July 31, 2026 l The Manila Times
I previously argued that the greatest challenge facing Philippine small and medium enterprises (SMEs) is that before firms can become bankable, they must first become competitive. Better management, internationally recognized quality standards and stronger market connections form the foundation of successful businesses.
But capability alone is not enough. Once an enterprise has the skills, systems and certifications to compete, it faces another hurdle: obtaining the long-term capital needed to grow.
This is perhaps the weakest link in the Philippine SME ecosystem. A recent World Bank report notes that Philippine SMEs increasingly seek financing not just for working capital, but to modernize factories, acquire equipment, adopt digital technologies and obtain the certifications needed to join global value chains.
These investments require patient capital, often with repayment periods of three to five years. Yet most SME loans remain short-term, and nearly 70 percent of firms still rely on retained earnings to fund expansion.
Micro, small and medium enterprise (MSME) lending, meanwhile, accounts for less than six percent of total bank credit. This mismatch between investment needs and financing structures limits productivity, innovation and ultimately economic growth.
Why does this happen? The answer lies less in unwillingness than in the economics of banking. Banks are custodians of depositors’ money, and their first responsibility is to safeguard public savings while lending prudently. Large corporations typically have audited financials, stable cash flows, substantial collateral and established credit histories. SMEs often lack some or all of these, making them appear riskier to lenders.
As a result, universal and commercial banks gravitate toward larger borrowers. The World Bank notes that many institutions simply pay the penalties under the Magna Carta for MSMEs, rather than change their lending models. This is not irrational — banks respond to incentives, regulation and shareholder expectations — but it does suggest that public policy needs to evolve.
For years, efforts to expand SME financing have relied heavily on mandatory lending targets backed by penalties. The goal was sound, but experience shows penalties alone rarely change behavior; when noncompliance becomes just another operating cost, banks may simply absorb it rather than redesign how they lend.
The next phase of policy should lean more on incentives. Banks that consistently exceed SME lending benchmarks while maintaining sound portfolios should receive calibrated regulatory rewards — such as preferential access to rediscounting facilities, expanded credit guarantee support or proportionate adjustments to provisioning requirements for well-performing SME portfolios. Prudential regulation should never be compromised, but it also shouldn’t discourage responsible lending to productive enterprises.
Any future penalty system should also be proportionate. The previous approach applied a uniform standard across institutions with vastly different sizes, business models and market footprints. A nationwide universal bank and a small rural bank serving one province face very different realities, and regulation should reflect that. A risk-sensitive, proportionate framework is more likely to encourage participation than a one-size-fits-all rule.
Rural and thrift banks deserve particular attention. Operating close to their communities, they understand local industries and borrowers in ways financial ratios alone cannot capture, and they often succeed where larger institutions cannot. But they face a structural limit: their funding comes mainly from short-term deposits, making it hard to offer long-term investment loans.
This is where government financial institutions can help. Expanded long-term wholesale funding through LandBank, the Development Bank of the Philippines and the Small Business Corp. would let rural and thrift banks finance equipment, technology and productivity investments rather than just short-term working capital.
Technology offers further opportunities. Digital accounting, e-invoicing, payment platforms and alternative credit scoring now give lenders richer information on SME performance than collateral alone once allowed. Better information reduces uncertainty, and reduced uncertainty lowers the cost of credit.
Perhaps the most underappreciated reform is transparency. The Bangko Sentral ng Pilipinas already publishes extensive banking statistics. Why not add an annual public scorecard showing each bank’s SME lending as a share of total loans, growth in SME lending and other key indicators?
This wouldn’t be about shaming institutions — it would recognize banks that genuinely support entrepreneurship, while helping depositors, investors, local governments and the public identify banks that actively finance Philippine enterprise. As banks compete on reputation and social impact, transparency itself becomes a powerful incentive.
Ultimately, entrepreneurs and banks are not adversaries. SMEs seek opportunities to grow; banks seek opportunities to lend responsibly. Good public policy should reconcile these goals, rather than force a choice between them.
Capability must precede capital — but once capability is built, capital must follow. If we want Philippine SMEs to become exporters, innovators and generators of quality jobs, we cannot leave them stranded between competitiveness and financing.
The challenge for policymakers is to build a financial system that rewards responsible lending, encourages innovation and channels long-term capital toward enterprises capable of driving the country’s next stage of growth.
Helping SMEs survive remains important. Helping them compete is better. Helping them scale is how nations become more prosperous.
***The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as FINEX. For comments, email benel_dba@yahoo.com. Photo is from Pinterest.