SMEs as a global phenomenon

Development specialists and international fund managers describe the present wave of interest in small and medium-scale enterprises or SMEs as a global phenomenon. Many developing countries in fact have placed SME development and promotion on top of their economic agenda. With the failure of past industrialization policies favoring large enterprises to stimulate wide-ranging development, SMEs are being given renewed emphasis as engines of economic growth and poverty alleviation. The search for the elusive formula to successfully support the sector is again a focus of concern among policymakers and financial institutions worldwide.

In the Philippines, SMEs are businesses whose asset size range from P3 million to P100 million and employ 10 to 200 employees. They account for 90 percent of registered business enterprises, contribute about 25 percent to the country’s gross national product and provide jobs to roughly half of the labor force. Because of their significant contributions to income and employment generation, they are regarded as a lead sector in stimulating economic development and alleviating poverty, particularly in the countryside. SMEs are expected to provide most of the 1.5 million new jobs that government seeks to generate annually to address widespread poverty. Yet, important as they are, SMEs have not been getting enough support, especially for their funding needs. Banks have been wary to lend to small and medium enterprises because it is regarded as costly, risky and more difficult.

SMEs make a difference

I was a senior executive of one of the country’s largest commercial banks when I decided to strike out on my own more than 30 years ago. I acquired a small development bank in Bulacan with the plan to grow and transfer the bank to Makati, then convert into a commercial bank catering to large corporations. But fate, it seems, had other plans for me and the institution under my care, Planters Development Bank (Plantersbank). Because of the bank’s small size and the provincial location of its first offices, we had no choice but to cater to the small producers and traders in the neighboring areas. Many of these entrepreneurs had no experience in dealing with banks, they had to be taught how to access and properly use credit.

At that time, very few Filipinos, especially in the countryside, had access to formal credit. Financing were mostly provided by informal moneylenders who took advantage of the situation by charging borrowers as much as 20 percent monthly interest–money that entrepreneurs could have used to satisfy their other needs. When Plantersbank entered the picture, our borrowers could hardly believe they were paying interest far lower than what they were used to. And with the bank’s help, we saw their profits grow and their businesses expand. They started putting up more shops, acquired additional equipment and hired more people. I soon realized that by assisting small enterprises, we were making an impact where it counted the most – with the marginalized sector and the SMEs in the countryside. And it felt good.

Recognizing the difference we were making on the lives of SME clients, we abandoned our original plan to become a commercial bank and decided to remain an SME-focused private development bank. Melding social purpose with our regular business function we vowed that, no matter how big our bank became, we would always stay committed to support the small Filipino entrepreneur. We found our special niche, defined our mission, and resolved to stick to it.

That decision was not an easy one. We had no model to follow back then. We had to feel our way through and overcome the many limitations of lending to the sector by learning to improvise and develop practical solutions. What sustained us was our deep and abiding faith in the small entrepreneur, our determination to make an impact, and the success stories of many SMEs that we have assisted.

After more than three decades now, Plantersbank remains deeply involved in the financing of SMEs in the Philippines. Because of the Bank’s mission we have attracted prestigious international shareholders such as the World Bank’s International Finance Corporation, the Netherlands Development Finance Company (FMO) and the Asian Development Bank (ADB).

Ours has been a long and fulfilling partnership with the small entrepreneur that has enabled us not just to do business at a profitable level, but more important, to also contribute in a vital way to our country’s progress. It is along this line that Plantersbank was cited as one of three banks in the world that has successfully pursued profitability objectives with social development goals, also known as the double bottomline approach. This achievement presented at the Harvard Business School Conference on Global Poverty in December 2005 is a fitting tribute to Plantersbank’s determination and contribution to sustainable development

A global phenomenon

Among developing countries, the failure of past industrialization policies favoring large enterprises led to a search for alternatives. It has become clear that development doesn’t trickle down from the top as once thought. Development has to be built from the bottom up. It doesn’t come from the leavings of the rich on the table; it comes about from the direct participation of enterprising individuals in the labors of wealth creation. So a new workable model has evolved. This model is based on creating new wealth rather than redistributing wealth. Its focus is economic rather than the social. And its anchor is private enterprise and initiative as opposed to largely government and social service sector.

In the past several years, I have received numerous invitations and had opportunity to talk about SME financing and share the Plantersbank experience here and abroad, including the Global Forum of the United Nations Environmental Program Finance Initiatives in New York, the APEC for SMEs gathering in Beijing and regional bankers in ASEAN. More and more developing countries worldwide have placed the promotion and development of small and medium scale enterprises or SMEs on top of their economic agenda, believing that the creation of small businesses can set off sparks leading to a progressive chain reaction–increasing economic participation, multiplying income opportunities and jobs, driving market growth and improving the quality of life. Such outputs comprise a sustainable economy that fosters development and growth.

As the country strives to attain its own commitments to the United Nations goal of reducing by half the incidence of poverty by the year 2010, SME-anchored development will more and more occupy the center-stage. I can think of no better way to jumpstart the process than enlisting every one’s support to promote and build the Filipino entrepreneurial culture and unlock the dynamism of the SME community in the Philippines. Let’s make it happen.