Proportionate Regulatory Policies
for the MSME Sector
President and COO
Small Business Corporation
Version as of 24-06-2011.
Presentation Outline
1. Importance of MSME Sector
2. Role of Government
3. General Practices on Proportionate
Regulatory Policies
4. The Philippine Response
5. Policy Execution
6. Conclusion
*The views expressed herein are the author’s and do not necessarily
reflect the position of the Small Business Corporation.
Importance of MSME Sector
The economic impact of MSMEs:
 MSMEs make up 99.6% of total Philippine
establishments and makes the following
contributions to the Philippine economy
 61% of employment
 32% of value-added
 60% of exports
MSMEs are largely dependent on the banking system for
 MSMEs are disadvantaged due to size, higher unit
transaction cost, perceived risks, and financial
infrastructure distortions
The Role of Government in MSME
 Facilitate MSMEs’ access to credit from formal
institutions by:
 Crafting policies that will allow for a
borderless credit access by MSMEs and
ensuring effective implementation of such
 Creating a regulatory environment for banks
conducive to MSME lending
 Capacitating both banks and MSMEs
 Absorbing some costs of programs aimed at
increasing MSMEs’ access to credit
 Addressing market failure, leveling the
playing field
Proportionate Policies
 “One size does not fit all”
 Regulation and supervision can be expensive to
implement, and costly when it fails
 Need for affirmative action and tiered regulation—
 Differing regulatory requirements based on market
 Reduce discrimination
 Scale regulatory treatment
General Practices on Proportionate Policies
[World Bank, CSBFA, RBI, SBA, CRA, CGAP]
Guarantee Schemes (more than half of all counties in the world
have a guarantee program)
Directed Credit Programs
Interest Rate Subsidies
Regulatory Subsidies, e.g. lower provisioning
Regulations Concerning Documentation
Establishment of Credit Registries to address information
Priority Sector Lending, e.g. mandatory credit laws, PSL in India,
Community Reinvestment Act in the USA
The Philippine Response
1. Magna Carta for MSMEs or RA 9501 (2008)
 Required that banks allot at least 8% for micro and
small and 2% for medium enterprise in their total loan
 Strengthened the Small Business Corporation, a
specialized financing and guarantee institution for
2. Barangay Micro Business Enterprise (BMBE) Law (2002)
 Provides income tax exemption, minimum wage
exemption, and other benefits such as special credit
window and other forms of assistance programs for
micro enterprises
The Philippine Response
Credit Information System Act or CISA (2008) or RA 9510
 Mandates the creation of a credit information bureau that will
serve as a central registry of repository of credit information
including credit history and financial condition of borrowers
 Promotes an efficient credit information system that will address
financial institutions’ concerns on all their credit-related activities
Bangko Sentral ng Pilipinas (BSP) Regulations and Circulars on SME
 Capital requirements, loan documentation, risk weights
BSP Regulatory Framework on Microfinance:
 Encouraged the establishment of microfinance-oriented banks
and has a specialized microfinance regulatory unit. This allowed
non-collateralized lending to the sector based on cash flow.
In theory, the Philippines
is adopting the menu of
proportionate regulatory
What is the problem?
Policy Execution
1. a) Magna Carta for MSMEs or RA 9501 (2008)
 On the mandatory credit allocation
 Compliance report too broad / Not transparent
 Overall, banking sector appear to be compliant with the
requirements of the law, but at the margin especially in
micro and small—8.5% vs. mandated 8.0%
 Individual performance of banks reveal, however, that many
big banks remain under-complied
 Some banks cover for the deficiency of other financial
 Lending figures to micro and small business sector is flat
over the past 10 years—Negative real growth is observed.
 Moral Hazard problem; Penalty structure for non-compliance
is cheap/uniform and biased against smaller banks
Policy Execution
1. b) Magna Carta for MSMEs or RA 9501 (2008)
 On SB Corporation
 Self-sustaining. No government infusion in the past 19
years. Declares Dividends.
 No sovereign guarantee. Another GFI whose main
mandate is guarantee for (large) export firms has a
sovereign guarantee feature.
 Limited capitalization when benchmarked against
guarantee corporations in Asia; multiple objectives.
Recent increased capitalization remains in paper
 Supervision not much different from “standard” prudential
supervision of banks
Policy Execution
1. b) Magna Carta for MSMEs or RA 9501 (2008)
 On SB Corporation
No clear appreciation of nature of guarantee corporation
 Costs incurred by the government in implementing MSME
financing programs (e.g credit guarantees) may not be
directly recoverable using revenues per se as a measure
Full cost recovery could not be achieved without compromising
the objective of facility finance to small business.
