competition policy and access of small and medium enterprises

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Competition Policy and Access of Small and Medium Enterprises (SMEs)

to Financial Services: A Review of Selected SMEs1 Rene B. Hapitan

I. Introduction

In the study “Reactions to the Entry of Foreign Banks in the Philippines: A Critical Case Study of Selected Local Banks”2, it was hypothesized that as the scope and operations of foreign banks increase, local banks will move to the middle-market and retail sectors, while maintaining its presence in the wholesale side of the banking business. In attempting to document the movement of credit access and its impact on competition policy, thirty SMEs in Metro Manila, Luzon, Visayas, and Mindanao were surveyed and analyzed If credit access due to competition has indeed increased, its impact on SME lending will be felt in terms of the number of credit facilities available and quite possibly lower interest rates. The use of case studies as a primary research tool represent an important research track, not only as a method of developing hypothesis for quantitative studies, but for generating and testing theory.3 By using case studies of selected SMEs, a rich area of policy initiatives can be discussed along the following areas: credit policy, credit access, impact of foreign bank entry, local and foreign bank strategy, and financial and economic liberalization. This study will have four major sections. The first is an examination of previous studies on competition and its impact in SME lending. The second will present the overall SME environment, and access to credit. The third will be a discussion of the study’s significant findings and its analysis, leading to the fourth section which is a discussion of policy initiatives. II. Review of Literature – Competition Theory, and the SME Environment Motta (2004) provides a comprehensive historical review of the competition theory in the United States from its early origins to the Sherman Act of the 19th century to the present period. He characterized the present period in competition theory as one where there is “renewed strength in the fight against cartels, signaled by some prison sentences given in some high-profile international cartel cases, and helped by the introduction of a successful leniency policy (italics his) that grants amnesty to managers that provide proof of the existence of cartels

From the examination of the history of competition theory, he was able to derive the following objectives of competition policy. These are: welfare (total surplus),

1 The author is thankful to The World Bank and the Philippine Institute for Development Studies (PIDS) for their generous funding support for this project. The author is equally thankful to Janet Chua for her valuable contribution in the data gathering and the preliminary analysis of the findings, and to Alvin Ang for his assistance in the gathering of information for the Mindanao (Davao) based SMEs. 2 Hapitan, R. PASCN Discussion Paper 2001-09 3 Patton, E. & Applebaum, S. (2003). “The Case for Case Studies in Management Research”. Management Research News. 26.5:60-71.

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consumer welfare (consumer surplus), defense of smaller firms (italics mine), promoting market integration, economic freedom, fighting inflation, and fairness and equity.

The key element in the statement of the objectives is the defense of smaller firms, which is further explained as follows:

“The defen(c)e of small firms has often been one of the main reasons behind the

adoption of competition laws… The favo(u)rable treatment of small firms is not necessarily in contrast with the

objective of economic welfare if it is limited to protecting such firms from the abuse of larger enterprises, or giving them a small advantage to balance the financial and economic power of larger rivals. However, artificially helping small firms to survive when they are not operating at an efficient scale of production is in contrast with economic welfare objectives. Indeed, this encourages inefficient allocation of resources and would often contribute to keep high prices in the economy.

The European Commission seems to have taken the view that small and medium enterprises (SMEs) are more dynamic, more likely to innovate and more likely to create employment than large firms. This would be an additional argument to promote SMEs.

An interesting evolution in the study of competition is provided by Cho and Moon

(2000) where it can be argued that the quantum leap in the discussion of competition theory was established in Michael Porter’s industry forces. This is presented in Figure 1.

. As the world entered a new millennium, rapid developments in globalization and

information technology have created new business models that pose a challenge to both business and government. For businesses, it has been a choice of surviving, competing, and/or extending the product/service/technology life cycle. For governments, it is creating the appropriate business environment, enhancing economic development, and reducing poverty. Fischer’s (2003) exposition on globalization strongly supports the conclusion that growth requires a policy framework that predominantly includes an orientation toward integration into the global economy. Intal (2001) summarizes the dynamics in the financial opening and internationalization of the financial services of a country, especially the Philippines:

It is important that the presumed benefits from financial opening and integration necessitate domestic financial deregulation, especially with respect to interest rates and bank branching. It is argued that such internationalization of financial services potentially increases the pressures for improved regulation and supervision, better disclosure rules and general improvements in the legal and regulatory framework for the provision of financial services and improved screening of projects and monitoring of firms. Overall, the opening up and internationalization of financial services of an economy would increase pressure for, and contributes toward, an improved financial infrastructure in the economy.4

4 Integrative Report, “Managing Risks and Opportunities of Financial Liberalization and Integration: A Macro-Micro Analysis. PASCN Discussion Paper 2002-01

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Figure 1 Evolution from Trade Theory to Competitiveness Theory

Source: Cho, D. & Moon, H. (2000). From Adam Smith to Michael Porter. Evolution of Competitiveness Theory.

TRADE THEORY (Wealth is set by endowments)

Adam Smith

COMPETITIVENESS THEORY (Wealth is created by choices)

Michael Porter

Extension

Debate

Ricardo Heckscher & Ohlin

Leontief

Prestowitz Thurow Cohen

Vernon Linder

Krugman, Lancaster

Krugman

Diamond Model

Debate

Extension

Rugman Porter

Stage Model

Extension

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The proposed interaction of forces to hasten financial liberalization was stalled during the Asian Financial Crisis and the World Trade Center (“9/11”) attacks, exposing the fragile state of economic and financial development of many Asian countries. And while our neighbors have made significant efforts to recover from the setbacks, the Philippines has continued to struggle. This was further complicated during the latter part of 2004, where a temporary but crippling oil price increase threatened to further stall or even wipe out the gains the country has built over the last two to three years. As seen in The World Bank’s 2005 Outlook for East Asia, the prognosis for the country and our neighbors is not very encouraging as can be seen in Table 1.

