Enterprise Initiative

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The Philippine government announced in late April that it would provide P34bn ($717m) in loans to small- and medium-sized enterprises (SMEs). The government has made the development of such businesses a priority and implementing a wide range of initiatives to foster growth, including facilitation of financing.

SMEs are the backbone of the Philippine economy, representing 99.6% of all registered companies. They employ almost 70% of the labour force and contribute 32% of the GDP. A staggering 92% of all SMEs are actually micro enterprises, defined as employing nine or fewer employees and holding assets of $63,000 or less.

The government's loans to SMEs will come through the SULONG (SME Unified Lending Opportunities for National Growth) financing initiative programme, which is part of its ongoing national small business development plan. Between 2004 and 2006, the government has provided $1.9bn worth of loans to MSMEs through SULONG.

Additionally, recent initiatives from the Small Business Guarantee and Finance Corporation (SBGFC), a government programme to develop, promote and deliver various types of direct and indirect financing for small enterprises, include the Borrower Risk Rating (BRR) system, which signals a change in the organisation's lending paradigm from collateral-based to risk-based lending. "This means lack of collateral will no longer be a reason for denial of a loan application. Instead, the level of risk should determine whether an enterprise is qualified for financing," Benel Lagua, president and COO of the SBGFC, told OBG.

In April, the Department of Trade and Industry (DTI), which spearheads all government SME development, and the Development Bank of the Philippines (DBP) signed a memorandum of understanding (MOU) designed to speed up the loan process for SMEs. Under the terms of the agreement, DBP will evaluate loan applications endorsed by DTI under a nationwide program to assist micro-, small- and medium-sized enterprises. The DBP has allotted $316m for loans to such businesses this year.

The government's announcement to provide SME funding followed on the heels of a survey that found SMEs in the Philippines were not considered very competitive by other similar business owners in the region.

US-based United Parcel Service (UPS) package distribution company recently completed its annual survey that gauges the competitiveness of small- and medium-sized enterprises in Asia. The resulting Asian Business Monitor report, released last month, was based on interviews conducted with 1,200 decision-makers of SMEs across 12 markets in the Asia Pacific region.

The results revealed that SMEs in the Philippines were rated the least competitive by more than half of their peers across the region. Beneath the pessimism lies an optimism among the Philippine business community. While only 26% of SMEs in the region predict strong growth prospects for the Philippines, some 69% of Philippine SME leaders are optimistic about their companies' growth prospects in 2007, an increase of 6% on last year's results.

Pointing to the fact that the UPS survey results reflect the perceptions of a mere 100 SMEs from the Philippines, Lagua said he believes they may not necessarily coincide with realities on the ground. "Nonetheless, these perceptions must be taken seriously to open the minds of business leaders and push the government to react and do more for SMEs," he told OBG.

Lagua said he believes that with the initiatives of the Philippine government as well as other concerned groups, "It is possible for Philippine SMEs, in the next three or five years, to be recognised as one of the most globally competitive."

One major pillar of the government's support of SMEs is a law known as the Magna Carta for Small Enterprises, which was enacted in 1991. The legislation requires all lending institutions, whether public or private, to set aside for credit at least 6% of their loan portfolio for small enterprises and at least 2% for medium enterprises.

Last week, the central bank approved a plan to allow banks to lend to microfinance institutions instead of directly to SMEs as a way to comply with the lending requirement included in the Magna Carta legislation.

The terms of the law are due to expire in August this year. Lagua said the passing of an updated SMEs Magna Carta, with specially mandated lending to such businesses, is one of the key steps the government still needs to take. "Regardless of what happens, we are confident SME lending will proceed although we look at the Magna Carta provisions as a catalyst to accelerate its growth," said Lagua.

Lagua said he hopes such a bill would improve the collection of information about SMEs, making it easier for credit providers to lend to them because of the available data, and ultimately benefiting these businesses as the flow of credit should be smoother.

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