The crucial ‘M’ in entrepreneurship

Even today as I am halfway around the world, I am never too far to keep abreast of news from home. Last week, I was delighted to hear that the Kanegosyo Center has been formally launched, and that I got a special mention from our President for our efforts to work together with other members of the private sector towards MSME development.

The President said that he was quite happy that members of the private sector who are involved in MSME development “see each other not as competitors but as partners.”

“That is the heart of what we are doing here – that we are trying to work together,” he said.

I couldn’t agree more. This is not a competition. We need to work together, to move forward in the same direction, and help each other to make the Philippines become competitive worldwide.

The 2022 presidential campaign left a resounding word in the hearts of many Filipinos: ‘unity.” It is a term that carries immense weight and significance, reminding us of the importance of collective action in achieving our goals. Ask anyone who has ever been on a boat – whether as a sailor, seaman or passenger – and they will tell you how important it is to follow the captain’s orders for the voyage to be successful. Just like a crew following the skipper’s lead, unity is the key to reaching our destination safely and efficiently.

That is why the recent decision by one of the country’s largest microfinance companies to dedicate a service to support MSMEs is truly commendable. It responds to the President’s call for the private sector to come together to help MSMEs become the drivers of economic growth, and it will give access to an important resource in entrepreneurship.

The pillars of successful entrepreneurship, which we at Go Negosyo often refer to as the three Ms – Mentorship, Money and Markets – are crucial factors in propelling small businesses towards growth. Of these three pillars, “Money” can prove to be the most challenging, especially for those with limited resources and who wish to seek capital from traditional institutions.

The President himself observed that banks tend to favor billion-peso loans over smaller ones because of the higher returns generated from larger transactions. The situation has hardly changed in the last decade. In 2022, loans to MSMEs accounted for only 4.2 percent of new loans granted by universal and commercial banks; this is an even smaller fraction from more than a decade ago. Yet even the banks will be the first to admit that they would sooner pay millions in penalty than risk billions in lending to small businesses, especially to those engaged in agriculture, which is still perceived as an unpredictable business.

Hardly is it surprising then that MSMEs often resort to borrowing from friends and relatives rather than banks. From our interactions with MSMEs, we gather that they are often overwhelmed by the documentary requirements and ultimately are intimidated by the prospect of borrowing from the formal sector. The situation is even worse in the provinces, as the smaller MSMEs, particularly the ones in agriculture, are often located in the barangays and sitios that have no bank presence at all.

And when these MSMEs do decide to approach external sources of capital, they often find themselves entrapped in the oppressive cycle of debt associated with the informal finance sector. The struggle faced by small businesses is evident, and it is high time we shift our focus from simply telling them what they “ought” to do and instead assess whether they have the means to do so.

We frequently hear suggestions that MSMEs should explore new markets, diversify their product offerings or enhance their operational processes. Well-meaning and sensible as these may sound, the advice must be tempered with a broader perspective and acknowledge that the notion of “ought” implies the presence of the necessary resources and support. Before imposing expectations on these small entrepreneurs, we must ensure that they have access to the means required for growth and success.

Because safe, risk-averse lending is the nature of the business of banking, it becomes all the more commendable when financial institutions go out of their way to empower the smaller players in our economy.

Financial institutions play a pivotal role in empowering small businesses. While it is fair to acknowledge their limitations, the question remains: Can financial institutions go beyond their traditional lending practices to cater to the unique needs of MSMEs? This is a question that they must answer themselves, as they have the power to unlock the immense potential within our entrepreneurial ecosystem.

Filipino entrepreneurs are known for their resilience, creativity, grit and courage; these qualities are abundant within the millions of MSMEs that make up almost all the enterprises in the Philippines. What we, as the private sector, possess are the necessary resources to facilitate their growth and provide them with opportunities. It is incumbent upon us to recognize the value of investing in MSMEs and to foster an environment where financial institutions actively participate in supporting the dreams and aspirations of these entrepreneurs.

By embracing unity and harnessing our collective resources, we can enable the Filipino entrepreneurial spirit to flourish, empowering MSMEs to drive economic growth, create employment opportunities and contribute to a vibrant and prosperous society. At present, the MSMEs’ contribution to the country’s GDP is estimated at around 40 percent. Given the large number of MSMEs in the country, there is still so much more room to grow.

MSMEs must be given the access to capital that they need to become the true drivers of economic growth in the country. It is time for financial institutions to rise to the occasion, realizing their potential to make a significant and lasting impact on the lives of small businesses across the nation.