Table 1

East Asia Economic Growth, 2002-2005

2002 2003 2004 2005 East Asia 6.0 5.9 7.1 5.9 Developing East Asia 6.9 7.8 7.9 7.0 S. E. Asia 4.6 5.3 5.8 5.5 Indonesia 4.3 4.5 4.9 5.4 Malaysia 4.1 5.3 7.0 6.0 Philippines 4.4 4.5 5.4 4.5 Thailand 5.4 6.8 6.4 5.8 Transition Economies China 8.3 9.3 9.2 7.8 Vietnam 7.0 7.2 7.2 7.5 Small Economies 2.6 4.2 4.1 3.4 Newly Industrialized Economies 4.7 3.0 5.9 4.4 Korea 7.0 3.1 4.9 4.4 3 other NIEs 2.8 2.9 6.9 4.4 Japan -0.3 2.5 4.3 1.8

Source: The World Bank East Asia Update, November 2004 According The World Bank, the country’s real Gross Domestic Product grew by 6.3% for the first half of 2004, which exceeded most expectations. Growth was led by the services sectors at 6.9%, with the transport, communications, and storage sub-sector growing by 11.4%. Industry grew by 5.6%, whereas agriculture, fishery, and forestry grew by 6%.5 While GDP growth was impressive, sustaining this growth was a primary concern. The World Bank noted that the banking sector remains constrained by high

5 The Asian Development Bank in a report released in December 2004, places East Asia growth for 2005 at 7.6%, with Cambodia at 2.3%, China at 8.0%, Indonesia at 5.3%, Laos at 7.0%, Malaysia at 5.4%, the Philippines at 4.7%, Singapore at 4.4%, South Korea at 4.2%, Thailand at 5.7%, and Vietnam at 7.1%.

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levels of non-performing assets, and that preliminary household survey results point to a large decline in real family incomes between 2000 and 2003. The Bank suggests, “policy makers need to turn their focus to nurturing the emerging recovery in private investment and improving the overall investment climate.” It notes in the recent World Economic Forum, the Philippines had been slipping in competitiveness rankings from 35 in 2000 to 52 in 2004. Amidst this scenario, however, is a very encouraging environment where by economic and financial growth and development has been led by small and medium enterprises (SMEs), a scenario seen in many East Asian countries. Export-led growth, which has been attributed to the rise of Singapore, has been fueled primarily by SMEs. (Hock, 2002). While much of Singapore’s economic growth has been supported mainly by foreign multinational corporations, Singapore’s next phase of growth in the 90s was needed to be supplemented by developing SMEs. (Theng and Boom 1996). Nugent and Yhee (2002) in studying Korean SMEs noted the dynamism of SMEs that have contributed to the enormous transformation of the economy, especially with regards to exports, foreign investment and productivity performance. Aw (2002) observed that two key features characterized Taiwan’s 8% per year growth for three decades in early 60s to the early 90s: an export-oriented trade regime and a market structure based predominantly on SMEs, which has been part of Taiwan’s industrial strategy in the late 1950s. Even Indonesia has attributed clustering of export–oriented SMEs in rattan furniture, wood furniture, and garments as sub-contractors to foreign investors have contributed largely to its economic growth. (Berry, Rodriguez, and Sandee, 2002). To accelerate the growth of SMEs, it is essential that an environment for easy entry be created. Kawai and Urata (2002) in studying Japanese SMEs noted that cost disadvantages owing to small scale and the shortage of technical resources are significant deterrents to entry. They also noted that the availability of government-directed credit deters entry which suggests that, in their current form, such credit programs protect incumbents. Berry, Rodriguez, and Sandee (2002) also noted the importance of public policy support for fostering subcontracting links and clustering formation. The level of economic development is also essential to the growth of SMEs. Studying Thailand’s SME experience, Wiboonchutikula (2002) determined that when overall economic growth is high, the share of small firms tend to contract possibly because many small firms become medium in size and others disband because their owners can find more remunerative employment in large firms. In slower growth periods, the employment share of small firms appears to rise probably because larger firms may be taking in less new workers or even laying-off workers. In Singapore, even where there is recognition of the top SMEs6, Hock (2002) suggests to put more emphasis on developing other SMEs, as they lack the capacity and capability to support foreign multinational corporations and invest overseas.

6 Called “Enterprise-50,” these companies are awarded by the government for their contribution to business excellence.

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Because SMEs are resource-disadvantaged, Lee, Lim, and Tan (1999) have enumerated three generic strategies, which are also suggested by many textbooks and mainstream literature:

1. Niching – filling market gaps by offering products differentiated from (but substitutable to) that of the bigger rivals.

2. Free-riding – exploiting the market development efforts of bigger rivals by offering products identical to theirs.

3. Forming strategic alliances to gain competitive advantages over the bigger rivals and/or to deter them from adopting aggressive competitive actions against the SMEs.

In their study, however, they found that contrary to conventional arguments,

success in niching is not conditional upon the continued ignorance of the niche by the bigger firms. They also found that it is not true that SMEs must have a cost advantage vis-à-vis the bigger firms in order to niche or to free-ride successfully.

