Managerial Improvement Loan (MARUKEI Loan) for Small Businesses ADFIAP International CEO Forum VII November 18, 2010, Siem Riep, Cambodia Managerial Improvement Loan (MARUKEI Loan) for Small Businesses Taro MORITA International Cooperation Office JAPAN FINANCE CORPORATION Micro Business and Individual Unit (JFC-Micro)

Content Introduction of JFC-Micro “MARUKEI Loan” Program Appendix 1. Collaboration with Business Supporters 2. JFC-Micro’s International Cooperation

Establishment of Japan Finance Corporation 1. Introduction of JFC-Micro Establishment of Japan Finance Corporation National Life Finance Corporation (NLFC) Japan Finance Corporation (JFC) (Oct 1, 2008) Japan Finance Corporation for Small and Medium Enterprise (JASME) International financial operations For SMEs Agriculture, Forestry and Fisheries Finance Corporation (AFC) Micro Business and Individual Unit (JFC-Micro) Japan Bank for International Cooperation (JBIC) JICA Small and Medium Enterprise (SME) Unit Overseas economic cooperation operations Okinawa Development Finance Corporation (ODFC) (After 2012) Agriculture, Forestry, Fisheries and Food Business Unit Shoko Chukin Bank Stock corporation Japan Bank for International Cooperation (JBIC) Development Bank of Japan Stock corporation Japan Finance Corporation for Municipal Enterprise Abolished

Overview of JFC-Micro 1. Introduction of JFC-Micro JFC-Micro is one of the units of JFC, and has been providing direct loans to Micro and Small Enterprises(MSEs) and individuals, which have difficulties in obtaining enough funds from private sector. History Establishment of People’s Finance Corporation (PFC) Reorganized into National Life Finance Corporation (NLFC) Integrated into Japan Finance Corporation (JFC) Organization Stock corporation wholly owned by the Japanese government Non-profitable policy-based financial institution Regulatory body Ministry of Finance, and other Ministries Funding Borrowing from the government, Government guaranteed bonds, JFC Bonds Size Branch offices: 152 Employees: approx. 4,700 Loans Outstanding Business Loans to MSEs 6,531 billion yen (=80 billion USD) Other Loans 961 billion yen

Characteristics of JFC-Micro Loan 1. Introduction of JFC-Micro Characteristics of JFC-Micro Loan Borrowers Micro and small Borrowers with 9 employees or less: 86.2% Huge number 1,084,043 borrowers Wide range Not focusing on specific industry or region Loans Small amount Average loans outstanding per borrower: 6 mil. yen Mid or long term 3-7 years: 85.8% , 7-10 years: 8.1% (FY2009) No collateral Loans without collateral in number: 78.3% (FY2009) Start-up support Start-up loans to 18,478 entrepreneurs in FY 2009 Risk management loan 9.1% (NPL* ratio: 2.7% + Restructured loan ratio 6.4%) (As of the end of March, 2010) *NPL = Loans to borrowers in legal bankruptcy + Past due loans in arrears by 3 months or more

Comparison with Private Financial Institutions 1. Introduction of JFC-Micro Comparison with Private Financial Institutions Number of Institution(s) Total number of SME customers Loans outstanding per customer JFC-Micro 1 1,084,043 25% of Japanese enterprises are JFC-Micro’s clients. 6.0 million yen (74,000 USD) Private banks 144 approx. 2,240,000 (15,555 per institution) 79.6 million yen (980,000 USD) City Banks and Regional Banks Credit Associations 272 approx. 1,210,000 (4,448 per institution) 34.8 million yen (430,000 USD) Regional small financial institutions for SME (As of the end of March, 2010)

