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Small and medium sized enterprises (abbreviated as SMEs) play significant economic, social roles in employment creation, resource utilization, and income generation, contribute to exports and make the economy more dynamic.
‘Title page FINANCING SMALL AND MEDIUM ENTERPRISES IN VIETNAM: AN EXPLORATORY STUDY by Hoang Hai Yen A research study submitted in partial fulfillment of the requirements for the degree of Master of Business Administration Examination Committee: Dr. Do Ba Khang (Chairman) Prof. John C. S. Tang Dr. Fredric W. Swierczek Nationality : Vietnamese Previous Degree: : Bachelor of Economics University of Economics Hanoi, Vietnam Scholarship Donor : Government of Switzerland Asian Institute of Technology School of Management Bangkok, Thailand April 1999 Acknowledgments I wish to express my deeply gratitude to Dr. Do Ba Khang, my advisor and chairperson of research committee, for his valuable guidance, comments and encouragement throughout the course of this research study. I am also highly indebted to Prof. John C. S. Tang and Dr. Fredric W. Swierczek, who have served as committee members, have provided me with constructive suggestions. I would take this opportunity to extend sincere gratitude to the Government of Switzerland for providing the scholarship for my study in MBA program. I would like to thank to Dr. Nguyen Thac Hoat, a member of Board of Administration of Vietnam Commercial and Industrial Banks. I would like also thanks to my colleagues in National Economic University, my classmates, my friend Ms Lien, Mr. Hung. Special thanks are due to Phan Trieu Anh, without his help, this research would not have been possible. Last but not least, I remain indebted to my beloved parents and family members for their tremendous sacrifices, enduring encouragement and push which lead me to this stage of life. ii Abstract Vietnamese Small and Medium Enterprises have considerable development in the recent years, however are facing the two most critical problems of funding and lack of product market. The study involves in the understanding of the current situation of financial sources for Small and Medium Enterprises in Vietnam. The objective of this study is to identify financial problems faced by Vietnamese SMEs by reviewing and analyzing some past surveys on SMEs as well as SMEs financing cases to gain some experience in the development of SMEs in the coming time. The problems stem from not only capital supplying capabilities of financial institutions but also the weaknesses of SMEs themselves. The analyses of several case studies of selected SMEs successful in getting funds recently are the basis to derive possible lessons for others. The study concludes with some recommendations for both Financial Institutions and Small and Medium Enterprises to overcome the problems identified. iii Table of contents ‘Title page i Acknowledgments .ii Abstract iii Table of contents iv List of abbreviation .v List of figure .vi List of Table .vii 1 Chapter 1 .1 2 Introduction .1 Chapter 2 .6 Literature review 6 Chapter 3 .14 Development situation of SMEs in Vietnam 14 Chapter 4 .20 Analysis of Funding sources of SMEs in Vietnam 20 Chapter 5 .38 Case studies on SMEs financing 38 Chapter 6 .52 Recommendations and Conclusions 52 References 56 iv List of abbreviation SMEs: Small and medium enterprises LEs: Large Enterprises SOEs: State Owned Enterprises NSEs: Non State Enterprises GDP: Gross Domestic Product VND: Vietnam Dong CGSs: Credit Guarantee Schemes VCCI: Vietnam Chamber of Commerce and Industry MPI: Ministry of Planning and Investment CIEM: Central Institution of Economic Management ILO: International Labor Organization MOLISA: Ministry of Labor, Invalids and Social Affairs OECF: Overseas Economic Cooperation Fund SPA: State Planning Committee UNIDO: United Nation Industrial Development Organization BID: Vietnam Investment and Development Bank ICB: Vietnam Commercial and Investment Bank Vietcombank: Vietnam for Foreign and Trading bank RIDA: Research Institute for Development Assistance MPDF: Mekong Project and Development Facility HCMC: Ho Chi Minh City CESAIS: Center for Economic Studies and Application v List of figure Figure 1.1 Research methodology 3 Figure 5.1 Organization chart of BEMES company. 41 vi List of Table Table 3.1 Trend in number of business enterprises 15 Table 3.2 Equipment and technology level of SMEs (1991-1995) 16 Table 3.3 Difficulties facing SMEs in general 18 Table 4.1 Funding source of financing NSEs in HCMC and Hanoi 22 Table 4.2 Credit sources 23 Table 4.3 The main purpose of borrowing from banks 24 Table 4.4 The short-term credit distribution of banks to NSEs 25 Table 4.5 Medium and long-term credit distribution of banks to economy by sector 26 Table 4.6 The level of capital borrowing from banks 27 Table 4.7 The changing interest rate from 1986-1995 28 Table 4.8 Difficulties in borrowing from banks 29 Table 4.9 The difficulties in borrowing money from banks 31 Table 4.10 Problem SMEs faced when asking banks loans 31 Table 4.11 Classification of companies according to the size of business capital 32 Table 4.12 Overdue debt in short-term credit banks classification of economic sector 33 Table 4.13 Overdue debt in long-term credit banks classification of economic sector 36 Table 4.14 Target when borrowing money from informal financial source of SMEs 37 Table 4.15 The condition to borrow from informal financial sector. 