How SMEs Will Benefit
From The GFSME-SBGFC Merger

Business Options
Manila Bulletin
July 17, 2001

Ever since the GFSME-SBGFC merger was revived this year,  brickbrats have been thrown in its path by well-meaning but uninformed observers.

To make the process more forward, we should put all doubts aside and appreciate the ultimate benefits of the merger.

The first contention has been the legal concerns, citing the Agriculture and Fisheries Modernization Law which, oppositors claim, prevents GFSME from being merged with SBGFC.  To put the case to rest, we should cite Section 25 of R.A. 8435, to wit:

“All existing credit guarantee schemes and funds applicable to the agriculture and fishing sector (underscoring mine) shall be consolidated into an Agriculture and Fisheries Credit Guarantee Fund.  The rationalization shall cover the credit guarantee schemes and funds operated by …GFSME …”

The law itself clearly differentiates the funds to be consolidated with the AFCGF.  For GFSME, the funds include portions of the Comprehensive Agricultural Loan Fund (CALF) it managed for the Department of Agriculture.  These funds are not included in the GFSME corpus to be consolidated with SBGFC.

Subsequent studies on the implementing rules and regulations for AFMA, particularly one prepared by an independent private consultant, delineated the funds for AFCGF.  The corpus of GFSME funds are not included.  GFSME, which was formerly attached to the Office of the President, managed a general fund intended for guarantee of all types SMEs.

The second misconception is the allegation that the merger will result to a loss of funds to the agriculture sector.  Certainly, even under SBGFC, GFSME funds can still be used to guarantee SMEs in the agriculture and fisheries sector in addition to SMEs in the non-agriculture sector.  The merger will in fact improve government’s ability to support these sectors on a more coordinated basis.

Third, the merger is not a seat-of-the-pants action.  It is a well studied measure for rationalization mandated by the Magna Carta for SMEs (R.A. 6799).  This has been discussed in the Cabinet, even of former President Estrada, and was endorsed by the then Executive Secretary who chaired the Board of GFSME’s mother agency.

With these monkeys off our backs, we can now proceed to understand why the merger make good sense, economically as well as socially.

First is the synergistic effect of combining the two organizations.  There will have to be some attrition to take care of common services which can now be saved.  The attrition will not only be in terms of people (although this will be handled with appropriated safety nets for affected personnel who may even be re-deployed to front-line offices), but also in equipment and fixed assets.  Immediately, one office can be let go which will give rise to opportunity income or savings.  Bottom line is the cost of doing business should be reduced.

But more important than cost savings is the opportunity to build from the best talents available in both organizations.  If new management will be allowed a free hand in manning the re-engineered entity, certainly we expect that meritocracy should be the guiding light in picking the most qualified personnel available.  Better talent plus correct motivation should translate to our ultimate goal – excellent service to the SME constituency.

Third is the power of pooling resources.  I have written in another column how far we lag behind our Asian neighbors in the amount of resources we allocate for credit supplementation services.  Certainly the merger improves on this.  Although we still have a big catch up job to do, this is a step in the right direction.

One of the weakness of the SBGFC capital structure is that its funding mainly comes from GFI’s, a good portion of which is in preferred shares with specific dividend commitments.   By the nature of its fund source, SBGFC’s cost of capital is demanding.  On the other hand, SBGFC’s investment outlet for free funds is limited to government securities.  The mismatch does not provide opportunity for capital build-up.

If the GFSME funds can be equitized into SBGFC, the latter assumes a higher regular equity base which can be channeled to promising collaboration with the SME constituency at calculated risks.  The balancing act of the new SBGFC will still be there, but since the weighted average cost of capital is lower, the assistance to SMEs can be enlarged.

As a footnote, it worth noting that the GFSME funds was originally P300 M, but over P350 has been “returned” by way of management fees to its mother entity.  Technically, the GFSME money to be consolidated, around P900 M represents earnings.  If the GFSME were run like any regular government agency then, the original P300 M would have been expensed by now.

On a broader scale, the re-engineered SBGFC can embark on programs and projects which will touch on credit supplementation activities heretofore untested in the Philippines.  Among the programs that can be pioneered include:

A guaranty program to develop the venture capital industry in the country, with  special focus to  addressing the equity gap in the SME fund source.

Jump starting mutual guarantee funds to be co-owned by guilds or cooperatives with track record in the Philippines.

Direct guarantee certificates which will reverse the process of guarantee 
enrollment and allow SME clients to be pre-cleared by the guarantee agency  
before review by banks.

More aggressive automatic guarantee lines for selected sectors and identified 
partnership given a set of pre-qualification criteria.

Technology acquisition guarantee programs.

This is just an initial listing that can be generated.  Another overriding goal of the merged institution is to adopt the best practices worldwide on the efforts to assist and nurture SMEs.  We don’t really have to reinvent the wheel.  Many strategies have been tried in other waters.  All we need to do is ensure the measures fit the idiosycracies of the Philippine environment.

A model that easily comes to mind is the U.S. Small Business Administration.  There are many programs in that agency worth emulating.  And the merged organization can take a look at what the SBA is doing well.

Of course, one main difference is that the SBA is funded yearly by the U.S. government while the merged institution is expected, among others, to be self-sustaining.  The templates and models are nonetheless there, and we benefit by knowing that together with the successes are failures from which we learn.

All of these things can be done because the merger increases the resource base of the new institution.  The demands of credit supplementation are better met with a bigger fund pool because of the risky nature of our expected endeavors. 

Remember that even the best run bank is not going to be spared by loan defaults along the way.  But such failures are absorbed well because bigness allows sound risk management.

The merged institution is in a better position to diversify its SME exposure.  And diversification is not a simple matter of getting as many enterprise to partner with.  The key to making diversification work is investing in entities that are not perfectly correlated.  That way, the expected return of the institution can be maintained even as the risk (or standard deviation, mathematically) of the exposure is brought down.

All these should eventually translate to a more dynamic institution addressing the different needs of Philippine SMEs.  We envision a more proactive SME credit supplementation program.  We need a pro-active program that considers the vagaries of our SME clientele.

SME’s ultimately benefit from the merger through what I call the 5 A’s of Credit Supplementation delivered.

Access. Through a more robust guarantee program, local SMEs can be serviced by a system that reduces the risk of the formal financial community and helps bridge bankability for small business.

Attention.  SMEs need a dedicated program addressed to their needs.  And the merger will provide this focus to this unique group of business concerns, solving the gap between perception and reality of small business lending.

Affordability.  A bigger program can help provide the muscle that should reduce the cost of borrowing to the target sector.

Action or activities.  There is a real need to move funds that are allegedly aplenty in the system through delivery mechanisms tailored towards project specifics.  The merger is expected to get these programs in place.

Awareness.  SME lending requires a technology of its own that must be learned by the banking community.  Part of the role of the credit supplementation agency is to “teach” this technology and to communicate that in the ultimate analysis small business lending is a very productive undertaking.


Home Page