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An Assessment on Financial gap of Small and Medium Enterprises

of Brunei Darussalam
1. Aims and objectives of the project
Collect information on financial gaps in the SME, sector in

Brunei Darussalam.
Assess the impact of government-support programs on Brunei

SME sector.
Develop the innovative financing programs for Small and

Medium Enterprises in Brunei Darussalam.

2. Background of the study
SMEs form a large part of private sector in many developed and
developing countries. While cross-country research sheds doubt on causal
link between SMEs and economic development, there is substantial
evidence that small firms face larger growth constraints and have less
access to formal sources of external finance, potentially explaining the









development helps alleviate SMEs growth constraints and increase their

access to external finance and thus levels the playing field between firms
of different sizes. Specific financing tools such as leasing and factoring can
be useful in facilitating greater access to finance even in the absence of
well-developed institutions, as can systems of credit information sharing
and a more competitive banking structure.
Small and Medium Enterprises are responsile for significant levels of
employment, innovation and productivity, it is important that policy
makers and advisers are well informed about the determinants of SME
growth and, in particular, the various supply- and demand-side issues
surrounding the provision of growth funding for this sector. Financial
problems (lack of funds) constrain the development and growth of SMEs
because many SMEs are unable to access the same kinds of growth
funding often available to large businesses.
The financing of small and medium-size enterprises (SMEs) has been a
subject of great interest both to policy-makers and researchers because of

the significance of SMEs in private sectors around the world. More

importantly, a number of studies using firm-level survey data have shown
that SMEs not only perceive access to finance and the cost of credit to be
greater obstacles than large firms, but these factors constrain SMEs (i.e.
affect their performance) more than large firms.
Types of Finance for Small and Medium Enterprises:

Term loans
Asset finance
Asset-based finance
Equity finance

The conventional wisdom on SME finance argues that supply- side

factors are at the root of the inadequate financing of SMEs. In particular,
the way in which financial institutions operate is biased against offering
SME financing. Thus, many banks and other financial institutions are not
interested in servicing SMEs. One of the main factors often cited that
hampers SME financing is opaqueness. By opaqueness the literature
means that it is difficult to ascertain if firms have the capacity to pay
(have viable projects) and/or the willingness to pay (due to moral hazard).
This opaqueness particularly undermines lending from institutions that
engage in more impersonal or arms-length financing that requires hard,
objective, and transparent information.
Compared with large firms, banks are less exposed to small enterprises,
charge them higher interest rates and fees, and experience more nonperforming loans from lending to them. Although there are some
differences in SMES financing across government, private, and foreignowned banks with the latter being more likely to engage in arms-length
lending the most significant differences are found between banks in
developed and developing countries. Banks in developing countries tend
to be less exposed to SMEs, provide lower share of investment loans, and
charge higher fees and interest rates. Overall, the evidence suggests that

the lending environment is more important than the firm size or bank
ownership type in shaping bank financing to SMEs.
SMEs are disadvantaged in raising financing compared to large firms and
often face difficulties in signaling their creditworthiness. Empirically,
failure rate are notably higher for SMEs. Large businesses have a greater
pool of financial and managerial resources to survive critical periods.
Furthermore, agency and asymmetric information problems may be more
pronounced for small firms. As a consequence of the persistence of an
equity gap for small businesses, the bulk relies for external funding upon
bank debt. However, regarding bank loans, SMEs find themselves again in
a deprived position compared to large firms. Small firms are more
constrained in the use of control mechanisms, as collateral, long-term
relationship and reputation, which ease information problems. For
instance, collateralization may under some circumstances contribute to
attenuate credit-rationing problems. The younger and smaller a firm, the
less it is able to pledge collateral.
Furthermore, SMEs usually are less capital intensive than larger ones. The
intangibility of the assets, an important characteristic of start-up and
small firms, also impedes this control mechanism. Pledging personal
collateral in the form of a guarantee offers only a partial solution as it is
limited in supply. Despite the fact that SMEs generally lack sufficient
collateral, lending to SMEs is more often based on pledging collateral. In
order to empirically study our research question,
There are also government assistance programs that help with access to
finance. SMEs are vulnerable and very few manage to survive more than
five years. Public authorities throughout the world, perhaps recognizing
both the importance and frugality of the SME, have created agencies and
set up numerous business support and assistance measures to help the
sector obtain better access to finance and to encourage business
formation. These government programs generally focus on specific
industrial sectors such as manufacturing, agriculture, mining different
types of business activities such as export, innovation, research, and

