MANY in government want to help micro, small and medium enterprises (MSMEs), and with good reason. They represent more than 99% of all registered businesses, employ 63% of the workforce and contribute 40% to the total economy. Unfortunately, good intentions have not yet translated into policies producing optimal results.
Impressive as these statistics already are, many believe that small businesses can do more for the economy. But realizing their full potential requires better implementation of Republic Act 9501 or the “Magna Carta for MSMEs,” which was passed in 2007.
In particular, this law deals with access to capital, an obstacle to the success of small businesses. Specifically, the law obliges banks to reserve 10% of their total loanable funds for MSMEs. But financial institutions have consistently failed to comply, with many paying the penalties instead. Unfortunately, the policy interventions needed for better implementation have eluded decision makers.
Jose Teodoro “TG” Limcaoco, President and CEO of the Bank of the Philippine Islands, speaking at the Manila Times Mid-Year Economic Forum on Friday, July 29, 2022. FACEBOOK LIVE SCREEN CAPTURE
Jose Teodoro “TG” Limcaoco, President and CEO of the Bank of the Philippine Islands, or BPI, has a few suggestions worth considering. During a business forum organized by this newspaper on Friday, he noted that banks also want to help MSMEs, but he doubted that virtuous practices could be legislated. Generally, banks avoid lending to MSMEs, due to the perceived risk of default.
So far, telling banks to just take on more risk hasn’t worked. Mr. Limcaoco suggested that the government should instead share the risk with the banks. Of course, the mechanics must be studied further, but it deserves further study. Certainly, others have already raised similar ideas, but with so much concern for MSMEs now, the time seems opportune.
Also, the risk could be minimized if banks had more information about loan applicants. In this regard, Limcaoco said the government should speed up the rollout of the national ID card and expand the Credit Information Corp. (CIC), the nation’s only public credit registry and credit information repository.
With more people registered with the CIC, Limcaoco said banks could provide more loans, and not just to entrepreneurs. For example, he added, more students could qualify for financial aid if loan officers had their detailed background information, including credit scores.
In the same vein, there is another Magna Carta provision for MSMEs which should also be better implemented. The law assures them “access to a fair share of government contracts and related incentives and preferences.” Part of Magna Carta Section 4 adds: “Eligible MSMEs shall be entitled to a share of at least ten percent (10 percent) of the total value of purchases of goods and services provided to the government, its offices , offices and agencies every year”.
Indeed, the government is an important customer for many sectors and industries. The national budget this year alone is north of 5 trillion pesos, of which 10% is about 500 billion pesos. Additionally, local governments should have more funds available to them now, due to the implementation of the Mandanas-Garcia ruling. This too is an opportunity for MSMEs to get more business from the government.
Naturally, however, the solutions to persistent problems are never simple. Many MSMEs lack the capacity to meet large government orders, which are usually required by public procurement laws. Buying in bulk favors the government because it is simply more economical. In fact, MSMEs face similar lost opportunity from private sector clients.
This may not be the only reason why government offices are not buying more from MSMEs, but policy makers should review their procurement policies. They may have to balance competing virtues, save taxpayers’ money and pay more to help MSMEs. The latter seems to offer higher net gains.
It is certain that support to MSMEs will generate higher economic dividends. Buying from them also allows them to develop the capacity to respond to large orders from private buyers. In other words, the government could relaunch a virtuous circle.
As others have said, the Philippines has many good laws, like the Magna Carta for MSMEs. But often the government is short-handed.