SILVER SERVICE: 25 years of MSME empowerment with SB Corporation
Twenty-five years ago, the Small Business Guarantee and Finance Corporation (SBGFC) was created under the Magna Carta for Small Enterprises (Republic Act No. 6977, as amended by Republic Acts No. 8289 and No. 9501) to offer a wide range of financial services specifically for micro, small and medium enterprises (MSMEs) engaged in manufacturing, processing, agribusiness and services. These financial services include guarantees, direct and indirect lending, venture capital operations and the issuance of compliance debt instruments for the mandatory credit allocation for MSMEs.
The STAR sits down with Small Business (SB) Corporation president and CEO Brillo Reynes, as he discusses the agency’s role in providing financial instruments geared towards MSMEs and how these efforts directly translates to countryside development and nationbuilding, in connection to the SB Corp’s 2016 Gawad MSME, today at the Makati Shangri-La.
Pillar of MSME development
Since it’s inception, the SBGFC or simply SB Corp., was envisioned to provide mandatory allocation of credit resources to MSMEs and to focus on government assistance programs and agencies concerned with the development of the MSME sector.
The MSME sector is a massive part of the Philippine economy, based on 2014 official figures provided by the Philippine Statistics Authority (PSA). According to government data, there are 946,988 establishments in the country. Of these, 99.6 percent (942,925) are MSMEs and the remaining 0.4 percent (4,063) are large enterprises. Of the total number of MSMEs, 90.3 percent (851,756) are micro enterprises, 9.3 percent (87,283) are small enterprises, and 0.4 percent (3,886) are medium enterprises. And all of these MSMEs need sources of funds, in the form of small business grants, loans or lines of credit. As one of the main drivers of economic growth, a robust and healthy MSME sector ensures continued job creation and increased national income (GDP).
While the Bangko Sentral ng Pilipinas (BSP) requires all banks and lending institutions to set aside a portion of their total loan portfolio and make it available for MSMEs (at least six percent for micro, small enterprises and at least two percent for medium enterprises), there still is a significant portion that has not fully reached the formal sector. Addressing this gap has been the primary role and function of the SB Corporation.
“We are not competing with banks, we service MSMEs that are pre-bankable or those still unbanked so that limits our market. We are the financial arm of the Department of Trade and Industry (DTI) because we function as one of the four pillars of the department; namely, business environment, access to market, productivity and efficiency, and lastly, access to finance [which we serve]. We are that instrument,” Reynes describes.
Creative solution: Risk-based lending for MSME’s
The MSME sector is often considered an underserved sector. Microfinance institutions cannot fully cater to MSMEs given their resources and reach limitations. On the other end of the spectrum, majority of small businesses cannot access bigger banks because they are often considered high-risk clients mainly due to limited assets or absence of adequate collateral, lack of financial statements (often labeled as information asymmetry) and inability to meet the stringent requirements mandated by bigger universal and commercial banks.
To address the problem, the SB Corp. has come up with a creative solution—riskbased lending—an advocacy launched in 2008. This risk-based approach for MSME lending does not look at the collateral as a major consideration to approve MSME loan applications, but rather looks at the borrower’s quality and debt servicing capacity. Under the scheme, operating MSMEs are evaluated and scored to process the loan transaction.
“We at the SB Corp. do not give such emphasis to collaterals. The need for collaterals is the reason why banks do not serve the majority of MSMEs. Instead, we are using a risk-based lending strategy. We look at the various aspects of an operating enterprise, including management, administration, production and financial standing. Normally, these enterprises do not keep reliable reports on business operations and financial performance; many of them do not maintain records. So we go to them, take a look at their operations and try to put together a financial format for them. We are then able to have a good idea of their financial performance and then compute the various figures that are needed in lending,” Reynes explains.
In recent years, the agency also issued MSME notes—used to fund loans to micro, small, and medium enterprises—that were mainly bought by banks to meet the BSP’s mandated allotment of credit to MSME. An increasing number of financial institutions, mostly foreign-owned banks and rural banks, are now subscribing to MSME notes.
Growing for the future
As a directly attached agency of the DTI, the SB Corp. is also one of the smallest government owned and controlled corporations (GOCC). Led by the central office in Makati City, the SB Corp.
operates through five area offices (North Luzon, South Luzon, Central Luzon, Visayas and Mindanao) and 18 desk offices strategically located in major business hubs (Isabela, Dagupan, Baguio City, Naga, Legazpi, Quezon, Palawan, Laguna, Mindoro, Rizal, Cebu, Iloilo, Bacolod, Tacloban, Davao, Gensan, Cagayan de Oro and Butuan). The agency is also looking to establish desk offices in three more locations (Nueva Ecija, Zamboanga and Kidapawan City) and increase manpower so desk offices can handle MSME transactions on their own, instead of forwarding paperwork to the central office. As of May 31, 68 personnel are deployed in the identified areas, generating a total of the P2.358 M earning portfolio level. To address the growing needs of the sector, the SB Corp. is also pushing for full capitalization, one of the legislative agendas being lobbied in Congress.
“We are in the process of reorganizing under the initiative of the Governance Commission for GOCCs (GCG) so the organizational structure is better aligned with our strategy and national goals. We hired a third-party consultant to conduct a current state assessment, workforce analysis and planning. We need to grow and upgrade so we can slowly catch up with our contemporaries in the private sector and other GOCCs. We cannot be left behind,” Reynes reveals.
The 25th Anniversary
In celebration of SB Corp.’s 25th anniversary, the agency is set to hold the “2016 Gawad MSME” today at Makati Shangri-La. Led by DTI Secretary Ramon Lopez and SB Corp. president Brillo Reynes, the event will recognize several key players in the MSME sector, namely: partner banks, microfinance organizations and other financial institutions, and ultimately, outstanding MSMEs.
Highlight of the event will be the awarding ceremonies where a number of citations and distinctions will be given to outstanding MSMEs whose exemplary performance and growth have proven the effectiveness of the pioneering programs in equity financing, enterprise rehabilitation financing and portfolio credit guarantees. The agency will also acknowledge the efforts and valuable contributions of important people who played an important part in the SB Corp. as it grew into the organization known today.
“I believe we have been a reliable partner of MSMEs, particularly those not yet served by banks and other agencies of government, those in the margins, the small and the startups trying to find their way into the MSME sector. We hope to be there, to strengthen the links and resolve bottlenecks in the value chain,“Reynes concludes.