Credit  Guarantees for SME Development
Business Options 
Manila Bulletin

June 14, 2001

The recent socio-political conflicts experienced by the country in the last few months highlight the urgent need to push for the strengthening of its SME base across the regions. For developing economies such as the Philippines, SME building alone is the sustainable approach in ensuring that the population is provided with ample safety nets amidst the impending threats of globalization.

The economic pie should not only be enlarged but also be better distributed. This can be achieved only through a solid, determined effort to adopt SME development as a national measure, complementing the already in-place investment-led strategy of government.

SMEs can bridge the gap between main industries, assure a regionally balanced economic growth and serve as the prime mover behind technological advances and the creation of new jobs.

But SME development is a tricky agenda to pursue not only because it involves reaching out to many, as against the big push strategy  of  targeting at key but well placed large businesses. For this reason, while many pay lip service to assisting SME's, few really devote sustained effort to deliver.

The question really is where to start. There is no quick fix solutions here. The sector must  be approach from all angles and we argue that the strategy must be comprehensive. 

At the supply side, creditors and investors should be encouraged to allocate its resources to the same SME level. On the demand end, we have to make local SMEs attractive enough to magnet the resources of creditors and investors. this squeeze tactic, in a manner of speaking, could lead to the flowering of Philippine SMEs in a scale that will solve our unemployment woes, and perhaps  attack the poverty problem.

One part of the supply side solution is the use of credit guarantees for SME loans. Banks and financial institutions have a natural reluctance to lend to SMEs because of the perceived risks in the sector. To offset this risk, as well as to reduce the cost of a potential bad loan, the credit guarantee serves as a sweetener.

The guarantee actually does two things. One, it enables the bank to lend more than they otherwise would to the SMEs. But more important, in the long term, the bank gets a learning opportunity to understand the dynamics of SME lending. This will hopefully lead to the confidence necessary for lending without guarantees in the future.

In the Philippines there is now an opportunity to demonstrate the value of the guarantee strategy. Executive Order No. 19 has been issued to pave way for the consolidation of the Guarantee Fund for Small and Medium Enterprises and Small Business Guarantee and Finance Corporation.

 This consolidation move will not only test the value of the guarantee. There are other clear advantages to this course of action.

One, efficiency is enhanced as the consolidation will allow elimination of redundancies in two agencies. Costs will definitely be reduced with the streamlining of personnel and reduction of overhead burden.

Two, the combined resources of the agencies will have better chances for sustainable growth and financial viability over the long term. New areas of coverage such as the emerging e-commerce sector and technology modernization can be exploited.

Finally, the combination will afford the agencies a chance to exploit to the fullest its wider mandate. With this merger, we expect to see a more solid support to SME's credit access soon, especially in making available the possible missing link in our financial environment - the credit guarantee enhancement.

Still, the banks must play their part. The credit guarantee, as a rule, is a secondary mechanism that achieves its desired effect because it works in tandem with the banking community. So even as the guarantor extends out its hand, the bankers must play their part and use the guarantee programs as judiciously as it can to reach its own goals of profits with outreach to the community. In the end, they will realize the scheme makes things better for all stakeholders.

The credit guarantee strategy is a win-win-win proposition for the guarantor agency, the banks and the SME entrepreneurs. They only need to understand and correctly perform their respective roles as well, in an atmosphere of mutual trust.


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