PHILIPPINE banks again failed to follow the law requiring them to lend 10 percent of their loan portfolio to micro, small and medium enterprises (MSMEs).
Data from the Bangko Sentral ng Pilipinas (BSP) showed banks approved only 4.52 percent or P488.13 billion of their P10.8-trillion loan portfolio to MSMEs as of June. Furthermore, banks have fallen short of the mandatory credit allocation for MSMEs since 2011.
As of 2022, MSMEs comprise a staggering 99.6 percent of all registered businesses in the Philippines — highlighting their integral role in the country’s economic landscape. MSMEs are also responsible for 65.1 percent of total employment across the nation.
The concentration of employment within MSMEs makes it even more important for the government to address their bank financing and financial inclusion challenges.
Republic Act 6977, or the Magna Carta for MSMEs, mandates all banks to allocate 10 percent of their total loan portfolio for small businesses to boost the sector — 8 percent for micro and small enterprises and 2 percent for medium-sized enterprises.
However, many banks would rather pay penalties for noncompliance instead of assuming the risks that come with lending to MSMEs.
From the measly 4.52 percent (P488.13 billion) of the banks’ P10.8-trillion loan allocation, micro and small enterprises accounted for 1.82 percent, while medium-sized enterprises received 2.7 percent.
Breaking it down, universal and commercial banks lent 1.35 percent of their total loan book (P134.1 billion) to micro and small businesses, and 2.38 percent (P235.8 billion) to medium enterprises.
Thrift banks allocated 3.74 percent of their loan book to micro and small businesses, and 5.39 percent to medium-sized businesses.
Digital banks lent 1.41 percent (P250 million) to micro and small businesses, and 0.16 percent (P30 million) to medium enterprises.
In contrast, rural and cooperative banks have performed better in providing MSMEs access to bank financing. The BSP says rural banks loaned 17.61 percent (P37.9 billion) of their total credit to micro and small enterprises, and 9.26 percent (P19.9 billion) to medium businesses — far exceeding the required threshold for lending.
Obstacles
MSMEs face obstacles in bank financing due to high interest rates, lack of collateral assets, fewer financial documentation of their creditworthiness and a general lack of tailored financial solutions. To fill the gap, the government has partnered with private fintech institutions such as Paymongo and First Circle. The latter offers specialized credit lines to SMEs for as low as 0.99-percent monthly interest rate — lowering the barriers to financing by requesting fewer application documents from SMEs, as well as removing application and processing fees.
According to BSP’s 2021 Financial Inclusion Survey, seven out of 10 farmers and agricultural workers remain financially excluded. This exclusion includes female business owners, with 58 percent of women-owned MSMEs citing access to finance as a challenge compared to 37 percent of male-owned MSMEs.
A notable gap also persists in the adoption of digital finance across different types of MSMEs. According to the 2022 ADB MSME survey, 44 percent of male-owned MSMEs use digital financial services, while only 28 percent of female-owned MSMEs do the same.
In terms of enterprise size, 19 percent of micro, 54 percent of small and 73 percent of medium enterprises reported using digital financing systems.
The same ADB 2022 survey mentions that only 12 percent of male-owned and 9 percent of female-owned MSMEs cited access to training and information as adequate. This issue is more pronounced among smaller enterprises, with only 6 percent of micro businesses reporting sufficient access, compared to 25 percent of medium enterprises.
BSP’s National Strategy for Financial Inclusion for 2022-2028 is a set of objectives devised to promote financial health and financial inclusion for MSMEs. Its initiatives focus on broadening financial literacy, increasing access to various financial services and enabling MSMEs to build a strong financial foundation so these can thrive and more readily access bank financing.
Key objectives include:
– Strengthening credit infrastructure: Initiatives such as the credit risk database will improve risk assessment for MSME clients, while the credit surety fund is a credit guarantee program that enables MSMEs easier access to non-collateral bank financing by helping MSMEs become creditworthy and bankable.
– Promoting innovative financing: Through movable asset finance, the BSP encourages alternative financing solutions that help MSMEs secure credit using nontraditional collateral, such as livestock, machinery, receivables and other movable assets.
– Digitally enabling MSMEs: Initiatives like the Standard Business Loan Application Form and PalengQR Plus Program aim to streamline application processes and facilitate digital transactions for more MSMEs.
Financial education and consumer protection also plays a critical role in empowering MSMEs to manage their finances and utilize available resources effectively. DTI Negosyo Centers across the Philippines provide financial literacy sessions and strategies to improve practical skills and financial inclusion among entrepreneurs, while BSP’s Financial Consumer Protection Framework helps MSMEs resolve issues and maintain confidence in using digital finance tools.
Jess Jacutan is an SEO and content marketing consultant for First Circle, an SEC-registered financial technology company that has been empowering SMEs through funding and free growth tools since 2016. Feedback at [email protected] and [email protected].
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