Mobile-phone banking could help improve small and medium enterprises (SMEs) access the sources of financing in the Philippines by helping provide credit information on these firms, according to the Asian Development Bank (ADB).
ADB Sustainable Development and Climate Change Department Senior Advisor Noritaka Akamatsu said generally adverse credit gathered from the industry is one of the reasons SMEs find it difficult to access financing, particularly collateral-free nonsecured lending support, from both banking and non-banking institutions.
Akamatsu explained that banking and nonbanking institutions exert great effort in seeking negative credit information, which is focused on defaults, to the detriment of small businesses.
“Today many payments, particularly [those made by] microbusiness, [are made] over mobile phones. Consistently honoring payments can be captured in the mobile information sphere and that information can be captured to show that certain businesses are pretty credit worthy. I think Philippines and the many countries in the region should make good use of this information to provide credit without taking collateral,” Akamatsu said.
Akamatsu explained that in a secured lending framework, firms or individuals accessing credit are required to provide collateral usually in the form of real estate, which many firms, particularly small businesses, may not have.
By providing increased information on the financial transactions made by small firms, banks and other lending institutions could be assured that even if some SMEs do not have collateral to offer, they have a good payment history that could be used as basis for extending financial support to them.
The ADB admitted that access to finance has hampered the growth and expansion of many SMEs. Notwithstanding this fact, they still comprise 96 percent of businesses in the region and employ 62 percent of the region’s labor force.
In the Philippines alone, micro, small, and medium-sized enterprises (MSMEs) represent 99.6 percent of total enterprises and account for 64.9 percent of total employment in the Philippines.
However, Philippine MSMEs’ access to financing has been lacking, with bank lending to these firms only reaching P387 billion in 2013 and P396 billion as of September 2014.
Data showed that net loan portfolio of the Philippine banking sector reached as much as P3.31 trillion in 2013 and P3.84 trillion in September 2014.
This is despite the Magna Carta for MSMEs mandating banks to allocate 10 percent of their loan portfolio to MSMEs—around 8 percent to micro and small enterprises and 2 percent to medium-sized enterprises.
The details also showed that the compliance ratio in the micro and small enterprise credit stood at 5.6 percent in 2013 and 4.6 percent in September 2014.
The compliance ratio in medium-sized enterprise credit reached 6.1 percent in 2013 and 5.7 percent as of the end of September 2014.
“This suggests that hesitation by the banks to finance micro and small enterprises has been increasingly widening, especially in universal and commercial banks,” the ADB report stated.
The ADB said improving the access of SMEs to credit both in the Philippines and in the region will further enhance the economic potential of SMEs.
Governments in the region, the ADB said, need to help SMEs become more competitive and able to participate in global value chains.
This includes governments making it easier for SMEs to access new financing, such as supply-chain finance.
It added that limited access to bank credit is a persistent problem in Asia and the Pacific. Lending to SMEs has declined over the course of the global financial crisis and in 2014, they received only 18.7 percent of total bank loans.
“However, the region needs to further develop credit bureaus, collateral registries and credit guarantees to expand financial outreach, particularly in low-income countries,” ADB said.
Curretly, SMEs in the region contribute only 42 percent of gross domestic product (GDP). In the Philippines the manufacturing value-added of SMEs, which is equated to GDP contribution by the ADB, 35.7 percent or P751.94 billion of the country’s GDP in 2006.