Micro, small and medium enterprises (MSMEs) continue to expand in fast-growing Philippines, getting a boost from booming electronic commerce, according to the Asian Development Bank (ADB).

However, MSMEs in the country remain hampered by limited access to financing, partly as banks avoid bad loans or defaults among borrower-entrepreneurs who cannot repay their liabilities, the Manila-based multilateral lender's Asia Small and Medium-Sized Enterprise Monitor 2024 report released on Wednesday, Nov. 22, showed.

ADB data showed that the number of Philippine MSMEs further rose to a record 1,241,766 in 2023, sustaining the yearly increase, which was reversed only in 2020, at the height of the most stringent COVID-19 lockdowns that shuttered many businesses.

Alongside economic reopening and recovery from the pandemic, MSMEs are not only increasing in scale but also providing more jobs—from 5.38 million in 2020 to 5.46 million in 2021, 5.61 million in 2022, and a record 6.36 million in 2023.

MSMEs account for 99.6 percent of all registered businesses in the Philippines and employ 66.8 percent of the country's total workforce—also a historic-high employment share.

The ADB cited that about four out of every five local MSMEs are doing business in areas outside Metro Manila.

Three-fourths of MSME workers here are also employed in the provinces.

It helps that MSMEs in the country have been "increasingly adopting digitalization and innovation to enhance their growth and resilience," the ADB said.

"Despite comparatively lower research and development budgets, MSMEs are innovating processes, helping improve the country's Global Innovation Index ranking (54 among 129 countries)," the ADB report noted.

This happened as the report pointed to e-commerce edging out traditional cash-based transactions with brick-and-mortar retailers.

"Platforms like Lazada, Shopee, Facebook Marketplace, Zalora, Carousell, and eBay Philippines have reshaped consumer behavior, particularly during and since the pandemic. This shift includes online marketplaces, digital payment systems, and diverse e-commerce platforms," it said.

"The surge is fueled by rising consumer demand, technological advancements, and the sheer convenience of online shopping and delivery systems. E-commerce is evolving as businesses and consumers increasingly use digital transactions, offering new opportunities for MSMEs," it added.

While the ADB cited a recent study showing that up to 91 percent of Philippine MSMEs are looking forward to e-commerce as their growth driver in the next three years, these small businesses lamented some concerns like issues when handling product returns as well as lengthy delivery periods.

For the ADB, local MSMEs "need to improve their efficiency and reliability to meet consumer expectations."

Even as the domestic MSME credit market continued to expand post-pandemic, its market size remained "small”—accounting for merely 4.1 percent of total bank lending as well as equal to only 2.1 percent of gross domestic product (GDP) in 2023, the ADB noted.

According to ADB data, the share of MSME loans to total Philippine bank loans has been shrinking from as much as 6.1 percent pre-pandemic, to 4.9 percent in 2020, 4.6 percent in 2021, and 4.3 percent in 2022.

Their share to GDP also slid from 3.2 percent in 2019 to 2020's 2.7 percent, 2021's 2.4 percent, and 2022's 2.2 percent.

Last year, combined loans extended to a total of 1,521,815 MSMEs inched up 2.1 percent to P503 billion.

But the ADB pointed out that MSMEs' non-performing loans (NPLs) reached P51.9 billion in 2023, or a tenth of the sector's borrowings—a bigger share than the 3.2-percent ratio of gross NPLs to the country's total bank lending.

"The Philippines, Singapore, and Thailand saw large increases during the pandemic in 2020, dropping gradually since 2021—except in the Philippines which continued to have the highest MSME NPL ratio at 10.3 percent, nearly double the 5.5-percent ratio in 2019," the report noted.

As a whole, the ADB said "lack of collateral and recurring issues over risks and costs make MSME lending a high-risk and low-margin proposition" in the country.

"Financial institutions rely heavily on traditional lending methods to meet MSME credit requirements, which is another major challenge. There is also limited information on market operations and the viability of MSMEs, coupled with a lack of credit history typically required by financial institutions to assess creditworthiness," the ADB explained.

"In addition, key stakeholders often have limited knowledge and experience in doing secured transactions, and there is no well-functioning online registry for movable collateral," the report added.

It did not help that "access to traditional sources of capital, such as banks, is hindered by high interest rates, stringent collateral requirements, and a long and tedious loan application process."

"MSMEs accessing capital markets involve high costs and compliance requirements, misconceptions about their suitability for capital markets, lack of familiarity with markets, and a shortage of skilled personnel and expertise. Also, poor financial literacy and limited awareness of funding opportunities make access to finance difficult," the ADB said.

As such, homegrown MSMEs usually turned to pawnshops and other alternative non-bank financing sources.

"Pawnshops had outstanding financing totaling P40 billion as of end-2022, with 98.5 percent of them located in the provinces," according to the ADB.