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2. Access to Credit
2.1 Banks
2.2 Other Sources
2.3 Credit Bureau
In-Country Assessment Information

2. Access to Credit

In the global context, the country’s banks are relatively strong, ranking 46th out of 142 in the Global Competitiveness Report 2011-2012. However, uncompetitive processes for acquiring loans exist (rank 52nd out of 142), based on enterprise surveys. This weak access to bank loans is at least in part compensated by the growth of MSME-focused microfinance.

Microfinance institutions currently have a broad depth of services for small entrepreneurs, including those offered by the Development Bank of the Philippines and the Land Bank of the Philippines. The Magna Carta for Micro, Small and Medium Enterprises created a Small Business Guarantee and Finance Corporation charged with implementing “comprehensive policies and programs to assist MSMEs in all areas, including but not limited to finance and information services, training and marketing”. The institution is also responsible for extending various forms of financial assistance to MSMEs and making venture capital available for them. Yet, interviewed entrepreneurs believe that the implementation of such efforts is insufficient and they are still experiencing significant difficulties with access to credit.

There is currently no public institution that provides credit information, although the private sector partly compensates for this with private credit bureaus.

 

Goal – An efficient, transparent financial sector that provides a broad range of citizens with access to multiple forms of competitive credit so that they can start businesses, build wealth, and purchase property

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2.1 Banks
Core Question: Are traditional banking services robust and extensive enough to serve the needs of the population to help them build wealth and purchase property?Yes – Strong, the IMF notes that the financial sector has remained resilient and that nonperforming loans are relatively low at under 5%.

Access
2.1.1 How easy is it to obtain a bank loan?
Strong – Ranking 52nd out of 142; Score 3.03 out of 7 Trend ↑

Soundness
2.1.2 How sound are the country’s banks? Strong – Ranking 46th out of 142; Score 5.57 out of 7

Source:The Global Competitiveness Report 2011-2012, World Economic Forum

www.weforum.org/issues/global-competitiveness

2.1.3 Microlending
Status – Strong, although microfinance institutions have a great number of services, small businesses have difficulty getting loans due to the lending requirements.

2.1.3.1 Microfinance allows citizens without traditional creditworthiness to build a credit history. How many microfinance institutions are operating in the country? 202

ASA Philippines Foundation www.asaphil.org/
CARD Bank cardbankph.com/wp_cardbankph/home.php
KMBI www.kmbi.org.ph/
Life Bank Foundation
TSPI Development Corporation www.tspi.org/

2.1.3.2 What is the number of active borrowers per institution?

ASA Philippines Foundation 179,626
CARD Bank 725,800
KMBI 186,170
Life Bank Foundation 236,917
TSPI Development Corporation 264,089

Source: Microfinance Information Exchange www.mixmarket.org/mfi

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2.2 Other Sources
Core Question: Are entrepreneurs free to raise capital outside the banking system including venture capital and/or by issuing stock in a well-regulated stock exchange? No – Weak, access to capital outside banks remains weak and as a result some small businesses resort to informal lending. Informal lending is based on trust, confidence, and familiarity but can only provide limited capital.

Financial Freedom
2.2.1 How much control does the government exert over financial services? Weak for entrepreneurs – Score 50 out of 100 – Considerable government control

Source:Index of Economic Freedom 2011, Heritage Foundation
www.heritage.org/index/Country/Philippines Venture Capital

2.2.2 How easy is it for entrepreneurs to find venture capital? Weak – There are start-up loans granted by the Small Business Corporation, created by law to provide access to credit to entrepreneurs, as well as by the Landbank of the Philippines, the Development Bank of the Philippines and others. However, interviewed MSMEs feel that those initiatives are insufficient.Source: Financing Programs for Micro, Small and Medium Enterprises in the Philippines, Bureau of Micro, Small and Medium Enterprises, Department of Trade and Industry.

Equity Investors
2.2.3 How easy is it to raise money by issuing shares on the stock market? Strong – 44th out of 142; Score 3.98 out of 7 Trend ↑ although not relevant for MSMEs

Source:The Global Competitiveness Report 2011-2012, World Economic Forum

www.weforum.org/issues/global-competitiveness

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2.3 Credit Bureau
Core Question: Is comprehensive credit information available through public and private credit bureaus?

No – Weak, the public credit bureau (enacted by the Credit Information Systems Act in 2008) has yet to become operational. In the meantime, there are private credit bureaus formed by the credit / banking associations.Overall Ranking 126th out of 183 Trend ↓

Coverage
2.3.1 What is the depth of information available in credit bureaus? Strong – Score – 3 out of 6 with a higher number indicating more information is available

Public
2.3.2 What is the extent of public credit registry coverage? Very Weak – not available23

Private
2.3.3 What is the extent of private credit registry coverage? 8.2% WeakSource:Doing Business 2012 – Getting Credit, World Bank

www.doingbusiness.org/data/exploreeconomies/philippines

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In-Country Assessment Information
FQ13: How available are mortgage loans for purchasing commercial property (office, retail, industrial and logistics), who is the typical user and what are the prevailing trends?

While the basic legal framework of the banking system is in place, access to credit by MSMEs is hardly robust. Even for those who own real property that may be utilized as collateral or security, access to credit may not necessarily come easy as they must hurdle technical and legal obstacles related to policies governing real property-secured loans. The steps required before the loan is finally approved entail not only documentation (preparation or signing of loan contract/real estate mortgage contract), but also dealing with a notary public, the concerned assessor’s office, and the Register of Deeds. Even before a real property owner decides to secure a loan, she/he has to consider the appraisal value, interest rates and duration of the loan.

