In improving financial inclusion (FI), Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said the combination of small businesses’ financial trail, electronic or e-payments, and some form of state-funded anti-default system are key to first-time borrowers.

“The access of medium and small-scale firms to credit will be improved by technology to the extent that electronic payments, if you include financial trail, that will be very helpful. But at the same time, there’s no substitute for subsidized guarantee fees for first-time borrowers,” Medalla said in a recent Asian Development Bank (ADB) event in Songdo Convensia, Incheon, South Korea.

The FI-centric ADB panel discussion on “Financial Inclusion to Accelerate COVID-19 Recovery: Lessons in Evaluations” highlighted the role of digital technology, digital finance and fintech in ensuring an inclusive post-Covid recovery.

This is not the first time that Medalla opened talks on the question of a government guarantee fund or a surety funding for micro, small and medium and enterprises.

As early as July 2022, the BSP chief was already recommending a higher guarantee funding to incentivize banks to lend more to MSMEs as a long-term post-Covid assistance.

Medalla said last year that since temporary relief measures designed to support MSMEs during Covid times are winding down, a permanent solution such as a guarantee finance may be necessary for MSMEs and the agriculture sector.

“There is no substitute for a guarantee fund for first-time borrowers where the government absorbs the difference between perceived probability of default for first-time borrowers,” he said in the ADB event. “(But) that seems simple until you realize that it can become very political. Eventually, whatever the good intentions are forgotten. This is the other thing we have to focus on: how can we subsidize guarantee fees that are not abused?” he said.

Medalla echoed what he said in 2022 that a long-term solution is a guarantee fund where the banks when they lose money lending to MSMEs do not absorb 100 percent of the loss.

The next step now is for the government to decide how much fund to set aside as guarantee or surety, and how much is the sharing of losses to be absorbed by the lending bank and the state.

Medalla said eventually, MSMEs will have a track record or a financial trail and will become “bankable”.

“The hard one is how you can get your first loan? … The formula for that is some form of fund that subsidizes. (The) risk, though, is we are full of stories that start out that way but it never ends out like that. That is the real problem. It’s a governance issue,” he said.

Medalla has always emphasized that BSP and the government should foster good governance and funding to encourage lending to sectors that would otherwise have no access to credit.

The BSP chief has also said in the past that the MSME credit concern is a fiscal problem, therefore the solution is also fiscal.

“The question…is whether governments are capable of managing it well. The other problem is if people see that government is there, they feel like they can get away without paying. How the government does those guarantees, the private sector with the obligation to pay is strong. There are many other things but there’s no substitute for government being able to collect taxes properly and being able to target those sectors,” said Medalla.

The BSP has been supporting MSMEs and the agricultural sector through their ongoing programs such as: credit enhancement mechanisms to encourage bank lending to MSMEs and agribusinesses through the Credit Surety Fund (CSF) and Credit Risk Database; and the promotion of non-traditional financing approaches such as agriculture value chain finance and supply chain finance.

The MSME sector accounts for 99.5 percent of business enterprises and 63 percent of total employment. It is one of sectors that took a big hit because of the cessation of business activity during the long lockdowns of 2020 and 2021.

A central bank survey showed that 60 percent of MSMEs have stopped operations as soon as the country was placed in a pandemic lockdown in 2020.