Guarantee Fund for SMEs
Banking on Small

Manila Inc.

by Charles Belgica

        “THIS GOVERNMENT MUST REWARD performance,” declares Benel P. Lagua, managing director of the Guarantee Fund for Small and Medium Enterprises (GFSME), on the impending government move to consolidate the operations of agencies involved in the credit guarantee business.

Summing up the GFSME’s 10-year track record, Lagua maintains that having performed well, they should not be penalized in the streamlining process by being abolished and absorbed by a surviving entity among existing credit guarantee agencies.

The rationalization of the credit guarantee business is provided for in the Magna Carta for Exporters recently approved on third reading in the Lower House.  Under this proposed laws, the Export Development Council is mandated to conduct a study on unifying the government’s export financing institutions.

But the streamlining process will affect not only GFSME and Philguarantee, but a number of other credit guarantee agencies established lately by other government units.

Despite the sad experience of Philguarantee with foreign loans gone sour—more specifically guarantees on so-called behest loans-the credit guarantee business remains an effective and profitable way of helping small and medium enterprises (SMEs) to avail of lower interest rates and reduced collateral loans.

The success of credit guarantees spawned the formation of other government guarantee agencies.  Today, there are at least eight government agencies in the business, serving the needs of farmers, small and medium scale entrepreneurs , manufacturers, exporters, real estate developers, and house-and-lot buyers.

Aside from GFSME and Philguarantee, we have the Small Business Guarantee and Finance Corporation (SBGFC), Home Insurance Guarantee Corporation (HIGC), the Quedan Guaranty Corporation (Quedancor), Industrial Guarantee Loan Fund, and the Comprehensive Agricultural Loan Fund.

Winning Performance

Among them, GFSME claims to have gained a headway in establishing professionalism and credibility with the banks.  “We serve as a model for a well-run guarantee institution upon which other new guarantee businesses pattern their operations,” says Lagua.

The claim is backed by an independent study made by the Department of Agriculture (DA), showing that among government guarantee firms, the GFSME possesses the best record in timely payment of guarantees.  As of January this year it has honored guarantees amounting to P89.983 million from 61 accounts.

“We are not  difficult to talk to. And we listen to our clients. If there is a call on our guarantee, we pay immediately,” emphasizes Lagua.

Overall, GFSME’s performance last year surpassed its record for approved guarantees amounting to P560 million—the best ever in its 10-year history. As GFSME resources more than doubled in the last 10 years, approved guarantees on 1,462 accounts stood at P2,467 billion as of June this year.

From an initial seed fund of P300 million, its resources has grown to P776.185 million as of June 1994.   This growth is net of the 197.470 million remitted as dividend payment to the Livelihood Corporation, its parent corporation.  Already, GFSME has paid back government about two-thirds of its original investment in the program.

Further proof of its viability is its consistent performance as a net income earner.  Last year, the agency posted P69 million.

Industry Contributions

Even among banks, GFSME is considered the leader in the credit guarantee business.  According to Lagua, it has established a track record of professionalism and efficiency.  This can be attributed to its prudent management of its asset base, its prompt payment of guarantee calls, and a lean but professional staff.

Another proof of GFSME’s leadership is the fact that both the DA and the Department of Trade and Industry (DTI) have studied GFSME system for possible duplication.  The DA has chosen it to be one of the three agencies that will administer its guarantee programs.

A trailblazer in the industry, GFSME was among the few agencies which actively supported the development of the prawn industry, when traditional agricultural exports were on the downtrend.  Up to now it continues to spearhead the identification of non-traditional projects with potential for credit support such as cutflowers, asparagus, pineapple, tuna. 

To expand its support to other businesses and industries, GFSME has ventured into programs to help entrepreneurs in the manufacturing, service, and franchise sectors.  In 1991, it launched its GOLD (Guarantee Opportunities for Light Industries) program.  Other efforts to complement government lending programs followed, such as with Land Bank’s Agricultural Loan Fund and DBP’s Industrial Guarantee Loan Fund.

Moreover, to reach out to more beneficiaries, GFSME opened accreditation to rural banks in the countryside, as well as non-government organizations.

Small is Bankable

GFSME’s portfolio of accounts abound with success stories of enterprises that took off because of the GFSME guarantee -- and its belief that “small is bankable.”

“Because they were small businesses and start-ups, banks wouldn’t touch them with a 10-foot pole,” relates Benilda L. Cruz, director for accounts administration.

