E.O. 558 Is For The "Non-Bankable" Poor

Last week, the entire Philippine banking and finance community were caught by surprise over the President’s signing of E.O. 558. The said Order repealed the Estrada-era E.O. 138 which prohibited government non-financial agencies (GNFAs) like DSWD from engaging in microfinancing. Even high ranking officials from the Department of Finance (DOF) and Bangko Sentral ng Pilipinas (BSP) were puzzled at the President’s seemingly “irrational” and “rash” order and most of the key leaders in the credit financing sector have already come out to express their concern and alarm even, over the junking of E.O. 138. Some commentators like Billy Esposo even claimed that E.O. 558 will be used for politicking in next year's elections. Judging from their reactions, it now seems clear that Malacañang acted "unilaterally" and did not consult finance and banking officials before issuing the E.O. (or probably someone in Malacañang knew that these people would naturally oppose the move and just decided to go on with it). BSP Governor Amando Tetangco “worded” this widespread cynicism the best when he said: “with E.O. 558, the country would risk losing its hard-won fiscal discipline that has dramatically improved international perception of the Philippines… The government could best preserve and enlarge its gains in microfinance lending by maintaining a policy environment that would encourage private financial institutions to invest in serving the bankable poor.”

The question to Mr. Tetangco then is: “what about the non-bankable poor" (di ba parang oxymoron). Aren't they entitled to loans too? (By the way, I would be very interested to hear from him the difference between the "bankable" and "non-bankable" poor).

I remember that when Arroyo first assumed the Presidency, she cited “SME Development” as one of her key programs to create more jobs and bring about economic growth for Filipinos. In 2003, she launched “SULONG” (which stands for “SME Unified Lending Opportunities for National Growth” – quite a mouthful). SULONG is an amalgamation of 7 government financial institutions or GFIs (DBP, LBP, National Livelihood Support Fund, PhilExim, Quedancor, SSS and Small Business Corporation) which signed a covenant to implement an “integrated approach” to SME lending. And after only three years in operation, current DTI Secretary Peter Favila reports that over P85 billion in loans have already been released to various SMEs nationwide under the SULONG program. Theoretically, since there are about 800,000 SMEs in the country according to NSO data, this means that each SME can borrow about P105,000 under the SULONG program. Note that besides SULONG, there are many other GFIs and private sector groups also engaged in microfinancing. Fueled by Overseas Development Assistance (ODA) loans and local savings, the perception is there is much money to be lent out to SMEs in the Philippines today.

This perception seems to be bolstered by the fact that only a week ago, a friend of mine whose family owns a small rural bank in Dipolog City, Zamboanga del Norte said that their bank is currently “awash with microfinancing cash” (courtesy of PCFC – People’s Credit and Financing Corporation). He also said that their primary problem now is the lack of qualified borrowers; most of the small businesses in their area lack the necessary documents to qualify for a loan. He further notes that SME owners are “opaque” (as opposed to transparent) and it is very hard for his credit investigators to examine their credit standing because they do not usually keep a record of their business transactions.

Businessmen oftentimes lament the fact that Philippine banks are very strict and quite conservative in their lending habits. They say banks will only lend you money if you can prove to them that you don't need them. Banks, especially the big ones, perceive SMEs as "high credit risks" and disdainfully view SME lending as "too much work for too little gain." According to a study made by Fajardo in 1990, the median age of SMEs in the Philippines is 7 years. A study made by the Ministry of Science and Technology of China also made a similar finding: "around 50% of SMEs come to an end in their first three years of business and 50% of the remaining 50% disappear in the next 5 years." In other words, only 25% of start-up SMEs remain after only 8 years in business and very few small businesses survive to be more than 10 years old. Various banking industry studies also show that microfinancing is at least 5 times more costly than say, commercial loans. This is so because you need to hire more people to manage larger volumes of accounts but at "tingi-tingi" amounts. We Ilonggos have a word for it: "pabugas-bugas."

Despite government's efforts to provide credit access to the poor, there are still many who fail to qualify for start-up business loans. For one, most GFIs require collateral and "equity capital" - meaning a borrower should also have counterpart money for his start-up business - to qualify for a loan. But who has capital nowadays? Certainly not the poor itinerant vendor. Also, most Filipinos are "afraid" of going inside a bank: first, you have to look "presentable" (i.e. indi naka-tsinelas, sando) or else the loan officer would think you do not have "capacity to pay," second, loan processing demands paperwork and usually takes at least a month and third, it is more convenient to borrow from the friendly neighborhood "5-6" (ikaw pa ang pinupuntahan para pautangin!).

I think that the underlying reasons/motivations for President Arroyo's repeal of E.O. 138 can be attributed to the fact that GFIs have not been entirely successful in "weaning away" Filipino entrepreneurs from the "5-6." She therefore wants the line agencies (like DSWD) to come in and provide credit to the "non-bankable poor," to borrow Tetangco's term. While it has restored the faith of the international community, the prudential measures being observed by GFIs and MFIs (Micro Financing Institutions) have caused a "bottleneck" in SME financing. Thus, as my friend the rural banker said, they are "awash with microfinancing cash but little qualified borrowers." I surmise that the President (or whoever her E.O. 138 adviser is) felt that not enough funds are reaching the poor or if loans are do released by GFIs/MFIs, the microfinancing funds most often reach not the poor itinerant vendor but the middle-class entrepreneur. Interestingly, just weeks before the President signed E.O. 558 Malacañang and NEDA have issued press statements urging our financial sector to be more "developmental," and "not be lazy" in lending to SMEs. So I guess the President got "impatient" with the "excuses" and prudential guidelines of our GFIs/MFIs and decided to just proceed with taking on the "5-6" on her own.

For not sufficiently explaining and defending the rationale for E.O. 558 in media, Malacañang is losing the policy debate over the issue. I think Palace PR hacks should perform better at explaining the President's new policy directive to our people.