There is a micro-finance revolution happening all around us and this is indeed most welcome as new fund sources are being made available to very small livelihood ventures which directly benefit our poor countrymen. As we embrace this micro-finance phenomenon, however, there could be reason to worry that the attention given to this field will lead to a substantial subtraction from the fund sources directly needed by the small and medium enterprise (SME) sector during these critical times. There is a need to look deeper into how to balance between the micro-financing industry and small business lending which impact the economy in rather different ways.
Micro-finance refers to funds made available to very small livelihood activities, mostly by way of the Grameen system. The loans are small - from P5,000 to P20,000 per borrower and usually involving individuals engaged in retailing, trading and other community-based livelihood units. Most of the lending programs target women who are made to form informal networks with other co-borrowers who will co-guarantee each others’ loans. Social pressure, training and a vision nobler than simple profits are components of the micro-finance organization, usually a development NGO.
Micro-financing has gained momentum and considered a huge success during recent years largely due to impressive reported repayment rates of 97%-100%. What used to be an inconceivable concept, namely that the "poor is bankable" has become an eye opener to many even in the formal financing industry. Its success has spurred international donors and lenders as well as government policy makers into supporting its further expansion. Today, even our Bangko Sentral, some private banks and other policy makers are jumping the bandwagon. Indeed, micro-finance deserves the attention it is getting.
There is, however a caveat which we must not forget. For all the success and good prospects of micro-financing, its impact is very different from that of the credit delivery effort for the SME sector. Ventures supported by micro-finance are largely for livelihood. They will serve to put food on the table. They will alleviate poverty for many of our countrymen. But they will hardly be able to create the kind of economic value-added that can lead to hastened material growth and employment opportunities that would move our country forward. To achieve these at a rate that will truly eradicate poverty and at a pace that will bring the entire economy forward, we need a strong SME sector where real businesses, viable and competitive, will be formed.
Public policy must therefore be careful that it maintains proper balance where support to one sector is not done at the expense of another. Given the propensity of some policy workers to go with the favored advocacy of the day, which in this case is micro-finance, this column expresses its concern that SMEs will be neglected not by institution, but by default.
As a case in point, let’s review the allocation of credit revenues to SMEs by virtue of RA 8289. This law mandates all lending institutions to set aside at least one percent (1%) and at least two percent (2%) for small and medium businesses, respectively of the total loan portfolio based on their balance sheet.
As of March 2001, the BSP reported that the net loan portfolio of the banking sector amounted to P1.007 trillion, of which P80.597 billion or 8% represents SME lending. Actual direct compliance with the law is P213.392 billion while indirect compliance through alternative means is P15.510 B. Now, if this figure is correct, the banking sector has over-complied with the laws by allocating over 20% to SMEs. (Sir, the P1.007 trillion figure, based on your write-up is net portfolio, meaning outstanding balance, of which P80 billion represent outstanding loans of SMEs. Thus, you cannot conclude that the compliance is over 20%. Yes, 20% if the base or divider is P1.007 trillion. The divisor should instead be total loans released to SMEs during the year, di ba?.)
The amount of over P200 B to SME lending is staggering. If we are to believe this figure, then why do we have a lot of anecdotal stories of SMEs complaining about poor access to bank loans. If we accept at face value that there is full compliance with the law, public policy makers might be led to believe that SMEs are already being sufficiently taken cared of.
Full compliance taken at face value, what this writer finds disturbing are the following figures from the BSP report. Let’s focus solely on direct compliance for small enterprises and we see a story unfolding:
Direct Compliance of the Whole Banking System to Small Enterprise Lending
Rate of Compliance
December 1999 - P128.602 B 12.84%
September 2000 - 115.077 B 12.00%
December 2000 - 114.448 B 11.60%
March 2001 - 117.755 B 11.69%
The figures above are self-explanatory. On a year-to-year basis, the total amount available to small enterprises have declined from December 1999 by almost P12 B.
We have to wonder, therefore if the mandatory allocation system is indeed working. We need to ask what can be done to make it more functional. There may be a need to overhaul our measurement mechanism because we may not be measuring meaningful numbers.
