"Here’s the governor on financial inclusion."
At the Micro Entrepreneurship Awards on Nov. 26 at the Bangko Sentral, central bank Governor Benjamin Diokno explained his policy of pushing small businesses and financial inclusion.
I quote here main part of Diokno’s speech, which is self-explanatory.
My only comment is that there is huge gap between rhetoric and execution in helping SMES. Banks generally do not want to lend to small businesses.
SMEs are expensive to deal with. They do not have formal management. They do not have proper records. Their business model could be flawed. They do not have money.
If you don’t have money, the banks don’t treat you like a person. They become intrusive, asking a lot of nasty and personal questions. You are a non-entity. The banks blame the BSP for this attitude. BSP is very strict, they say, on so-called KYC—know your client.
Both the banks and BSP are afraid of fraud. You know the biggest frauds? They are committed by the bank owners themselves, by insiders. Even the bankruptcy of the old central bank founded in 1949 was caused by a very stupid CB governor. He agreed to absorb the forex losses of the multinationals and currency speculators. Today, we, taxpayers are still paying for that CB failure.
Major bank failures or fraud have been caused by the owners themselves and by insiders. Never the SMEs who account for at most less than 20 percent of total bank loans.
So here is Ben Diokno:
“For us in the BSP, your stories remind us of the importance and urgency of our work in financial inclusion.
The goal of financial inclusion is to ensure all Filipinos are able to use financial services that are appropriate to their needs and capacity.
Financial services, including microfinance, allow individuals and businesses—regardless of the size of income—to effectively manage their finances and achieve their financial goals.
The micro, small and medium enterprises or the MSMEs warrant a special focus for our financial inclusion work. MSMEs are the backbone of our economy, with significant contributions to employment, innovation and development.
We cannot talk about inclusive growth without a strong MSME sector. When we lift our MSMEs, we uplift the country. MSMEs seldom have access to much needed financing. There are many reasons for this.
For instance, banks and other lenders have limited understanding of and visibility into the MSME as a market. They tend to perceive MSME financing as high risk and low margin, which leads to lack of availability and variety of MSME financing products.
The MSMEs, micro-entrepreneurs in particular, are reluctant to approach formal lending institutions due to lack of acceptable collateral and credit history. They may also get intimidated by the documentary requirements and may have limited financial literacy. As a result, the banking sector’s MSME exposure is only at 6.2 percent of the total loan portfolio and 9.2 percent of the total business loans. We recognize these issues and have undertaken a three-pronged approach to improve MSME access to finance:
The first is putting in place the needed financial and digital infrastructure to mitigate the risk and lower cost of MSME financing.
Such infrastructure includes a robust credit information system, digital ID platform, movable collateral registry, warehouse receipt system, and credit surety fund. Toward this end, BSP has advocated for the passage of critical legislations for market-enabling infrastructure. This includes the Philippine Identification Systems Act (RA 11055) or PhilSys as the country’s digital ID platform will facilitate onboarding and digital finance innovations.
The Personal Property Security Act (RA 11057) aims to promote the use of inventories, crops and other non-real property assets of MSMEs as acceptable collateral to secure a loan. Complementing this law is the proposed bill to strengthen the warehouse receipt system which aims support farmers and agri-entrepreneurs in securing bank loans and managing commodity price fluctuations.
The BSP is also developing, with the assistance of the Japanese Government, a Credit Risk Database as a comprehensive MSME statistical reference tool to facilitate collateral-free and lower-cost credit for well-managed enterprises.
The second part of our approach is promoting innovative approaches in MSME financing.
BSP has put enabling regulations for banks and other lenders to roll out innovative solutions and strategic use of cutting-edge technologies to serve the MSME market. Our efforts to promote digital payments are meant to facilitate delivery of financial services, including credit, that are designed around the needs and preference of small-value transactors.
For instance, through a more extensive use of digital payment system, a wet market vendor can now apply and get pre-approved for a microloan through a digital platform, and receive proceeds in his digital wallet within minutes.
He can then choose to pay that loan after a week or make daily payments just by using his phone.
The convenience, affordability and flexibility of this digital product will hopefully make the informal lenders charging exorbitant fees less attractive.
In addition to this, one of the innovations that we are promoting is agriculture value chain financing or the AVCF. Strong value chains enable farmers and agri microentrepreneurs to adopt modern agritech and access high value markets—thereby increasing productivity and income potential. AVCF is an innovative approach as it uses the strength of the entire value chain in determining the creditworthiness of the agri-entrepreneurs who otherwise would not be able to access credit if banks only relied on their individual credit profile.
The BSP is working with the Asian Development Bank on a pilot AVCF project with the goal of strengthening the interest and capacity of banks to undertake value chain financing.
The third and last part of our approach to promote MSME financing is bridging the information gap.
BSP’s key initiative under this theme is a comprehensive MSME study that will generate new and more granular data on MSMEs that can lend to a more nuanced understanding of the characteristics, segmentation and needs of the sector. This can support evidenced-based policymaking and equip banks and other lenders with valuable market insights for customer-centric product development.
The BSP is also facilitating strategic partnerships in the industry.
For instance, the Negosyo Center of the Department of Trade and Industry partnered with Microfinance Council of the Philippines Inc., and Alliance of Philippine Partners for Enterprise Development Inc. to facilitate information sharing. This will enable Negosyo Centers to refer clients to various financing options and help MFIs design products and services appropriate to clients’ needs.”