SMALL AND medium enterprises (SMEs) form the backbone of a market oriented economy. They account for a great amount of employment opportunities in the economy and are very important components of the middle class. The importance of SMEs in the growth and development of a market economy has already been well recognized in Philippine laws, policies and institutions. Their importance is highlighted even more now because of the great concern in the country and throughout the world for poverty reduction through inclusive growth.

In order to appreciate the value of SMEs, it would be useful to discuss briefly the true meaning of inclusive growth. The concern for inclusive growth is because of the experience that just plain economic growth has not necessarily resulted in reducing poverty at a satisfactory pace and that the benefits of growth mainly remained with the bigger enterprises and their shareholders and employees and have not spilled over enough into the lower income classes. Therefore, the term inclusive growth is meant to emphasize the need to pursue an economic growth path where the lowest classes share a greater portion of the benefits of growth so that the poverty incidence in the country is reduced and eventually eliminated.

It is believed that SMEs that are growing in number and size producing globally competitive goods and services would be more effective in creating jobs for their own payroll and also to support their own needs for goods and services than just relying more on big business conglomerates. SMEs can and in fact supply goods and services to big conglomerates. SMEs also compete with conglomerates and supply goods and services to other countries. Growing numbers and size of SMEs are needed to absorb and take advantage of our labor force to drive the Philippine economy into sustained inclusive growth.

FINANCE FOR SMES

F1NEX has long advocated the need to increasing the range and depth of financing options for SMEs. There are already existing policies to support SMEs. The Bangko Sentral ng Pilipinas has been a strong advocate of lending to Micro enterprises and SMEs and requires that a total of 10% of the loan portfolio of a bank should be in Micro/Small and Medium Enterprises (MSMEs). The Small Business Corporation is a government institution dedicated to the financing of SMEs under the Department of Trade and Industry. However, given the urgency of facilitating the growth and development of SMEs and in support of inclusive growth, there is much more that can be done in developing and increasing the financing options for SMEs. The following issues ought to be explored:

1. There is still a big gap between the funds available for lending by banks and the needs for financing of SMEs. This gap can be bridged by more information reported by SMEs in accurate and standard formats that credit officers can understand and verify. In this age of electronic connectivity and social media, SMEs, with some guidance from entities like the FINEX and the government institutions, can easily use technology to provide information to bankers. In fact, information technology should be used by SMEs to access national and global resource and consumer markets. They should also be able to use the same technology to know more about banks and other sources of financing.

2. An industry of Venture Capital Funds should be developed to provide equity financing for SMEs that show promise of growth and financial success. The series of success stories of startups "from the garage" in Silicon Valley in partnerships with venture capital funds are now legendary with such names as Apple, Google and Facebook among others. These continue. However, venture capital financing for SME does not have to be spectacularly successful. What is important is that equity capital is available not only to fill in a financing gap but even more important is the structure and financial management skills and discipline that a venture capitalist will bring to the SME that will prepare it for greater size and even public listing.

3. Other forms of financing need to be developed for SMEs such as receivables financing and commercial paper issuances to be sold to qualified investors. If SMEs have to borrow from the informal sector to finance at much higher rates what they cannot access from the banking sector, solutions should be worked out to broaden and deepen instead the formal sector. The process should bring together more sources and users of funds at well-defined and transparent risk and yield parameters.

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^{* Written by PDIC President Valentin A. Araneta, FFEI Trustee, for the Special Feature on the 2nd Finex SME Forum published in the Businessworld on July 23, 2014.}