MSME lending for inclusive growth
How often do we read news reports about increased lending by the banking sector? Just recently, the Bangko Sentral ng Pilipinas reported that banks’ loan portfolio in July grew 17.7 percent to R5.41 trillion. On a sectoral basis, the following growth rates were reported: production – 17.4%, real estate – 18.8%, manufacturing – 10%, wholesale and retail trade – 14.1%, household consumers – 20.6%, motor vehicles – 37%, credit card – 7.7% and salary based general consumption – 58.5%.
On the surface, some progress is being achieved. But is the financial sector making substantial inroads with respect to job creation and poverty reduction? To be fair, the statistics on production and manufacturing appears encouraging but it would be interesting to dissect the outlets for such loans. Our best estimate is that the enterprise loans are mostly channelled to large enterprises. After all, the reports on MSME compliance has not been as robust as the big picture. Loans to MSMEs as of Q! 2016 is only 7.6% higher than same period 2015, lower than the overall loan portfolio growth. Further, the financial sector has accomplished a compliance ratio of 9.2% slightly lower than the 10% mandated by law through Republic Act. No. 9501.
A recent paper, entitled “Access to Finance and Job Growth: Firm-Level Evidence across Developing Countries” by Meghana Ayyagari, Pedro Juarros, Sandeep Singh and Maria Soledad Martinez Peria, finds a strong positive relationship between access to finance and job growth. Overall, firms with acccess to a loan exhibit employment growth between 1 to 3 percentage points larger than firms with no access to finance. The paper also find the association between finance and job growth to be stronger among MSMEs than among large firms. MSME firms with access to a loan have between a 1 to 4 percentage point larger employment growth than MSMEs without a loan. This difference in job growth among MSMEs with and without access to finance is at least three times larger than the differential among large firms with and without a loan. MSMEs in industries with high dependence on external finance respond to the introduction of credit bureaus with growth rates that are almost two times larger than those large firms in similar industries.
This study uses comprehensive firm-level data across a large set of developing countries. It underscores the need to pay closer attention to MSME lending as a way to drive firm employment growth. Lending for inclusive growth cannot ignore the power of paying special attention to MSMEs.
Note that the major lending growth areas as ranked are salary loans, motor vehicles and household consumption. The financial sector has prioritized sectors that provide, by way of processes, simplified approaches to intermediation. In fact, growth in lending is probably focused on easy wins in consumer lending like cards, salary loans and property purchases. But it maynot be delivering the job growth and concommitant poverty reduction outcomes that would come from increased lending to productive sectors such as manufacturing, agriculture and small and medium sized enterprises.
The financial sector is not yet fully engaged in delivering real value to small enterprises that are needed for growth. The challenge is to design loan products that will play a serious welfare support role in the lives of low and middle-income households. Much of today’s lending growth may be helping in the development of the Filipino middle class for better consumption but the financial access for the average Filipino productive enterprise deserves acceleration.
The financial sector needs to address the challenge of MSME lending in a more aggressive way, especially considering that enterprise loans cannot be factory manufactured like consumer loans. Credit markets have real impact on labor market outcomes, and it surely can be done best through more focused attention to small businesses. This means improving the distribution channels, addressing the one-size-does-not-fitall nature of small business loans, adding to manpower needs of specialized lending, and improving the technical capacity of account officers and relationship officers to better understand the needs of smalll enterprises. It also means more investments in technological and process innovations to address information assymetry issues in relating to small businessmen. Lenders must be present to or within reach of the prospective borrowers in this arena.
(Benel D. Lagua is Executive Vice President at the Development Bank of the Philippines. He is an active FINEX member and a long time advocate of risk-based lending for SMEs. The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.)