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Issues of Community-Based Financing and the Possibility of Cash-Flow Lending

Hiroshi Oka, Senior Fellow
April 2018


Regional financial institutions facing declining profitability are pursuing initiatives for community-based financing to establish sustainable business models. According to the Annual Report from the Financial Services Agency of Japan (FSA), this financial model “aims to promote the development of the local economy and stabilize its management base through […] financing based on a business value evaluation of business partners and business support among others.” It is an effort to provide added value such as loans based on business feasibility evaluations and business support, among others, to business partner companies by increasing net-income capital by raising the lending interest rate.

This community-based finance model takes the stance that, in response to business support and information provided by the regional financial institution, and activities to promote understanding of the businesses conducted by the company, the business partner company acknowledges its value and responds to the interest rate increase (pays a reasonable price). In interviews and opinion surveys targeting corporations conducted by the FSA, it was found that “Corporations are more inclined to emphasize attitudes which bring financial institutions closer to other corporations, such as ‘seeking understanding of their company and their company’s business’ and ‘trust-based relationships built over the long term’ rather than ‘interest rate conditions of loans’”, meaning that the idea and direction assumed by community-based finance are consistent. However, in an interview survey targeting regional financial institutions conducted by this author, significant doubt about the FSA’s report was expressed: “Many corporate managers are particular about the interest rates from regional financial institutions, which goes against the FSA’s findings”.

Moreover, in financing based on the business feasibility evaluation, which is the core of community-based finance, problems such as the below were expressed:

  • It is difficult to detect changes in the business environment and creditworthiness of business partners in a timely manner.
  • It is difficult to obtain accurate information necessary for evaluating the business of the business partner company.
  • At the time of loan appraisal, there is a tendency for projects to be evaluated with a uniform weight, which hinders proper credit judgement.

Companies targeted for loans based on their business feasibility evaluation are those in which the obligor is classified from the lowest to the normal level of caution, and in some cases is defined as being concerned about the possibility of bankruptcy, with a high risk of collateral. Potential bad loans will be accumulated when advancing lending methods with the above problems, and it is also expected that it will become obvious instantaneously due to changes in the economic environment.


The full version of this report is available in PDF format below. This report is only available in Japanese.
Issues of Community-Based Financing and the Possibility of Cash-Flow Lending (1.23 MB )