Cruz singles out a group of farmers associations-AGASCI, Green Valley and Villarey Asparagus Growers’ Association as the most successful.  They were contracted by Dole Philippines, Inc. to grow asparagus.  These are then packaged and exported by Dole Japan.

The project, Dole’s pioneering venture to produce commercial-quantity asparagus for export involves about 100 farmers in Polomolok, South Cotabato who are beneficiaries of the government’s agrarian reform program.  Started in June 1990 with a total of 200 hectares, participating farmers earn only P26,000 in annual income from planting corn.

The project has made a big difference in the life of the farmer-beneficiaries.  Annual incomes rose 381 percent to P125,000 and has changed the landscape of the community.  Many houses of farmers are now made of concrete and steel.  Families can now afford to send their children to school.

With the project’s success, Dole plans to increase  the project area to 1,000 hectares.  An additional  400 farmers will benefit from this expansion plan.

The significance of the project, Cruz points out, is that it proves there can be a symbiotic relationship between big businesses and community members.  She explains that both sides benefit from the contract-growing relationship.

“Farmers are assured of a ready market for their produce, while Dole’s cost of investments is lessened as it does not to have to spend for land and equipment.  Further, Dole doesn’t have to worry about daily farm operations, which are handled by farmers.  It only provides the technicians to monitor and teach the farmers,” says Cruz.

Then there is the story of Alberto and Emerita Latido who started a poultry business in 1998 with P450,000 in borrowed funds guaranteed by GFSME.  From a net worth of P300,000 the couple had grown their poultry business in 1993  to P4 million in assets and a net worth of P2.4 million.  Moreover, they are now into piggery, fruits, and coconuts.

The rehabilitation and turnaround of the Calabia & Sons Aquaculture Development Corporation  (CSADC) is another inspiring story.  The business is a tilapia hatchery farm guaranteed by the fund.  CSADC did quite well in the first two years.  But starting 1989, it was hit by natural and man-made calamities.  Typhoons wrecked havoc on its fishcage operations, and the pollution of the Laguna De Bay forced their demolition.  Thus, CSADC failed to pay its loan amortizations.

The bank called on the GFSME cover.  Readily the fund paid 85 percent of the loan and stepped into the shoes of the creditor. After evaluating the business, GFSME decided to help CSADC by restructuring the loan.

The fund through its Accounts Administration Group actively took part in the rehabilitation of CSADC.  The GFSME helped in finding specific markets for the products, linked it with suppliers of fish growers, and provided liberal terms for its loan. 

CSADC has responded well to the challenge of turning around the business and is on its way to recovery.  It posted annual sales of P8.1 million, and a net income of P1.5 million.  The company has paid five quarterly amortizations amounting to P1.06 million.


The turnaround philosophy of the GFSME reflects its character as an organization. The agency has managed to rise above its inherent weaknesses through innovative business strategies.

GFSME was created through a Letter of Instruction (LOI) by then President Ferdinand Marcos.  It was known then as KKK (Kilusang Kabuhayan at Kaunlaran) Guaranty Fund and administered by the KKK Processing Center Authority (now the Livelihood Corporation or Livecor).

Having been created by an LOI, it does not have its own charter.  Lagua says their corporate identity leans on Livecor, its fund administrator.

“On top of the absence of a charter are the government standardization attrition laws which limit our capability to recruit good people from the private sector,” says Lagua.

“That is why we have remained a “lean and mean” organization.  The GFSME is manned by less than 50 personnel, which is small for a 10-year organization.

According to Cruz, manpower growth has not kept pace with the growth of accounts.  “Our six-man staff for accounts administration handles almost 600 accounts, a staggering ratio of one staff for every 100 accounts,” she laments.

“With the magnitude and reach of GFSME, it is time we are given a separate and distinct corporate identity,” Lagua stresses.  The call is not underserved.  The GFSME has adjusted well to the constraints.  It has kept overhead expenses low and compelled the organization to be productive.

“We have been able to move on by being more persistent, innovative, and conscientious,” Lagua stresses.

“First, through constant communication and training, we try to inculcate a positive mindframe among our staff.

“Second, we focus on things that matter such as loan originations, maintaining credibility with financial institutions, establishing rapport with them, and defining our areas of responsibilities well.

“Third, we challenge conventions and innovate accordingly.  We break down obstacles into realistic blocks and work on what is implementable.”

These strategies are reflected well in the management of the fund.  For example, to maintain its leadership in an increasingly competitive industry, GFSME has strengthened its relationship with banks and financial institutions.  It has reduced its guarantee fee to 1.8 percent—the lowest in the industry.  It has lessened  red tape by acting immediately on request for payments on the guarantee, and professionalized its ranks through skills, trainings and values formation.

