The Philippine small and medium enterprise (SME) sector, by and large, do not go to banks for their financing needs, according to a recently-released Deloitte-Visa report.
“Digital banking for small and medium-sized enterprises: Improving access to finance for the underserved” reported that in the Philippines, total amount of loans lent by banks to SMEs was US $9 billion in 2014, paltry compared to Thailand’s estimated US $171 billion lent by banks to Thailand’s SME business sector.
Thailand’s performance in SME bank loans is the highest in the region, according to the report.
Philippine SMEs account for 35 percent of gross domestic product (GDP) and employ 65 percent of the workforce, with majority concentrated in the National Capital Region.
Personal funds continue to be a dominant source of financing among local SMEs, where only 39 percent of respondents citing bank loans as a funding means.
A significant proportion of SMEs has to seek funding from alternative sources including: capital leasing, or roughly 24 percent of respondents; supplier credit, 24 percent; equity financing, 10 percent; and grants, two percent.
Access to financing is a key challenge for SMEs in the Philippines, with most lenders requiring collateral before extending credit. Slow fund disbursement due to lack of credit information, lack of bank and government guidance on preparation of compliance documents, and vulnerability of financial institutions that result to high-cost loans are other financing barriers,” the report revealed.
A related finding is that local SMEs face non-financial challenges including rising business costs, difficulty of accessing sustainable, quality labor, intense business competition, unstable consumer demand, and government regulations.
Considering their significant contributions to their countries’ economies, small businesses should enjoy priority in terms of services by government and financial institutions, Deloitte Consulting’s executive director Mohit Mehrotra said. They would lag behind in competitiveness and resilience, innovation and sustainability, without adequate financing, he added.
To promote SME lending, the Philippines and other ASEAN countries must adopt innovative solutions, including developing new business models involving leveraging on digital solutions providers and forming strategic partnerships with banks, technology and e-commerce providers.
Photo: From kpmgfamilybusiness.com