37 Table 4.16 Evaluation of SMEs about advantages of financing in informal finances 38 Table 4.17 The borrowing interest of informal source 39 Table 4.18 Summary the criteria and characteristics of each funding source. 48 Table 5.1 Income statement of January-September 1998 49 Table 5.2 Balance sheet of January-November 1998 49 Table 5.3 Pro forma income statement for the new project 50 Table 5.4 The growth rate of labor and sales of 1994-1997 52 Table 5.5 Leasing package for Xuan Kien by International Leasing Company. 54 vii 1 Chapter 1 2 Introduction 1.1 Rationale of the study Small and medium sized enterprises (abbreviated as SMEs) play significant economic, social roles in employment creation, resource utilization, and income generation, contribute to exports and make the economy more dynamic. Governments in most countries, whether they are highly industrialized, developing or among the least developed, have expressed increased enthusiasm for SMEs because of their contribution to the people’s well being and satisfying their basic needs. SMEs also occupy a vital role in the distribution system of all nations. This sector works closely with customers, which is essential to promote the industrial growth of industries. SMEs can provide new and innovative ideas to industries, which require a huge investment for developing and existing. So, it is important to facilitate SMEs. However, SMEs in most of the developing countries face many difficulties such as shortage of capital, or the lack of materials and management skills. The promotion of SMEs may be an effective and important approach to economic development. According to the preliminary findings of a survey of 17 economies conducted by Taiwan economists, the problems faced by SMEs in Asian-Pacific region differ considerably. In developing countries like Vietnam, the main difficulty in business of SMEs is the lack of financing. SMEs are hungry of capital. Nhuan (1997) and an overview of Vietnam Fund (1997) by Bear Stearn International Limited show that: Financial institutions can not exploit completely their capital capability while SMEs face shortage of capital. The question is why SMEs can not be qualified to borrow this available fund? Which factors cause borrowing failure of SMEs? Besides, Beesly and Rothwell (1987) observes that companies need to complete a good financial plan before talking with potential lenders. The financial institutions looking at some criteria (four “Cs” (Characteristic, Capability, Collateral and Capital) model that will be mentioned in the literature review) in the lending decision. For borrowers, particularly SMEs need to know the factors that influence the lending decision of financial institutions. They also need to know which criteria they should focus and improve to get fund from financial institutions. Some recent surveys on evaluating loan eligibility in New Zealand, Canada which are mentioned in literature review show that lack of management skill, poor performance, weak financial position, ability to repay debt and insufficient security of SMEs are the key reasons for banks to reject lending to SMEs. The question is that whether SMEs in Vietnam have the same difficulties or not? 1.2 Problem statement In Vietnam SMEs has been formed and developed since the late nineteenth and early twentieth centuries. Up to present, SMEs have remained dissatisfied with the funding supply from all financial institutions. The gap between the funding needs of SMEs and the supply from financial institutions stems from both the capabilities of SMEs themselves and 1 different requirements of the others. In getting loans from different sources, SMEs have to satisfy different provisions, which sometimes turn out to be impossible for them. Many SMEs have struggled to get fund from multiple sources at reasonable prices. Some have succeeded but the others either have stayed lack of fund or have to agree with unbearable interest. 1.3 Objectives of the study 1. Review financial sources for SMEs • Identify the different financial sources available in Vietnam for SMEs. • Determine contribution of each major financial institution to funding SMEs. • Identify an analyze difficulties facing SMEs in getting loans from financial institutions. 2. Based on several case studies of selected SME’s successful in getting funds recently in order to derive lessons for other SMEs. 1.4Research framework The research framework has been designed in such a way that both SMEs and financial institutions are attributed and treated in one topic. This whole research focuses upon the SMEs financial problems in getting funds from formal financial institutions. The research has been carried out in Vietnam, and can be divided into three stages: • In the first stage, the review of commercial banks, SMEs and Government bodies that have responsibility of supporting SMEs development were carried out. The relevant data in financing was collected and reviewed during this stage. • In the second stage, the data was analyzed to know the situation of SMEs in Vietnam especially in financing area. The common obstacles SMEs have to face were classified. Which ones are raised by Government’s policy, which ones are raised by financial institutions and which ones are raised by SMEs themselves. The responsibilities in those obstacles of the Government policies, financial institutions, or SMEs are identified. • Some companies that were successful in getting external funds are selected to analyze for in-depth understanding the successful factors to have lesson for others. • Finally, in the third stage, all the data has been composed into this report. The framework for the study research is showed in the following figure. 