FQ14: What are the interest rates, term and loan-to-value ratios?

Interest rates: The rates range from 6% to 24% per annum depending on the type of product. Loan-to-value ratios: The General Banking Law provides that loans against real estate shall not exceed 75% of the appraised value of the real estate security, plus 60% of the appraised value of the insured improvements. Term: Based on an interview with a banking expert, the duration of loans is usually from 3 months to 5, 7, or 10 years, depending on the business. However, more flexible loan arrangements with lower requirements as can be found in the database of the Bureau of Micro, Small and Medium Enterprise Development.

FQ15: To what extent are microenterprises (5 or fewer employees) active in the country? Approximately what percentage are formally registered firms?

According to the Department of Trade and Industry, as of 2009, there were 780,437 business enterprises operating in the Philippines. Of these, 99.6% (777,357) were micro, small, and medium enterprises (MSMEs) and the remaining 0.4% (3,080) were large enterprises. Of the total number of MSMEs, 91.4% (710,822) were microenterprises, 8.2% (63,529) were small enterprises, and 0.4% (3,006) were medium enterprises. The majority of MSMEs in operation as of 2009 were in the wholesale and retail trade industries with 385,610 business establishments, followed by manufacturing with 111,987, and hotels and restaurants with 97,298.

FQ16: What services other than loans such as insurance, funds transfers, and business development training are available from microfinance organizations for formal businesses?

MFIs provide a broad range of financial services such as deposits, loans, payment services, money transfers and insurance products to the poor and low-income households and their microenterprises, although outreach has been largely disappointing.

FQ17: What professional financial services are available outside state-owned banks including insurance, credit cards and investment management?

The banking sector is dominated by five large commercial banks. Two large state-owned banks account for about 15 percent of total assets. Credit is generally available at market terms, but banks are required to lend specified portions of their funds to preferred sectors, including MSMEs.

FQ18: What has been the appreciation (or depreciation) rate for commercial property over the last several years?

In the City of Manila, the schedule of fair market values has not increased since 1986. For the City of San Fernando Pampanga, the schedule of fair market values has not changed since 2009, although between 1996 and 2009 there was a 30 to 35% appreciation rate on residential and agricultural land.Source: Interview and documents from the Assessor’s Offices in both cities.

FQ19: How available is seed money or angel investors for the start up of small businesses?

There have been significant efforts on the part of the Central Bank as well as the Bureau of Micro, Small and Medium Enterprises to make loans available for business start-ups. The Magna Carta for Small Enterprises requires that banks make available a certain portion of their loans for use by MSMEs. Moreover, other initiatives are being undertaken to make start-up lending friendlier to small businesses. They include: Real Estate/Chattel Mortgage (REM/CHM), Hold-out on Deposits, Assignment of Receivable and/or Inventory, JSS of Principal Stockholders/Officers, Guarantee cover from Small Business Corporation (SB Corporation), if required. Developments banks are also increasingly considering business plans of small and medium enterprises, assignment of project income, purchase orders, export receivables, etc. as acceptable collateral. However, the challenge is to get more banks to actually implement the above initiatives and to develop the attitude of serving small businesses.Outside of banks, severely resource-constrained small vendors operating in public markets rely heavily on informal lenders or financiers known as “5-6.” However, they charge exorbitant interest rates and lack government supervision to protect borrowers. 5-6 moneylenders charge a nominal interest rate of 20 percent over an agreed period of time. A person who borrows 5 pesos from a 5-6 moneylender over a period of one week repays 6 pesos. 5-6 moneylenders do not require collateral or documents from their borrowers. Instead, the borrower’s credibility is determined by his or her business and loan repayment history.Since informal lenders collect on a daily basis, they tend to seek out businesses that generate cash on a daily basis. These include vendors, proprietors of small businesses, and small service providers (e.g., groceries, eateries, tailoring shops, and hair salons).

FQ20: Do small businesses have access to credit information about potential customers?

Generally, no. Comprehensive credit information is only available through private credit bureaus as no public credit information bureau exists at present (although the establishment of one is underway). The Bankers Association of the Philippines (BAP) Credit Bureau and the Credit Management Association of the Philippines are private initiatives that maintain records of creditworthiness. This information is not easily accessible to the public. Credit information is not heavily relied upon for purposes of obtaining financing because current lending practices favor collateral as a measure for hedging financing risks.

FQ21: Can businesses gain access to information about them contained in credit bureaus and correct inaccuracies?

To address the lack of a credit bureau, the Credit Information System Act (Republic Act No. 9510) was passed on October 31, 2008. Section 5 of the law provides for the creation of a Central Credit Information Corporation “whose primary purpose shall be to receive and consolidate basic credit data, to act as a central registry or central repository of credit information, and to provide access to reliable, standardized information on credit history and financial condition of borrowers.” As such, reliable and correct data is required by the law. However, the implementing rules and regulations are still in progress.

Source: Unless noted, “Access to Credit, a Background Paper” by Atty. Tanya Lat and Atty. Francisca Claver and information confirmed in focus groups and interviews conducted by the Institute for Solidarity in Asia in June and July 2011 in Manila and San Fernando, Pampanga.