Business Options
Manila Bulletin

August 9, 2001

This column has been a strong advocate for support to SME's especially in the finance area. For this reason, we believe the planned merger of the Guarantee Fund for Small and Medium Enterprises  (GFSME )  with the Small Business Guarantee and Finance Corporation  ( SBGFC )  is a move in the right direction.  We hope there will be enough political resolve to see this merger to fruition despite constraints which are administrative in nature.  After all, the benefits as outlined in a previous piece far outweigh the costs.

Even as we push for this merger, we still argue that the consolidated organization must take on a new tack in handling its traditional tools of wholesale loans, retail loans and credit guarantees.  These are important components of the strategy but are not alone sufficient.  The fundamental problems of SME lending must be attacked on several levels.  In the ultimate, the high risks and transaction cost associated with lending to SMEs must be reduced on the institutional and, therefore, macro plane.

What this means is reinventing the agency mandate so that its overarching objective includes advocacy of financial environment reforms that makes lending to SMEs inherently attractive to the private sector.  This involves partnering with private financial institution in a strong way so that their capacity to serve smaller clients is strengthened.  This also means influencing competition in the financial markets to make it a  natural conduit for SME lending.  The ultimate aim of the GFSME-SBGFC combo should be to increase the number of financial institutions that will find SME-oriented programs to be profitable. Once profitable, SME lending becomes sustainable.

The objective, for example, of the guarantee is not just to reduce the risks associated with lending to small businesses by the formal financing sector. The risk reduction formula aims to allow the banks soft entry and exposure to SME lending.  The risk sharing is a vehicle to increase the learning curve of the banks in this arena.  The guarantee program must thus set a long range program of lower participation in the risk burden scheme.  A desired outcome of the program is the increased number of financial institutions actively involved in SME lending, with reduced guarantee coverage.

As a developmental agency, the new organization must be bold enough to try out new strategies and approaches in systematizing the manner of handling SME loans. It is not a simple financial institution that must emerge, but a "teaching" organization and a pioneering one.

  Lending technology is what must be improved on.  And if more private sector participants are to join the fray, the new technology must eventually translate to profitable operations for the banks.

The components of the technology are the steps involved in credit review and evaluation.  Because the transaction costs in this process are perceived to be the same without regard of the size of the loan, banks are naturally not pre-disposed to smaller accounts.  A technological breakthrough is necessary to bring down the cost of credit evaluation.

This likewise extends to the other components of the review, that is, monitoring, billing, collection and payments.  The role of the finance development agency for SMEs is to introduce innovations that will make this happen.  Specialized lending approaches must be found to achieve economic efficiency in this process.

The advantage of e-commerce as well as the increasing sophistication of computer-based models must be explored to its fullest.  Evaluating SME credit worthiness can be simplified through the use, for example, of credit scoring mechanisms.  The one-stop SME centers being promoted by the Department of Trade and Industry can be strong partners in credit review.  Credit rating agencies should likewise be allowed to flourish and should probably get the necessary incentives to do so.  SMEs must get the necessary support for the preparation of their business plans and financial projections.

Bottom line is the merged GFSME-SBGFC organization should help strengthen the small-scale lending capacity of the private financial sector.  This means the organizational service is not limited to credit or guarantee, but must cover SME lending technology transfer as well.

While this paradigm calls for a review of the services to be rendered by this new agency, it also demands that the agency be empowered to handle this tasks.  Its present constraints in terms of its investment outlets must be liberalized.  Its cost of capital structure need to be made less onerous.  Its financial base must be continuously expanded to make it a strong partner for the banking sector it serves.  Its own access to soft funds especially those concerning technology development and technical assistance grants must be opened up.  And eventually its mandate has to be expanded so it can meet the challenges it faces in serving the SME sector beyond its traditional product lines, and towards a market-oriented approach.



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