Evolution of Small Business Financing Based on Database Utilization

ABSTRACT

Japan's financial problems lie in the absence of a marked to market function in its credited loans, or, more specifically, the lack of a proper credit pricing mechanism in the finances directed toward small-medium businesses. This problem has gradually become more and more apparent throughout the ten and some odd years of bad-debt disposal brought on by the burst of the bubble economy.

The establishment of a proper credit pricing mechanism would make it possible for the first time to process, at a reasonable price, the large amounts of small-scale information files for credited loans geared toward small-medium businesses. This means the standardization of the financial statements that are required for Internet trading, credit pricing models, and the expansive All Japan small-medium business credit risk database.

Along with the enhancement of the credit risk information database for different types of private sector companies, the Credit Risk Database (CRD), a globally pre-eminent database holding large amounts of information on small-medium companies, has been created. The CRD has already amassed data on 1 million small-medium corporations in Japan, covering about 2/3 of the total 1.65 million in Japan, and also holds many case examples of defaults. The BOJ as well as statistical and actuarial experts have confirmed that highly accurate predictions and estimations for default rates are possible with the current CRD data. Credit pricing experts also praise its utility, pointing out that with the database, it is now possible to easily compute theoretical risk premiums for finances directed toward small-medium companies, an arduous task up until now.

With the utilization of this database will enhance the capabilities of credit pricing companies that make it possible for market players such as investors and financial institutions (including arrangers of progressive bonds such as CLOs) to make informed judgments.

Meanwhile, the adoption of standardized financial statements, or XBRL (Extensible Business Reporting Language), continues to move forward. The trend for this was set off, more than anything else, by the world convention on XBRL, which took place in Tokyo in November of 2002. The Tokyo Stock Exchange has since begun to use it for the top summary page of the kessan tanshin (a brief summary of the most recent financial statement at the conclusion of the fiscal year). In 2004, the Tax Administration Agency decided to adopt XBRL for the affixed sheets (financial statements) that it uses in electronic tax collection, and the BOJ has begun considering the adoption of XBRL in the collection reports it receives from financial institutions. Thus, in Japan, a trend for the adoption of XBRL that includes public institutions has been rapidly gaining momentum.

From the beginning, Japan has been second only to France as a global leader in the amount and the accuracy of its financial data on small-medium corporations. With the adoption of XBRL, it has now become possible to capitalize on this strength. There is yet no country that has the infrastructure including the IT to "scientifically monitor" small-medium businesses from a global perspective.

By building on this strength and bringing together the three current developments of the CRD, the adoption of XBRL, and the improvement of credit pricing mechanisms, Japan can potentially dance into the forefront by creating the world's pre-eminent database on small-medium businesses.

Finally, as a step toward the realization of a new three-in-one model electronic financial market, I would like to present a concept for a loan auction board (LAB). METI, who supports this concept, has already setup a research team on loan systemization, and is currently examining the legal and bureaucratic matters concerning its realization.

This expansion of the electronics finance market, these enhancements of the market infrastructure, and finally, these increased incentives to market players for using the electronic finance technologies will form an evolutionary stride in Japan's small-medium business finances.