Around 1.7 billion people globally are still unbanked – either having no proper savings or access to credit – according to the 2017 Global Findex Database.

In Southeast Asia, only 27% of adults have formal bank accounts and only 33% of businesses have access to proper financing. While the region has been growing exponentially for the past few decades, financial inclusion in the region remains poor.

The Philippine economy in particular has been consistently growing by 5.3% per year, driven by favourable economic conditions and strong macroeconomic fundamentals. However, this promising growth can only be achieved sustainably and inclusively if roadblocks currently faced by the lifeblood of the country’s economy – its small and medium-sized enterprises (SMEs) – are addressed.

Although SMEs comprise 99.6% of all businesses in the Philippines and employ 65% of the workforce, they only account for 35% of the country’s gross domestic product (GDP). Clearly, there is much room for development in this sector that could unlock opportunities for greater employment, rising incomes, innovation and value creation.

However, this promising growth can only be achieved sustainably and inclusively if roadblocks currently faced by the lifeblood of the country’s economy – its small and medium-sized enterprises (SMEs) – are addressed.

In Southeast Asia, only 27% of adults have formal bank accounts and only 33% of businesses have access to proper financing

Lack of access to business credit

Among the host of challenges faced by SMEs, the most notable is a lack of access to credit. In Southeast Asia, 33% of SMEs lack access to loans and a line of credit. This problem is more acute in the Philippines, where a staggering 50% of SMEs do not have access to formal loans.

This problem prevents SMEs from doing as much business as they possibly can. Cash flow gaps faced by suppliers of big corporations and government agencies, for example, are huge blockers that limit their growth potential, and small business owners often have to turn down business opportunities that come their way due to a lack of the capital necessary to take them on.

This is mainly brought about thanks large buyers having the upper hand in negotiations and extending payment terms to their smaller suppliers for as long as they possibly can – which leaves small business owners waiting for payment for months, and sometimes even years.

And as business expenses pile up while payments from large buyers fail to materialise, the desperate need for capital arises.

To solve this problem, small business owners often use their own personal funds or borrow from family and friends. Even worse, they turn to predatory and informal lenders who charge interest rates ranging from 10-50% of the loan amount per transaction.

Predatory and informal lenders charge interest rates ranging from 10-50% of the loan amount per transaction.

With most banks requiring large bank deposits and real estate property as collateral before extending credit, it is no surprise that SMEs lack proper alternatives – not to mention the slow underwriting processes caused by a lack of available credit information, and a lack of bank and government guidance on compliance documents.

Innovation in underwriting SME loans

A lack of previous credit history creates a vicious cycle for SMEs. Loan applications with missing information are automatically rejected by formal institutions, which leads SMEs to again go back to informal sources of funding.

To solve this problem, the question that needs to be tackled is: how can underwriting of SME loans be simplified, given the lack of data on small businesses that have no history of transacting with formal institutions?

The Philippine government has been proactively seeking solutions to improve credit scoring capabilities within the country. Enacted in 2008, the Credit Information Corporation (CIC) was tasked with collating and distributing relevant information with which to create a complete credit report for borrowers.

CIC Credit Reports will generate credit scores which will assist lenders and borrowers alike, resulting in a higher rate of successful transactions, lower transaction costs and improved transparency between lender and borrower.

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