THE backbone of the Philippine economy is the small and medium enterprises (SMEs). From thriving local bakeries to innovative tech businesses, they influence our day-to-day lives and drive economic growth. Yet, despite their critical role, SMEs face numerous challenges, particularly in securing the necessary financing to thrive.

It is true that the Magna Carta for micro, small and medium enterprises (MSMEs), enacted in 1991, was a groundbreaking law that acknowledged the vital role that MSMEs play. By facilitating easier access to financing through organizations like the Land Bank of the Philippines, the Development Bank of the Philippines and the Small Business Corp., the financing arm of the Department of Trade and Industry, this law aimed at creating an advantageous business environment. However, even with these measures in place, MSMEs continue to face substantial financial obstacles.

To better understand these challenges and explore potential solutions, I had enlightening discussions with Joel Cruz, president and managing director of South Asia Link Finance Corp. (SAFC); Jocarl Zaide, our chief financial officer; and Robert Jordan Jr., our chief executive officer. These executives offered insightful insights on how to close the funding gap for MSMEs based on their extensive experience in both traditional and alternative finance institutions.

One glaring issue is the failure of Philippine banks to meet the mandated MSME lending quotas. Under Republic Act 6977, banks are required to allocate 10 percent of their total loan portfolio to MSMEs, with 8 percent for micro and small enterprises, and 2 percent for medium-sized enterprises. However, as of March 2024, the compliance ratio stood at a mere 4.41 percent, far below the required 10 percent. This reluctance is attributed to the perceived high risks and lack of collateral typically associated with small business loans, prompting banks to opt for penalties over compliance.

Reflecting on his extensive experience in traditional banks, Jordan shared, "In my years with traditional banks, I saw firsthand the struggles SMEs faced in securing financing. This experience showed me that the system needed a more supportive approach." His journey from United Coconut Planters Bank to SAFC has fueled his passion for serving SMEs more effectively.

According to Bangko Sentral ng Pilipinas data, as of June 2023, MSME loans accounted for only 4.71 percent of the banking industry's loan portfolio, falling short of the mandated targets. The compliance rate for micro and small enterprises was just 1.93 percent, while medium enterprises saw a slightly better compliance rate of 2.78 percent. These figures highlight the systemic challenges MSMEs face in accessing traditional banking loans, often leaving them financially constrained.

Cruz emphasized, "At commercial banks, the focus on risk management often stifles the entrepreneurial spirit of SMEs. Shifting to SAFC allowed me to truly help these businesses turn their visions into reality." His leadership has driven the company's growth from P10 million in capital to P4.5 billion in total assets by the end of 2022, with 70 percent of SAFC's loan portfolio consisting of SMEs.

One major obstacle still stands in the way of MSMEs' access to finance. While SMEs and microenterprises make up the great majority of businesses, the Asian Development Bank claims that many of them have difficulty obtaining funding. The Covid-19 epidemic has made this issue worse by forcing many MSMEs to either halt operations completely or drastically downsize them due to financial difficulties.

Zaide added, "While working in private banks, I realized that SMEs needed more than just loans; they needed partners who understood their challenges. At SAFC, we provide that partnership, helping SMEs navigate financial hurdles and achieve their goals." His transition from private bank to SAFC underscores the necessity of flexible and supportive financial solutions for SMEs.

With that in mind, it is evident that financial institutions, governments and SMEs themselves must work together to fully realize the potential of SMEs. Important measures include ongoing regulatory framework changes, increased financial literacy and innovative financial solutions. By working together, we can establish an environment that supports SMEs and promotes innovation and sustainable economic growth.

Seve Paulo P. Linis is the digital and process innovation head at SAFC, specializing in process optimization and digital marketing strategies. With a cum laude degree in BS Management Economics from the University of the Philippines Baguio, Linis has a solid grounding in accounting, marketing, economics and business management. He has collaborated with various organizations across different industries locally and internationally.