Micro, small and medium-sized enterprises (MSMEs) are often called the “backbone of the economy.” After all, they comprised 99.57% of all Philippine establishments as of 2016 and accounted for 25% of the country’s total exports revenue, according to the Department of Trade and Industry.
Despite being acknowledged as the backbone, MSMEs, however, still end up with a wishbone whenever they turn to banks for credit.
The World Bank estimates that around 70% of all SMEs in emerging markets lack access to credit, with the total credit gap for both formal and informal SMEs reaching as high as US$2.6 trillion. In the Philippines, the Bangko Sentral ng Pilipinas (BSP) placed the credit gap at P170 billion ($3.2 billion).
Several policies, programs, and initiatives have already been put in place to stem the yawning credit gap. These include the BSP’s Credit Surety Fund that allows cooperatives and businessmen with viable business plans but limited capital to obtain loans from banks even in the absence of hard collaterals, the issuance of BSP Circular No. 855 that lowers the risk weight imposed on banks’ loans to MSMEs to free up more funds for this sector, among others. In 2016, the FINEX Foundation for Entrepreneurship Inc. (FFEI), the SME arm of the Financial Executives Institute of the Philippines (FINEX), launched a business-to-business online portal called Loanpinas.com to give SMEs the opportunity to register and post loan requests online.
The latest welcome addition to these initiatives is the impending passage of Senate Bill No. 1459 or the Personal Property Security Act, sponsored by Sen. Bam Aquino and Sen. Francis Escudero. The bill, which hurdled the third and final reading at the Senate last May 31, seeks to expand the list of assets acceptable to banks and financial institutions as collateral. It also aims to reduce the risks linked to movable collaterals, including bank accounts, inventory, equipment, and intellectual property.
Those without a land title can use their crops, future produce, warehouse receipts, or farm equipment to access credit. This enables them to sustain their livelihood instead of resorting to selling their land, turning to loan sharks, or perpetuating the cycle of borrowing from friends and family, losing their financial independence in the process.
As most financial institutions still prefer land and real property as loan collateral, this reform will bring in more unbanked Filipino MSMEs to formal financial channels.
The bill also mandates the creation of a modern, centralized, and online national collateral registry. This would make it easier for banks to check if any collateral being submitted has not been used for another loan, increasing confidence in lending. The bill’s provisions not only empower the borrowers but also assist the lenders, who can enjoy the bill’s clear protection in case the loan goes bad.
The new law is expected to uplift millions of Filipinos still mired in poverty, pave the way for more inclusive growth in the country, and enable MSMEs to turn their credit wishbone into a powerful weapon to become a true economic backbone.
Ma. Victoria C. Españo is the President of the Financial Executives’ Institute of the Philippines (FINEX) and the Chairperson and CEO of Punongbayan & Araullo Grant Thornton, one of the leading Audit, Tax Advisory and Outsourcing firms in the Philippines.
marivic.espano@ph.gt.com.