development; the provision of financing through credit guarantee

programs, public venture capital funds, micro-lending agencies; and
assisting firms to become investment ready.
Public intervention in improving access to finance is based on the
assumption that significant imperfections exist within that market place
that preclude the private sector from correcting these market distortions.
Such structural government programs are aimed at closing liquidity gaps,
which result when firms from the SME sector are unable to secure
necessary capital. These situations may arise for a variety of reasons,
including supply-side challenges and demand-side problems. In terms of
supply of capital, capital limitations may come from actual shortages in
the market place where private sector participants effectively hoard
capital and are unwilling to extend it to SMEs; this may be due to highperceived risks, the SME sector not being a strategic area of focus, of the
banks unfamiliarity with the SME sector.
Firms may not meet the financing criteria set by capital providers related
to profitability, liquidity, and growth potential. In general terms, lenders
seek businesses that are profitable and have suitable collateral, while
equity providers look for profitable ventures with high growth potential.
Some SME firms may also not be investment ready.
As part of its Wawasan 2035 vision, Brunei Darussalam aims to








transforming itself into a knowledge-based economy by 2035, while also

carving a niche as a trade and financial services centre. Resources
currently make up around 90% of exports and 85% of government
revenue. The long-term economic vision also includes a drive to promote
alternative industries, such as technology and innovation, halal food and
manufacturing, alongside increased support for innovative, non-standard
foreign investment and research into renewable energy technologies.
There is a need to promote small and medium in a rapid manner. But
Small and Medium Enterprises in Brunei Darussalam have problems for
financial resources, although government has taken several initiatives.

3. Outputs and outcomes of Project

The following is one of the supply chain finance methods. We develop
different methods to suit the needs of SMEs in Brunei.
Example: in supply chain, due to the weak overall strength, less
proprietary capital, greater demand for cash, small and medium









management and expansion of investment. The demand for credit funds

of small and medium enterprise usually comes form the normal production
business and expansion of shortfall mainly stems from the period of stock
inventory and accounts receivable, and generally such occupying period
takes a longer time. Therefore, in meeting the financial needs of small and
medium enterprises, commercial banks should provide relevant service
during the period of cash flow gaps in supply chain, with regard to the
characteristics of small and medium enterprises operating cycle:
A. During the shortfall in funds from cash payments to sell stock,
commercial banks can adopt the financing service mode of supply chain
based on stock and aiming at borrowerwarehousing enterprise;
B. During the shortfall in funds from sell stock to receive cash,
commercial banks can adopt the financing services mode of supply chain,
based on accounts receivable, and aiming at borrower downstream
customer. In addition, during the investment expansion process of
equipment purchase (or plant investment), problems will emerge on the
gap of capital and time of a large amount of expenditure and amortization
by the enterprise, therefore, during the funding gap of singular
expenditure amortization, banks can adopt the financing mode of
supply chain based on the future revenue and the seller guarantee and
aiming at upstream customerborrowing enterprise. Plant) will result in
a gap of funds and time between a large sum of expenditure and
At this time, upstream enterprises are often suppliers of equipment (or
plants and other fixed assets), borrowers are the purchasers of fixed

