This study explores methods of upgrading the role of the Mutual Savings and Finance Company as a financial institution specialized in funding small and medium enterprises (SMEs) in the economy, where structural imbalances exist between classes, sectors, and regions.
SMEs account for substantial job creation and adding value, but they are weaker than large companies in terms of financing. Despite growth potential, SMEs experience difficulties obtaining financial assistance from large financial organizations, including banks, due to structural characteristics such as high information costs and transaction fees associated with small loans. During periods of credit tightening, or where there is substantial demand for finance from large companies such as in Korea, SMEs chronically lack financing capabilities, unbalancing the concentration of market capital and creating a sellers’ market.
Finance for SMEs can be a matter where market failure due to large external economic effects caused by information asymmetry and gaps in bargaining power. Currently Korea offers policy finance for SMEs, in which the government allocates financial resources to SMEs. For example, two banks exclusively, Industrial Bank of Korea (IBK) and Kookmin Bank (KB), are designated to manage financing SMEs. General financial institutions are also obliged with a mandatory minimum ratio of bank loans to SMEs as part of policy finance. However, beneficiaries of such finance are limited to mid-to-high level SMEs, and financial assistance for small businesses is far from sufficient.
By the end of 1990, the primary financial sector provided loans of KRW 35,735.4 billion, representing 52.8% of the total SME loans of the KRW 67,644.6 billion granted by financial institutions within the regulatory system, while the secondary financial sector loans total 47.2%. Broken down by financial institution, commercial banks lent out KRW 14,728.9 billion, followed by Mutual Savings and Finance Company whose SME loans amount to KRW 7,423.3 billion. IBK and regional banks provided SMEs with KRW 6,662 billion and KRW 6,126.8 billion, respectively.
As compared to the total combined SME loans, IBK accounts for 95.4%, Mutual Savings and Finance Company for 77.5%, regional banks for 73.7%, trust accounts for 50.0%, KB for 44.8%, and commercial banks for 44.7%. This indicates Mutual Savings and Finance Company is outstanding in terms of finance for SMEs throughout the primary and secondary financial sectors, while IBK is the most specialized institution funding SMEs among private banks. As such, Mutual Savings and Finance Company established its own distinctive domain in financing SMEs.
If the government liberalizes interest rates, every financial sector will see their receiving interest rates rise overall. As a result, the Mutual Savings and Finance Company will lose its advantage of low interest rates, weakening its ability to secure loan customers. Therefore, in order for the Mutual Savings and Finance Company to compete with other large financial organizations, it needs to reduce its dependence on low interest rates and respond with new management strategies.
First, Mutual Savings and Finance Company needs to secure loan customers by furthering its strategy of establishing rapport with its customers based on its own strengths as a small financial institution. Second, it needs to be prepared for increased competition on the path towards liberalization of interest rates, and increase its efforts for innovation and expertise to better satisfy ever increasing financial demand from SMEs, small businesses, and working-class households in the growing economy. Third, it needs to give careful consideration to scaling up the organization and opening new branches.
중소기업의 발전과 상호신용금고의 경영전략(Development of SMEs and management strategies of mutual savings and finance company)
[서울] : 한국개발연구원
|Series Title; No||정책연구시리즈 / 1-37|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Industry and Technology < Entrepreneurship|
|Holding||KDI; KDI School|