Theng and Boon (1996) studied Singapore SMEs and traced the reasons for their

failures. They found that when divided into exogenous and endogenous factors, top six (6) factors are endogenous: high operating expenses, lack of capital, short-sighted view of the future, lack of control over cash, lack of knowledge of the company’s product(s), and inappropriate marketing strategy. The most important exogenous variable is high taxes, which was ranked seventh, and the lack of formal education is the lowest.

Studying UK automotive SMEs, Yusof and Aspinwall (2000) have found four

areas which form the critical success factors in implementing a Total Quality Management (TQM) program are management leadership, measurement of results, progress, and performance, appropriate training for employees, and adopting a quality assurance system. On the other hand, the following need more attention as automotive SMEs have low practice levels: continuous improvement system, improvement tools and techniques, and supplier quality assurance. These findings are significant as they authors also point out that these critical success factors were not the same as for large companies, especially when the survey had been modified to meet SME characteristics.

A classic study in entrepreneurship is Robert Cressy’s 1996 paper entitled, “Are

Business Startups Debt-Rationed?” Using a large sample of UK startups, he was able to demonstrate that human capital is the “true” determinant of survival and that the correlation between financial capital and survival is spurious. Provision of finance is demand-driven, with banks supplying funds elastically and business requests governing take up. The lack of identification of what he terms as “debt gaps” under asymmetric information is a major reason for the failure of business startups. In a much recent study, Ong, Habibullah, Radam, and Azali (2003), while noting the reluctance of (Malaysian) banks to lend to SMEs due to the high credit risk involved, underscored the importance of credit guarantees to help SMEs secure loans from financial institutions.

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Part of delivering increased access to credit is the level of financial reform, but as Laeven (2003) noted, while financial reform has been one of the most profound policy reforms in many developing countries in recent years and is thought to have a large potential impact on the performance of firms and on economic welfare, there is no professional consensus on the net benefits of financial liberalization. In one of the earliest studies on the impact of bank deregulation and small business in the United States, Struck and Mandell (1983) found that small business suffered as a result of bank consolidations. And since Struck was with the Office of the Comptroller of the Currency, this study hastened the deregulation of the banking system in America. Jayaratne and Strahan (1996) advanced their “finance-growth nexus” by establishing that the relaxation of bank branch restrictions increased significantly rates of real, per capita growth in income and output and the improvements in the quality of bank lending, not increased volume of bank lending appear to be responsible for faster growth. The impact on productivity, profits, and efficiency were likewise observed by Humphrey and Pulley (1997).

Using panel data on a large number of firms in 13 developing countries, Laeven

(2003) found that liberalization affects small and large firms differently. Small firms are financially constrained before the start of the liberalization process, but become less so after liberalization, in contrast to large firms. This led him to hypothesize that financial liberalization has adverse effect on the financial constraints of large firms, because these firms had better access to preferential credit during the period before financial liberalization. This close relationship between Japanese manufacturing firms and financial institutions was also observed earlier by Weinstein and Yafeh (1998).

The economics of bank regulation has been thoroughly examined by

Bhattacharaya, Boot, and Thakor (1998) and have suggested developing alternatives to deposit insurance in order to lessen the impact of moral hazards in the bank charter value (competitive environment) and the scope of banks (industry structure). Carpio and Honohan (1999) looked at the reasons for the fragile nature of banking reform in developing countries and found that bank regulators in developed economies have converged on a paradigm which relies mainly on assuring banks have adequate financial capital. And while capital standards are helpful, they are likely to be insufficient to assure banking stability for developing countries. Studying Spanish banks, Kumbhakar, Lozano-Vivas, Lovell, and Hassan (2001) have found that despite policy on improving productivity, declining levels of output in technical efficiency along with a significantly high rate of technical progress, indicating mixed impact of such initiatives.

With regards to mergers, Yu and Luu (2003) suggest that, as far as Taiwanese

banks are concerned there is evidence to support the “relative market power hypothesis,” that is, greater market shares lead to higher productivity.

In the Philippines, Lamberte (2001) notes that banks have the natural tendency to

be large to exploit economies of scale and scope and in the process tend to shy away from small savers and borrowers. And while the government has provided the necessary environment to hasten lending to small borrowers, Lamberte lists the following

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constraints which banks face in expanding their financial services to small businesses: macroeconomic instability, inadequate infrastructure, regulation on deposit mobilization, shortage of capital, competition with government banks, inadequate (Central Bank) supervision, and loan portfolio regulations. III. The Current Small and Medium Enterprises (SMEs) Environment and SME Access to Credit Figure 2 (see separate section) traces the different development in the policy environment of SMEs since the First Republic. It is quite clear from the illustration that SMEs have always been a priority policy area for all administrations.

The main policy environment at present is Republic Act (RA) 6977, as amended by RA 8289, or the Magna Carta for Small Enterprises, defines small and medium enterprises as “any business activity or enterprise engaged in industry, agribusiness and/or services, whether single proprietorship, cooperative, partnership or corporation whose total assets, inclusive of those arising from loans but exclusive of the land on which the particular business entity’s office, plant and equipment are situated.” SMEs are categorized in terms of asset size and number of employees. The same law authorizes the Small and Medium Enterprise Development Council (SMEDC) to periodically review the above definitions, and if necessary adjust taking into account inflation and other economic indicators.

