THE DIFFICULTY faced by micro, small and medium-sized enterprises (MSMEs) in obtaining bank financing has been holding back the sector’s growth, the Asian Development Bank (ADB) said.

“Access to finance is a chronic barrier for MSMEs to survive and grow; the share of MSME credit to total bank credit has been falling to less than 10% since 2013. Microfinance operations by banks have been expanding since 2016, although compliance with mandatory lending levels to micro and small enterprises has not improved,” the multilateral bank said in its Asia Small and Medium-Sized Enterprise Monitor (ASM) 2020 report published Thursday.

The ADB said the share of MSME loans to banks’ total lending portfolio fell to 6.1% (P588.8 billion) last year from 11.7% in 2010 as more lenders did not comply with the mandatory credit allocation to the sector, preferring to just pay the penalty rather than take on the risks associated with lending to these firms.

“Microfinance remains critical for enhancing access to finance for the poor, low-income households, and MSMEs,” it said, noting lenders focused on microfinance recorded P10.8 billion of savings and P27.3 billion in loans last year. Of the total loans, microenterprises accounted for 84% or P22.9 billion, while the rest were extended through microfinance plus, micro-agri loans, and micro-housing loans.

“The nonbank finance industry is small in scale and NBFIs (nonbank finance institutions) do not specially target MSMEs for financing; however, they are a viable funding source for MSMEs, especially microenterprises and the self-employed,” the report said. Meanwhile, the capital market is not yet seen as an “effective alternative funding venue” for expanding MSMEs, the ADB said, as the SME equity market is still small and has low liquidity, with the SME Board valued at P11.6 billion at the end of 2019.

The multilateral bank said the country’s sole credit bureau system, the Credit Information Corp. (CIC), and the national ID program would help expand financial inclusion among MSMEs.

“Not only will [the national ID] address the persistent issue on the lack of acceptable IDs, but it can also boost account ownership by enabling remote and more seamless on-boarding. PhilSys (Philippine Identification System) will also enable online identity verification that can support the digitalization of financial services,” it said. Government data showed the number of successful pre-registrations to the national ID system exceeded its target by 48% to hit 1.06 million as of Oct. 20, less than 10 days since the process began. The government plans to register five million heads of households this year and 40 million more per year through 2022.

MSMEs make up 99.5% of total businesses and 63% of the total labor force in the country.

“Micro-enterprises involved in traditional trading activities hold the dominant share of MSMEs in the Philippines; agribusiness and technology-based MSMEs have much growth potential with government support,” the ADB said.

The sector’s contribution to the country’s gross value added (GVA) accounted for 35.6% to P752 billion in 2006, led by small firms and those in the manufacturing sector according to the latest available data.

However, most MSMEs still focus on the domestic market as they do not have much exposure to global markets or value chains, but several firms are going into export.

“Technology is spread widely across the Philippines and e-commerce has been growing rapidly; yet there are few domestic e- commerce players, while information technology-business process outsourcing or IT-BPO continues to grow, supported by government programs,” the ADB said.

It said the government’s efforts to lower the corporate income tax and reform the tax incentive system will benefit MSMEs as a high corporate income tax is a heavy burden on their operations. It also noted the soft loans extended to help businesses boost their adoption of technology.

The ADB said in the region, MSMEs remain to be a “driving force” for Asian economies as the sector accounts for 97% of all enterprises and 69% of the national labor force on average. However, their contribution to growth has been limited to 41% of each country’s gross domestic product (GDP).

“MSMEs in Southeast Asian economies mainly focus on domestic markets and their level of entrepreneurship remains suboptimal. Supporting the development of MSMEs, particularly in technology adoption and participation in global supply chains, will contribute to inclusive growth and aid in recovery efforts from COVID-19,” said ADB Chief Economist Yasuyuki Sawada. — Beatrice M. Laforga