SME growth hobbled by credit constraints

Small businesses, which account for more than a third of economic activity in the Philippines, cannot thrive without proper access to credit from formal sources, the Asian Development Bank (ADB) said in a new report.

Local “mom and pop stores,” the multilateral lender said, still rely on their owners or expensive loans from loan sharks to bankroll their operations, keeping them from growing significantly.

Several government programs may be in place to help small and medium enterprises (SMEs) get access to proper finance, but the state’s own definition of which businesses qualify remains in dispute.

“SMEs need to be able to tap a wider range of non-bank financing options in addition to bank loans, including capital markets if they are to realize their potential,” ADB Office of Regional Economic Integration Deputy Head Noritaka Akamatsu said.

The ADB in its inaugural Asia SME Finance Monitor report said a wide range of financing options on top of bank loans need to be made available to small businesses across the region.

Latest government data showed small businesses accounted for 99.6 percent of all enterprises in the Philippines as of 2011. About half or 47 percent of these were wholesalers and retailers, and car and motorcycle repair shops. Over a third or 38.5 percent were in the services segment.

These small businesses contributed 35.7 percent of gross domestic product in 2006, latest data showed.

The definition of SMEs differs in the Philippines, depending on which agency is talking. The National Statistics Office defines small businesses as firms with 200 employees or less. Under the legislated Magna Carta for SMEs, small businesses are all companies with assets worth P100 million or less, excluding land.

Majority of SMEs in the Philippines still relied on their owners’ personal savings for funding, or personal loans from family and friends. Most companies cited “fear of loan exposure, inability to qualify because of lack of collateral, and lack of knowledge on credit sources and processes.”

Other sources of finance for SMEs include “five-six” credits from loan sharks, where a person borrows P5 and repays P6, implying a nominal interest rate of 20 percent over an agreed period. Paolo G. Montecillo