Micro entrepreneurs’ real problem

There has been much talk about helping small businesses become the backbone of a prosperous economy even in previous administrations, yet micro entrepreneurs still struggle to survive. There is actually a law—Republic Act No. 9501, or the Magna Carta for micro, small and medium enterprises (MSMEs), signed on May 23, 2008—that should guide the government in growing this sector, but its implementation leaves much to be desired.

Last week, Malacañang released a copy of the Philippine Innovation Act that President Duterte signed on April 17. It seeks to “remove obstacles to innovation by suppressing bureaucratic hurdles” and “encourage entrepreneurial attitude in order to stimulate growth ambitions in business,” especially MSMEs. The law created the National Innovation Council “to develop strategies to promote the creation of new ideas that will be developed into new and quality products, processes and services aimed at improving the welfare of low income and marginalized groups, as well as create livelihood for these sectors.”

Also last week, the Department of Trade and Industry (DTI) announced that it has released more than P3 billion worth of loans to beneficiaries of its lending program for micro and small enterprises. The amount was extended under the DTI’s Pondo sa Pagbabago at Pag-asenso (P3) program, the government’s microfinance initiative to eradicate usurious “5-6” lenders. Since its launch in 2017, the program has made available to more than 83,000 microentrepreneurs loans worth P5,000 to P200,000. There is a proposal to pass a P3 bill in Congress to institutionalize the program. While the program gets an annual allocation from the national budget, making it a law would give it more certainty.

The government is also working on the guidelines that would govern the implementation of a new law allowing small businesses to obtain bank loans using personal property like vehicles or equipment as collateral. The law was signed by Mr. Duterte last year in a bid to accelerate the growth of MSMEs, which provide bulk of employment in the Philippines.

These efforts are laudable, but the main issue that needs to be addressed is the access of MSMEs to formal financing from banks. Small and medium-scale businesses were estimated to contribute up to 62 percent of employment and comprise more than 90 percent of all businesses in the Philippines. However, they received only 9.2 percent of loans and financing from the country’s major banks. The number of registered businesses in the Philippines was 1.42 million as of May 2019.

The business community has time and again raised the continued lack of access to financing as the biggest hurdle for these small firms, which puts them at a big disadvantage especially when competing in the global market.

Sergio Ortiz-Luis Jr., president of the Philippine Exporters Confederation Inc., recently argued that, locally, there seems to be a bias in lending against MSMEs, as most banks would rather lend to one big company than 20 small enterprises: “From my point of view, what we as an MSME need is access to financing. There is a law, but it is not being implemented effectively due to the faulty implementing rules and regulations of the Magna Carta for MSMEs, which does not seem to be working well as financing has not flowed into the sector over the years.”

Focus, indeed, should be given to addressing restraints to capital and other sources of funding besetting MSMEs. The World Bank earlier noted that 81.2 percent of Philippine businesses relied on internal funds to finance expansion or keep themselves afloat, and that only 0.1 percent of them could access bank financing, which is a key ingredient of growth. Smaller firms do not know where to turn to for financing, although banks have often argued they have very scant knowledge of small businesses because of their lack of credit history. Yet how can MSMEs develop such history if banks don’t lend them in the first place?

The MSMEs’ predicament should prompt the government to require banks to recognize the key role MSMEs play in the Philippine economy, and to allocate more of their money to help these MSMEs prosper. Perhaps it can use its regulatory powers if moral suasion fails. There are other problems that MSMEs face, including red tape in dealing with permits from local government units. However, the most pressing need remains the lack of access to bank financing that is being filled by usurious lenders. It’s about time this problem was addressed squarely and firmly.