Money for the ‘missing middle’

Finance has always been widely and easily available for large enterprises in the Philippines. Borrowing from the banks is easy for large companies, or those with 200 or more workers and/or P100 million or more in assets, which make up less than half a percent of our total firms in the country. The more well-known are often able to borrow “clean” loans, meaning without any physical collateral, and get the best terms and lowest interest rates banks could offer. At the other end are microenterprises, or those employing less than 10 workers on assets up to P3 million, which make up 91 percent of all Filipino firms, and which for years have been the object of various government and nongovernment microfinance programs providing credit, insurance and other financial services for the poor. With deliberate targeting on the poorest segments of society, finance has become less of a problem to the smallest of enterprises as well.

And then there are those in between, in the small and medium category, or those with 10-99 workers and/or capital of P3-15 million, and 100-199 workers and/or capital of P15-100 million, respectively, which together account for around 8 percent of all firms. It is for these firms, our “missing middle,” that bank financing has not been as responsive, especially for those in the “small” category. The problem with this is that the bulk of microenterprises get stuck at being “micro.” Moving up to become a “small” on to “medium” enterprise is beset with formidable hurdles, financing being most prominent, along with various government regulations and taxes. As a result, many otherwise promising entrepreneurs would rather stay micro, and I’ve personally heard at least three entrepreneurs say so.

Philippine micro, small and medium enterprises (MSMEs) account for a significantly smaller share of total output (35 percent) and employment (61 percent), compared to most other economies in the Asia-Pacific. Indonesia, considered the most comparable economy in Asean to ours, reports MSME contributions starkly higher than ours, at 59 percent of output and 92 percent of employment. Little wonder, then, that as of 2014, Indonesia reported that its poor made up only 11 percent of its population, while we had more than twice as much, at 26 percent.

I’ve heard it argued that the first M in “MSMEs” are a totally different “animal” from SMEs and should therefore not be lumped with the latter in providing government support programs. Their loan needs are typically within P50,000; banks can reportedly provide up to P150,000 without collateral. SMEs would normally need to borrow more than that, up to a few million in working capital. At this level, loan financing becomes a much more difficult proposition. Banks start factoring in the cost of evaluating and reviewing a loan application, perceived risks, and costs of monitoring, and begin to be reluctant to lend without any collateral or guarantee. Particularly problematic is the P150,000-P2 million loan range, which I’m told most major banks wouldn’t touch, with loan minimums set at P2-3 million. But it is within that range that a microentrepreneur “graduating” into the “small” category typically needs to borrow—and with great difficulty. This is the missing middle, the missing bridge to the next higher level, which keeps micro enterprises where they are, blocking the way to their being S, M or L.

It’s not just all about bank loans, either. Equity and bond financing for SMEs are next to nil in the Philippines, as are mechanisms to mobilize angel investors and formal venture capital. The Tokyo Stock Exchange has long had a “market for the high-growth and emerging stocks” (with the nice acronym “Mothers”); the Philippine Stock Exchange has been struggling to put up a similar equity financing mechanism for smaller but promising firms. A credit information system is critical, and our Credit Information Corporation, a government corporation established by law in 2008, is trying to fill that gap. If SMEs are to be the rightful engines for broadening participation in our economic growth, financing our missing middle is a challenge into which we need put our best minds and efforts.

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