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Extending financial credit to SMEs

SMEs in Thailand are in dire economic straits. Despite the fact they make up 99% of businesses in the country, they receive only 18% of outstanding credit from commercial banks and contribute 35% of GDP.

These statistics highlight the pervasive inequality in our economic system. The government must come into the rescue.

If we examine this problem thoroughly, the absence of adequate credit access lies at the root of the problem.

One of the hurdles is that commercial banks restrict the volume of credit offered to SMEs, to maintain financial stability. To remove that hurdle, it is worth studying the experiences of successful micro-finance institutions abroad that offer substantial loans to SMEs, but without sacrificing the stability of their financial systems.


In 1983, Grameen Bank (GB) from Bangladesh initiated a primary financing model that has become widely popular in many countries such as Indonesia and the Philippines. With a focus on extending financial services to the extremely poor, especially women (who comprised 95% of its client base), GB’s borrowers held 93% ownership, with the government claiming the other 7%.

GB demanded that credit seekers gather as groups, with five members per group, and comply with all of GB’s stipulations. After GB appraised each credit application (this takes about one month), it usually offered loans to two out of five members in each group.

After the first two borrowers have fully repaid their principal and interest within 50 weeks, the other three would have the right to borrow from GB. Even though each member of the group was not required to fulfill the debt obligations of other members, this condition induced the members who had not borrowed yet to put pressure on those who had already borrowed to repay as scheduled.

This pressure served as loan collateral, which was not requested by GB before offering credit at all. Instead, GB required that each member save at least 5 taka (1.62 baht) per week and deposit these savings into GB’s account every week. If the requested loan exceeds 8,000 taka, an additional 50 taka has to be deposited.

Additionally, each week there was a meeting between GB and borrowers to (1) examine and supervise credit utilisation as well as borrowers’ debt servicing capacity; (2) receive an allocation of debt repayments as well as required savings from group members.

Although GB did not require loan collateral from borrowers, its strategy, combined with good governance and efficiency led to an excellent performance. This can be substantiated by the debt repayment ratio of 99% on average during 2000–2003. GB has achieved self-financing on a sustainable basis since 1995. It did not depend on any concessions from domestic or foreign sources, as the required savings sufficed for lending.



Since 1988, the Malaysian government has established Yayasan Usaha Maju (YUM) as a public agency administered by the Rural Development Corporation. By 1995, YUM was transformed into a private company managed by the staff trained by Grameen Bank. Thus, its management and strategy were similar to that of Grameen’s. For instance, (1) each group consisted of five clients, (2) a weekly meeting was held with all group members, and (3) every member was required to make savings deposits.

Overall, YUM’s performance was highly successful, as evidenced by the average repayment ratio reaching 96.97% during 1997–2002. Meanwhile, the lending and deposit amounts also increased significantly.

South Africa

The Small Enterprise Foundation (SEF) was set up in 1992 to provide financial services to the impoverished. It emulated Grameen Bank of Bangladesh by forming five-member customer groups and not demanding collateral before extending credit. Furthermore, SEF prioritised female clients.

However, SEF differed from Grameen in that it required all group members to share responsibility for the group’s total debt obligations. Between 2001 and 2003, SEF’s achievements were evident through its consistently rising repayment ratio and deposit-to-credit ratio.

Catholic Relief Services (CRS)

CRS represents a network of micro-finance institutions in 31 countries, serving three types of customers — women, self-employed individuals, and those without access to domestic financial markets. The CRS network excelled in providing small local loans, and its overdue debt ratio never exceeded 7.7%.

These achievements were attributed to the six primary principles of CRS (similar to Grameen’s), which are as follows: (1) serving the poorest individuals, especially women who are often neglected in terms of credit access in regular markets, (2) linking the size of client loans to that of client deposits, (3) using guarantees from group members instead of collateral, (4) inviting customers to participate in CRS management, (5) prioritising the number of clients and their self-sufficiency, (6) planning to achieve the sustainability of CRS to assist the poor.


The experiences of successful micro-finance organisations in various countries reveal several crucial common characteristics, as summarised below.

1. Monitoring the debts of SMEs and impoverished individuals stands as a paramount task for the survival of these financial organisations. Effective debt monitoring can be achieved by adopting tactics similar to those of Grameen Bank. These tactics involve:

(a) Limiting the size of member groups to ensure that each group’s members can closely and accurately monitor the progress of those already in debt. Failure to do so might result in the loss of borrowing privileges in subsequent rounds.

(b) Facilitating frequent (for example, weekly) meetings between lenders and borrowers, which will significantly aid in the timely monitoring and supervision of borrowers.

2. Mandatory weekly savings will exert pressure on members who haven’t borrowed yet, motivating them to oversee those who are already indebted. Additionally, these savings can serve as a liquidity buffer for lending institutions, enabling them to manage risks and maintain their financial stability.

3. Several micro-finance institutions abroad, such as Grameen Bank and CRS, are extensively interconnected. These linkages yield four notable benefits:

(a) Enlarge borrower and depositor bases.

(b) Such a wider scope helps to distribute risks and enhance the financial stability of central agencies.

(c) Augment liquidity and flexibility in managing shared funds because of the rising magnitude and frequency of demand for and supply of funds.

(d) The aforementioned benefits collectively foster the self-sufficiency of micro-finance institutions on a sustainable basis.

Pakorn Vichyanond was previously Research Director at the Thailand Development Research Institute and has worked at the Bank of Thailand and the World Bank.

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