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SMEs and Credit Constraints in the Philippines

Posted: 2019-12-13

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Small and medium enterprises (SMEs) serve as the backbone of the Philippine economy, accounting for over 99 percent of all firms, about two-thirds of employment, and a third of gross value added (GVA). Despite their importance, SMEs face a host of challenges in attaining competitiveness. Lack of access to financing or credit constraints are among the major obstacles that SMEs in the Philippines face. Credit constraints hinder an SME from innovating and acquiring assets to expand its operations. Since a large share of SMEs are unable to obtain loans from formal sources such as banks, it is not uncommon for some SMEs to explore alternative sources of financing from the informal sector such moneylenders (“five-six loan sharks”), or other sources apart from banks or financial institutions.

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From a sample of 480 SMEs in Metro Manila and Calabarzon, we estimated that 40 percent were credit-constrained, while 47 percent were quasi-constrained - i.e. able to borrow from informal sources. In particular, 42 percent of small and 33 percent of medium enterprises were credit-constrained, while 47 percent of both small and medium enterprises were quasi-constrained.

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Estimation results from our recent paper (Firm Characteristics and Credit Constraints across SMEs in the Philippines) suggest that the firm characteristics that matter in accessing finance solely through formal channels may not be relevant when accounting for informal sources. Firm size, previous purchase of fixed assets, and increased use of digital technologies for accounting and financial management are associated with a lower predicted probability of being credit-constrained for the average SME in our sample. However, except for digital technology use, these firm characteristics are not significant in predicting the probability that the average SME is quasi-constrained.

In addition, we also found that the increased adoption and use of digital technologies in accounting and financial management is associated with a lower predicted probability of being credit-constrained and quasi-constrained for the average SME in our sample. Using digital software for accounting and financial management may make it easier to oversee and generate reports on a firm’s finances. Increased use of digital processes also improves a firm’s ability to organize its records such as financial statements. This could make the firm more attractive to external creditors, especially if the creditor requires the financial statements of the firm.

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Credit constraints hamper the expansion, innovation, and growth of SMEs, which serve as the backbone of our economy, in addition to being an engine of growth. Enabling SMEs access to finance is essential to maximize returns from the SME sector, which plays a significant role in the economic development of our country.

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References:

1. AIM RSN PCC Policy Brief 2019-04

2. Discussion Paper 19-006:Firm Characteristics and Credit Constraints across SMEs in the Philippines


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