Managerial Improvement Loan 1. Introduction of JFC-Micro JFC-Micro’s Loan Programs Ratio of Loans Outstanding in number (as of the end of Mar. 2010) General Loan This loan is available to MSEs in almost all industries. Max. loan amount is 48 mil. yen (= 592,000 USD) Special Loan This loan is extended in response to economic and financial policies for MSEs. Max. loan amount is 72 mil. yen. (= 889,000 USD) Managerial Improvement Loan (“MARUKEI Loan”) Environmental Health Business Loan (EHB Loans) This loan is available to MSEs relating to public hygiene, such as restaurants, barber shops, beauty parlors, laundries, hotels, etc. 24.0% 53.0% 13.8% 9.3%

What’s MARUKEI Loan? 2. “MARUKEI Loan” Program MARUKEI Loan was established in 1973. (“MARUKEI Loan” is popular name of “Managerial Improvement Loan.”) MARUKEI Loan is a system to financially complement “the Managerial Improvement and Dissemination Services” for small businesses implemented by Chamber of Commerce and Industry(CCI) or Society of Commerce and Industry(SCI). The purpose of MARUKEI Loan is, by providing small loans, to enhance the effectiveness of management counseling by CCI or SCI and realize managerial improvement of small businesses. MARUKEI Loan is extended by JFC-Micro without taking any collateral or a guarantor on the basis of recommendation from CCI or SCI.

Target and Condition 2. “MARUKEI Loan” Program Target of the Loan Commerce and service business with 5 or less full-time workforces Manufacturing and other business with 20 or less full-time workforces Requirements Getting recommendation from CCI/SCI. Requirements to get recommendation from CCI or SCI Receiving management counseling of CCI/SCI for 6 months or more Being in business for one year or longer in the same district Fully paying taxes Terms and conditions Max. amount 15 million yen ( =185,000 USD) Payment period Equipment: 10 years or less, Working: 7 years or less Collateral Collateral or a guarantor is not necessary. Interest rate 0.3% lower than JFC-Micro basic rate

“The Managerial Improvement and Dissemination Services” 2. “MARUKEI Loan” Program Policy Framework “Act on Supporting Small Business by CCI/SCI” “Basic Guideline to CCI/SCI” formulated by the Minister of METI Other operation Other operation “The Managerial Improvement and Dissemination Services” MARUKEI Loan Subsidy Government CCI SCI Small Businesses Counseling by Management Counselors on finance, tax, accounting, labor, transaction, innovation, management, ICT, environmental measure, etc.

CCI and SCI 2. “MARUKEI Loan” Program CCI and SCI are special legal entities aimed at developing regional commerce and industry. Chamber of Commerce and Industry (CCI) Society of Commerce and Industry (SCI) Number 515 1,812 Members Approx. 1,352,000 Approx. 913,000 Location Mainly established in large cities Mainly established in small cities, towns and villages No jurisdictional overlap between CCI and SCI. Operation Counseling and advisory service for businesses Issuing certificate of origin, etc. Mainly counseling and advisory service for small businesses Statutory Law CCI Act (1953) SCI Act (1960)

Mr. T, Management Counselor 2. “MARUKEI Loan” Program Management Counselor CCI and SCI employ certified Management Counselors. <Must correspond to any of the following> Having received the official training course Having experience on management counseling or business management for a certain period Being qualified as CPA, Licensed Tax Accountant or SME Shindan-shi Mr. T, Management Counselor of XXX SCI I visit small businesses in the region on a daily basis, and I offer counseling on various managerial matters. It is called “Circuit Management Counseling.” When I am consulted on a financial matter, I sometimes recommend to apply for MARUKEI Loan. Since I keep close contact with managers of small businesses, I know well about their personality, business situations, human relationship and even their family.

