ADB extends $44-M package for development of SMEs in RP

The Asian Development Bank (ADB) is extending a package of grants and loans amounting to roughly $44 million for the development of small and medium enterprises (SMEs) in the Philippines.

The package is composed of a partial credit guarantee facility of $18.4 million, a $25-million loan, and an equity investment potential worth $1 million.

The loan carries a 15-year term with a three-year grace period, and an interest rate determined in accordance with ADB’s Libor-based lending facility.

The project is supported by a technical assistance grant to strengthen credit management systems for SMEs, and a separate grant from the Japan Fund for Information and Communication Technology, financed by the Government of Japan, to develop the Philippine business registry.

The package is part of a number of pipeline projects covering the years of 2005 to 2007 and targetted to reach up to $1.5 billion, "depending on progress of sector reforms and fiscal consolidation."

ADB senior financial economist Asa Malmstrom Rognes said the financial package projects to stimulate SME development which in turn will contribute to sustainable growth and job generation.

"The combination of a public sector loan and a private sector facility allows the project to target different segments of the SME market and will hopefully expand financing to SMEs through a demonstration effect," Rognes added.

The Small Business Guarantee and Finance Corp. (SB Corp.) is the executing agency for the project, which will be carried out over five years.

The loan, which has a sovereign guarantee, will serve as a credit line to SB Corp., which will onlend the amount in local currency to viable SMEs with a sound business foundation that do not have access to bank financing. It will also strengthen the government financial institution’s credit underwriting and risk management.

The partial credit guarantee facility, equivalent to P1 billion, will be offered to encourage selected private sector financial institutions to expand their SME portfolio. However, it does not have a sovereign guarantee.

The facility will cover up to 50 percent of well-defined SME loan portfolios.

SME’s are an integral part of the Philippine economy, contributing 32 percent of value added and accounting for 31 percent of employment. However, effective SME operation is constrained by lack of supportive policies, cumbersome and costly registration and licensing processes, lack of a national business and collateral registry, and absence of comprehensive credit information.

Access to and availability of financing is limited due to banks’ perception that SME lending is more costly and risky compared to other investments, as well as to SME’s difficulty in preparing credible business plans and realistic cash-flow estimates and providing sufficient collateral.<