assets such as equipment. When confronting such investment decisions, it

is difficult for borrowers, due to their weak strength, to pay a large sum of
capital for investment in fixed assets such as equipment.
Enterprises that are providers of equipment and other fixed assets usually
have strong economic strength, and are often willing to provide certain
guarantee for buyers in order to quicken the recovery of funds and expand
sales volume effectively, therefore, during the gap of fund and time of
singular expenditure and amortization, banks can adopt financing
mode of supply chain based on the future revenue and the seller
guarantees, and aiming at upstream customer - borrower.
Seller guarantee on loan to purchase of equipment.
Seller guarantee on mortgage loan of plants. The loans stated above all
require that the borrower owns a certain amount of down payment. On
such basis, banks will complete the examinations on the solvency of the
borrower (mainly its future cahs flow reliability, stability and ability of
Small and medium enterprise (buyer) orders equipment or other assets
from upstream enterprises Small and Medium enterprise (buyer) applies
for a loan to the banks for the purchase of the equipment.
Upstream enterprise (supplier) provides guarantee on the loan to the bak
of the buyer. The bank loans directly to borrowers and transfers the
money to the bank account designated by the supplier. Vendor delivers
the equipment to the buyer. Borrower mortgages or pledges the assets
purchased to the bank. Borrower pays the principal and interest of the
loans to the bank. When the repayment of loans is finished, the contract
of guarantees and mortgage or pledge will be written-off.
4. Methodology
We will interview both the demand and supply side of SME finance in the
Brunei Muara district of Brunei Darussalam. Our sample is active in
various industries, ranging from wholesale trading, publishing and

construction to manufacturing. Appropriate econometrics method will be

used for the analysis.
5. Novelty and/or originality
Even though there are some studies on SMEs in Brunei Darussalam, no
project studied on financial problems in detail.
6. Gantt Chart
e and
Analysis and








7. Benefit and Impact of research to ITB

ITB can include the findings in it Finance curriculum.
ITB might do these types of studies on revenue basis in future.
8. Prior Experience and capability of Researchers
Dr Ulaganthan Subramanian already conducted three surveys in Brunei
Darussalam and published papers on financial area.
Berger, A. and Udell, G.F. (1990). Collateral, loan quality and bank risk,
Journal of Monetary Economics, 25, 21-42.
Berger, A. and Udell, G.F. (1992). Some evidence on the empirical
significance of credit rationing, Journal of Political Economy, 100, 10471077.
Berger, A. and Udell, G.F. (1995). Relationship lending and lines of credit
in small firm finance, Journal of Business, 68, 351-381.
[brunei times lack info high biz risk cited reasons banks refuse lend smes
[brunei time smes told get equity financing not bank]
Jovanovic, B (1982) Selection and the evolution of industry,
Econometrica, 50:3, 649-670.
Kon, Y. and Storey, D.J. (2003). A theory of discouraged borrowers. Small
Business Economics, 21, 37-49.
Levenson, A.R. and Willard, K.L. (2000). Do firms get the financing they
want? Measuring credit rationing experienced by small businesses in the
US, Small Business Economics, 14(2), 83-94.

Metcalf, H., Modood, T. and Virdee, S. (1996). Asian Self-Employment: The

Interaction of Culture and Economics, London, Policy Studies Institute.
Natwest/SBRT (2003). Natwest Quarterly Survey of Small Business
Customers, Small Business Research Trust.
Petersen, M.A. and Rajan, R.G. (1994). The benefits of lending
relationships: evidence from small business data, Journal of Finance, 49,
Ram, M., Smallbone, D. and Deakins, D. (2002). Ethnic minority
businesses in the UK: access to finance and business support, British
Bankers Association: London.
Storey, D. and Westhead, P. (1997) Management training in small firms: a
case of market failure?, Human Resource Management Journal, 7, 61-71.
SBS (2001/2002). Small Business Omnibus Survey, Small Business
SBS (2003). Annual Survey of Small Businesses: UK, Small Business
SFEDI (2002). Small Businesses Skills Investment 2002. Small Firms
Enterprise Development Initiative.
Wilson (1979). Interim Report on the Financing of Small Firms, Cmnd 7503,
London, HMSO. Wilson, R. (2004). Business Finance 2004, Institute of