31 Aug 2013

Funding the SMEs in the Philippines : a true challenge to support an economic (and sustainable) development

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Small business

SMEs’ access to funding is not only a hot issue in the hold economies, as it has been the case in the EU for instance, as an aftermath of the financial crisis. Small entrepreneurs in emerging countries are facing similar obstacles to grow their activities.

 
 
 
 

The Filipino SMEs’ market

Despite a strong economic growth (+/- 6 % per annum) , the Philippines are facing a persistent poverty line encompassing 30 % of the population. Accessing to a job is the most acute issue that face the poor. Some of them would have the capabilities to develop their own business (and engage staff) but they are limited in their development by the low amount of loans served by the microfinance institutions (MFIs). They fall into what we call the “missing middle”, i.e. the range of business activities that are too big to be supported by MFIs, but too small to be eligible to loans from commercial banks.

The challenge is even higher with emerging countries as they need a solid banking and financial framework to set up the basement of a formal SMEs’ sector – i.e. paying taxes – and secure a sound economic growth.
In the Philippines, there are around 800.000 registered SMEs and further 100.000 are estimated as being unregistered. 50 % of them fall into the segment of wholesale and retail trade.
Manufacturing activity and hotels & restaurants represents each around 100.000 companies.
 

Government policies and programmes for SMEs

The first programme for the SMEs was launched in the 70’s, in a political context of economic protectionism. No successful results were obtained.
The liberalization era in the 80’s was subject to the development of new financial solutions like guarantees to exporters and various supports to SMEs in order to help them face the steady growing competition.
Considering the intense competition climate surrounding the world economy, the focus in the 1990’s was specifically put on export expansion, entrepreneurship and management, technological upgrade
For instance, in 1991, the Magna Carta for Small Enterprises was passed to consolidate government programmes for the promotion and development of SMEs into a unified framework. The Magna Carta (terminology that could be defined as “part of a constitution ensuring rights and liberties”) also mandated all lending institutions to set aside 8% of their total loan for the SMEs’ sector.

The success of government-sponsored lending programs would have been limited because to two main reasons :

1) much of the funds from these programs are directed not to real SMEs but more toward livelihood and micro-enterprise projects. Microfinance is still reaping the results of its popularity among investors and lenders worldwide

2) another thesis of the weak impact of the lending programmes is provided in a paper called “SMEs access to finance : Philippines” (1) :“although banks appear to be generally complying with the mandatory lending to SMEs, with a total compliance rate reaching almost 29 percent in 2002; these loan funds, particularly from large banks and financial institutions, have hardly benefited small firms. Anecdotal evidence shows that much of this money does not actually go to SMEs but to some large firms that deliberately understate their assets so as to be classified as small or medium enterprises …Meanwhile, some rural banks cite difficulties in finding medium enterprises in the small towns where they operate. Mostly, banks would rather pay the fine than set aside non income-generating funds for lending to medium enterprises”.
 

Main obstacles to SMEs’ funding

“So far, the largest proportion of SMEs’ funding comes from the personal resources of
business owners and their family members including internal accruals as well as borrowings from relatives and friends and loans from informal lenders. Bank financing represents a very small proportion of both start-up capital and the current financing needs of SMEs, which reflects the difficulties faced not only by SMEs in obtaining loans from banks and other formal sources, but also the unwillingness of many owners to secure loans from formal and informal lenders”.

It is then observed that funds obtained from the banking sector accounted for only 11 to 21% of capital raised by SMEs. This is lower than the 30% international benchmark seen in other developing countries like India and Thailand.

Despite the availability of funds for lending, SMEs find it difficult to access these funds.
The main issues highlighted are :
– the overemphasis on collateral, becoming a fundamental risk to ignore the project’s feasibility
– the weak compliance with the requirements to apply for a loan : submission of financial statements and business plans is often out of the skills and capabilities of the business owners. Due to high costs, they cannot be assisted by an accountant.
general aversion among private banks to dealing with a larger number of smaller accounts (many banks are still not aware of the need for lending to small businesses)
long loan-processing times resulting from these two above-stated factors
deficient financial expertise with the business owners to manage a healthy cash-flow
refused financing by credit suppliers
 

Policy recommendations

To improve SMEs access to finance, it may be suggested the following approach :

1) Reinforce the skills of credit officers in banking and financial institutions
Although all loan and credit information are managed by CMAP – Credit Management Association of The Philippines (2), it is important to address the high-risk profile of firms arising from the absence of track records, informational asymmetries, shortage of assets and collateral and insufficient management skills.

2) Training and capability-building programmes for SMEs
There is a dramatic need to improve the financial literacy and management capacity of the business owners. Even in the most developed countries, it remains an steady issue …
 
 
 
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(1) Paper writen by Rafaelita M. Aldaba, from Philippine Institute for Development Studies (PIDS)

(2) The CMAP governs all financial institutions that provide loans and credit. Its members are banking, financing, services, trading, manufacturing and insurance sectors. They aim to instill, develop and nurture credit consciousness, responsibility and discipline among ourselves and among credit grantors private sectors and to promote active and voluntary interchange, and mutual reciprocal use, of quality credit information

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