Phl SMEs laggard among Asean 5

Small and medium enterprises (SMEs) in the Philippines, despite being critical drivers of growth and employment, have the least access to bank financing among the major economies in the Association of Southeast Asian Nations (Asean), according to a joint report of the British financial advisory firm Deloitte and the global credit card firm Visa. 

The report, titled “Digital banking for small and medium-sized enterprises: Improving access to finance for the under served,” examined SMEs in Indonesia, Malaysia, Singapore, Thailand and the Philippines, where they contribute between 30 percent to 60 percent to gross domestic product (GDP) output and employ 60 percent to 90 percent of the workforce.

The report said less than 60 percent of SMEs in these countries have access to bank loans as a means of financing, with personal funds continuing to be a dominant source.

“As key contributors to their countries’ economies, SMEs should be a priority market for stakeholders such as the government, regulators, and financial institutions. Without adequate financing, SMEs will not be able to build competitiveness and resilience, innovate and be sustainable in today’s competitive climate,” said Mohit Mehrotra, Deloitte Consulting’s executive director.

The report noted that among the key factors impeding SME lending resulting in the poor inclusion of SMEs in the five countries were stringent lending regulations, inadequate financial infrastructure, poor distribution of infrastructure, and collateral-based credit-risk models.

In the Philippines, SMEs account for 35 percent of economic output and employs 65 percent of the workforce, with majority of these enterprises concentrated in the National Capital Region; 89 percent of them are younger than 25 years old.

The report said that, after adjusting for the size of the economy and the SMEs’ contribution to GDP, the Philippines lagged behind its neighbors in the domain of SME lending.

“Total SME loan volume for 2014 was only $9 billion, compared to Thailand’s $171 billion, the highest in the region,” the report noted.

To make up for the lack of bank loans, personal funds remain a dominant source of financing among Philippine SMEs. The report said only 39 percent of respondents cited bank loans as a funding instrument.

“A significant proportion of SMEs have to seek funding from alternative sources, like capital leasing (24 percent), supplier credit (24 percent), equity financing (10 percent) and grants (2 percent),” it noted.

It said access to financing is a key challenge for local SMEs, with most Philippine lenders requiring collateral before extending credit.

“Slow fund disbursement due to lack of credit information, lack of bank and government guidance on the preparation of compliance documents, and vulnerability of financial institutions that result in high-cost loans are other financing barriers,” the report added.

SMEs also face other challenges, including rising business costs, difficulty of finding sustainable and quality labor, intense business competition, unstable consumer demand, and government regulations, the report also said.

To overcome these challenges, particularly factors limiting SME lending, the report suggested that the Philippines and its Asean neighbors adopt innovative business solutions to address the varied financial and non-financial needs of SMEs. LUIS LEONCIO