Our Neighbors Know Better  
Business Options
Manila Bulletin 
April 24, 2001

We can learn a lot from our Asian neighbors in the use of the credit guarantee system and its value especially in times of economic crisis. This was evident in the various country papers presented during the 11th Asian Credit Supplementation Institution Confederation (ACSIC) Training Program hosted by the Philippines in which representatives from credit guarantee agencies throughout Asian shared their experiences in keeping their economies afloat during and after the Asian financial crisis of 1997.

The countries that participated in the training program held at the Asian Institute of Management (AIM) Conference Center in Makati City are: Japan, Republic of Korea, Thailand, Indonesia, Malaysia, Taiwan, Sri Lanka, Nepal, and the Philippines.

The Guarantee Fund for Small and Medium Enterprises (GFSME), the host guarantee agency of the Philippines presented a paper on our experiences on how to mitigate the risk of moral hazard in lending to small and medium enterprises (SMEs).  We shared our agency’s experience on how to make sure that we guaranteed only viable accounts that are not behest, or loans based on the patronage system prevalent in our culture.

However, many of the participants found our mitigating measures against moral hazard to be a complex procedure and runs counter to their paradigm of simplification and efficiency.  Their systems and procedures are continuously being improved, and the trend among the more developed countries is to employ advanced technology, and to encourage use of these technologies among the SMEs they guarantee.

But one significant observation made during the program was developed countries placed more importance and value in the credit guarantee system in growing and stimulating their economies, and keeping them afloat and on the path of recovery during crisis than the developing countries.  They also demonstrated a remarkable readiness to bear risk and face potential losses in support of disadvantaged sectors in the SME groups.   

Our credit guarantee system pales in comparison with the likes of Japan, South Korea, Taiwan, and even Malaysia.  For example, total power complement of all major players in our credit guarantee system is not even half of the Korea Credit Guarantee Fund which employs about 2,000, and maintains a network of branches throughout the country.  And they have two guarantee agencies.  The other one, the Korea Technology Credit Guarantee Fund, employs about 1,500.

In funding, the Philippines credit guarantee system is only about P5 billion, an insignificant sum when viewed in the context of the SME market.  The amount represents less than two percent of total loans lent to SMEs in the country.  If we want economic impact,  then,  we  have  to  rethink  funding  to  the  guarantee  system.  Compared to our neighbors, this amount is small against the hundreds of billions appropriated to their credit guarantee system.

It seems that while some sectors of the Philippine financial sector advocate the removal of credit guarantees for SMEs, the experience of these countries point to the critical role they play.  In Japan, they have appropriated and transferred a huge funding of Y20 billion to their 52 Credit Guarantee Corporations throughout the country.  Not to mention Credit Guarantee Corporation of Tokyo and the Japan Small and Medium Enterprise Corporation, two of the bigger guarantee agencies in Japan.  This is in response to the financial crises and the recession plaguing the

Japanese economy.  As a result, the guarantee system has saved 7,800 enterprises from bankruptcies, of which 7,700 are SMEs, and Y1.6 trillion in liabilities, and kept intact some 77,000 jobs.  

Moreover, to further expand coverage, Japan has redefined its SMEs by lowering asset size requirements and opening up the system to a wider range of business types.

Taiwan is not only enlarging its credit guarantee coverage and capacity for economic recovery due to the financial crisis, but has effectively used it to rebuild the damage brought about by the devastating earthquake of 1999.  This was made possible through policy decisions creating new guarantee facilities focused on strategic sectors such as construction, SME development, agricultural automation, and industrial development.

The Malaysian and Thai experiences have taken the same path.  Thailand’s Small Industry Credit Guarantee Corporation (SICGC) was recapitalized by four billion Baht in 2003.  The move is calculated to increase guarantee coverage to about two percent of loans to SMEs by year 2008.

In Malaysia, government is expanding its Credit Guarantee Corporation Malaysia Berhad by infusing RM 1 billion in additional capital.  The infusion is in support of new guarantee schemes it will implement in the new millenium which include direct guarantees to SMEs and a 100% guarantee cover.

The lesser-developed economies such as Indonesia, Sri Lanka and Nepal have used the credit guarantee system to promote recovery efforts.  Indonesia has embarked on guarantee programs to promote exports, and an innovative scheme of non-bank guarantee to finance the working capital requirements of SMEs.  

In Nepal and Sri Lanka, the credit guarantee system ensures the flow of funds toward priority sectors in development such as agriculture, services and industries.

In the Philippines, the credit guarantee system by the smallness of its size and its very prudent posture in the provision of credit guarantees, has minimal impact on the SME sector when compared to its neighbors.  One good thing resulting from this, however,  is  that  prudence  has evolved a model of sustainability, which the GFSME has practiced in its years of existence.  Proof to this is GFSME’s profitable and viable operations  without  any  additional  fund infusion from government, aside from the P300 million seedfund given to it in 1983.  Today, the seedfund has been paid back, and the GFSME has grown into P1 billion guarantee agency.

The message driven home to us from the exchange of information with these countries is that we are not doing enough, or we have not placed the right importance the credit guarantee system deserves as a tool in developing SMEs into globally competitive businesses.

It is a pity we have not maximized the use of this very potent tool for development.  If only we have put more resources into the system, and maximized its used in SME development, we may be better off today.  SMEs are fertile ground from which big businesses grow.  And from the way we have been unsuccessful in doing so compared to our neighbors, it would seem they know better.  Indeed, the Japanese and the South Korean do know the importance of this tool and have successfully used it for development.  Other countries in the region are doing the same.  We hope it is not too late for us.


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