When government programs work
For this column, I want to share with readers the performance of a small fund, the Industrial Guarantee and Loan Fund (IGLF), which has quietly but consistently served the MSME sector over 65 years now. The story of IGLF shows that there are government programs that work, as long as it is managed professionally and kept free from as much political interference as possible.
BRIEF HISTORY
A few years after World War II, during the trying period of rehabilitation, the Philippines signed an Economic and Technical Cooperation Agreement with the United States of America (US). The IGLF was established through a Counterpart Project Agreement entered by and between the Philippine Council for United States Aid and the Mutual Security Agreement.
It was created for the purpose of providing assistance to local enterprises engaged in export-oriented activities like mining and manufacturing. Specifically, the purpose of the IGLF was: “To encourage and assist in the establishment, expansion and refinancing of small and medium-size industrial, mining and other enterprises, but with emphasis on small-scale industries.”
Administration of IGLF was a function of the former Central Bank of the Philippines and was transferred to the Development Bank of the Philippines effective August 1990. The IGLF under the Development Bank of the Philippines encouraged MSME loan availments in the countryside, promoted industry dispersal and pushed for more value-adding enterprises. Moreover, it aligned with the MSME Development Plans of the country. It established the IGLF Grant for Research and Promotion to support the technical assistance, developmental, promotion and capacity building needs of MSMEs.
IGLF has also been a major fund contributor to the Credit Surety Fund, a credit enhancement scheme conceptualized by the Bangko Sentral ng Pilipinas which aims to improve the bankability and credit worthiness of capital-short micro, small and medium entrepreneurs. The goal is to open up lending opportunities to entrepreneurs deemed unbankable for lack of collateral. In fact, while BSP won a Governance Award for its credit surety fund initiatives, IGLF has been instrumental in making this happen not just in the funding side but also in its strategic formation and training needs.
Now, in its 65th year of existence, the IGLF has built a solid track record of helping Filipino entrepreneurs.
QUICK REVIEW OF OPERATIONS
IGLF’s performance continues to indicate favorable management of resources. It has paid out all its foreign obligations to the World Bank and with only the Asian Development Bank having a remaining balance of P305 million. IGLF has grown the government’s initial investment of P803 million to P6.8 billion today. Average net income from 2013-2016 of P110.74 million translates to an average return on total assets of 1.7%.
Loan portfolio has also continued to grow. Outstanding balance in 2014 rose by 68%, from P1.97 billion to P3.31 billion and in 2015 it again increased by 36% or P1.17 billion. In 2016, loan portfolio expanded by 25%, registering significant growth to P5.59 billion from P4.49 billion in 2015.
This robust performance demonstrates IGLF’s drive to push even further its commitment to support micro, small and medium enterprises with their credit needs. As IGLF assists MSMEs in their ventures, they are able to help increase livelihood and economic opportunities, and make their lives better in their respective communities. The historical record of IGLF over the past six decades is an affirmation of its significant contribution to SME development.
AN INDEPENDENT ASSESSMENT
An evidence-based impact evaluation of the IGLF program by the World Bank had encouraging findings. One, the small and medium industry (SMI) lending was an inexpensive way to support the creation of new jobs, albeit with little effect on directly reducing poverty. SMI lending should be considered as part of a social safety net in only the broadest terms. Second, the SMI lending through financial intermediaries supported banking sector soundness and almost certainly helped the economy sustain the shocks which its neighbors experienced. Third, the credit risk of the commercial banking sector was reduced as the repayment record of assisted SMIs was considerably better than that of larger firms. Fourth, SMIs already confront higher real borrowing cost because they have higher transaction costs and could use more flexible financial products.
The IGLF is one rare government program that has grown and stood the test of time. It is one success that the administration can build on as it confronts the more complex and uncertain challenges confronting the Philippines’ small and medium industries today.
The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.
Benel D. Lagua is Executive Vice-President at the Development Bank of the Philippines. He is an active FINEX member and a long time advocate of risk-based lending for SMEs.
