UN urges banks to hike MSME lending

MANILA, Philippines — Domestic banks should extend more financing to micro, small and medium enterprises (MSMEs) as the new round of lockdown will likely push the sector to greater uncertainty and delay much-needed recovery.

In its latest policy brief, the United Nations (UN) Philippines said banks should consider MSMEs as part of the value chain structure to lessen uncertainty and free them from the repeated cycle of having constrained resources.

“The banking industry’s lack of willingness to lend to MSMEs is attributed to the perception that even in normal times, lending to smaller companies is riskier than lending to larger companies,” UN Philippines said.

“Given the current situation where markets are soft and there are more potential sellers than buyers, it is understandable that banks would be less confident with MSMEs,” it said.

MSMEs were among the hardest hit sectors since the pandemic started last year, with many of them stopping operations. Some even had to turn to informal businesses and employment to cope with the impact of the crisis.

MSMEs in the Philippines comprise 99.5 percent of all business enterprises. They make up 60 percent of all exporters and contribute 25 percent to total export revenues.

They also account for 62 percent of total employment in the country. Of all MSMEs, 53 percent are women-led and were severely impacted by the pandemic.

“As a result, women-owned and led MSMEs can find themselves at a bigger disadvantage, having less access to formal finance and facing structural, legal and cultural barriers to owning assets that can serve as collateral for loans,” UN said.

UN Philippines noted that the mandatory requirement for banks to set aside 10 percent of their loan portfolios to MSMEs expired in 2018 and should be considered for reinstatement.

Latest data from the Bangko Sentral ng Pilipinas showed that loans extended by domestic banks to MSMEs declined 8.6 percent to P488.46 billion in the first quarter of the year.

The UN said the implementation of such a policy must be evaluated so that the BSP may come up with a new one.

“As large banks are more willing to service the larger, less risky enterprises, a different service delivery mechanism may be explored and designed specifically for emergency financing of MSMEs, which make up over 90 percent of business establishments,” it said.

UN emphasized that banks and other financial institutions could prioritize MSMEs that are using inclusive business models.