Micro, small and medium enterprises (MSMEs) account for 99.5 percent of business establishments in the Philippines, employ 63 percent of the workforce, and have been responsible for approximately 40 percent of the country’s gross domestic product (GDP). This sector was among the most severely affected by nearly two years of quarantine and lockdown due to the coronavirus pandemic --- and its revitalization is pivotal to the objective of increasing the pace of economic recovery.
The Bangko Sentral ng Pilipinas (BSP) has issued the proposed rules to guide banks in allocating a minimum four percent of their loanable funds for innovation development for the benefit of micro, small and medium enterprises (MSMEs) and startups. In the draft circular, the loanable funds for innovation development credit will be computed similar to the calculation of loanable funds for agriculture and agrarian reform credit.
This initiative is also geared toward realizing the goals set forth in Republic Act No. 11293, the Philippine Innovation Act, that was enacted in 2019. Qualified borrowers for innovation development credit are MSMEs, startups, innovation centers and business incubators, as well as other entities that support development of new technologies and innovative goods or services.
In the draft circular, currently being circulated among banks, the BSP acknowledges the key role of innovation in spurring inclusive development, as well as in enhancing the growth and competitiveness of MSMEs: “Innovation encourages creative thinking, which in turn, increases productivity and economic output. The banking system plays a crucial role in providing credit necessary to support the development of new technologies and other innovation-related activities.”
The BSP defines innovation as “the creation of new ideas that results in the development of new or improved products, processes, or services which are then spread or transferred across markets.” Innovation development credit includes loans and other financing activities for the development of new technologies, product innovation, process innovation, organizational innovation, and marketing innovation.
The National Innovation Council (NIC) --- a multi-sectoral policy formulation body that is tasked by law to craft a National Innovation Agenda and Strategy Document --- is developing strategies towards promoting MSME internationalization, digitalization, and participation in the local and global value chains. A comprehensive support program, from incorporation to internationalization, including industry firm-level collaborations, shall be developed by the NIC and implemented by concerned government agencies.
Banks have an existing mandatory credit allocation of eight percent of their loanable funds for micro and small enterprises and two percent for medium enterprises under RA No. 6977 for the development of the small and medium scale business sector. As of end-2021, based on BSP data, banks’ compliance to RA No. 6977 is only 2.08 percent for micro and small enterprises. This translates to P178.14 billion loans for micro and small enterprises when banks should have loaned P685.60 billion. For medium enterprises, the banks released P284.99 billion last year versus the minimum requirement of P171.42 billion.
Economic recovery could be hastened considerably if the MSME sector is given a big boost, especially in terms of driving projects and activities that contribute to employment generation and uplifting the welfare of Filipinos that have been severely affected by the global pandemic.