MSME financing outside the box

Credit financing for our micro, small and medium enterprises (MSMEs) falls way short that of our comparable neighbors. Not surprisingly, their contribution to our economy’s output and employment is also the smallest. I ended my last column noting the need to do things differently, if we are to address the failure of our financial institutions, including government development banks, to respond to the credit needs of Filipino MSMEs. We have a new MSME Development Plan for 2017-2022 that reaffirms general strategies articulated in past plans, but also calls for innovative and alternative approaches and instruments to feed the still unmet funding needs of countless small Filipino firms and farms.

Improved access to finance is one of five strategic goals on which the new MSME Development Plan is anchored (the others are improved business climate, enhanced management and labor capacities, improved access to technology and innovation, and improved access to markets). The aim is to have public and private financial institutions work together to provide fair and equitable financing to all MSMEs at reasonable cost, and with simplified documentary and collateral requirements. To this end, the strategies are to streamline and simplify loan processes, provide the necessary enabling environment for financial institutions to serve MSMEs better, and improve the MSMEs’ capacity to access formal financial channels.

The importance of the last cannot be overemphasized. While there may be many hurdles to small business finance on the supply side (i.e., that of the financial institutions), much remains to be done on the demand side (i.e., that of borrowing firms) so that funders would even see them worthy of investment. It is commonly observed that many small businesses, especially those at the microlevel, do not even maintain adequate financial records, hence are unable to determine their actual costs and revenues, much less manage them. Wider availability and accessibility of training on financial literacy and management for small entrepreneurs is thus a prior need requiring more providers, well beyond the limited initiatives of government and nongovernment organizations in this area. This is an investment that financial institutions themselves could and should take on. It could pay back in expanded business opportunities and more faithful compliance with mandatory loan portfolio allocations provided in the Magna Carta for MSMEs, and improve their corporate citizenship overall.

The supply side of financing calls for new approaches, including a paradigm shift in the treatment of government financial institutions mandated to serve the financing needs of small farms and firms — namely, the Land Bank of the Philippines, Development Bank of the Philippines, and Small Business Corp. The MSME plan calls for applying a different set of regulatory standards on them, distinct from those applied to regular banks, so they can live up to their true mandates. The government must get away from seeing them as profit-making entities to raise funds for the treasury.

On innovative and alternative financing, it’s well worth noting that financing for small businesses need not be in the form of loans alone, and that financial institutions to serve MSMEs goes well beyond banks. The capital markets offer other modes of turning the economy’s savings into investments in productive endeavors. The need is to connect those with excess funds (the savers) in the economy with those in need of them to fund productive ventures, and advances in information technology offer an expanded set of tools to facilitate this. Venture capital mechanisms to mobilize funds from anonymous investors and a stock market to serve small firms’ capital needs have yet to gain traction here. Crowdfunding, or mobilizing small amounts from large numbers of contributors through the internet, has raised billions of dollars to finance products successfully launched overseas. We need a legal framework that will encourage greater confidence in such mechanisms on the part of our saver-investors.

If we are to finance MSMEs better, it’s time we thought outside the box.

cielito.habito@gmail.com