SMEs continue to face financing challenges — study

MANILA, Philippines — Small and medium enterprises (SME) continue to face challenges in access to financing and are often more successful in obtaining loans by tapping informal sources, a study of the Asian Institute of Management (AIM) said.

The AIM Rizalino Navarro Policy Center for Competitiveness’ policy brief titled “Firm Characteristics and Credit Constraints across SMEs in the Philippines” released this month showed about 40 percent of 480 SMEs in Metro Manila and Calabarzon (Cavite-Laguna-Batangas-Rizal-Quezon) are credit-constrained.

To be considered credit-constrained, the SME either attempted to take a loan but was unable to do so, or was able to obtain a loan at an amount not enough to cover what is needed.

Meanwhile, 47 percent of the 480 SMEs were quasi-constrained or those unable to secure loans from formal sources like banks, but got to borrow from informal sources including the business owner or one of the owners, family or relative of the business owner/one of the owners, and “five-six’ money lenders.

The study also showed a larger proportion or 42 percent of small enterprises were credit-constrained, compared to medium enterprises at 33 percent, while an equal proportion of small and medium firms were quasi-constrained at 47 percent.

As lack of financing is a problem SMEs in the Philippines and many others are unable to obtain loans from banks, the study said the enterprises often turn to informal sources.

In tapping loans, the study found characteristics formal sources like banks and other financial institutions consider before allowing an enterprise to borrow, may not be significant to informal sources.

Formal sources like banks look at the firm’s size, previous purchase of fixed assets, and increased use of digital technologies for accounting and financial management (AFM) before extending loans.

The study also found that increased use of digital technologies in AFM makes it easier for the SME to get loans, particularly from formal sources.

“Using digital software for accounting and financial management may make it easier to oversee and generate reports on a firm’s finances. Increased use of digital processes also improves a firm’s ability to organize its records such as financial statements. Thus, having a higher level of digital AFM use could make the firm more attractive to external creditors, especially if the creditor requires the financial statements of the firm, as do most banks and other lending institutions in the formal sector,” the study read.

MSMEs account for over 99 percent of all registered businesses in the country.

The sector serves as the backbone of the economy as it contributes about two-thirds of employment.

Given the results and the SMEs’ contributions to the economy, the study said there is a need to take steps to address the challenges faced by the enterprises in getting financing.

“Credit constraints hamper the expansion, innovation, and growth of SMEs, which serve as the backbone of our economy, in addition to being an engine of growth,” the study read.

“Thus, enabling SMEs access to finance is essential to maximize returns from the SME sector, which plays a significant role in the economic development of our country,” it said.