Government News Analysis

Lack of sophistication

2017 Global Innovation Index (GII) Philippines
2017 Global Innovation Index (GII): Access to credit

Economies flourish and stumble almost in direct proportion to the vibrancy of their small- and medium-size enterprise (SME) sectors, which is why governments do all they can to encourage and support them. They know that bolstering this sector is essential to economic development and job creation.

But SMEs like their big corporate cousins need cash – to operate, to develop and to expand. And where they have to go for that cash is the banks and the finance houses. They can provide the SMEs with the credit which will allow them to built their infrastructure and go after their markets. Unfortunately though, all too frequently, the lenders are reluctant to lend.

In a 2015 report – “Integrating SMEs into Global Value Chains: Challenges and Policy Actions in Asia” – the Asian Development Bank said this: “… limited access to bank credit (throughout the Asia-Pacific banking system) is a major barrier to the survival and growth of SMEs … Poor access to finance remains a chronic and structural problem for SME development in Asia and the Pacific”.

With respect to the Philippines, the report cited the following statistics: SME loans in the Philippines (3.1% of GDP) were the second lowest in Southeast Asia (following Myanmar, 0.1%). Across the Asia-Pacific region, the Philippines had the fourth lowest uptake in terms of SME loans to GDP, and the second lowest – only coming ahead of Papua New Guinea – for SME loans as a proportion of total loans.

So just how geared up is the Philippines when it comes to support from the financial institutions for locally based companies seeking to compete, domestically and globally? Whether that’s in terms of agricultural products or machinery parts, or services, what sort of assistance can new businesses expect from the bankers and the financiers? And how easy is it for more-establish companies to access the cash they need to expand?

The answer to that, in part, lies in the level of ‘market sophistication’ which forms one of the categories of the 2017 Global Innovation Index (GII) – a league table of 127 countries worldwide which ranks their innovation quotient.

Market sophistication – an attribute of innovation – measures the level of these economies’ financial sophistication. It takes into account the facilities for credit and financing we just briefly looked at; plus, investment issues such as the protection of minority investors, as well as the health of trade, competition and size of the domestic markets.

Here are the GII’s ‘market sophistication’ world-ranking results for eight Association of Southeast Asian Nations (Asean) states – Laos and Myanmar were not surveyed. Singapore, 4th; Malaysia, 20th; Thailand, 42nd; Vietnam, 34th; Cambodia, 37th; Brunei, 54th; Indonesia, 64th; Philippines, 92nd.

Last in Asean and by a considerable margin – for the Philippines that’s a really poor showing. But if you think that’s bad, take a look at the report’s ranking for ‘credit’ access. Cambodia, 7th; Singapore, 11th; Vietnam, 17th; Malaysia, 46th; Brunei, 55th; Thailand, 58th; Indonesia, 99th; Philippines, 110th. Frankly, words fail us. Is it really that much easier for a Cambodian company to access lines of credit in Cambodia than it is for a Philippine company to do so in the Philippines? And why?

The world knows by now that the Philippines is a vibrant entrepôt that can sustain high levels of economic growth. And yet the financial institutions persist in keeping the Philippine SME sector starved of the fuel it needs.

How much more vibrant it would be, then, if firms and entrepreneurs there had greater access to the cash they need to allow them to grow. After all, credit is to small- and medium-size businesses what petrol is to a petrol engine – without it, it can’t move.