For decades, the Philippines relied on mandated credit quotas to push banks toward underserved sectors. The Agri-Agra Law and micro, small, and medium enterprise (MSME) lending requirements under the Magna Carta were intended to correct market failures by steering resources toward agriculture and MSMEs. Yet after years of implementation, one conclusion is difficult to escape: mandated lending targets, as originally designed, did not reliably translate into genuine access to finance.

This assessment is based primarily on my experience with the MSME credit mandate. In the early years, banks were generally compliant. Over time, however, the rapid expansion of bank balance sheets did not result in proportional growth in MSME lending. Larger banks learned how to “game” the system, while smaller institutions struggled under the burden of compliance. The policy was well-intentioned, but design flaws undermined its objectives. These flaws now offer valuable lessons as policymakers revisit the reinstatement of mandatory SME lending.

First, abandon the “one-size-fits-all” approach.

The Magna Carta required all banks—rural, thrift, universal, and commercial—to allocate 10 percent of their loan portfolios to MSMEs, split into eight percent for micro and small enterprises and two percent for medium enterprises. In theory, this democratized credit; in practice, it ignored the vastly different business models, client bases, and risk capacities of Philippine banks.

Rural and cooperative banks, whose natural markets consist of micro-borrowers, found it nearly impossible to meet the medium-enterprise requirement because their communities simply did not generate enough borrowers of that scale. Conversely, large commercial and universal banks easily met the medium-enterprise quota but avoided micro segments, choosing to pay penalties or rely on “alternative compliance” rather than investing in costly retail underwriting systems.

International experience suggests a more nuanced approach. India’s priority sector lending framework differentiates targets across bank types, including small finance banks, private banks, and cooperatives. Nepal’s productive-sector mandates are phased in and calibrated by institution. The lesson is clear: symmetrical rules imposed on asymmetrical institutions produce distorted outcomes.

Second, design proportionate penalties.

In the Philippines, penalties for non-compliance were largely uniform, creating perverse incentives. For large banks, the fines were immaterial—far cheaper than building an MSME lending infrastructure. For small rural banks, those same penalties were punitive, sometimes swallowing months of profit and weakening capital buffers.

Other jurisdictions use more sophisticated mechanisms. In Brazil, shortfalls in rural credit compliance are redirected into low-yielding funds, imposing an opportunity cost proportional to balance-sheet size. In India, non-compliant banks must place funds with the Rural Infrastructure Development Fund. These approaches ensure that large banks face meaningful costs while smaller institutions are not crippled. Crucially, these models provide transparency regarding how penalty resources are utilized—a feature notably absent in the Philippine system.

Third, fix transparency and reporting.

A persistent weakness of the MSME mandate was poor data quality and limited public disclosure. Even the National SME Development Council lacked granular, timely information on which banks complied, how much lending was direct versus alternative, and how many actual MSME borrowers were reached.

Contrast this with Bangladesh, where the central bank publishes dashboards disaggregated by bank, region, and gender. India releases comprehensive annual data to enable public scrutiny. If mandates are to be credible, the Philippine public deserves to know which banks are truly lending to disadvantaged sectors—and which are merely checking a box.

Fourth, move beyond pure quantity targets.

Global evidence shows that quotas increase loan volumes but rarely build lasting capability unless paired with structural incentives. Future policy should emphasize access rather than portfolio percentages. Success metrics should track the number of new-to-bank MSME borrowers, the adoption of cash-flow-based and alternative credit scoring, and the use of digital onboarding. Furthermore, policy should incentivize participation in guarantee programs and lending to priority sub-segments, such as women-led enterprises and first-time borrowers. Banks that invest in genuine capability-building should be rewarded, not treated the same as those that comply only on paper.

Fifth, strengthen risk-sharing and market infrastructure.

The most successful systems rely not on quotas alone, but on credit guarantees, refinancing windows, and institutional reforms. Programs such as India’s CGTMSE and Bangladesh’s SME guarantee schemes significantly reduce bank risk. Similarly, robust collateral registries and digital credit bureaus lower information asymmetry and unlock bankable deals.

The global trend is not toward abandoning directed credit, but toward smarter, more flexible frameworks. If mandatory SME lending is to be reinstated, it must be redesigned—differentiated by bank type, proportionate in penalties, transparent in reporting, and focused on real-world access. Only then can the policy genuinely support the SMEs that drive inclusive growth.