SMEs need startup fund — chamber

For at least 30 years, the main obstacle to developing small and medium enterprises (SMEs) has been access to capital, an officer of the Philippine Chamber of Commerce and Industry (PCCI) told The Manila Times Thursday. “The financial system is awash with liquidity, but the funds are not flowing to SMEs,” Francisco Floro, vice president for SME Development of the chamber, said in an exclusive roundtable interview.

And so for 30 years, Floro has been pushing for government to create an SME fund. Last month, the chamber again made a pitch for the idea when it submitted a list of resolutions to President Gloria Arroyo.

In its proposal, the chamber urged President Arroyo to establish a joint venture between the government and the private sector to establish a financial entity that would provide collateral-free loans and training to startup business. The fund, if approved, would be managed by the private sector, Floro said.

“If the government can set up development funds, which will not come from the deposits of the depositors, they can use it for development fund purposes to a lot of [SMEs],” he told The Times.

Risky image

Unfortunately, financial institutions perceive most SMEs as “not bankable” or high-risk loan applicants, and because of that, these enterprises are required to put a collateral, Floro explained. But the problem was that most startups don’t have collateral, he added.

Also, SMEs that had experience financial difficulty find it impossible to apply for new loans, and yet, Floro added, it was normal for new enterprises to experience money problems.

He explained that the development fund should be provided based on an enterprise’s potential market and capacity to sustain the business, since most of the new businesses were venturing into their specialties and should not require loan collateral.

He said that banks could not be blamed for being difficult because they have to be prudent with the deposits of their clients. But he added that there ought to be a facility for SMEs wherein the primary goal is developmental.

With the fund allocation to SMEs, the government would not only loosen credit standards but would also answer the other major areas of SME concerns, including the need for trainings, marketing efforts and right technology, Floro explained.

But banks tightened their credit standards as an early defense from the global financial crisis that erupted last year.

Banks still had loan facilities for SMEs. However, the formal financial institutions only allocated 11 percent to 15 percent of their total funding to SMEs, which is low compared to the usual benchmark of 30 percent, according to the International Finance Corporation’s (IFC) study on Financing Small and Medium Enterprises in the Philippines.

SMEs are the economy

Floro told The Times that government allocates a budget for education, defense, public and health and other important sectors. “Why can you not budget funds for business development,” he asked.

SMEs play a key role in the country’s economic development, he said. In the Philippines, micro, small and medium enterprises (MSMEs) make up 99.7 percent of the country’s total registered enterprises, generate 70 percent of total jobs, and contribute about 30 percent of the manufacturing output.

SMEs also contribute significantly to exports, both as adaptive and flexible providers of specialized inputs or directly as niche suppliers of products, services and technologies.

They are also the seedbed of entrepreneurial skills, innovation and new ideas.

Floro said, “When you talk about SMEs, you talk about almost the entire economy.”

Meanwhile, the central bank is improving its rules on SME financing, as well as supervision and examination policies, to encourage banks to expand their loans to the sector. Specifically, the International Finance Corp. and the German Technical Cooperation (GTZ) will provide technical assistance to the central bank to increase its supervisory and regulatory capacity for SME lending within the banking sector.

This would help central bank in designing the appropriate training program particularly in the SME risk-based lending operations for banks. –MARICEL E. BURGONIO SENIOR REPORTER, Manila Times