Starving the small firms (and farms)
Ask a small entrepreneur what her/his most formidable hurdle is to sustaining her/his business, let alone expanding it, and chances are she/he will point to financing. Data recently cited by the World Bank show how pathetically behind the Philippines is relative to its Asean-5 neighbors in bank loans extended to small and medium enterprises (SMEs). As of 2014, Thailand had US$171 billion, Malaysia US$61 billion, Singapore US$57 billion, Indonesia US$51 billion, and the Philippines a paltry US$9 billion.
As these economies vary widely in size, a more comparable assessment should look at the total value of output (gross domestic product or GDP) generated by SMEs as well. As a ratio to the total GDP from SMEs, SME loans in the Philippines and Indonesia only came up to 9 percent, Singapore 36 percent, Malaysia 55 percent, but Thailand a whopping 105 percent. Small Thai firms actually get more bank loans than their aggregate GDP contribution! At the other end, Philippine SME loans are equivalent to less than one-tenth of SMEs’ GDP. While Indonesia posts the same low ratio, its SME loans, along with Thailand’s, were growing the fastest at a compound annual growth rate of 12 percent. Singapore’s SME loans were growing at 11 percent, Malaysia’s at 8 percent, but Philippine SME loans grew more slowly (6 percent) than the overall economy did—leading us to lag behind even more.
It makes eminent sense, then, that as our country chairs and hosts the Association of Southeast Asian Nations (Asean) this year, our foremost economic agenda is the cause of micro, small and medium enterprises (MSMEs). We have chosen to highlight micro enterprises and expanded the acronym to include a second M, traditionally subsumed under the S (small), and have succeeded in getting the United Nations to adopt the expanded term. But with the relatively pathetic numbers we are showing in SME finance, it may look like we are mostly preaching to the choir. In reality, much of the needed work must start right here at home.
The Department of Trade and Industry gathered last Friday over 1,000 people spanning the private sector, civil society and the government from across the region, in the Asean 2017 MSME Development Summit. In preparation for that, the DTI had also convened three pre-Summit roundtable discussions in May, attended by about 100 participants representing a similar cross-section of stakeholders. With strong participation by MSME practitioners themselves, both the Summit and the roundtables leading to it discussed the seven Ms that now define the government’s strategy to provide holistic support to widen and deepen the MSME sector: Mindset, Mastery, Mentoring, Money, Machines, Markets, and Models.
For the middle M of money, referring to the dearth of financing discussed earlier, the Summit identified three key imperatives. First, we need to develop, promote and expand alternative financial instruments to better serve MSMEs’ needs. Beyond traditional bank loans that have not been forthcoming enough, financing options could include movable collateral, export packing credits, receivables financing, social venture capital, securitized investments, and online crowd funding mechanisms. Second, we need to develop and apply a more appropriate regulatory framework to govern development banks and other financial institutions designed to address MSME financial requirements. When subjected to the same rules and standards that commercial banks are held to, they will behave like commercial banks, and deviate from their mandated mission of serving the financing needs of small firms and farms, as has been lamented about the Land Bank and Development Bank of the Philippines. Third, MSMEs need help to become creditworthy, via improved financial literacy and management, risk-sharing schemes, and a responsive credit information system using data analytics with alternate data not typically used in credit reports.
There is wide scope for widening our MSMEs’ access to capital, and unless we succeed in this, we will remain the region’s bottom-dweller in having small firms become the inclusive economic growth driver they could and should be.
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