Procedure for the Loan 2. “MARUKEI Loan” Program CCI or SCI JFC-Micro (4) Recommendation and application for the loan CCI or SCI JFC-Micro Analysis Approval Approval from the Chairman Assessment Committee (3) Recommendation letter, etc. Management Counselor Close Relationship (1) Management counseling (2) Application for recommendation (5) Loan Small Businesses

<Average> 4,389,000 yen (542,000 USD) 2. “MARUKEI Loan” Program Results of the Loan The latest results of the loan Loans disbursed in FY 2009 Number 42,665 Amount 187,244 mil. yen (2.3 bil. USD) <Average> 4,389,000 yen (542,000 USD) Loans outstanding as of the end of March, 2010 183,436 418,578 mil. yen (5.2 bil. USD) Composition ratios by industry (Number of loans disbursed in FY 2009) Manufacturing Wholesale Retail Service Construction Others

Management Counseling 2. “MARUKEI Loan” Program Key Concept of MARUKEI Loan Linkage between managerial support and financial support CCI/SCI Wide network Information on regional small businesses Close Relationship JFC-Micro Fund for loan Knowhow on lending (monitoring, etc.) Meeting, Seminar, Information exchange Management Counseling Linkage MARUKEI　Loan Small Businesses Getting no collateral/guarantor loan Improving management CCI/SCI Enhancing the effectiveness of the management counseling JFC-Micro Alleviating the problem of information asymmetry

Frequently Asked Questions (1) 2. “MARUKEI Loan” Program Frequently Asked Questions (1) Does CCI/SCI take management counseling fees from small businesses? No, counseling is provided without any fees. How does CCI/SCI cover the operational cost? CCI/SCI is operated by annual member fees and government(central and local) subsidy. Counseling services are offered to non-member small businesses as well. Who takes credit risk of MARUKEI Loan? JFC-Micro takes all risks. Loan contract is made between JFC-Micro and small business borrower. Does JFC-Micro pay a commission to CCI/SCI? No, JFC-Micro dose not pay any commissions. Does JFC-Micro approve all of the recommendation from CCI/SCI? No. JFC-Micro can reject the recommendation. However, in reality, most of them are approved.

Frequently Asked Questions (2) 2. “MARUKEI Loan” Program Frequently Asked Questions (2) What kind of action do JFC-Micro and CCI/SCI take in case of payment delay? JFC-Micro monitors borrowers in cooperation with CCI/SCI. What does JFC-Micro do in case of default? JFC-Micro makes every effort for collection. If repayment is not expected, JFC-Micro will write off the loan. Does CCI/SCI take any responsibility for NPL ? No, CCI/SCI does not have any legal responsibility. How about the NPL ratio of MARUKEI Loan compare to other loan ? Roughly, a little higher than other loan programs. (It is difficult to compare accurately since the different calculation method is adopted.) Are there any possibilities of corruption between Management Counselor and small business borrowers? To avoid such situation, JFC-Micro keeps close relationship with CCI/SCI and checks carefully each recommendation before approval.

Collaboration with Business Supporters Appendix 1 Collaboration with Business Supporters Business Supporters Close Relationship JFC-Micro SME CCI SCI Management counseling MARUKEI Loan ＋ Environmental Health Trade Association Managerial advice on EHB ＋ EHB Loans SMRJ, Local Government Technical support for entrepreneurs Business Startup Loan University, College ＋ NPO Financial and managerial advice Licensed Tax Accountant General Loan ＋ Special Loan SMRJ: “Organization for Small and Medium Enterprises and Regional Innovation, Japan”

JFC-Micro’s International Cooperation Appendix 2 JFC-Micro’s International Cooperation JFC-Micro has accumulated unique knowhows on Micro and Small Enterprise finance , such as credit analysis techniques, over the past 60 years. Recently, not a few foreign countries requested JFC-Micro to transfer its experience, knowledge and techniques. In order to meet these demands, JFC-Micro established International Cooperation Office in 2001. Participating in ODA technical assistance projects by MOF, JICA, etc. in the field of SME/MSE finance Dispatching experts to international conferences and seminars related to SME/MSE finance or microfinance. Accepting foreign study groups and dispatching staff to seminars held in Japan to give lectures.

Thank you for your attention! Contact Us. International Cooperation Office, Japan Finance Corporation, Micro Business and Individual Unit (JFC-Micro) <E-mail> morita-t@jfc.go.jp <Website> http://www.k.jfc.go.jp/pfce/indexe.html