In its latest resolution7 SMEDC has defined SMEs as follows:

Table 2 Definition of Micro, Small, Medium, and Large Enterprises

(in terms of asset size and number of employees)

Asset Size Number of Employees Micro Up to P 3.0 million 1 – 9 Small P 3,000,001 – P 15,000,000 10 – 99 Medium P 15,000,001 – P 100,000,000 100 – 199 Large More than P 100,000,000 More than 200

Source: Bureau of Small and Medium Enterprise Development, Department of Trade and Industry Since its inception of RA 6977 in 1991, the asset size classification for SMEs has been revised by SMEDC. Table 3 outlines these changes. 7 Resolution No. 01 Series of 2003 dated January 16, 2003. This resolution was made to reflect the provisions in RA 9178, or the “Barangay Micro Business Enterprise (BMBE) Act of 2002”, where BMBEs were defined as those enterprises who assets were below P 3.0 million.

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Lamberte (2001) also suggests that there are two other pieces of legislation that will have to be considered when looking at the operational definition of SMEs. These are the Comprehensive Agricultural Reform Law, where small farm enterprises refer to those who own five (5) hectares or less, and the Social Reform and Poverty Alleviation Act of 1997 (RA 8425), where poor households are defined and where it is defines micro-enterprises are defined as those with a capital of P 150,000.00. He notes that this

Figure 2 The Philippine SME Development Milestones 8

1935 The first Philippine Constitution first record national commitment for

economic success through industrial and technological growth. 1946 to mid 1960s Rapid industrialization with large scale capital and import intensive

enterprises for domestic market. Policies on low long-term interest rates Industrial Guarantee and Loan Fund (IGLF); specialized incentives to attract foreign investments; the Basic Industries Law; the Mining Act the Textile Act; quantitative import controls; overvalued exchange rates.

In the 50s: The establishment of several R&D institutes; the Investment

Incentives Act; fiscal and other incentives by the Board of Investments; the creation of the Foreign Trade Zone Authority.

In the 1960s: Start of Small Industries Programs – the Cottage Industries

Act – assistance and exemption from most taxes of firms registered with the National Cottage Development Authority; bilateral agreement with the Netherlands led to a special project with the University of the Philippines on training and other services for small-scale industries.

The latter half of the 60s: strategy shift to export-oriented industries – liberalization of the import controls and devaluation but had to be recalled when the manufacturing sector was adversely affected by the influx of manufactured imported goods.

1970s The Export Incentive Act complemented investment policies.

Oil crisis- for the first time SME was given emphasis in the Philippine Development Plan (1972-1976); special program to link entrepreneurs and financing institutions; Medium and Small Industries Coordinated Action Program (MASICAP); the Department of Industry was created in 1974, took over MASICAP and established the Small Business Assistance Centers (SBAC) in the regional areas. By the mid 70s, private industry groups were formed and took initiatives, mostly jointly with the government. The Commission on Small and Medium Industries governed the operation of agencies and implementation of programs until 1981.

8 Full text can be obtained from Appendix 4 of The SME Development Plan 2004-2010

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1979 – the Countryside Development Policies – the Investment Promotion Act placed on pioneer enterprise incentive status “Less Developed Areas”.

Figure 2, continued 1986-1992 Aquino government The 1987 Philippine Constitution reinforced commitment for the

development of the private sector and provided for a wide range of government reforms and reorganization.

Major government reforms and restructuring programs – foreign direct

investments (FDIs) for industrialization; unification of the structure of industrial incentives; integration and simplification in trade and industry services through field units, provincial and regional offices of the Department of Trade and Industry; trade liberalization; industrial dispersal through countryside industries; the Magna Carta for Small Enterprises of 1991; the Local Government Code of 1991; and the Cooperative Code of 1991.

1992-1998 Ramos government Social Reform Agenda. 1993-1998 Medium Term Philippine

Development Plan – to become a “newly industrializing country” by the turn of the century – Philippines 2000; global excellence; people empowerment; integrated development assistance for SMEs; balanced agro-industrial development program.

1992-1998 – SME Development Plan identified regional agro-industrial centers as focus for the countryside program; micro-relending with NGO and cooperative conduits and liberalized terms; adoption of SME Centers or First-Stop/Business-One-Stop Shops in major citied and provincial areas.

1998-2001 Estrada government The 1998 SME Development Plan worked on principles of viability and

competitiveness, private-sector initiatives and market driven responses and the complementarity of three government bodies on enterprise development: The Export Development Council, The Industry Development Council and The Small and Medium Enterprise Development Council

2001-2004 Arroyo government The 2001-2004 Strong Republic Development Strategy emphasizes

employment generation and upgrading of living standards. Enabling laws include the Magna Carta for Small Enterprises 1991 as amended 1997, BMBE Law 2003, Export Development Act 1994, Investment Incentives Act, Cooperatives Code 1991 and Local Government Code 1991.

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Institution of the Long-term SME Development Plan 2004-2010 which seeks to transform SMEs to globally competitive enterprise in the medium to long-term.

definition does not necessarily conflict with the Magna Carta for Small Enterprises because the Magna Carta defines micro-enterprises in terms of assets inclusive of those arising from loans; where as the in RA 8425 defines micro-enterprises in terms of capital. (Lamberte, 2001).

