Why Philippines Small Businesses Need More Access To Financing

On the face of it, the Philippine economy has recovered successfully since the 2020 recession. 2021 saw a 5.6% GDP growth bounceback, with 2022 forecasted for over 6% growth whilst keeping a handle on inflation. Helping drive this growth is small and medium-sized enterprises, which make up over 99.5% of registered businesses in the Philippines and over 60% of jobs.

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ADB Survey Findings: A Crisis of Working Capital

Digital Infrastructure

The Positives

However, if we dig deeper, we can see that this bounce-back growth hasn’t been completely equal across the board. The pandemic most certainly caused irreversible damage to many small businesses around the country and many continue to struggle today. As seen in this essay, one of the key ways to ensure SME survival around the world in the depths of 2020 was through financing, be it government-backed loans or private financing.

However, SME financing is underdeveloped in the Philippines. Whilst the large corporations can gain access to loans using their substantial collateral, SME loans only accounted for 3% of total GDP in 2019, whilst this number is closer to 4% in the UK for just UK bank small business loans. This suggests that only a small number of SMEs have access to bank credit. Compare this to Cambodia, which set up a new public bank specifically for MSMEs, and Malaysia, who set up special Covid-19 relief for working capital financing for SMEs. Vietnam and Thailand also released low-interest soft loan packages for SMEs.

Whilst there was a 30-day grace period for loan repayments, the lack of microfinancing and SME loan options for Philippine businesses means that it’s very difficult to leverage for growth. So, growth remains sluggish, whilst job creation and their impact on the economy remain fairly stagnant. Whilst SMEs make up 99.5% of all businesses in the Philippines, they only make up 36% of the economy.

ADB Survey Findings: A Crisis of Working Capital

In 2021, a working paper was published by the ADB Institute on the effect lockdown had on Filipino micros, small, and medium-sized businesses. Its findings hit home not just the damage that was caused by the pandemic and lockdowns, but where MSME vulnerabilities lie and the continued lack of support that they receive.

In March 2020, almost 60% of microenterprises had zero sales, and neither did 44.8% of small firms and 35.8% of medium-sized firms. Around 47.4% of businesses found it more difficult to borrow funds, with only 3% claiming it’s now easier. Clearly, smaller enterprises were hit the hardest yet struggled the most to gain financing.

In fact, 33.1% of microenterprises relied on close relatives for borrowing money in 2020. The medium-sized businesses had far better success in getting bank loans, further proving that financial accessibility depends on the firm size, which is even more unfortunate because micro and small firms are the most vulnerable in needing working capital for their survival. It was shown in the ADB report that 71% of MSMEs faced difficulties in raising even P50,000, which is under USD$1,000, despite 77.3% of MSMEs needing up to P10 million to survive the lockdowns.

Digital Infrastructure

Another obstacle that stands in the way of SMEs is that Philippine internet infrastructure and digital skills within the labor force are lagging behind. Because of a lack of government investment within both of these areas – infrastructure and digital education – is causing a lack of innovation among SMEs.

It’s already underdeveloped in the city compared to some of its neighbours, but this lagging behind is made worse by the fact that 80% of SMEs in the Philippines are located in rural regions outside of Metro Manila where internet infrastructure is worse.

Furthermore, this digital landscape is hurting SMEs hopes of financing, too. One of the main drivers of alternative lending in Australia, the UK, and some neighboring countries is technology. Technology is helping automate the application process for SME loans, making it faster, as well as helping pair businesses with average credit scores to the correct lenders. This efficiency is lost, meaning that Philippine businesses are more reliant on the hopes of traditional bank loans – something that is also underserved but has been improving.

The Positives

Fortunately, this need for more SME financing has been heard by some – even with overseas giants. One example is Investree, an Indonesian online platform that helps connect SMEs to business financing and investors. Very recently, they have announced a collaboration with Filipino-based Netbank to help SMEs in their recovery.

Essentially, Netbank will allocate the funds for Investree’s clients by pairing them up with small businesses. New jobs and business growth are expected to result from this collaboration, showing that tech-driven alternative finance is severely needed.

Kok Chuan Lim, the CEO and co-founder of Investree Philippines, stated: “Investree Philippines is very excited to have onboarded Netbank as one of our first institutional investors in the Philippines.”

He continued, “We have been working with the team at Netbank since we obtained our license earlier this year to jointly develop services that will improve ease of use for our SME issuers and reduce credit risks for our note investors. I am confident that our partnership will further enhance the adoption of crowdfunding as a viable working capital source for our SME clients.”

Finally, the government continues to show some support for SME loans, such as the MSME loan program, which provides an alternative financial line from 5-6 informal lenders. Only micro enterprises (P3.0 million or below in assets) can apply, but a loan between Php5,000 and Php200,000 is available at a 2.5% monthly interest rate.