No Free Lunch

Our credit-starved MSMEs

In Thailand, total bank loans going to micro, small and medium enterprises (MSMEs) in 2014 exceeded the value (105 percent) of their contribution to gross domestic product (GDP). In Malaysia, it was 55 percent, while Singapore had 36 percent. In money terms, Thai MSMEs got a total of US$171 billion worth of loans, Malaysian MSMEs got US$61 billion, and Singapore, tiny as that nation is, had US$57 billion in MSME loans. In Indonesia, the figure was US$51 billion. These comparative data came from a recent World Bank publication.

What about the Philippines? Shamefully, our MSMEs comparatively got a trickle: a mere US$9 billion. That’s equal to less than one-tenth of their GDP contribution. Compared to their Asean counterparts, Filipino small firms are starved of bank loans. The bulk of their capital thus comes out of family savings, or borrowed from friends or relatives. According to the latest (2015-2016) Philippine survey of the Global Entrepreneurship Monitor, less than 6 percent of Filipino entrepreneurs obtain financing from financial institutions, with 78 percent relying on family funds. And then there’s the ubiquitous “5-6” lender, who collects 20 percent (borrow 5, pay 6) on a turnaround of a day to a week. Annualized, that’s an astronomical interest rate, but small businesses often have no other recourse to obtain operating capital.


There’s even more disturbing news: Bangko Sentral ng Pilipinas data show that the share of bank loans going to MSMEs in the Philippines has continuously declined since at least 2008. That was the year Congress passed the Magna Carta for MSMEs, which mandates, among other things, that banks allocate at least 8 percent of their loan portfolios to micro (with less than P3 million in assets) and small (between P3 million and P15 million in assets) firms, and at least 2 percent for medium-scale (P15 million to P100 million) firms. In that year, MSMEs got about 19 percent of total bank loans: Firms in the micro and small categories got around 10 percent, and medium-sized firms got 9 percent. Philippine banks were thus well beyond compliance with the thresholds when the law came into effect. But it would seem that the law had the perverse effect: After enactment, the percentages moved in the wrong direction! By 2011, loans for micro and small firms had fallen below the mandated 8 percent, and were down to just 3.3 percent last year, after continuously falling over the years. Medium firms have likewise seen a continuous decline in their overall loan share, from 9 percent when the Magna Carta passed, to only 5 percent now, although still above the (rather low) 2 percent minimum.

That is of no consolation considering that trends show Philippine MSMEs to be poised to fall even farther behind. Possibly most sobering among the comparative World Bank data is how the compound annual growth rate of bank loans for MSMEs is lowest in the Philippines at 6 percent, even slower than our overall GDP growth. For Malaysia, that growth rate for MSME loans is 8 percent, for Singapore 11 percent, and for Indonesia and Thailand, 12 percent. We already have a pitifully low base to build on relative to our comparable neighbors; worse, we can’t even grow it as fast as they are able to.


The result of all these is evident in the outcomes: The Philippines has the least MSME contribution to total GDP (36 percent) and total employment (61 percent) among the mentioned countries. Indonesia tops the list with 59 percent of its GDP and 92 percent of total jobs coming from its MSMEs. It’s not hard to reach the conclusion that our MSMEs’ being starved of credit financing is our primary problem. There’s clearly something we’ve been doing wrong all these years that led to the failure of our financial institutions, including government development banks, to respond to the credit needs of small Filipino businesses. Whatever it is, the problem needs a hard rethink from all stakeholders concerned.

Last week, President Duterte approved the new MSME Development Plan for 2017-2022. I will focus another column on MSME financing solutions, old and new, that have been proposed and must form part of putting the plan to action.

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TAGS: bangko sentral ng pilipinas, micro small and medium enterprises (MSMEs
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