Micro, small and medium enterprises or MSMEs are more vulnerable to economic changes as they often rely on daily revenues, unlike large corporations that have huge and diversified fund sources.

MSMEs' low financial capacity was highlighted during the pandemic when 38 percent of them closed shop while 49 percent reduced operations, according to a 2020 survey on the Philippines by the United Nations Development Program.

A key reason for this was the lack of funding, which was identified by 49 percent of the poll respondents as a major constraint.

A substantial 47 percent said they have a hard time obtaining bank financing while they encounter insufficient and slow financial aid from the government.

Results of the survey revealed 80 percent of MSMEs had no access to any form of financial support.

Even after the pandemic which began in 2019, studies showed many Filipino MSMEs have been struggling to grow their businesses due to insufficient funds.

According to the Asian Development Bank or ADB, total loans for Filipino MSMEs from 2007 to 2019 stabilized at 5 percent of the gross domestic product or GDP, much lower than Thailand's 30 to 34 percent and Malaysia's 20 to 24 percent.

Laggard financial institutions

ADB data showed non-bank financial firms in the country had slower MSME lending in 2019 at 3 percent of GDP compared to Cambodia's 27 percent and Indonesia's 8 percent.

Last year, Philippine lenders poured 76 percent of all loans over large corporations, much higher than Thailand's 38 percent and Malaysia's 32 percent based on data from McKinsey & Company.

Fast forward to the first half of 2023, the Bangko Sentral ng Pilipinas reported MSME lending slightly grew by 3.1 percent compared to the year-ago level.

However, it remained much smaller at 3.6 percent share of the total loans compared to 47.8 percent for non-financial corporations, 20 percent for individual borrowers, and 10.6 percent for financial firms during that period.

The central bank said universal and commercial banks remained the top provider of MSME loans.

Top uses for loans

The United Nations Industrial Development Organization identified in 2020 the top reasons for MSMEs to take out loans.

The majority or 65 percent of its survey respondents said they wanted to borrow to increase their working capital, 40 percent to pay existing loans, and 40 percent to pay taxes.

The survey results said the majority or 75 percent of MSMEs needed up to P2 million to sustain their businesses, while 50 percent said they did not have business continuity plans to cope with economic crises. Most of them or 83 percent were micro enterprises.

"Overall, the results of the rapid response survey confirmed the significant disruptions caused by Covid-19 pandemic and the consequent community quarantine in the day-to-day operations of MSMEs, with their income and cash flow affected most," the United Nations or UN said.

"Furthermore, MSMEs were concerned about their employees' welfare but the lack of income made it difficult for business owners to provide regular financial assistance to their workers," the global institution added.

Funding for the digitalization of MSMEs has also emerged as one of their top concerns since the pandemic as they needed to reach more customers.

"It is possible, however, that while microbusinesses had not developed on paper their business continuity plans, several may have already resorted to concrete actions by going digital and selling diversified products online," the UN said.

Infusion to digital shift

Based on a study by global technology firm Cisco, 15 percent of Filipino MSMEs lack budget for digitalization, making it their top challenge followed by the shortage of digitally skilled staff and resistance to change.

To increase MSME lending, the UN Development Program recommends three major solutions to the government.