2 Research Framework F i n a n c i a l i n s t i t u t i o n s Banks Financial leasing Informal sources 1. Contribution to funding SMEs 2. Criteria in evaluating loans to SMEs 3. Advantage and disadvantages 1. SMEs’ capabilities -Management -Financing -Technology -Market 2. Financial documentation - Business planning - Bookkeeping activities Gap Analysis of selected cases SMEs Lessons and recommendations 3 [...]... ♦ In- depth interviews with financial institution’s executives (bank officials, lessors, SMEs creditors), the pattern of these interviews was a mix of structured and unstructured type of interviews, following areas were discussed: Financing policies for SMEs Financing distribution for SMEs Financial institutions’ opinions on SMEs Difficulties these financial institutions facing in funding SMEs ♦ In- depth... structure of Vietnamese SMEs As cited in “Non-State sector in open door time 1991-1995” issued by General Statistics Publisher (1996), 46.2% of SMEs participating in trade and repairing services is large relative to the total number of SMEs Nearly 18% of the total number of SMEs in the country are working in industry and construction Among the industrial SMEs, 37.3 % are operating in food processing industry:... Against though as with the case of finance, the available literature often fails to make important analytical distinctions of this kind In Vietnam, a report on the survey of management training need of SMEs in Vietnam (1997) that conducted by MPDF determines the need for management training and related services The difficulties faced by managers of SMEs are found in with financial management, financial... only on financing problems and issues related to SMEs ♦ There are many financial institutions supporting SMEs in Vietnam financially They are commercial banks, financial leasing and international funds based in Vietnam 4 such as Vietnam Templeton Fund, Vietnam Frontier Fund, or some funding supporting organizations for SMEs that are aided by some international organizations However, just three main sources... sector is accounted for 65% of GDP The contribution share of NSEs, including SMEs, in GDP is approximately at 40.66% SMEs in Vietnam generated 25% of gross national industrial output, 54% of regional industrial value, 64 % of commodity circulation In some special fields, these business even manage hundred percent of certain products on the market Those specializing in industry, trading and services have... is necessary to analyze, in a more concrete way, the main difficulties encountered in the investment and operating process In addition, consequences of Government policies on development of SMEs are also considered 3.3.1 Lack of capital There are more financial institutions investing in Vietnam such as financial leasing companies (Vina Lease-1995), or international funds (Vietnam Fund Limited-1991)... 1998) Following the Statistics Yearbook 1997 issued by General Statistical Publisher, at the end 1996, total number of laborer in all SMEs of Vietnam is about 7.8 million persons, accounting for 22.5% of total labor force of the country In other words, the share of laborers in all SMEs is equal to 79.2% of non-agricultural labor force Over 85% of labor in SMEs are participating in processing industry,... SMEs and their criteria in evaluating loans to SMEs The difficulties facing SMEs in getting funds from financial institutions is finding, in which the difficulties that due to weaknesses of SMEs themselves are focused as certain concern In Chapter V three selected case studies will be presented background of the company, development history and financial situation, their funding problems and ways overcome... (1994) In 1997, there was a survey on the financial conducted by the Central Institution Economic Management (CIEM) under the support by United Nation Industrial Development Organization (UNIDO) A sample of 100 NSEs was selected in two provinces Vinh Phu (an industrial province in North of Vietnam) and Can Tho (an industrial province in the South), covering manufacturing and trading sectors in both... business, it is virtually impossible to obtain funding Some of the more formal sources of fudging included “ venture capital firms, investment banking firms, insurance companies, large corporations, small business investment companies and minority enterprise small business investment companies, accountants, banks.” 2.3.1 Informal credit market and SMEs • Richardron, and Singer (1982) shows that in a situation . Financing distribution for SMEs. Financial institutions’ opinions on SMEs Difficulties these financial institutions facing in funding SMEs. ♦ In- depth interviews. considerably. In developing countries like Vietnam, the main difficulty in business of SMEs is the lack of financing. SMEs are hungry of capital. Nhuan