President and COO
Small Business Corporation
Philippines
Version as of 24-06-2011.

Presentation Outline
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*The views expressed herein are the author’s and do not necessarily reflect the position of the Small Business Corporation.

Importance of MSME Sector
 The economic impact of MSMEs:
 MSMEs make up 99.6% of total Philippine establishments and makes the following contributions to the Philippine economy
 61% of employment
 32% of value-added
 60% of exports
 MSMEs are largely dependent on the banking system for financing
 MSMEs are disadvantaged due to size, higher unit transaction cost, perceived risks, and financial infrastructure distortions

 Facilitate MSMEs’ access to credit from formal institutions by:
 Crafting policies that will allow for a borderless credit access by MSMEs and ensuring effective implementation of such policies
 Creating a regulatory environment for banks conducive to MSME lending
 Capacitating both banks and MSMEs
 Absorbing some costs of programs aimed at increasing MSMEs’ access to credit
 Addressing market failure, leveling the playing field

Proportionate Policies
 “One size does not fit all”
 Regulation and supervision can be expensive to implement, and costly when it fails
 Need for affirmative action and tiered regulation—
 Differing regulatory requirements based on market capitalization
 Reduce discrimination
 Scale regulatory treatment

 Guarantee Schemes (more than half of all counties in the world have a guarantee program)
 Directed Credit Programs
 Interest Rate Subsidies
 Regulatory Subsidies, e.g. lower provisioning
 Regulations Concerning Documentation
 Establishment of Credit Registries to address information asymmetry
 Priority Sector Lending, e.g. mandatory credit laws, PSL in India,
Community Reinvestment Act in the USA

The Philippine Response
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Magna Carta for MSMEs or RA 9501 (2008)
 Required that banks allot at least 8% for micro and small and 2% for medium enterprise in their total loan portfolio
 Strengthened the Small Business Corporation, a specialized financing and guarantee institution for
MSMEs
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Barangay Micro Business Enterprise (BMBE) Law (2002)
 Provides income tax exemption, minimum wage exemption, and other benefits such as special credit window and other forms of assistance programs for micro enterprises

The Philippine Response
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Credit Information System Act or CISA (2008) or RA 9510
 Mandates the creation of a credit information bureau that will serve as a central registry of repository of credit information including credit history and financial condition of borrowers
 Promotes an efficient credit information system that will address financial institutions’ concerns on all their credit-related activities
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Bangko Sentral ng Pilipinas (BSP) Regulations and Circulars on SME
Lending
 Capital requirements, loan documentation, risk weights
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BSP Regulatory Framework on Microfinance:
 Encouraged the establishment of microfinance-oriented banks and has a specialized microfinance regulatory unit. This allowed non-collateralized lending to the sector based on cash flow.

Policy Execution
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a) Magna Carta for MSMEs or RA 9501 (2008)
 On the mandatory credit allocation
 Compliance report too broad / Not transparent
 Overall, banking sector appear to be compliant with the requirements of the law, but at the margin especially in micro and small—8.5% vs. mandated 8.0%
 Individual performance of banks reveal, however, that many big banks remain under-complied
 Some banks cover for the deficiency of other financial institutions
 Lending figures to micro and small business sector is flat over the past 10 years—Negative real growth is observed.
 Moral Hazard problem; Penalty structure for non-compliance is cheap/uniform and biased against smaller banks

Policy Execution
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 Self-sustaining. No government infusion in the past 19 years. Declares Dividends.
 No sovereign guarantee. Another GFI whose main mandate is guarantee for (large) export firms has a sovereign guarantee feature.
 Limited capitalization when benchmarked against guarantee corporations in Asia; multiple objectives.
Recent increased capitalization remains in paper
 Supervision not much different from “standard” prudential supervision of banks

Policy Execution
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b) Magna Carta for MSMEs or RA 9501 (2008)
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 No clear appreciation of nature of guarantee corporation
 Costs incurred by the government in implementing MSME financing programs (e.g credit guarantees) may not be directly recoverable using revenues per se as a measure
 Full cost recovery could not be achieved without compromising the objective of facility finance to small business.
 Cost-recovery can be measured through the underlying economic impact of MSME programs (i.e taxes for government, productivity, employment, income, economic growth, etc.)…[Canada SBFA Report]

Policy Execution
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Barangay Micro Business Enterprise (BMBE) Law
(2002)
 Reluctance from executing agencies (i.e DOF and LGUs concerned about losses due to tax exemption granted to BMBEs)
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Credit Information System Act or CISA (2008) or RA
9510
 Still awaiting full implementation after almost 3 years that the law has been signed
 Lack of funds to support the mandate, including the creation of the credit information corporation

Policy Execution
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a) Bangko Sentral ng Pilipinas (BSP) Regulations and
Circulars on SME Lending
 On Loan Documentation:
 Requires the submission of BIR-submitted Income Tax
Return (ITR) upon loan application, including its waiver of confidentiality and its annual submission
 Moratorium on submission granted for MSMEs, but to expire in December 2011
 After 2011, small business loans without documents to be classified as “especially mentioned”
 ITRs rarely reflect true condition of an enterprise. Should the exemption be extended?

