The economic downturn caused by the Covid-19 pandemic has taken a painful toll on micro, small and medium enterprises all over the world. Many governments adopted measures to help MSMEs survive the crisis, such as extending financial and other forms of support. For example, the Philippine government provided P5,000 one-off financial assistance for affected workers in businesses adopting flexible work arrangements or temporary closures under the Covid-19 Adjustment Measures Program.
MSMEs drive the Philippine economy. They account for 99.5 percent of all enterprises and employ 63 percent of the labor force. An Asian Development Bank report said the ability of our MSMEs to access finance faces constraints even during non-crisis periods. The share of MSME loans in the total outstanding bank loans was 6 percent in 2019. Bank loans to MSMEs accounted for only 3.2 percent of the gross domestic product during the same period, the report said. This suggests that a very small number of MSMEs have access to bank credit.
“A prolonged pandemic will make it more difficult for MSMEs to raise funds from formal financial institutions and to survive the crisis and its aftermath, which could contribute to more potential losses to the Philippine economy and risk the projected economic rebound,” the ADB report said.
Majority of our MSMEs can’t get loans due to stringent lending measures, and they end up asking family and friends for additional financing to keep their businesses running, according to a study by cloud banking platform Mambu. The “Small Business, Big Growth” report said 77 percent of surveyed Filipino MSMEs “have been unable to secure sufficient, or any, funding on at least one or more occasion over the last five years.” Some 56 percent of the local entrepreneurs resorted to asking their friends and family for loans as a result; about 45 percent, meanwhile, dipped in their own pockets to start their businesses. (Read, “Most MSMEs turn to kin, friends for financing,” in the BusinessMirror, March 10, 2022).
According to Mambu’s findings, 93 percent of the Filipino MSME respondents said they are open to changing financial institutions for a better lending experience. This scenario provides an opportunity for new entrants in the industry, which can challenge the existing banks and financial technology firms. “If lenders want to play a part in the success of Filipino MSMEs, they need to modernize the lending experience, and embrace new technologies to make lending processes simpler, more personalized, and accessible,” Mambu Commercial Director William Dale said.
Nearly a third of the Philippine economy remained informal—a trend shared with several Southeast Asian nations—resulting in a narrow tax base that makes building back better after the pandemic a big challenge, according to an Asian Development Bank economist. “It is important for tax authorities to recognize that efforts to lower costs of compliance may entail lower tax revenue flows from each taxpayer; however, improved tax compliance means an expanded tax base—more and more taxpaying individuals and firms entering a tax system—thereby enhancing total tax revenues,” said Aekapol Chongvilaivan, ADB Southeast Asia Department Senior Economist for Public Finance. (Read, “PHL’s big informal sector poses fiscal challenge,” in the BusinessMirror, March 10, 2022).
Although Alert Level 1 is now in full swing in Metro Manila and many provinces, majority of the MSMEs are still temporarily closed or are operating at decreased capacity, an indicator of the difficulties they are facing in getting back to their business operations, according to a recent survey conducted by the United Nations Development Program (UNDP) on the impact of Covid-19 on MSMEs in the Philippines. The UNDP said majority of the MSMEs need assistance to recover from their losses. Their most pressing needs are access to credit facilities, tax breaks, and deferred loan payments.
As MSMEs comprise 99.5 percent of businesses in the Philippines and are employing 63 percent of the country’s workforce, they may hold the key to the country’s economic recovery. If we unlock their potential and help them grow, they can help generate jobs. Experts believe that the fastest way to create jobs and expand government’s tax base is to help MSMEs by providing the capital they need to expand their business. To do this, the government needs to step in by guaranteeing loans to bridge the gap between MSMEs that badly need funds and the banks willing to lend but also need security for the increased risk associated with lending to MSMEs.