Table 3

Asset Size Classification of Small and Medium Enterprises 1991 and 2002

(in pesos) Type of Enterprise 1991 Up to end of 2002

Micro Less than P 50,000 Up to P 5,000,000.00 Cottage P 50,001 – P 500,000.00 N. A. Small P 500,001 – P 5,000,000 P 5,000,001– P 15,000,00

Medium P 5,000,001 – P 20,000,000 P 15,000,001 – P 100,000,000 Source: Bureau of Small and Medium Enterprise Development, Department of Trade and Industry

Because of the change in definition of SMEs in terms of asset sizes, a similar ten-year comparison of SME growth needs to be viewed with caution. Nonetheless, let us review SME performance from 1999 – 2002:

Table 4

SME Performance 1999 and 2002

1999 2002 Net Change Total business establishments in the Philippines

826,000 809,460 - 2.0%

% micro, small, and medium enterprises (MSMEs)

99.6 99.7 + 0.1

% micro 90.9 91.8 + 0.9 % small 8.3 7.5% - 0.8 % medium 0.4 0.4% 0.0 % jobs created by MSMEs of the total labor force

70% 70% 0.0

% value added to total sales and census value-added in manufacturing industry

32% 30% -2.0%

Source: Bureau of Small and Medium Enterprise Development, Department of Trade and Industry

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As of 2002, it is important to note that despite comprising most of the business establishments in the Philippines, SMEs (including micro-enterprises) account for only a disproportionate contribution to jobs created and value added.9 It is equally important to note that despite the drop in the number of establishments from 1999-2002, the number of micro-enterprises increased at the expense of small enterprises. As a result, the total value added dropped by two percentage points. This appears to imply that the policy changes from 1999-2002, while increasing the number of micro-enterprises, did not help the increase in the value-added of the manufacturing industry due to drop in the number of small enterprises. Tables 5a to 5f summarizes the specific performance of SMEs as of 2002.

Table 5a Number of Establishments by Industry and Firm Size, 2002

Percentage to total Establishments Industry

(PSIC) Total

Establishments Micro Small Medium Large Agriculture, Hunting & Forestry

3,120 47.0 45.9 3.2 3.9

Fishing 1,145 45.2 49.8 2.6 2.4 Mining & Quarrying 327 60.6 32.1 3.7 3.7 Manufacturing 122,977 88.5 9.9 0.8 0.8 Electricity, Gas & Water Supply

1,216 39.7 43.6 8.8 7.9

Construction 2,649 56.0 36.2 3.8 4.0 Wholesale & Retail Trade, Repair of Motor Vehicles, Motorcycles & Personal & Household Goods

434,475

95.7

4.2

0.1

0.1

Hotels & Restaurants 88,608 92.0 7.7 0.2 0.1 Transport Storage & Communications

14,263

75.4

22.3

1.3

1.1

Financial Intermediation 24,060 76.6 22.7 0.3 0.4 Retail Estate, Renting & Business Activities

38,862

88.5

9.9

0.7

0.8

Education 9,282 53.0 41.6 2.9 2.4 Health & Social Work 28,183 94.7 4.5 0.4 0.4 Other Community, Social & Personal Service Activities

40,293

94.3

5.4

0.1

0.1

All Industries 809,460 91.8 7.5 0.4 0.3

9 The Bureau of Small and Medium Enterprise of the Department of Trade and Industry defines census value added as being “equal to the sum of the value of fixed assets produced by the establishment for its own use; major alterations, additions and improvements to fixed assets done by the establishment on own account; shipments of products; receipts from resales; receipts from industrial services done for other; ending inventory; and electricity sold less the sum of the cost of materials and supplies; fuels; industrial services done by others; goods bought for resale; beginning inventory; and electricity purchased.

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Table 6b Number of Establishments by Sub-Industries, Manufacturing Sector, 2002

Percentage to total Establishments Major Industries

(PSIC, D15-39) Total

Establishments Micro Small Medium Large Food Products & Beverages 52,046 92.9 6.4 0.3 0.4 Tobacco Products 24 16.7 41.7 0.0 41.7 Textiles 1,612 68.8 23.8 3.9 3.5 Wearing Apparel 19,037 91.0 7.6 0.6 0.7 Tanning & Dressing of Leather, Luggage, Handbags & Footwear

2,582

82.9

15.1

1.3

0.7

Wood, Wood Products & Cork, except Furniture

3,722

86.5

12.2

0.7

0.6

Integrated Paper & Paper Products

598

48.7

41.0

5.5

4.8

Publishing, Printing & Reproduction of Media

4,283

77.5

21.4

0.7

0.4

Coke, Refined Petroleum & Other Fuel Products

28

35.7

50.0

0.0

14.3

Chemicals & Chemical Products 1,067 37.5 50.6 7.1 4.8 Rubber & Plastic Products 1,578 52.3 39.5 4.7 3.5 Non-metallic Mineral Products 5,855 88.3 10.1 0.7 0.9 Basic Metals 1,266 62.6 31.1 3.9 2.4 Fabricated Metal Products Except Machinery & Equipment

14,609

94.0

5.5

0.3

0.2

Machinery & Equipment Not Classified

3,416

79.2

19.4

1.0

0.5

Office, Accounting & Computing Machinery

52

23.1

26.9

9.6

40.4

Electrical Machinery & Apparatus, Not Elsewhere Classified

237

22.8

50.2

14.8

12.2

Radio, Television, & Communications Equipment

256

11.7

32.4

10.9

44.9

Medical Precision & Optical Instruments, Watches & Clocks

114

34.2

30.7

15.8

19.3

Motor Vehicles, Trailers & Semi-Trailers

854

74.9

20.4

2.6

2.1

Other Transport Equipment 72.5 72.5 22.3 2.5 2.7 Manufacture & Repair of Furniture

