Introducing innovative financing mechanisms can help improve access to finance for Pacific businesses—PSDI
SYDNEY, AUSTRALIA (30 January 2024) - Innovative Financing Mechanisms, such as small-scale offers regimes and investment-geared crowdfunding, can help bridge the financing gap for small and medium-sized enterprises (SMEs) in the Pacific region, says a new report published today by the Asian Development Bank’s Pacific Private Sector Development Initiative (PSDI).
Innovative Financing Mechanisms in the Pacific explores the potential of alternative sources of financing, which can lower the barriers to accessing finance, as a solution to some of the funding challenges experienced by Pacific businesses.
“Innovative Financing Mechanisms can really broaden the options available to Pacific businesses seeking finance,” says Mr. Jeremy Cleaver, PSDI’s Senior Finance Sector Specialist. “They offer more safeguards and structure than the informal funding through networks and family connections that is common in the region, but without some of the constraints of traditional debt and equity financing, like the requirement for collateral, equity thresholds, and credit history, along with long processes, and high transaction costs.”
Financing is critical to business growth, which in turn supports broader economic growth, job creation, and increased productivity. However, access to simple and affordable finance options remains a key challenge for many SMEs, that are constrained by credit requirements that are difficult to meet, very limited equity financing options, and a perception that small scale lending is riskier and costly.
"For policymakers looking to increase the availability of finance for local businesses, the paper offers guidance around how to make these mechanisms work in Pacific economies,” says the report’s author, Ms. Jinita Prasad, Finance Sector Specialist. “This includes considering the suitability of these mechanisms, which will depend on various factors, such as the capabilities and willingness of the companies seeking finance, the savviness of investors, and whether the appropriate legal and regulatory frameworks are in place, as well as ensuring that intermediaries have the expertise to manage the mechanisms effectively.”
The paper emphasizes that each country will need to consider the opportunities of these mechanisms through a holistic assessment of their domestic financing landscape. This includes determining whether new laws and regulations would be required, the level of demand for finance, and whether a local investor base exists. The authors identify Fiji and Papua New Guinea as having an easier pathway for implementing Innovative Financing Mechanisms, due to existing securities laws and higher rates of financial literacy and awareness. Ideally, these financing mechanisms need to be less onerous than traditional financing mechanisms, to enable SME access to finance. At that same time, it is essential to provide adequate oversight over new financial technologies and players, to protect investors.
PSDI is an Asian Development Bank (ADB) technical assistance program undertaken in partnership with the governments of Australia and New Zealand. It supports ADB’s 14 Pacific developing member countries to improve the enabling environment for business and achieve inclusive, private sector-led economic growth, including through reforms designed to increase the availability of finance for Pacific businesses.