Congress has been urged to write a landmark law that will energize micro, small and medium-scale enterprises by easing the tight credit squeeze in the MSME and agricultural sectors that will finally free small entrepreneurs from the clutches of so-called “5-6” or usurious lenders.
Proponents of this proposed law cited the urgency of its approval by both the House of Representatives and Senate in support of the priority programs of the Duterte administration on turning the MSME and farm sectors into major engines of rapid growth and achieving financial inclusion over the medium term.
House Bill No 6907 or the “Financial Inclusion Act” seeks to revolutionize the access of MSMEs, rural-based enterprises, farmers and fisherfolk to formal credit and financing by allowing them for the first time ever to use their “movable assets” as collateral for loans that they can avail of from banks and other financial institutions.
Bohol Rep. Arthur C. Yap, who authored HB 6907 with Rep. Anthony M. Bravo of the COOP NATTCO Party List, pointed out that despite the surfeit of credit facilities offered by the banking community, small businesspersons and the rural folk have had difficulty accessing them because of “the stringent and voluminous requirements for loan applications (e.g. collateral, financial statements, business plans) and their lack of hard collateral in the form of real estate or land that financial institutions traditionally require from loan applicants.”
“As a result, these businesspersons and entrepreneurs have had no recourse but to avail of irregular financial arrangements, the most popular of which is the ‘5-6’ scheme of usurers who offer easy loans with a steep interest rate of 20%,” Yap said.
A lawyer and former agriculture secretary, Yap said the bill seeks to strengthen the secured transactions legal framework in the Philippines by putting in place a notice registry and enforcement of security interests in personal property that will allow would-be borrowers to offer to banks as collateral—in lieu of real estate or land—their available “movable assets” like farming tools, crops, warehouse receipts, intellectual property, inventories and accounts receivables.
“Finance and credit are the lifeblood of any economic activity, especially for agriculture and MSMEs,” Yap said. “Thus, there is a need to include more farmers and MSMEs in the mainstream financial system by leveraging their personal properties (farming tools, crops, warehouse receipts, intellectual property, inventories, accounts receivables, etc.) to increase farm productivity and achieve sustainable MSME growth.”
Yap said that giving a much needed boost to MSMEs through the provision of easy credit would go a long way in helping the Duterte administration achieve its overriding goal of high—and inclusive—growth, given that this sector is one of the country’s largest sources of employment that created 4.8 million jobs in 2013 alone, or almost double the 2.7 million jobs generated by large enterprises that year.
The former agriculture secretary lamented that despite the mandated allocation of credit through the Agri-Agra Law and the Magna Carta for MSMEs, “most banks still prefer to pay the penalty rather than increase their lending to farmers and MSMEs. As a result, most Filipinos are constrained to resort to borrowing from friends, family members, and the 5-6 scheme.”
“The Financial Inclusion Act will change this by granting easier access to lending and borrowing to all Filipinos,” Yap said.
Yap explained that at present, “the closest we can get to a ‘secured transaction’ is provided for by an old law called the Chattel Mortgage Law (Act 1508) that covers the legal and regulatory framework for secured transactions in the Philippines.”
“While it explicitly provides for the use of a broad range of movable assets as collateral, modern financial institutions do not lend based on movable assets. Also, his law was enacted way back in 1906 and needs to be revisited as it has not kept up with the requirements of an effective and efficient modern transactions law, more so with the increasing trade and finance for MSMEs,” he said.
This is the reason, he said, why the financing problem of MSMEs persists in the country “in spite of the numerous programs that have been implemented to address the issue or the passage of laws to facilitate credit access such as the Magna Carta for MSMEs (RA 6977 as amended by RA 8289 and RA 9501).”
He said the World Bank’s Global Financial Index show that Filipino entrepreneurs rank highest when it comes to borrowing from friends and family.
“Conversely, they have movable assets –trade receipts, inventories, account receivables, warehouse receipts, equipment or the commonly-used chattel mortgages. The bill would allow these to be used as collateral,” he said.
“We must realize that Philippine corporations and business entities are predominantly MSMEs, which create the most number of jobs and have the biggest percentage share of the Philippine GDP,” Yap added.
“Unfortunately, securing working funds for them remains a great challenge as outlined in a study by the World Bank’s IFC (International Finance Corp.) because our personal property collaterals laws are out-dated,” said Yap.
He noted that HB 6907 aims to encourage the use of movable assets as collateral for MSMEs precisely because of its significant contribution to the growth and development of the PH economy.
In 2014, the Philippine Statistical Authority tallied 946,988 establishments in the country, of which, 942,925 or 99.6% were classified as MSMEs –contributing about 35.7% of the total value added in the economy.
Regarding employment, MSMEs account for an average of 63% of the total employment of all establishments. In 2013, a total of 4.8 million jobs were generated by MSMEs, 75% higher than the 2.7 million jobs generated by large enterprises, he said.
In terms of exports contribution, Yap said MSMEs account for 25% of the country’s total exports revenues. It is also estimated that 60% of all exporters in the country belong to the MSME category and can contribute to exports through subcontracting arrangement with large firms, or as suppliers to exporting companies.
Yap said “MSME’s contribution to our GDP at 35.7% is relatively comparable to ASEAN-5 economies. MSMEs in Indonesia have the highest contribution to GDP at 57.8% followed by Vietnam at 40% and Thailand at 38.7%.”
Through Finance Undersecretary Gil Beltran, the Department of Finance has thanked Yap and Bravo / Eastern Samar Rep. Ben Evardone for sponsoring this bill.
Once passed into law, Beltran said HB 6907 would “expand lending to MSMEs using movable collaterals. The movable collateral registry will enhance investor confidence, boost production and generate employment.”
Yap recalled that the critical role of MSMEs in reducing poverty and achieving inclusive development was highlighted during the 2015 Asia-Pacific Economic Council (APEC) Meeting in Cebu.
“As a source of growth and innovation, the APEC Leaders’ declaration underscored the importance of empowering the MSMEs for them to contribute to and benefit from future growth,” he said.
Specifically, increased participation of MSMEs in the global trade can have asignificant impact in reducing poverty through employment creation, productivity improvements and economies of scale, he added.