7,587

91.5

7.5

0.7

0.4

Recycling 54 59.3 40.7 0.0 0.0 Not Elsewhere Classified 1,657 83.8 13.0 2.2 1.0 Total 122,977 88.5 9.9 0.8 0.8

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Table 5c Number of Establishments by Region, 2002

Percentage to total Establishments Region Total

Establishments Micro Small Medium Large I. Ilocos 48,103 95.5 4.3 0.1 0.1 II. Cagayan Valley 24,920 96.2 3.6 0.1 0.1 III. Central Luzon 88,822 93.8 5.8 0.2 0.2 IV. Southern Tagalog 142,863 93.9 5.5 0.3 0.3 V. Bicol 30,879 94.9 4.8 0.2 0.1 VI. Western Visayas 45,745 92.8 6.6 0.2 0.2 VII. Central Visayas 44,492 90.5 8.6 0.5 0.5 VIII. Eastern Visayas 19,951 94.5 5.1 0.2 0.1 IX. Zamboanga Peninsula 27,430 95.0 4.7 0.2 0.1 X. Northern Mindanao 33,045 93.2 6.4 0.3 0.2 XI. Davao 35,797 91.7 7.7 0.2 0.3 XII. Soccscksargen 28,313 95.1 4.5 0.2 0.2 NCR 195,029 85.5 13.2 0.7 0.6 CAR 14,201 94.9 4.8 0.2 0.1 ARMM 8,162 96.7 3.0 0.1 0.2 CARAGA 15,901 95.0 4.7 0.1 0.2 All Industries 809,460 91.8 7.5 0.4 0.3 Source: Bureau of Small and Medium Enterprise Development, Department of Trade and Industry

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Table 5d

Number of Employees by Industry and Firm Size, 2002

Percentage to total Establishments Industry (PSIC)

Total Employees10 Micro Small Medium Large

Agriculture, Hunting & Forestry

126,755

4.9

28.9

11.2

55.0

Fishing 29,684 7.3 37.1 12.4 43.1 Mining & Quarrying 17,156 5.6 19.7 10.0 64.7 Manufacturing 1,467,188 24.1 20.1 9.7 46.1 Electricity, Gas & Water Supply

77,819

2.8

21.1

20.1

56.0

Construction 145,706 4.6 16.7 9.2 69.4 Wholesale & Retail Trade, Repair of Motor Vehicles, Motorcycles & Personal & Household Goods

1,632,655

67.9

20.7

3.3

8.1

Hotels & Restaurants 469,941 56.8 31.7 4.0 7.5 Transport Storage & Communications

268,564

14.9

27.7

9.2

48.3

Financial Intermediation 76,912 31.3 38.8 4.0 25.9 Retail Estate, Renting & Business Activities

390,372

26.3

22.8

9.7

41.2

Education 271,613 7.6 39.2 13.8 39.4 Health & Social Work 156,541 38.4 21.0 9.4 31.2 Other Community, Social & Personal Service Activities

184,771

56.3

23.7

4.5

15.5

All Industries 5,484,790 39.2 24.0 7.2 29.6 Source: Bureau of Small and Medium Enterprise Development, Department of Trade and Industry

10 As defined by the Bureau of Small and Medium Enterprise Development and the National Statistics Office, employees are “all persons who work in or away from the establishment and receive compensation and are under the control of the establishment. Also included are salaried managers. The category “employees” includes all persons engaged, other working owners and unpaid family workers.

16

Table 5e Total Employment of Establishments by Region and Employment Size, 2002

Percentage to total Establishments Region Total

Employees Micro Small Medium Large I. Ilocos 180,421 66.2 21.9 4.4 7.5 II. Cagayan Valley 94,339 71.0 18.6 3.4 7.1 III. Central Luzon 460,834 51.2 22.4 5.7 20.6 IV. Southern Tagalog 914,574 39.9 18.3 6.5 35.2 V. Bicol 131,131 63.1 22.8 5.4 8.7 VI. Western Visayas 256,747 48.0 25.5 8.2 18.3 VII. Central Visayas 396,856 32.4 23.7 7.8 36.0 VIII. Eastern Visayas 95,316 61.3 22.4 5.7 10.6 IX. Zamboanga Peninsula 113,396 60.0 23.6 5.8 10.5 X. Northern Mindanao 177,125 49.0 24.1 6.8 20.1 XI. Davao 239,644 39.6 24.5 7.0 29.0 XII. Soccscksargen 138,611 55.1 19.8 4.7 20.4 NCR 2,112,538 25.8 27.8 8.8 37.7 CAR 65,383 53.9 21.0 5.5 19.6 ARMM 39,072 59.2 12.8 3.7 24.2 CARAGA 68,803 60.0 21.5 4.4 14.0 All Industries 5,484,790 39.2 24.0 7.2 29.6 Source: Bureau of Small and Medium Enterprise Development, Department of Trade and Industry

Table 5f Business Name Issued to Small Enterprises, 1995-2003

Number of Business Names Issued Micro Small Medium

Region 1995 2003 %

growth1995 2003 %

growth1995 2003 %

growthI. Ilocos 8,874 12,017 35.4 151 283 87.4 12 6 -50.0 II. Cagayan Valley

5,262 6,394 21.5 56 173 208.9 2 6 200.00

III. Central Luzon

14,105 25,269 79.2 282 849 201.1 23 4 82.6

IV. Southern Tagalog

24,914 39,317 57.9 345 852 147.0 40 4 -90.0

V. Bicol 4,546 6,645 46.2 91 193 112.1 19 1 -94.7 VI. Western Visayas

5,801 8,148 40.5 100 400 300.0 26 4 -84.6

VII. Central Visayas

6,952 9,687 39.3 144 3113 117.4 25 3 -88.0

17

VIII. Eastern Visayas

3,496 6,157 76.1 53 181 241.5 10 0 n. a.

