Financial inclusion has highlighted the need to make available a wide range of financial services (savings, credit, insurance, payments) to the unbanked and under-banked, particularly micro, small and medium enterprises or MSMEs. Interestingly, the Philippine Development Plan framework for 2017-2022 aims to provide a foundation for inclusive growth anchored on the three values of “malasakit, pagbabago and kaunlaran.”
I have previously written that lending to small and medium enterprises (SMEs) is primarily a distribution problem. The most recent count of the Philippine Statistics Authority of MSMEs in the country placed them at 99.6 percent of all enterprises. While the financial system is awash with liquidity, the credit gap for MSME loans is estimated by various research groups to range from P100 billion to P270 billion. Access to finance is a clear concern confronting small business, ranking in the top three of most surveys. Capital needs to flow to MSMEs to create sustainable economic growth.
As we enter a period of greater regional financial integration particularly in the Asean region, we now have a larger playing field in a market base of more than 600 million people, in 10 neighboring countries in one of the most dynamic regions in the world. This presents expanded opportunities for enterprises to grow. This however comes with huge pressures that will challenge companies to continuously improve and become more efficient to survive the stiff competition that greater economic integration presents. Enterprises will require additional investments to navigate rapidly changing market conditions. The challenges of addressing access to finance issues will further increase.
There is an SME market out there and what is necessary is to build a distribution channel that will make funds accessible to them. Access means availability of supply of quality financial services at reasonable costs for market players. The dimensions of access include the following: (a) reliability, or financing available when needed or desired; (b) convenience, or the ease of getting to the supplier funds; (c) continuity, or accessibility of finance repeatedly based on need; and (d) flexibility, or a product tailored to the requirements of client.
Financial institutions have a wide array of options to choose from by way of distribution channels. One favored recommendation in international best practice is for a separate and standalone SME unit to service this segment for improved operational efficiencies and a targeted and well-defined risk exposure. The more common ones are through branches or through dedicated SME business lending centers. These can be complemented with the use of electronic or internet and phone banking, including mobile telephony, to reach even more clients. Hybrid branch models are possible, with clearly separated space, personnel and bank office operation dedicated to SMEs within a bank—an SME bank within a branch model.
Efficiencies can be achieved by product standardization and leveraging of information technology across the target clientele. Risk can be managed by streamlining the credit assessment process and designing credit filters through tools like a small business credit scoring system. Focus and dedicated service will ensure that a previously rationed out segment will get quality attention.
The process of lending and the turnaround time for loan handling must be addressed. What parts of the process will be centralized or decentralized? SMEs must be serviced where they are. Convenience is paramount. Given the inherent feature of this segment characterized by informality and lack of reliable financial information, on-site visits and direct interaction with the owner or manager will be required. Hence, business center account officers must be directly involved in delivery and client servicing. But the bank has other options as to where to situate middle and back-office functions such as loan approval, risk analysis, monitoring of credit exposure and problem management.
The reward system must be attuned to the desired outcome in SME lending and cannot be short-sighted and based solely on the total loan portfolio. Among others, the goals of inclusive growth must be embedded in monitoring and program evaluation, thus putting in place critical parameters in the performance assessment of the SME unit. This will include, aside from total loans generation, the number of clients categorized by size grouping, market share, cross-sale of other bank products, clientele quality (non-performing loans), jobs generation, additionality measures and similar impact metrics.
Distribution initiatives must not only look at access. Availability when and where needed is a primary thrust.
Once all costs have been factored in, the issue of affordability must be addressed. Small borrowers must bear a cost burden that the marginal return on their investments can afford, so that the borrowings will eventually graduate to a savings culture that completes the range of services necessary in a truly inclusive financial system.
Benel D. Lagua is Executive Vice President at the Development Bank of the Philippines. He is an active FINEX member and a long time advocate of risk-based lending for SMEs. The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.