Dubai International Conference of Endowments on

1. Dubai International Conference of Endowments on Innovative Sources to Finance Small and Medium-Sized Enterprises Dubai, United Arab Emirates Financial Support for SMEs in Japan February 17th 2010 Hikaru FUKANUMA Principal Economist Japan Finance Corporation Research Institute Tokyo, Japan

2. SMEs: 4,197,719 (99.7%) Small Scale Enterprises: 3,663,069 (87.0%) Definition of SME in Japan Definition in SME Basic Law Number of SMEs (2006) Large Enterprises: 12,351 (0.3%) Ministry of Internal Affairs and Communications of ”Establishment and Enterprise Census of Japan”

3. Financial Position of SME Large Enterprises ＜Financial Position DI＞ SMEs Micro Businesses 98 99 00 01 02 03 04 05 0607 0809 Bank of Japan, “Short term Economic Survey of Enterprise”, JFC Research Institute, “Quarterly Survey on Small Businesses in Japan” Note: DI = Percentage for “Easy” - Percentage for “Difficult”

4. Financial Constraints of SME Why do SMEs have difficulties to obtain fund? 1. Information Asymmetry 2. Insufficient Collateral 3. Economies of Scale of Lenders

5. External Finance Measures for SMEs

6. Fund-raising Structure (As of March 31, 2008) Small Companies: Capital stock is less than \2 mil. Large Enterprises: Capital stock is more than \1,000 mil. Ministry of Finance, Financial Statements Statistics of Corporation by Industry

7. Loan Guarantee Insurance Deposit Financial Institutions for SMEs Private City Banks Regional Banks Banks Other Banks Credit Associations Cooperatives Credit Cooperatives Non-banks Finance Companies Factoring Companies Credit Card Companies SMEs Special Company Shoko Chukin Bank Policy-based Local Government Credit Guarantee Corporations

8. Loans Outstanding to SMEs (As of the end of March, 2009) Bank of Japan, Monthly Financial and Economic Statistics and other sources. Non-banks and local government’s lending are excluded.

9. Profile of JFC(1)

10. Profile of JFC(2)

11. Money Flow Bond Issue FILP Source of Fund Financial Market Government Own Stocks Special Account Surplus Reserve, etc Dividends, etc. Deposit FILP Bonds Government Industrial Investment Special Account General Account FILP Special Account Equity Subsidy Government-guaranteed Bonds JFC Bonds Loan Loan JFC FILP: Fiscal Investment and Loan Program

12. Establishment of JFC National Life Finance Corporation (NLFC) (Oct 1, 2008) Japan Finance Corporation (JFC) Japan Finance Corporation for Small and Medium Enterprise (JASME) International Financial operations Agriculture, Forestry and Fisheries Finance Corporation (AFC) Micro Business and Individual Unit Small and Medium Enterprise (SME) Unit Japan Bank for International Cooperation (JBIC) JICA ODA operations Agriculture, Forestry, Fisheries and Food Business Unit (After 2012) Okinawa Development Finance Corporation Shoko Chukin Bank To be privatized Japan Bank for International Cooperation (JBIC) Development Bank of Japan To be privatized Japan Finance Corporation for Municipal Enterprise Abolished

13. SME Finance Units of JFC

14. Attribute of SME finance by JFC (1) • Borrowers • SME/ Micro and Small businesses • Wide range • Loans • Huge number / Small amount • Mid and long term • Less collateral (No Deposit Service) • Special Loans with Political Aims (e.g. Environment Equipment Loan) • Supporting Business Start-ups

15. Attribute of SME finance by JFC (2) • Lisk and Cost • Higher Risk • More Cost Difficult for private sector to deal with Complementary Roles

16. Complementary Roles of JFC (1) • JFC complements private financial institutions by bridging the gap JFC Private Financial Institutions (PFIs) SMEs Well Performing SMEs Ordinary SMEs Micro Businesses Badly Performing SMEs SMEs making Socially Needed Investment Business Startups

17. Complementary Role of JFC (2) <Growth Rate of Loans Outstanding to SMEs> Private Financial Institutions Policy-based Financial Institutions Sources: Bank of Japan, Monthly Financial and Economic Statistics and Other Sources.

