To expand, create more jobs SMEs need more nonbank financing options

MANILA, Philippines - Small and medium-sized enterprises (SMEs) in Asia, including the Philippines, need better access to finance to grow and generate badly needed new jobs, according to  a report from the  Asian Development Bank (ADB).

“Most of Asia’s smaller firms are faced with difficulties in obtaining finance,” said Noritaka Akamatsu, deputy head of ADB’s Office of Regional Economic Integration, which produced the inaugural edition of “Asia SME Finance Monitor.”

“SMEs need to be able to tap a wider range of nonbank financing options in addition to bank loans, including capital markets if they are to realize their potential,” he added.

In the Philippines, the SME Development Plan 2004-2010 said that most SMEs had to rely mainly on owners’ savings and personal loans from family and friends for funding, the report said. Only a small segment sought financing from established institutions; many were deterred by fear of loan exposure, lack of collateral, and lack of knowledge on credit sources and processes.

SMEs — enterprises with a generally small workforce or low assets — make up 98 percent of all businesses and provide jobs for 66 percent of the labor force in Asia. But they represent only 38 percent of the region’s gross domestic product (GDP), indicating that governments can boost economic growth by developing SMEs.

However, small firms have trouble getting the finance they need, often losing out to larger companies in getting bank loans.

Although many governments have policies promoting SME growth, most measures usually focus on facilitating bank loans, such as public credit guarantee schemes in Indonesia and Thailand, secured transaction reforms in the Pacific region, refinancing schemes in Bangladesh and Malaysia, and mandatory lending in the Philippines.

The report highlighted the need to incorporate nonbank financing options and other schemes into national policies, such as increased use of asset-based finance and capital market instruments.

The report, which includes data on SMEs in 14 Asian countries, found that as the world economy becomes increasingly interlinked, SMEs will need access to further trade finance, supply chain finance, and innovative funding models to expand their business globally.

The Philippines’ MSME Development Plan 2011-2016 addresses the challenges and constraints facing the micro, small, and medium-sized enterprises. Two primary targets under the plan are to create two million jobs by 2016 and raise the economic contribution of MSMEs from 35.7 percent of total gross value added in 2006 to 40 percent by 2016.

To remove the two major impediments in MSME lending—lack of collateral and lack of credit information—the Bangko Sentral ng Pilipinas and policy makers are continuously developing the financial infrastructure for an enabling environment for MSMEs’ access to finance.

In 2008, the Credit Information System Act under RA No. 9510 mandated the creation of the Credit Information Corporation to provide a non-collateral-based credit system in the country.

The act requires all types of banks, insurance companies, credit card issuers, cooperatives, microfinance institutions, and other credit institutions to share their credit data with the Credit Information Corporation. The credit information system is set for full implementation by 2016.

In June 2013, the Department of Finance signed the movable collateral framework document, establishing a system that encourages financial institutions to accept non- real property assets as security for lending to MSMEs by 2015.