Reforms to credit information system needed to expand small businesses’ access to capital

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FINANCIAL REFORMS are required to improve small-business access to capital, enabling them to expand and participate in bigger projects such as those in the government’s program to radically upgrade Philippine infrastructure.

At the 5th Asia Pacific Economic Cooperation (APEC) Financial Infrastructure Development Network forum at the Philippine International Convention Center yesterday, participants backed the establishment of a legal framework for the use of moveable assets as loan collateral, as well as a universal registry for sureties that would accelerate credit decisions.

Such reforms are expected to benefit micro, small and medium enterprises (MSMEs), providing credit for their expansion — the potential for which is currently limited because banks seek hard collateral such as real estate.

“The most important challenge for MSMEs is access to financing. And the main reason to that is the lack of a good credit infrastructure,” said Julius Caesar Parreñas, senior advisor to Mizuho Bank, Ltd. in a press briefing.

He said that three critical initiatives will address these issues: a secured transactions law, credit information and insolvency systems.

A secured transactions law establishes a legal framework for the use of non-traditional collateral, such as accounts receivable, inventory, and intellectual property, among others.

House Bill No. 3682, which addresses the matter, is currently pending at the committee level at the House of Representatives.

Gay Santos, senior finance specialist from the International Finance Corp. of the World Bank group, said that despite having a stable banking sector, bank liquidity does not reach micro enterprises.

“One of the things that can bring the best bang for the buck in terms of financial inclusion is the implementation of reforms such as the secured transactions law,” she said, noting that it has been making good progress.

“This is providing a chance for every Filipino to really reach a sustainable level of growth,” Ms. Santos said.

However, she added that the country should have a centralized repository of movable assets for banks, which can also support their risk management assessments.

Mr. Parreñas added that a credit information system where banks can review the borrower’s track record will also make lending outcomes more predictable.

He added that such system could also include information on payments for utilities, and mobile phone bills so that unbanked individuals could still put together a credit history.

Finance Undersecretary Gil S. Beltran said that of the 10 members of the Association of Southeast Asian Nations (ASEAN), seven have secured transactions laws, while five have a universal collateral registries.

Christopher Wohlert, commercial distribution finance leader for Wells Fargo Asia, said that the reforms are meant to win over small businesses from informal sources of funds.

“As those enterprise grow, they need to borrow more money, that they move beyond friends and family, to the uncollateralized form or reputational lending,” he said.

“So it’s the next step that allows the MSMEs to continue to grow and succeed and not be limited by the amount of real estate that they have. It fills the gap between reputational lending, up to the corporate bond issuances, and even formal capital markets. That would enable them to succeed,” Mr. Wohler added. — Elijah Joseph C. Tubayan