18. Lehman Shock ! (%) Private Financial Institutions JFC 2007 2008 2009 SMEs Micro Businesses Complementary Role (3) Loans Outstanding for SMEs (Year-over-year growth rate) Bank of Japan, Monthly Financial and Economic Statistics and other sources. DI of “Cash Flow Situation” JFC Research Institute, Quarterly Survey on Small and Medium Enterprises in Japan

19. Characteristics of SMEs (compared with large enterprises) (1)Insufficient & Poor Financial Data (2)Depend on Manager’s Character & Ability (3)Sensitive to changes of Environment

20. ？ ？ Characteristics of SMEs (1)Insufficient & Poor Financial Data Most SMEs don’t have audited financial data. We are not sure if those are correct or not. ・Poor financial data(PL/BS) ・Some SMEs don’t have enough data. (e.g. bank accounts, account books, etc.)

21. Characteristics of SMEs (2)Depend on Manager’s Ability In SME, a manager handles almost everything related to a company, and its success highly depends on manager’s character and ability. accounting knowledge knowledge for the business ambition foresight career health condition human network reliability

22. Characteristics of SMEs (3)Sensitive to Changes of Environment Easily affected by unexpected changes of environment. Manager’s disease depression Retirement of employees SMEs Bankruptcy of business partners Trends Emergence of competitors

23. Management Skill Management Ability Operation of Organization Human Aspects Future Prospect of the Industry Location Career, Rank in the Industry Managerial Circumstances Qualitative Analysis Foundations of Sales Competitiveness of Products Ability to Get Fund Credit Analysis Managerial Operations Safeness Profitability Future Growth Quantitative Analysis Financial Situation Credit Analysis Keypoints

24. JFC’s approach for the Credit Analysis (1)Document Investigation (2)Interview (3)On-site Investigation (4)Other Investigation Decision by Branch ※Approval of the Head Quarter(Option) Loan Contract

25. Small Business Loan (1) Cooperation with Chambers / Societies of Commerce and Industry (As of Oct. 2009)

26. Small Business Loan (2) (As of Oct. 2009)

27. Small Business Loan (3) Procedure CCI or SCI Recommendation for loan (4) Approval by Chairman Credit Committee (3) Evaluation JFC-Micro Analysis Approval Consulting Managers Managerial guidance (2) (1) Application (5) Loan CCI or SCI Members

28. Small Business Loan (4) Close collaboration with CCI/SCI makes it possible to provide loans without collateral or a guarantor. Keep close contact Training & Meeting JFC Branch offices CCI / SCI Consulting Managers Teaching how to evaluate SMEs from financial aspect Giving information Providing useful information on member SMEs Business Support Financial Support SMEs

29. Credit Insurance System Credit Guarantee System Credit Supplementation System (1) Central Government Local Government Supervision Contribution Supervision Contribution Supervision Credit Guarantee Contract Private Financial Institutions JFC SME Unit Credit Insurance Sub-unit Credit Guarantee Corporations (CGCs) (52) Credit Insurance Contract Guarantee Loan SMEs

30. Credit Supplementation System (2) • Used by 40% of SMEs • Average guaranteed amount is 12 million yen (per SME) • Supports 11% of SME Loans • Functioning as a safety net for SMEs ※Implementing “Safety Net Guarantee” for SMEs suffering from credit crunches, bankruptcy of trading financial institutions or clients, disasters, etc. • Basic Guarantee Fee: 0.5% - 2.2% Mobilize Private Finance Institutions (PFIs) to provide loans for SMEs.

31. Finance Education Subsidy SMEs Technical Information Management Information Laws Tax System Support Measures for SMEs

32. Thank You for Your Attention ! Contact Information Hikaru Fukanuma Principal Economist Japan Finance Corporation Research Institute Tokyo, Japan E-mail: fukanuma-h@k.jfc.go.jp Web: http://www.jfc.go.jp/english/index.html