BSP Policies for Micro, Small and Medium Enterprises

Delivered by BSP Deputy Governor Nestor A. Espenilla, Jr. during the 9th Annual Meeting and Conference of APEC Financial Institutions Dealing with SME on 20 July 2012 at the Sunset Pavilion of Sofitel Philippine Plaza, Manila.

Honorable Secretary Cesar V. Purisima, Ambassador Jesus P. Tambunting, Chairman and Chief Executive Officer of Planters Development Bank, Asia-Pacific Economic Cooperation Colleagues (APEC), co-workers in Small and Medium Enterprise (SME) development, ladies and gentlemen, good morning.

It is my pleasure to join this 9th Annual Meeting and Conference for APEC financial institutions that deal with SMEs. In light of the importance of SMEs or to use a broader term, Micro, Small and Medium Enterprises (MSMEs) in the Asia Pacific Region, it is fitting that the private sector regularly come together to share experiences and learn from each other as well as discuss possible ways forward to further develop the industry.

A recent survey on Financial Access by the World Bank estimated that the global volume of SME lending was approximately at USD 10 Trillion in 2009. This is a significant amount yet the bulk of which, around 70%, is concentrated in the high income countries. The study further provides some seemingly good news for us today where the East Asia and the Pacific takes the second largest portion of this lending at approximately 25% of the total. 90% of this, however, is found only in China leaving the rest of the region accounting for only 3% of the global total.

While these data acknowledge the many imperfections of measuring SME lending across countries due to different definitions of SMEs and various indicators of lending levels, the message is clear. MSMEs in our region remain largely unserved and underserved.

This is also the case in the Philippines. In that same Financial Access study, data on the Philippines show that only around 20% of our small firms have access to loans from financial institutions. This pales in comparison to other countries in our region like Malaysia where this figure is around 60%. This is an important and urgent issue because MSMEs in the Philippines, like in other APEC economies, are critical engines of economic growth and employment. In the Philippines, MSMEs account for 99.6% of our total enterprises, employs 61% of our total employed population, and contributes 32% to the GDP.

These realities have resulted in much attention being given to MSME access to finance. Many economies have MSME programs which are comprised of various approaches to support and invigorate their respective SME sectors. Attention to MSME access to finance is therefore not new but I believe efforts for its promotion have gained renewed momentum.

First, because the gap between MSMEs and large businesses still remain remarkably large. Second, because events like the recent financial crisis once again highlighted the resilience of MSMES and their potential of providing much needed jobs and economic activity. Finally, emerging best practices and innovations around the world are successfully proving that expanding access to financial services to markets that are unserved and underserved can be achieved.

The G20, through their Global Partnership for Financial Inclusion (GPFI), has created sub-groups specifically on principles for innovative financial inclusion as well as on SME finance. The process undertaken by the GPFI in establishing these sub-groups have been an inclusive one where non-G20 members that have experience in this area, such as the Philippines, are actively involved. This is a clear recognition that solutions for financial inclusion and SME finance are already present around the world and best practices can be learnt through sharing and peer learning.

On the part of the Bangko Sentral ng Pilipinas, we have always believed that policy makers and regulators have a constructive role in creating the enabling policy and regulatory environment that will allow both the financial institutions and the MSMEs to seize the wide range of opportunities before them.

For an environment to be enabling, first and foremost, there shouldn’t be structural biases against MSME lending. At the same time, it should ensure that there is space for innovations undertaken by the market. Policies must be balanced in promoting credit and other financial services to MSMEs in an environment of healthy competition while ensuring safety and soundness of the financial system. Incentives may be provided but not at the expense of distorting fundamental credit decisions that are best left for financial institutions to make. Finally, the necessary infrastructure should be present to support MSME lending.

These features are consistent with the recently published G20 SME Finance Policy Framework (G20, 2011) wherein the roles of regulators to increase MSME access to finance was identified as a “proactive approach to addressing regulatory issues that constrain SME lending, openness to considering innovation, enforcement of consumer protection measures and paying attention to proportionality in measures to maintain the safety and soundness of the financial system”.

At the end of the day, the development of the MSME financial market, through sound, coherent and enabling policies, will lead to robust and long term growth and the creation of an inclusive financial sector. In light of the above framework, the Bangko Sentral has instituted some regulatory incentives for SME lending such as reducing the risk weight for SME loans from 100% to 75% (Circular 364), excluding SME receivables purchased by banks and other financial institutions from the single borrowers limit and exempting documentation requirements like Income Tax Return (ITR) which is a usual barrier for small enterprises.

While creating an enabling environment, we also continue to increase our own capacities. We have recently completed a technical assistance program wherein the capacity of the BSP examiners was strengthened in relation to the various models for SME lending (i.e. credit scoring, judgment models, etc.). With better knowledge of the many methodologies and technologies the banks can use to effectively lend to SMEs, our supervisors will be better able to appreciate and evaluate the credit management of the banks.

