Problem and Its Background

CHAPTER I

PROBLEM AND ITS BACKGROUND

Background of the Study

In the economic environment of the Philippines, there has been a trend of an emergence of a series of businesses that are managed not by multimillionaires who own large corporations, but of ordinary people who are engaging in the practice of building their own enterprises. These businesses, according to Republic Act No. 9178 or the Barangay Micro Business Enterprise (BMBE) Act of 2002, are those that have a maximum capital of one hundred million pesos (Php 100 000 000).  Republic Act No. 6977, as amended by RA 8289 and further amended by RA 9501 or the Magna Carta for Micro, Small and Medium Enterprises defines MSMEs according to assets. However, available statistics from NSO are still categorized according to the number of employees. Based on these categories, it is classified as micro, small or medium (Table 1) regardless of the type of business ownership (i.e., single proprietorship, cooperative, partnership or corporation).

Table 1: MSME Classification

According to the 2008 Year End Report on Bangko Sentral ng Pilipinas (BSP) Initiatives for Microfinance and Financial Inclusion, the growth of the number of microfinancing institutions and the services they offer was observed at the end of the particular year. Also, a number of regulatory policies such as the Housing Microfinance Product, as well as Circular 607 on Microfinance Reportorial Requirements which provided guidelines on the improvement of data collection by the Microfinance Institutions’ activities, were laid down. As such, BSP is also considering pushing for more legislation and capability strengthening of the microfinance industry, as well as the BSP itself in accommodating the growth of the same industry.

As of 2012 count, there are 944,897 business enterprises operating in the Philippines. Of these, 940,886 are micro, small, and medium enterprises (MSMEs) and the remaining 4,011 are large enterprises. Of the total number of MSMEs, 844,764 are micro enterprises, 92,027 are small enterprises, and 4,095 are medium enterprises. Overall, majority of the MSMEs are engaged in the wholesale and retail trade, repair of motor vehicles and motorcycle industries (436,809); information and communication, financial and insurance activities, and other service activities (133,157); accommodation and food services (126,108); followed by manufacturing (117,601); human health and social services, professional scientific and technical, education, administrative and support services, arts, entertainment and recreation industries, and real estate (105,927). The top five (5) locations of MSME establishments in the Philippines are as follows: National Capital Region (NCR), Region 4A (CALABARZON), Region 3, Region 7 and Region 6 (Appendix A).

As the positive growth of the Philippine economy continues to prevail, it is a welcome sign for these MSMEs that the development from this phenomenon also continues to trickle down to their businesses, giving them income and a room for expansion and the improvement of their operations. It is also a reality that the high quantity of MSMEs that operate in the Philippines has contributed a huge portion into the Gross Domestic Product (GDP). With the majority of business enterprises in the country falling under this category, it is undeniable that the impacts of these are manifested in the Philippines’ economic landscape, providing for employment for Filipinos as well as being able to provide services and additional product options to the market, with a growing number of establishments reflecting the proliferation of MSMEs in the country. According to a paper released by the Philippine Institute for Development Studies (PIDS), SMEs account for about 99 percent of total firms in the country. Yet, these SMEs account for only 35 percent of our GDP. In contrast, SMEs in Japan and Korea account for roughly half of their total GDP. Moreover, 61 percent of employment in the Philippines is generated by SMEs. Their counterparts in Japan and Korea account for 70 to 85 percent of employment (Manila Times, 2014). Despite representing an array of industries and its capacity to generate employment, the MSME sector in the Philippines has relatively low value added to the economy. The Department of Trade and Industry estimated that MSMEs in the country contribute only 35.7 percent of value added, lower than in other Asian economies such as Indonesia with 53.28%, Vietnam with 39% and Thailand with 37.8% (Senate Economic Planning Office, March 2012).  Amidst the incomparable statistics to our neighbor countries, it is clearly seen how great of a contributory factor MSMEs can be to the nation’s economic state once its full potentials are utilized.

The government’s fostering of the growth of these businesses is vital due to the constraints that MSMEs that often face. The lack of access to financing has been identified as the most serious constraint to MSME growth and development. This hindrance exists in the advancement not only of the growth of the currently operating MSMEs, but also in the creation of newer ones by enterprising individuals. To this purpose, new options of raising financial requirements should be provided to decrease the reliance on the larger banks, and to be able to make borrowing capital less complicated for these businesses (Aldaba, 2012). MSMEs must also be protected from the risks of intense competition with larger firms in order for these to sustain their operations.

A means of ensuring that MSMEs have an easier financing option aside from resorting to borrowing directly from large financial intermediaries, is turning towards microfinancing institutions which have more lenient standards as compared to the former. The target consumers of these institutions are composed of disadvantaged individuals and of new entrepreneurs that would want to borrow capital for the purpose of establishing new businesses, as well as entrepreneurs who require additional capital for the purpose of expanding their businesses.

Philippine microfinancing institutions’ funding comes from multiple sources. Among these are derived from non-government organizations (NGOs), as well as public financial institutions or cooperatives, as well as recent ventures by the large banks such as Bank of Philippine Islands. Recently joining these parties are foreign investors engaged in the microfinancing industry, capitalizing in the increased competition for microfinancing services, as well as the higher number of consumers of the same; and the small lending institutions branching throughout the Philippine archipelago. In the current situation of the microfinancing industry in the Philippines, the burgeoning number of microfinance creditors is evident, but the risks created by inefficiencies in their operations, especially with those that have nationwide coverage due to the high costs incurred by the long distances involved. With these inefficiencies, businesses are presented with hazards when availing of their microfinancing services. In spite of these, the use of microfinancing options is still attractive due to the wide range of services available to entrepreneurs who even offer assistance beyond financial matters such as enterprise skills enhancement, trainings, and business development services.