The Asean Bank Integration Framework (Abif) must push local commercial banks to direct more heft on sound business ideas of small and medium enterprises (SMEs) than on collateral, an economist from the University of the Philippines Diliman said.
Prof. Ramon L. Clarete, who specializes in international economics and multilateral trade policy, said the Abif must draft policies to assess the viability and profitability of products or services by SMEs as intangible assurance of return for investments to the private banks.
“Banks do not ordinarily look at SMEs with good business ideas as potential successful businessmen. A paradigm shift is needed where banks likewise lend to SMEs as they do large enterprises, confident that even without tangible collateral, their loans would still be repaid because the business ideas are sound and highly doable. Banks do not know how to make collateral out of intellectual properties,” Clarete told the BusinessMirror last Saturday.
The framework sets the guidelines and criteria for qualified Asean banks to draw more investment and trade and facilitate bank transactions easier among the region for its underserved and unbanked populations, including SMEs.
Through bilateral agreements, the Bangko Sentral ng Pilipinas (BSP) aims to establish banks in the Philippines from the region starting with its other founding members, or the Asean-5, by next year. The group includes Singapore, Malaysia, Thailand and Indonesia.
In April the BSP signed with Bank Negara Malaysia the Declaration of Conclusion of Negotiations that indicates number of branches, types of operations and delivery channels.
“If, for example, a new institution is created, say the Asean bank with regional branches, including the Philippines, and national presence in turn allowed to branch out in the country, then the project provides competition to existing banks. This would be a healthy development,” Clarete said.
Despite the permission in 2014 from the BSP for foreign banks to build branches with full banking authority in the country, the economist said high costs of gathering financial statements for creditworthiness and high vulnerability to market fluctuations of SMEs also repel foreign banks.
Clarete said SMEs usually arrange own records rather than hire auditors and have low-value assets to counter price hikes.
The BSP defines small enterprises as businesses with assets of more than P3 million to P15 million, while more than P15 million to P100 million for the medium.
Thus, Clarete sees the integration as an opportunity for a more inclusive model of lending by commercial banks to smaller firms.
The BSP has required commercial banks to focus credit evaluation on cash flow over collateral and adopt online loan application platforms through financial technology firms, such as Fintq of PLDT, to reach unbanked sectors.
“The Asean bank can take up the challenge of investing in the projects of SMEs, demonstrating proof of a good concept that good business ideas of SMEs can become good money. Another benefit is since they would go into unbanked areas the bank can mobilize savings, particularly if its presence in missionary areas catalyzes local development, raises incomes and, thus, savings,” Clarete suggested.
According to the BSP, in 2016 loans for small enterprises fell below the 8-percent requirement at 3.96 percent, or P199.2 billion, while loans for medium enterprises exceeded the 2-percent requirement at 5.33 percent, or P267.98 billion.
SMEs comprise 96 percent of all business in the country, but contributed only 3.1 percent to GDP or country’s total income in 2015, according to the Asian Development Bank.
“They had stayed away from SMEs because banking in the country is predominantly a pawnshop operation. Inclusive finance is a must these days in times when globalization is put to test in terms of its capacity to reduce inequalities among the peoples in the region,” the