30 Sep 2013

Social business in the Philippines (3) : financing the “missing middle”

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Negosyong Pinoy Finance CorporationWe continue our series with the case of a Manila-based finance company I recently visited whose mission is to fill the gap between microfinance and conventional banking. This company is worth being mentioned as actors working in what I call the “grey zone” are put under the spotlight.


The finance industry in the Philippines

In overall, out of a population of +/- 900.000 SMEs, the lowest third (300.000 SMEs) is the “grey zone”, i.e. the gap between microfinance and commercial banking where entrepreneurs struggle to borrow money for expanding their business.
At least 10 % of them are financially and severely underserved, which comes up to minimum 30.000 units.

Cartography of the institutions which provide credit :
Finance Industrie-Philippines

There are numerous providers in the Philippines of financial services to lower-middle and lower-income people, and to micro, small and medium‐sized enterprises (MSMEs).
The formal banking sector comprises commercial and universal banks, thrift banks and rural banks. In addition there are a number of (regulated and un‐regulated) non‐bank providers of financial services, including pawn shops, cooperatives and informal money lenders.
Commercial and universal banks are currently minor players in the provincial banking market. They have low branch density outside Manila and traditionally focus on more wealthy clients, since minimum account size limits exclude lower income groups. However, they are attempting to enter the middle income market.
Thrift and rural banks (sometimes called “provincial banks”) focus on the ‘lower mass’ consumer market, and provide most bank lending to Micro, Small and Medium Enterprises (MSMEs).

The Filipino provincial banking market is relatively undeveloped, compared to other countries. Increasing lending in provincial areas would be the most effective way to accelerate employment creation.
The funding gap for MSMEs is substantial. Only 15% of small enterprises in the Philippines use banks to finance their operation and investments. This is considerably less than the average for East Asia and the Pacific rim, of which about 25% access bank financing (1). Commercial banks are required to lend to SMEs but in practice, few actually allocate enough resources to it.

There is enough support, funding and attention to microfinance but very little to SMEs. Thus they remained . . . the “missing middle“.

How to fill the gap ?

In the Philippines, there are more than 300 MFIs (microfinance institutions).
While upper-range loan in microfinance is around 50.000 PHP (less than 1.000 €), some finance companies grant loans in a range from 50.000 PHP to 2.500.000 PHP (less than 50.000 €). This allows to reach the financing need of small entrepreneurs who are overlooked by the microfinance institutions.
The finance company I visited has developed a loan aiming at financing orders from large buyers. SMEs have to face huge treasury needs when they obtain orders from big players … because they must buy the raw material and supplies going into the final product to deliver.
The entire loan request can be granted within a 3 to 5 opening days. This allow the client to confirm the order to the buyer very quickly.

Another loan is dedicated to projects with extraordinary development relevance like projects benefiting persons with disabilities, indigenous people, out-of-school youth, single mothers etc.
Also projects addressing basic human needs like food, education, clothing or those promoting and protecting the environment.

You can get more information about this company on : Negosyong Pinoy Finance Corporation
(1) Khor, Niny, Asian Development Bank. “Constraints to SME Growth and SME Financing in the Philippines”. Keynote speech for NPFC Launch, July 2011

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