IX. Zamboanga Peninsula

2,987 2,519 -15.7 59 120 103.4 10 4 -60.0

X. Northern Mindanao

4,394 4,573 4.1 69 187 171.0 111 4 63.6

XI. Davao 7,482 6,686 -10.6 125 1911 154.3 12 9 -25.0 XII. Soccscksargen

4,102 4,988 21.6 54 140 159.3 3 3 0.0

NCR 71,841 59,690 -16.9 1,999 3,025 51.3 339 15 95.6 CAR n. a. 4,297 n. a. n. a. 172 n. a. n. a. 1 n. a. ARMM n. a. 613 n. a. n. a. 23 n. a. n. a. 1 n. a. CARAGA n. a. 1,906 n. a. n. a. 84 n. a. n. a. 1 n. a. All Industries 164,756 198,906 20.7 9,528 7,186 -24.6 532 66 -87.6 Notes: 1. CAR, ARMM, and CARAGA figures begin in 1997

2. Because the asset bases are different, the growth comparison may not be indicative of the actual change of the business names issued.

Source: Bureau of Small and Medium Enterprise Development, Department of Trade and Industry If we isolated SMEs without the micro industries the following significant figures are revealed:

1. SMEs account for roughly 8% of total establishments. 2. The top five (5) industries where as SMEs are concentrated include

Wholesale and Retail Trade, Repair of Motor Vehicles/Motorcycles and Personal and Household Goods, Manufacturing, Hotels and Restaurants, Financial Intermediation, Real Estate sectors, both in terms of number of establishments and number of employees.

To further enhance the capabilities of the SME sector, the SMEDC, Department of Trade and Industry, and various entities involved in Philippine SME development, including foreign donor organization have drafted “The SME Development Plan 2004-2010, and among its salient points includes the identification of key issues and challenges to the sector:

1. Issues relating to the competitiveness 1.1 Fierce competition in export markets, influx of cheaper-priced

competition. 1.2 Small domestic markets 1.3 Need for important parts/materials; limited industrial linkages 1.4 Lack of basic operational management knowledge/expertise 1.5 Barriers to form business; lack of support in funding and research

and development (market and technical) 1.6 Limited economic activities at the local level

2. Productivity and structural limitations

18

2.1 Outmoded or less productive operational assets/methods 2.2 Insufficient use of technology 2.3 Limited room for efficient operational levels 2.4 Insufficient management and professional know-how 2.5 Insufficient and inaccessible funding sources 2.6 Unappreciated and inadequate professional service 2.7 Insufficient incentives and inability to meet regulatory procedures 2.8 Insufficient access to information

3. Limitation relating to funding sources

3.1 Limited access to sources to capitalize the enterprise 3.2 Low fixed assets and profitability

Appendix A contains the complete text of The SME Development Plan 2004-

2010. SMEs Access to Credit Generally, the credit environment and access to credit of SMEs can be divided into two: those under the Magna Carta for SMEs where banks have been mandated to set aside a portion of their loan portfolios, and those other institutions that have actively pursued direct financing programs for SMEs. In 1991, the Magna Carta for SMEs required banks to allocate 5% of their net loan portfolio for small enterprises. This was later amended in 1997 to 6% for small and 2% to medium enterprises which stands until today and will remain effective until 2007. There are two modes of compliance, one is by direct loans to SMEs, and other through indirect compliance such as cash on hand, unavailed committed credit lines, holdings of notes, deposits in BSP, and other similar modes.

19

Tables 6a-6c summarizes the highlights of the mandatory credit allocation:

Table 6a Compliance of Banks to Mandatory Credit Allocation to SMEs

1991-2003 (in million pesos)

Note: Reporting is as of December 31 for every year except for 2003 which is as of September. Source: Bureau of Small and Medium Enterprise Development, Department of Trade and Industry

Direct Loans Indirect Compliance Total Compliance

Year

Net

Loan Portfolio

%

Change

Amount % to Net

Loan Portfolio

%

Change

Amount

% to Net

Loan Portfolio

%

Change

Amount

% to Net

Loan Portfolio

%

Change

1991 201,564 14,367 7.13 2,469 1.22 16,836 8.35 1992 187,594 -6.9 15,088 8.04 5.0 5,716 3.05 131.5 20,804 11.09 23.6 1993 276,462 47.4 30,360 11.08 101.2 3,588 1.39 -37.2 34,218 12.38 64.5 1994 385,316 39.4 48,746 12.65 58.0 4,813 1.25 34.1 53,599 13.90 56.6 1995 560,213 45.4 80,535 14.38 65.2 7,506 1.43 56.0 88,041 15.72 64.3 1996 791,568 41.3 108,955 13.76 35.3 4,889 0.62 -34.9 113,844 14.38 29.3 1997 886,844 12.0 189,824 21.40 74.2 29,181 3.29 496.8 219,005 24.69 92.4 1998 1,027,845 15.9 202,635 19.71 6.8 38,129 3.71 30.7 240,764 23.42 9.9 1999 1,001,567 -2.6 213,539 21.32 5.4 34,564 3.46 -9.4 248,193 24.78 3.1 2000 986,427 -1.5 214,729 21.77 0.6 16,900 1.71 -51.1 231,629 23.48 -6.7 2001 992,243 0.6 231,830 23.36 8.0 16,713 1.68 -1.1 248,543 25.05 7.3 2002 953,291 -3.9 232,814 24.42 0.4 26,804 2.81 60.4 259,618 27.23 4.5 2003 1,991,720 108.9 1,132,924 56.99 386.6 25,536 1.28 -4.7 1,158,460 58.16 346.2 Average with 2003 24.7 62.2 55.9 57.9 Average without