Policy Execution
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b) Bangko Sentral ng Pilipinas (BSP) Regulations and
Circulars on SME Lending
 On loan classification
 Reduced risk weight of MSME portfolio from 100% to
75%
 Subject to conditions like meeting certain prudential norms, including PDR of not more than 5% and a highly diversified portfolio with not less than 500 accounts
 Questions on appropriateness of conditional prudential standards to enjoy risk weight reduction benefit

Policy Execution
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 On loan classification
 Loans to exports to the extent guaranteed by SBC with 20% risk weight
 Loans to exporters to the extent guaranteed by
GFSME with 0% risk weight so long as these are outstanding upon merger
 Loans to exporters guaranteed by SBC in postmerger as 20% risk weight though these may be renewals
 Is the reduced risk weight sufficient incentive to banks utilizing the guarantee?

Policy Execution
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d) Bangko Sentral ng Pilipinas (BSP) Regulations and Circulars on SME Lending
 On unsecured loans
 In theory, no technical prohibition for granting of loans without collateral except for DOSRI limits
 However, an unsecured loan for banks’ risk-based
CAR is a 100% risk weight on capital
 Also, in the event the loan turns past due, loan loss provisioning is immediately high
 Not eligible for rediscounting
 Effectively, there is disincentive to lending without collateral

Policy Execution
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 Supported the creation of independent Credit
Surety Fund (CSF) set aside by LGUs
 Provides guarantee which secures the loan of
MSMEs with local banks and facilitates lending without collateral
 CSFs are too small and without muscle; model is not cognizant of how guarantee programs work

Policy Execution
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f) Bangko Sentral ng Pilipinas (BSP) Regulations and
Circulars on SME Lending
 Reserve Requirements
 PFIs of SB Corp are exempted from reserve requirements by BSP under SBC Wholesale Lending
Program, encouraging banks to expand their MSME loan portfolio
 However, BSP also runs its rediscounting window, sometimes at concessionary/subsidized rates, in competition with GFIs’ wholesale lending programs

Policy Execution
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Bangko Sentral ng Pilipinas (BSP) Regulatory
Framework on Microfinance
 Issuance of circulars governing the practice of microfinance in the banking sector—rediscounting, recognition of microfinance (no collateral, loan documentation), allow branching, etc.
 Modified Manual of Examination
 Promotion and Advocacy
 Philippines cited by EIU as having the best overall regulatory environment for microfinance on banks.
However, BSP does not cover NGOs and cooperatives.

Conclusion
 Execution is opaque
 Implementing rules not following the spirit of basic law
 Under-funded and undersized programs—not commensurate to mandate; unwillingness to make the investment
 Inter-agency conflict—apparent weakness in coordination
 Business model inconsistent with program objectives
 Costs and benefits of some proportionate regulatory schemes not well-measured
 Objectives are at cross-purpose
 Major changes in Microfinance; Uneven policy execution in SME Finance.

Conclusion
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 Focus on reducing risks and transaction costs associated with MSME lending
 Balance the benefits of regulation/supervision against the costs and risks of no regulation/supervision
 Aim for consistency across stakeholders and institutions

Conclusion
 Government intervention by way of proportionate regulatory action must:
 Serve as co-investor, thus, a source of risk capital
 Educate private capital on how to lend to SME
(capacity building)
 Channel capital in strategic directions
 Be designed for effective implementation, execution, and enforcement
 Be “enlightened”

References
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ADB (2000), “The Role of Central Banks in Asia and the Pacific: Overview”
( http://www.adb.org/Documents/Books/Central_Banks_Microfinance/Overview/chap_
05.pdf
)
Canada Small Business Financing Act (2009), “Comprehensive Review Report 2004-
2009),” [ http://dsp-psd.pwgsc.gc.ca/collections/collection_2010/ic/Iu188-1-2009eng.pdf
]
CGAP (2011), “Recommendations for Proportionate Regulation and Supervision of
Microfinance,” INCITRAL Colloquium on Microfinance
Clinton, Lindsay (2010), “India Journal: What’s Policy Got to Do With Social
Enterprise?” ( http://blogs.wsj.com/indiarealtime/2010/12/06/india-journal-whatspolicy-got-to-do-with-social-enterprise/ )
Fan, Qimiao (The World Bank), Presentation during the “Workshop on Improving
Access to Finance for SMEs in Asia-Pacific Region, June 16-17, 2008 http://blogs.worldbank.org/allaboutfinance http://dnb.com.au/Header/News/Banking_on_SMEs/indexdl_7334.aspx
http://www.philstar.com/Article.aspx?publicationSubCategoryId=66&articleId=697537
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Sibold, S. (2005), “Addressing the Burden of Regulation in Canada—The Case for
Proportionate Regulation,”
( http://www.tfmsl.ca/Documents/StephenSiboldPropReg.pdf
)
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Thornley, B. et al (2011), “Case 12: Priority Sector Lending,” in Impact Investing, A
Framework for Policy Design and Analysis
( http://www.pacificcommunityventures.org/insight/impactinvesting/report/12-
Priority_Sector_Lending.pdf
)
11.
Wikipedia, Community Reinvestment Act
( http://en.wikipedia.org/wiki/Community_Reinvestment_Act )

END.