Like its Southeast Asian counterparts, the Philippines relies on micro, small and medium enterprises to act as the engine of the national economy. The MSME sector accounts for 36% of gross domestic product and employs 63% of the country’s workers. Despite their importance, MSMEs have remained grossly underfunded and limited in their ability to grow. This ongoing challenge was compounded by Covid-19, as thousands of MSMEs struggled to stay afloat without adequate funds during the worst of the pandemic.
Despite policy measures to facilitate bank lending, credit to small businesses has declined further during the pandemic, with 79% of Filipino microenterprises citing lack of access to working capital as a barrier to maintaining or restarting operations. More needs to be done to close the funding gap. Fortunately, digital loans offer a viable solution.
Small businesses are deprived of financing options due to structural deficiencies in the traditional loan market. With over 15% of cities and municipalities in the Philippines lacking any sort of physical banking presence, many MSME owners struggle to access financial services. This lack of accessibility hampers their ability to obtain loans and build a credit rating, which further hampers prospects for financing. The onerous administrative and credit assessment processes imposed by banks on these businesses are also deterrents. Many resort to informal credit markets – including illegal sources of finance – which present a different set of challenges, such as unscrupulous debt collection practices by loan sharks and the absence of legal remedies in case litigation with lenders.
New technologies offer opportunities for digital financial service providers to fill market gaps by responsibly extending credit through online platforms to underserved small business owners. Businesses can access credit from anywhere in the country through digital lending, making it a viable financing option. DFS providers are also able to take advantage of Big Data, an ingredient missing in traditional lending. Proprietary information from the day-to-day touchpoints of small business borrowers, such as customer reviews and revenue streams, can be used by providers to create alternative credit scoring models, allowing them to better assess capacity reimbursement and the credit risk of companies that do not have a credit history.
By consolidating all of their services on a single platform, DFS providers can leverage real-time data and use proprietary algorithms to more accurately assess the creditworthiness of their small business customers and reduce lender-borrower information asymmetries. , thereby ensuring more efficient loan disbursements.
Grab’s Merchant Cash Advance working capital loan product exemplifies the value that digital credit can bring to small businesses. In Thailand, around $85 million was lent to 18,000 MSMEs in 2021 – mostly mom-and-pop shops and local businesses that typically struggle to get credit from traditional banks. These loans constitute 60% of Grab’s total loan portfolio, highlighting the strong need for working capital for Thai business owners to stay afloat and grow during and after the pandemic. The recent pilot launch of MCA in the Philippines, known locally as Quick Cash, presents a similar opportunity for Filipino MSMEs as they rebuild and grow in the wake of the pandemic.
While digital loans can facilitate the emergence of an inclusive financial system in the Philippines, policymakers also have a key role to play. Full public-private collaboration is needed for digital lending to evolve responsibly. The creation of the National Financial Inclusion Strategy is a step in the right direction. But the government needs to build on this good momentum by actively partnering with DFS providers to build an inclusive and sustainable lending ecosystem.
Digital loans are poised for rapid growth. Now is the time for policymakers to set industry-wide standards for responsible lending. They can leverage the deep product knowledge of reputable DFS vendors to define best practices that the rest of the industry should adopt. These can include basic guarantees that address the risks of increased overall indebtedness, such as blocking new loan issuances if borrowers miss a payment.
Relevant government agencies should also continue to play an active role in educating everyday Filipino business owners about various financing options, in response to a strong desire among MSMEs for more business literacy programs. Industry events can be co-created with DFS providers for MSMEs to learn more about digital lending solutions and emerging trends.
As the Philippine economy moves towards a post-pandemic recovery, rebuilding the resilience of small businesses is essential. Government and the private sector should leverage their respective strengths to reinvent a digital finance landscape that enables everyday entrepreneurs to thrive.
Erwin Nicholas Yamsuan is Head of Lending, Grab Financial Group Philippines