The Bangko Sentral also sees a unique role it can play in advocacy for increased access to financial services by MSMEs in a sound, viable and responsible way.

One such advocacy is our catalytic role in facilitating the creation of a Credit Surety Fund (CSF). The CSF is a fund which provides a maximum of 80% surety cover for loans granted by banks to borrowers that would otherwise have a difficulty accessing such credit facilities due to the usual barriers. The Fund is localized as it is generated from contributions of the local government, identified cooperatives/ NGOs in the area and government financial institutions, among others. Potential borrowers are those that are members of the contributing cooperatives/ NGOs. As of 30 June 2012, a total of 276 cooperatives and 9 NGOs are contributing/ participating in these CSFs. The combined amount of pledged and paid funds is nearly Php 350 million and may be made available to qualified SMEs.

The BSP also actively supports the development of the necessary infrastructure to further support access to finance to MSMEs such as a comprehensive credit information bureau and establishing a collateral registry. Other infrastructure that is necessary include well developed payments system, legal frameworks for insolvency regimes, accounting and auditing standards for SMEs, clear tax regime for SMEs, among others. We have applied this same general framework of creating the enabling policy and regulatory approach in dealing with microfinance that cater to micro and small enterprises.

In 2000, our General Banking Law mandated the Bangko Sentral to recognize microfinance as a legitimate banking activity. This came at a time when the usual barriers were present. Microenterprises did not have access to formal financial services and had to resort to informal lenders who exacted a steep price. Financial institutions were also wary of this market due to high credit risk and transaction costs.

The BSP then endeavored to create the environment to address these barriers. Our main objective in our approach to bank-based microfinance is to enable the delivery of commercially sustainable microfinance in the banking sector where the government only provides a supportive role through policy, regulation and capacity building. We studied the success of the microfinance practice around the world and set in place regulations that recognized and accepted best practices such as using group support or liability arrangements, cash flow based lending, and high frequency amortizations, among others.

We also liberalized entry into the banking system and created an environment that allowed new entrants into the market particularly microfinance NGOs that wanted to transform into a formal financial institution. We have also since then liberalized branching regulations, allowed for the establishment of micro-banking offices and paved the way for innovations in products and service delivery using technology and other similar means. While we allowed for these innovations in the banking system, we instituted prudent standards for the conduct of microfinance operations by prescribing the use of portfolio-at-risk to monitor and measure portfolio quality, in the context of risk-based supervision. This approach has allowed bank supervisors to fully understand the risk profile of microfinance and not lead the banks to simply avoid exposure to this market.

I am happy to report that we have seen positive results. To date, we have around 200 banks reaching nearly a million clients. Aside from our community banks, big banks are also now entering the microfinance market by providing wholesale loans to some of the country’s leading retail microfinance institutions, using their subsidiary rural or thrift banks to focus on microfinance or even partnering with other non-bank players such as telcos to deliver microfinance services. These new linkages and partnerships will hopefully lead to a wider range of products, broader distribution systems and local capital market development for microfinance.

We have also received some recognition globally where the Economist Intelligence Unit has, for three years in a row, identified the Philippines as having the best policy and regulatory framework for microfinance in the world. This recognition is based on a survey of 55 countries.

These successes have provided the impetus to move toward a greater goal of building a truly inclusive financial system. This inclusive financial system will break down barriers that view MSMEs or other specific market segments as mere niche activities that are separated from the broader financial system.

We will continue with our bold and deliberate steps to promote financial inclusion as we believe that it is a worthy policy objective and something that could and should be pursued alongside the promotion of stability and efficiency in the financial system. We will continue to create the policy and regulatory space that recognizes the importance of market based solutions and innovative approaches to address barriers to access to finance.

As we move toward this direction, we will continue with our steady advocacy for financial education and consumer protection. Just this month, our new rules that aim to ensure more truthful and transparent lending practices have become effective. We hope that these enhanced rules enable borrowers to fully understand the cost of their loans and be able to compare across providers. We also dedicate much resource in strengthening the economic and financial literacy in the Philippines as another tool to strengthen MSMEs. Financial literacy is essential in providing information, knowledge and skills on financial matters that will help in critical financial decision making. Equipped with this basic knowledge, the micro, small and medium entrepreneurs will be able to better manage the business, make informed decisions and seize economic opportunities. We also have a specific focus on economic and financial literacy for our overseas foreign workers (OFWs) and their families on growing their money through investments or entrepreneurship. This will assist in channeling our country’s rich resource toward productive activities that can have exponential gains for the economy.

These are the initiatives that we have undertaken. It is my hope that these can provide some useful insight in the work that you are doing toward our collective goal of building prosperity in our country and our region through MSME development.

Thank you and good morning.