Filling in the financing gap

A large chunk of business enterprises in the Philippines is comprised of micro, small and medium enterprises (mSMEs); one percent (1.0%) of the whole business organizations being large companies. The bulk of mSME sector, however, are micro-businesses.

Small and medium enterprises (SMEs) have commercial banks as their source of funds but micro-enterprises are left to scuttle for business funds and end up being exploited by loan sharks.

The financial need of this sector, may be small per organization, is cumulatively large considering its number. It’s no wonder we see Microfinance Institutions (MFIs) sprouting around our communities, competing with loan sharks and bombays, who charge them with higher interest rate of up to 240.0% per annum. MFIs usually charge 24.0%-40.0% interest per annum or even less.

Mostly, microfinance loans are extended to fund working capital needs of micro-businesses and/or livelihood projects, up to P150 thousand amortized daily, weekly, or monthly for the period of one month to one year.

Microfinance program stimulates micro-entrepreneurs not only to settle with livelihood projects but to expand its business. As they graduate, their need change and can no longer be served by MFIs. However, they are not yet eligible for rural and commercial bank’s clients. Commercial bank financing products are more tailored-fit for SMEs. Hence, the financing gap.

The Department of Trade and Industry (DTI) and Small Business Corporation (SBC) call them Graduating Micro-entrepreneurs; others coined them as Micro-no-More.

By definition of the law, micro-enterprises are those with asset size of less than P3.0 million; small enterprises have P3.0 million-P15.0 million in asset and businesses with P15.0million-P100.0 million assets are considered medium.

Graduating micro-entrepreneurs are those with asset size of at least P500 thousand up to the threshold of P3.0 million, whose funding need ranges from P100 thousand to half a million pesos, as defined by SBC. These loans can be amortized up to four (4) years.

SBC pioneered this program, a Graduating Micro Wholesale Program that bridges this financing gap and afforded bank and non-bank MFIs with a fund source to finance the needs of their micro-enterprise graduates. SEEDFINANCE Corporation, too, has wholesale lending programs of this kind.

MFIs, having no other source of funds, traditionally finance the needs of their graduates from their internal funds, which can only serve a few. As a result, these graduates turn back to loan sharks, sacrifice their profits and their growth stunted due to their unserved financial needs.

With this financing product in place, there is no doubt that the social pyramid will be converted into a social diamond, as was envisioned by the late President Corazon Aquino, the chairperson emeritus of PinoyME Foundation, an organization whose work is to bring microfinance programs to the poorest of the poor. A number of middle class families will emerge through the many employment opportunities the graduating micro-entrepreneurs will create.

Note:

I submitted this article to Sunstar - Cagayan de Oro for publication but was not printed. The editor, however, had offered the author to be a, as in the words of Editor Dan, “Maybe you can be a regular business column contributor? Or a business correspondent perhaps?”