How do we empower MSMEs?

A program that was launched in the recently-concluded Asia-Pacific Economic Cooperation (Apec) conference in Manila was the Financial Infrastructure Development Network (FIDN).

The FIDN is the brainchild of the Philippines, the host country for the 2015 Apec conference. It is a roadmap to make financial growth inclusive in the Apec region.

In his introductory remarks during the launching ceremony, Finance Secretary Cesar V. Purisima said, “when you look at the components of the [gross domestic product] of the Apec countries, the bulk of the entities are micro, small and medium enterprises (MSMEs). They account for the bulk of the workforce at an average of 60% of the total workforce. Unfortunately, however, they only account for 20% of the trade. So there’s clearly a mismatch.”

Purisima is absolutely correct. Over the last five years—thanks to President Aquino and his economic team—the Philippine economic performance has been among the highest in the world with an average GDP growth of 6.2 % per annum. We have also made major gains in governance reforms, thereby increasing investors’ confidence in the country.

However, economic growth had not trickled down to the bottom of a relatively large pyramid.

As a result, despite the Aquino administration’s achievements, our poverty incidence remained unconscionably high at 25.2% based on Asian Development Bank data. Compared to our fellow members in the Association of Southeast Asian Nations (Asean), we only beat Myanmar (25.6%). Additionally, unemployment (at 6.5%) and underemployment (at 20.8%) remained unacceptably high.

The challenge is how to make the contribution of our MSMEs more meaningful to the marginalized sector of our economy.

Purisima pointed out there are natural challenges facing MSMEs. The first is cost. Being small, their transactions are necessarily small. Since banks are scale operators, they do not have the proper cost structure to deal with small transactions. This results in higher cost for MSMEs.

The second is risk. In many cases, information on MSMEs is not readily available. Consequently, bankers assume there is a lot of uncertainties or risks facing MSMEs and, therefore, “it is not natural for the banking system to be able to naturally flow into smaller entities.”

It was later determined during the FIDN forum that there was a need to revamp the country’s 1948 vintage secured transactions law to include new forms of security arrangements (such as floating lien and factoring) to make financing more accessible and cheaper for our MSMEs.

Indeed, it is timely to seriously consider revamping our secured transactions law under our 1949 Civil Code to support our Go Negosyo Act and the National Strategy for Financial Inclusion recently launched by the Bangko Sentral ng Pilipinas.

As Purisima pointed out, “MSMEs have dead capital worth over $90 million” and so, “there is available asset that could support the borrower’s needs. Unfortunately, the bulk of these assets are not yet acceptable collaterals in most cases given the laws.”  Hence, there is a need to “refine our laws to make sure that creditors’ and borrowers’ rights are better defined…”

It may also be an opportune time to consider other ideas being considered or ventilated in the market. For example, we may want to consider an Inclusive Development Fund (IDF) or a similar fund focused on providing risk capital to our rural-based MSMEs.

While different in its objectives, the IDF should be managed with the rigor and discipline of an international private equity fund and provided with a robust management, technical, mentoring and governance support mechanism working in tandem with traditional investment management.

The big question is how to provide funding for the IDF. Of course, it would be tough to get Congress to approve a special funding for this initiative. An idea that is being considered is to invite leading private universal banks as primary investors, and our government financial institutions and multilateral development banks as substantial minority shareholders.

To incentivize our private banks to participate in the IDF, regulations have to be put in place, such as making the equity they invest be partly compliant with the Agri-Agra Law.

Well, these are just ideas and there may be other ideas out there.  As Secretary Purisima said in his remarks,  some of the APEC countries “have come up with interesting solutions” and we  “should not try and recreate the wheel.”  These ideas should be shared or even copied “because in the end, this will be a mutually beneficial undertaking.”

(The author is a senior partner of the Angara Abello Concepcion Regala & Cruz Law Offices or ACCRALAW and a law professor at the Ateneo College of Law. The opinions in this column are exclusively his and may not be attributed to the institutions where he is presently connected with.  He may be contacted at: [email protected])