 Cost-recovery can be measured through the underlying
economic impact of MSME programs (i.e taxes for
government, productivity, employment, income, economic
growth, etc.)…[Canada SBFA Report]
Policy Execution
2. Barangay Micro Business Enterprise (BMBE) Law
 Reluctance from executing agencies (i.e DOF and LGUs
concerned about losses due to tax exemption granted
to BMBEs)
3. Credit Information System Act or CISA (2008) or RA
 Still awaiting full implementation after almost 3 years
that the law has been signed
 Lack of funds to support the mandate, including the
creation of the credit information corporation
Policy Execution
a) Bangko Sentral ng Pilipinas (BSP) Regulations and
Circulars on SME Lending
On Loan Documentation:
Requires the submission of BIR-submitted Income Tax
Return (ITR) upon loan application, including its waiver
of confidentiality and its annual submission
Moratorium on submission granted for MSMEs, but to
expire in December 2011
After 2011, small business loans without documents to
be classified as “especially mentioned”
ITRs rarely reflect true condition of an enterprise. Should
the exemption be extended?
Policy Execution
b) Bangko Sentral ng Pilipinas (BSP) Regulations and
Circulars on SME Lending
On loan classification
Reduced risk weight of MSME portfolio from 100% to
Subject to conditions like meeting certain prudential
norms, including PDR of not more than 5% and a highly
diversified portfolio with not less than 500 accounts
Questions on appropriateness of conditional prudential
standards to enjoy risk weight reduction benefit
Policy Execution
4. c) Bangko Sentral ng Pilipinas (BSP)
Regulations and Circulars on SME Lending
On loan classification
 Loans to exports to the extent guaranteed by SBC
with 20% risk weight
 Loans to exporters to the extent guaranteed by
GFSME with 0% risk weight so long as these are
outstanding upon merger
 Loans to exporters guaranteed by SBC in postmerger as 20% risk weight though these may be
 Is the reduced risk weight sufficient incentive to
banks utilizing the guarantee?
Policy Execution
d) Bangko Sentral ng Pilipinas (BSP) Regulations
and Circulars on SME Lending
On unsecured loans
In theory, no technical prohibition for granting of
loans without collateral except for DOSRI limits
However, an unsecured loan for banks’ risk-based
CAR is a 100% risk weight on capital
Also, in the event the loan turns past due, loan loss
provisioning is immediately high
Not eligible for rediscounting
Effectively, there is disincentive to lending without
Policy Execution
4. e) Bangko Sentral ng Pilipinas (BSP)
Regulations and Circulars on SME Lending
 Supported the creation of independent Credit
Surety Fund (CSF) set aside by LGUs
 Provides guarantee which secures the loan of
MSMEs with local banks and facilitates lending
without collateral
 CSFs are too small and without muscle; model is
not cognizant of how guarantee programs work
Policy Execution
f) Bangko Sentral ng Pilipinas (BSP) Regulations and
Circulars on SME Lending
Reserve Requirements
PFIs of SB Corp are exempted from reserve
requirements by BSP under SBC Wholesale Lending
Program, encouraging banks to expand their MSME
loan portfolio
However, BSP also runs its rediscounting window,
sometimes at concessionary/subsidized rates, in
competition with GFIs’ wholesale lending programs
Policy Execution
Bangko Sentral ng Pilipinas (BSP) Regulatory
Framework on Microfinance
Issuance of circulars governing the practice of
microfinance in the banking sector—rediscounting,
recognition of microfinance (no collateral, loan
documentation), allow branching, etc.
Modified Manual of Examination
Promotion and Advocacy
Philippines cited by EIU as having the best overall
regulatory environment for microfinance on banks.
However, BSP does not cover NGOs and cooperatives.
Execution is opaque
Implementing rules not following the spirit of basic
Under-funded and undersized programs—not
commensurate to mandate; unwillingness to make the
Inter-agency conflict—apparent weakness in
Business model inconsistent with program objectives
Costs and benefits of some proportionate regulatory
schemes not well-measured
Objectives are at cross-purpose
Major changes in Microfinance; Uneven policy
execution in SME Finance.
 Government intervention by way of
proportionate regulatory action must:
 Focus on reducing risks and transaction costs
associated with MSME lending
 Balance the benefits of regulation/supervision
against the costs and risks of no
 Aim for consistency across stakeholders and
 Government intervention by way of proportionate
regulatory action must:
 Serve as co-investor, thus, a source of risk capital
 Educate private capital on how to lend to SME
(capacity building)
 Channel capital in strategic directions
 Be designed for effective implementation, execution,
and enforcement
 Be “enlightened”
ADB (2000), “The Role of Central Banks in Asia and the Pacific: Overview”
Canada Small Business Financing Act (2009), “Comprehensive Review Report 20042009),” [ ]
CGAP (2011), “Recommendations for Proportionate Regulation and Supervision of
Microfinance,” INCITRAL Colloquium on Microfinance
Clinton, Lindsay (2010), “India Journal: What’s Policy Got to Do With Social
Enterprise?” (
Fan, Qimiao (The World Bank), Presentation during the “Workshop on Improving
Access to Finance for SMEs in Asia-Pacific Region, June 16-17, 2008
Sibold, S. (2005), “Addressing the Burden of Regulation in Canada—The Case for
Proportionate Regulation,”
Thornley, B. et al (2011), “Case 12: Priority Sector Lending,” in Impact Investing, A
Framework for Policy Design and Analysis
Wikipedia, Community Reinvestment Act
[email protected]

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