But most important, GFSME listens to what its clients have to say.  “Our entry into export guarantee market came about as a suggestion from the banks,” says Lagua.

Effects of Rationalization

The move to rationalize the industry is viewed by the GFSME staff with some apprehension.  “We don’t know if we will be the surviving entity so it cannot be helped to feel some insecurity,” says Cruz.

But Lagua is optimistic and feels their solid performance will back them up.  However, both share the view that whatever is good for the country will be good for GFSME.  “All we ask is the legislators look at performance before making any decisions on the rationalization,” implores Cruz.

Future Scenario

Pending approval of the proposed rationalization, Lagua sees several scenarios.  “An option for government is to consolidate all the guarantee body agencies into one super-guarantee body.  Probably a new entity will come out of the consolidation.

“The other option is to ask the various agencies to focus on distinct segments of the industry.”  Either way, there will definitely be some mergers among some of the agencies as there are overlaps in functions and clientele.

The various guarantee agencies are now lobbying and strengthening their positions to survive the impending rationalization.  Which will come out the surviving entity is still anybody’s guess.

Anticipating possible mergers, GFSME is positioning itself as a one-stop shop to cater to the guarantee needs of everybody.  Starting as a guarantee for agricultural projects and SMEs, it now services the export, light industry, service and even the agrarian reform sectors.  “If you go to other guarantee agencies, they service only a particular sector,” states Lagua.

But Lagua says that “if in the future, there is a need for rationalization, GFSME is willing to serve as the country’s export guarantee agency, and continue to serve SMEs.

This statement reflects the concern of some industry observers that not all SMEs are into exports, and to consolidate the GFSME with other guarantee agencies will remove the support SMEs badly need.

Most exporters start as SMEs for domestic market before going into exports. At their start-up stage, they badly need assistance from guarantee institutions because they lack the assets for collateral, and are not financially able to pay high interest rates.

And what will happen to agricultural projects financed because of the guarantees?  If GFSME shifts its focus to exports, who will provide guarantees to agri-business loans?

To answer these questions, President Fidel V. Ramos has assigned the Department of Trade and Industry (DTI) and Department of Finance (DOF) to study how the credit guarantee business will be rationalized.  Within the year, a definite government stand on the issue would be out.  Whatever the outcome of the rationalization, credit guarantee will remain good business.  Public awareness level about credit guarantees is higher and the uncertain state of the economy will encourage banks to reduce risks by availing guarantees.   “We hope we all come out winners after the rationalization,” says Lagua.  


The guarantee system enables small and medium enterprises (SMEs)  to avail of loans at lower interest rates and lesser collateral cover. Without guarantee banks will not lend money to these businesses, and the opportunity to fulfill the potential  of an enterprise would have been lost.

Start-ups and growing enterprises are the most common beneficiaries of the guarantee system. But in recent years, the scope of guarantees have included house and lot buyers, developers, and landowners under the agrarian reform program.

A guarantee shares the risk of lending money. For example, a bank will lend a SME borrower, even if the business is new, and its collateral, deficient, because a portion of the loan is guaranteed against the risk of default. In most cases, the guaranteed portion is about 85 percent of the loan amount.

The guarantee’s usefulness comes into play when the borrower defaults in loan repayments, in which cases the guarantee agency pays the bank the corresponding guarantee obligation, based on the outstanding loan, including interest and principal. After the guarantee is paid, the guarantee agency steps into the shoes of the creditor. It now assumes the responsibility of collecting from the borrower. In most cases, as in the GFSME, they study the account if it can be restructured, and the business, rehabilitated. Benilda Cruz, of the GFSME’s accounts administration group, says they have two options: to foreclose the collateral, or restructure the account.

The first option is usually the last resort-means the GFSME will liquidate the collateral, and the proceeds, shared on a pro-rata basis with the bank. The second option involves re-documenting the loan-by giving additional financing, or extending the amortization period.

When restructuring an account, GFSME goes a step further. It identifies weak spots in the business where it could provide assistance.

It could link up the business with markets, find suppliers for lower cost of production inputs, or improve management systems and procedures.

Although about 20 percent are problem accounts, most of these recover after being given remedial measures.

The rest of the accounts-those which are viable business ideas-go on to grow and prosper. The bottom line is: the guarantee gives SMEs financial access they would not normally have-and an opportunity to realize a dream.

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