Micro, small, and medium enterprises (MSMEs) are critical in the country’s drive to maintain strong economic growth and uplift millions who live in poverty considering that in 2014 they comprised 99.6% of all Philippine businesses, generated 62.8% of all jobs in the Philippines,1and contributed to around 35% to Philippine GDP.2

The challenge is to ensure that microenterprises grow into small business; and small businesses develop into medium-sized enterprises. We must provide these businesses with an enabling environment so they survive, grow, and expand to create better lives for their families and increase job opportunities for other Filipinos. Crucial to their growth is access to financing at reasonable rates.

While there is notable growth in the microfinance sector, there is still a major gap relative to financing small enterprises, whose loan requirements are beyond the scope of microfinance institutions. Despite being a growth area for banks, SME financing is still considered unattractive given the perceived risks, without traditional collateral such as land and other real property. However, MSMEs’ assets are mostly personal in nature (equipment, inventory, motor vehicle, accounts receivable,etc.), making it difficult for MSMEs to meet bank requirements to get loan approvals. 

As early as 1906, the Philippines has in place a secured transactions legal environment, the Chattel Mortgage Law, and a document-based movable collateral registry operated by the Register of Deeds. The current regime recognizes a diverse set of movable assets acceptable as collateral for loan purposes (e.g., motor vehicles, standing crops, like rice, sugarcane, and other agri-aqua commodities, equipment, etc.,); however, these assets are not being fully utilized nor preferred by banks as loan collateral, except motor vehicles, which leaves the law ineffective to increase trade or facilitate access to finance for MSMEs, and underscores the need to modernize these laws governing movable asset lending in the Philippines. 

The Secured Transactions bill seeks to enable financial institutions to rethink how they view collateral and reduce the perceived risks, by providing protection for framework to govern lending transactions that involve the use of personal property as collateral, as well as the design, establishment, and operation of a unified, centralized, online notice-basednational collateral registry to assure banks that the collateral being submitted has not already been utilized for another loan. These reforms have the potential to increase credit access for women and small businesses, reduce the risks of non-satisfaction of debt and thereby lower the cost of borrowing, and reduce the rate of non-performing loans of financial institutions. 

Jurisdictions like Mexico, Vietnam, and China have undertaken similar reforms and have seen their positive impacts. For example, in Mexico, similar reforms led to the creation of a national Accounts Receivable Finance Platform by the government’s development bank, which has supported at least 130,000 SMEs through accounts receivable financing. In Vietnam, the number of collateral registrations (each representing a loan) surpassed 6000,000 cumulatively over a period of four years. In China, loans with movable asset security are now disbursed at about USD 3.0 trillion per year. 

The bill can bring growth to both MSMEs and to our financial institutions, and enjoin our banks to take part in MSME development with less risk. This measure provides us an opportunity to create a win-win, balanced environment for financial institutions and small businesses, which will generate more employment and sustainable livelihood for Filipinos across the country.