

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JFCSME Unit

Credit Insurance Sub-unit

JFCSME Unit

Credit Insurance Sub-unit

Private Financial

Institutions

Private Financial

Institutions

SMEsSMEs

Credit Supplementation System (1)

CreditGuarantee

Corporations(CGCs)

(52)

CreditGuarantee

Corporations(CGCs)

(52)

Credit Insurance Contract

Credit Guarantee Contract

LoanGuarantee

Local GovernmentLocal Government

Supervision Contribution

Supervision Contribution

Central GovernmentCentral Government

Supervision

Credit Guarantee SystemCredit Insurance System

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Used by 40% of SMEs

Average guaranteed amount is 12 million yen (per SME)

Supports 11% of SME Loans

Functioning as a safety net for SMEs ※Implementing “Safety Net Guarantee” for SMEs suffering from credi

t crunches, bankruptcy of trading financial institutions or clients, disasters, etc.

Basic Guarantee Fee: 0.5% - 2.2%

Credit Supplementation System (2)

Mobilize Private Finance Institutions (PFIs)to provide loans for SMEs.

Mobilize Private Finance Institutions (PFIs)to provide loans for SMEs.

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Subsidy

Tax System

Management Information

Education

Laws

SMEsTechnical

Information

Finance

Support Measures for SMEs

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Thank You for Your Attention !

E-mail: fukanuma-h@k.jfc.go.jp

Web: http://www.jfc.go.jp/english/index.html

Contact Information

Hikaru Fukanuma

Principal Economist

Japan Finance Corporation Research Institute

Tokyo, Japan