Like its Southeast Asian counterparts, the Philippines relies on micro, small- and medium-sized enterprises to act as the lifeblood of the national economy. The MSME sector accounts for 36% of gross domestic product and employs 63% of workers in the country. Despite their importance, MSMEs have remained largely underfinanced and constrained in their ability to grow. This perennial challenge has been 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 extended to small businesses slipped further during the pandemic, with 79% of Filipino microenterprises citing a lack of access to working capital as a barrier to maintaining or restarting operations. More must be done to close the financing gap. Fortunately, digital loans offer a viable solution.
Small businesses are starved of financing options because of structural gaps in the traditional lending market. With more than 15% of cities and municipalities in the Philippines lacking any sort of physical bank presence, many MSME owners find it difficult to access financial services. This lack of accessibility impedes their ability to secure loans and build up a credit score, further hindering financing prospects. Onerous administrative and credit assessment processes imposed by banks on these businesses are also a deterrent. Many resort to informal credit markets – including illegal funding sources – which present a different set of challenges, such as unscrupulous debt collection practices by loan sharks and the absence of avenues for legal recourse if disputes with lenders arise.
New technologies present opportunities for digital financial service providers to tackle 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 funding option. DFS providers are also able to leverage big data – a missing ingredient in traditional lending. Proprietary information from small business borrowers’ everyday touchpoints, such as customer reviews and income flows, can be used by providers to build alternative credit scoring models, enabling them to better evaluate the repayment ability and credit risk of businesses that lack credit histories.
By consolidating all their services in one platform, DFS providers can leverage real-time data and use proprietary algorithms to assess the creditworthiness of their small business clients more accurately and reduce lender-borrower information asymmetries, ensuring more efficient loan disbursals.
Grab’s Merchant Cash Advance working capital loan product illustrates the value that digital credit can bring to small businesses. In Thailand, approximately $85m was loaned to 18,000 MSMEs in 2021 – mostly family-owned shops and local businesses that typically face difficulty securing credit from traditional banks. These loans constitute 60% of Grab’s total loan portfolio, highlighting Thai business owners’ strong need for working capital to stay afloat and expand during and after the pandemic. The recent pilot launch of MCA in the Philippines, locally known as Quick Cash, presents a similar opportunity for Filipino MSMEs as they rebuild and grow in the wake of the pandemic.
While digital lending can facilitate the emergence of an inclusive financial system in the Philippines, policy-makers also have a key role to play. Comprehensive public-private collaboration is needed for digital lending to scale responsibly. The inception of the National Strategy for Financial Inclusion is a step in the right direction. But the government must build on this good momentum by actively partnering with DFS providers to build an inclusive and sustainable lending ecosystem.
Digital loans are primed for rapid growth. Now is an opportune moment for policy-makers to establish industry-wide standards for responsible lending. They can harness the deep product knowledge of reputable DFS providers to set out best practices that the rest of the industry should adopt. These can include baseline safeguards that address risks of increasing overall indebtedness, such as blocking new loan issuances if borrowers miss a payment.
Relevant government agencies must also continue to play an active role in raising the everyday Filipino business owner’s awareness of various financing options, in response to a strong desire from MSMEs for more business literacy programmes. Industry events can be co-created with DFS providers for MSMEs to learn more about digital lending solutions and emerging trends.
As the Filipino economy charges towards a post-pandemic recovery, rebuilding the resilience of small businesses is critical. Both the government and the private sector should leverage each other’s strengths to reimagine a digital financing landscape that allows everyday entrepreneurs to thrive.
Erwin Nicholas Yamsuan is Head of Lending, Grab Financial Group Philippines