MANILA, Philippines – Large and foreign banks in the country would rather pay fines than comply with the law mandating them to lend to small businesses.
According to the inaugural edition of the Asian Development Bank’s Asia Small and Medium-sized Enterprise Finance Monitor, Philippine MSMEs continue to have poor access to credit, “which limits the ability of SMEs to survive and grow.”
“According to the Bangko Sentral ng Pilipinas some large banks, particularly international banks, opted to pay a fine rather than set aside funds for lending to risky borrowers such as MSEs (micro and small enterprises),” the report said.
The BSP imposes a P500,000 a year fine for zero compliance, while the penalty fees for undercompliance; 90 percent of the penalties collected will be remitted to the MSME Development Council Fund, while the remaining 10 percent is retained by the BSP for administrative expenses.
Citing data from the Philippine government, the ADB said MSMEs in the country, make up 99.6 percent (816,759) of the total enterprises in the country in 2011. These MSMEs employed some 3.872 million, representing 61 percent of the total employment in the country.
The ADB said that while the Magna Carta for Micro, Small and Medium Enterprises as amended by Republic Act (RA) 9501 mandates banks to allocate at least eight percent of their loan portfolio to MSEs and at least two percent to medium-sized enterprises, banks generally fail to comply with this requirement.
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“In particular, the percentage of compliance with MSE credit required stood at 6.09 percent as of June 2013, which was short of the mandate 8.00 percent. Lending to medium-sized enterprises reached 6.44 percent as of June 2013, which was beyond the target of 2.00 percent,” the ADB said.
“Data from 2008-2013 reveals that universal banks in aggregate have reported undercompliance for MSE lending since 2008.”
Another factor for the reluctance of big banks to lend to small businesses is the “fragmented and underdeveloped” credit information systems in the country.
The government and various non-government organizations have set up a number of funding option for MSMEs, but said informal lending such as “5-6 credit” or loan sharks and paluwagan (modified sinking fund) are still popular options among MSMEs to get funding.
MSMEs in the country could also tap the capital markets through an initial public offering at the Philippine Stock Exchange, but this option has so far remained restrictive.
Since 2001 when the PSE launched the SME Board, four companies have made their IPOs on the SME BOard, two have since then moved to the Main Board.
“There is no single solution for financing SMEs. Rather, national policy makers need to develop a comprehensive suite of policy options that support innovative and diversified financing models that serve the financing needs of SMEs at different business targets,” the ADB said.
The government crafted the MSME Development Plan (20111-2016) to address the key challenges and constraints facing the MSME sector and to better implement measures to help small businesses in the country.
The MSME Development Plan has two targets: to create 2 million new and sustainable jobs by 2016 and raise the economic contribution of MSMEs from 35.7 percent of total gross value added in 2006 to 40 percent by 2016.
