Contributing to both economic and social development, it is a well-known fact that small and medium enterprises (SMEs) are important drivers to any economy and this especially the case in Cambodia.
With SMEs accommodating for around 40 to 50% of total employment in the Kingdom, these businesses play an important role in job creation, generating income for low-income individuals and vulnerable populations and fostering economic growth, social stability, and contributing to growth of a dynamic private sector as well. Furthermore, with Cambodia’s annual Gross Domestic Product (GDP) growth at around 7% for the past few years, it signifies how both the economy and SMEs here are stable and growing healthily.
However, despite their significant contributions to the overall economy in the country, one of the impending challenges SMEs face till today is getting the relevant access and support in various aspects. Here is an outline of some of the obstacles and roadblocks these businesses face:
Limited access to finance is one of the predominant challenges for these enterprises. In 2009, government data showed that under 8% of Cambodians engage with banks or microfinance institutions. This is contributed to the fact that many entrepreneurs are discouraged or even unable to take out loans, due to high levels of requirements, high interest rates and delays in processing loans.
Furthermore, even though the Kingdom has high liquidity in the banking sector, many banks find it difficult to give out loans to entrepreneurs in the SME sector due to the thought of their financial records being too poor or the lack of information on whether would-be borrowers have repaid loans and have too much debt now. Apart from that, there has also been a relatively weak legal system in place in regards to loans with SMEs that make the whole procedure a very uncertain one.
Hence, without the relevant funds and support from key players in the industry, this leads to a snowball effect; hindering businesses from acquiring the necessary information, services and tools to improve their skill set in the long run, remaining competitive amongst other companies or to accelerate their track to success.
Nevertheless, there is still a silver lining to be seen with the coming of the recent years. New governmental solutions have been introduced to help aid these businesses in all sorts of ways.
One of the ways the government has tried to help alleviate the situation was through encouraging SMEs to register their businesses and introducing tax holiday incentive for greater compliance.
As mentioned by Te Taing Por, President of the Federation of Association for Small- and Medium-Sized Enterprises of Cambodia (FASMEC), in The Phnom Penh Post, many fail to register due to the lack of incentives and enforcement for the low level of compliance, leading SME Entrepreneurs to feel like they gain no benefit since they are not protected from neighbouring competition.
He went on to also mention how tax enforcement is not balanced and transparent in the SME field, due to the lack of government policy helping to define the business classification for them to access finance.
However, to increase compliance amongst these SMEs, the government issued a sub-decree in early February that provides a two-year tax holiday for SMEs who voluntarily register with the General Department of Taxation (GDT). Besides, that under the legislation, the definition for what qualifies as small- and medium-business categories is extremely vast, with small businesses defined as one with an annual turnover between $62,000 to $175,000, while medium-size is classified from $175,000 to $500,000. Medium-size businesses were also previously subject to a 20 percent annual tax on profit.
More notably, in December 2017, Prime Minister Hun Sen vowed to launch a new state-owned bank, specially catered to SMEs. With an initial investment capital of $100 million, this bank would be similar to the existing Rural Development Bank (RDB) and will be introduced in the hopes of boosting local processing plants and strengthen export capacity.
With that, many industry experts also hope that this potential bank will be able to replicate RDB’s long-term and low-interest loans, which will definitely be an attractive offer to borrowers in the SME sector. Some have even suggested using the existing RDB bank to support this project, instead of building everything from scratch.
Though more details have yet to be released, this piece of news surely is a timely glimmer of hope for all the SMEs in the Kingdom seeking change in financial inclusivity and we at Geeks In Cambodia cannot wait to see what new initiatives roll out in the coming years to support our bustling SME sector!