2003

17.0

32.7

61.4

31.7

20

Table 6b Compliance of Banks to Mandatory Credit Allocation to Small Enterprises


Note: Reporting is as of December 31 for every year except for 2003 which is as of September. Source: Bureau of Small and Medium Enterprise Development, Department of Trade and Industry


Year

Net

Loan Portfolio

%

Change

Amount % to Net

Loan Portfolio

%

Change

Amount

% to Net

Loan Portfolio

%

Change

Amount

% to Net

Loan Portfolio

%

Change

1991 201,564 14,367 7.13 2,469 1.22 16,836 8.35 1992 187,594 -6.9 15,088 8.04 5.0 5,716 3.05 131.5 20,804 11.09 23.6 1993 276,462 47.4 30,630 11.08 103.0 3,588 1.30 -37.2 34,218 12.38 64.5 1994 385,316 39.4 48,746 12.65 59.1 4,813 1.25 34.1 53,599 13.90 56.6 1995 560,213 45.4 80,535 14.38 65.2 7,506 1.34 55.9 88,041 15.72 64.3 1996 791,568 41.3 108,955 13.76 35.3 4,889 0.62 -34.9 113,844 14.38 29.3 1997 886,844 12.0 112,274 12.66 3.1 18,844 2.12 285.4 131,118 14.78 15.2 1998 1,027,845 15.9 119,070 11.58 6.1 22,356 2.18 18.6 141,426 13.76 7.9 1999 1,001,567 -2.6 128,602 12.84 8.0 19,472 1.94 -12.9 148,074 14.78 4.7 2000 986,427 -1.5 114,448 11.60 -11.0 11,020 1.12 -43.4 125,468 12.72 -15.3 2001 992,243 0.6 144,154 14.53 26.0 10,929 1.10 -0.83 155,083 15.63 23.6 2002 953,291 -3.9 137,064 14.52 -4.9 18,902 2.00 73.0 155,966 16.52 0.6 2003 1,991,720 108.9 115,521 11.04 -15.7 15,880 1.52 -16.0 131,401 12.56 -15.8 Average with 2003 24.7 23.3 37.8 21.6 Average without

2003

17.1

26.8

46.7

25.0

21

Table 6c Compliance of Banks to Mandatory Credit Allocation to Medium Enterprises


Notes: 1. Reporting is as of December 31 for every year except for 2003 which is as of

September. 2. Mandatory allocation to medium enterprises began in 1997 only Source: Bureau of Small and Medium Enterprise Development, Department of Trade and Industry As can be observed from the tables, there has been more than adequate compliance to the mandatory credit allocation to small and medium enterprises. Based on figures released by the Bureau of Small and Medium Enterprises (BSME), total direct loams to SMEs rose by 4/5% from P 248.5 in 2001 to P 259.6 billion in 2002. This accounts for 27.2% of the bank’s total net loan portfolio in 2002. Looking the figures further, we note the following:

1. There is a staggering increase in the compliance as of September 2003 if compared to 2002. However, if we exclude this portion, the growth rates of the mandatory compliance from 1991-2002 (31.7%) are much faster to the growth of the loan portfolio (17.0%).

2. Most of the growth and the amount of loans available to SMEs are

accounted for by direct loans. The growth rate and the amount for indirect compliance while growing are erratic.


Year

Net

Loan Portfolio

%

Change

Amount % to Net

Loan Portfolio

%

Change

Amount

% to Net

Loan Portfolio

%

Change

Amount

% to Net

Loan Portfolio

%

Change

1997 886,844 77,550 8.74 10,337 1.17 87,887 9.91 1998 1,027,845 15.9 83,565 8.13 7.8 15,773 1.53 52.6 99,338 9.66 13.0 1999 1,001,567 -2.6 84,937 8.48 1.6 15,182 1.52 -3.8 100,119 10.00 0.8 2000 986,427 -1.5 100,281 10.17 18.1 5,880 0.60 -61.3 106,161 10.76 6.0 2001 992,243 0.6 87,746 8.84 -12.5 5,804 0.58 -1.3 93,550 9.43 -11.9 2002 953,291 -3.9 96,195 10.19 9.6 19,869 2.11 242.3 116,064 12.3 24.1 2003 1,991,720 108.9 105,344 10.07 9.5 9,886 0.94 -50.2 115,230 11.01 -1.2 Average with 2003 19.6 5.7 29.7 5.1

Average without 2003 1.7 4.9 45.7 6.4

22

3. However, a disturbing trend is seen over the last four to five years. The growth rate of direct lending and indirect compliance allocation to small enterprises is declining, but still well over the mandatory allocation required.

In terms of other financial institutions that provide credit access to SMEs, the

Bureau of Small and Medium Enterprises have identified have about nine (9) institutions of these institutions:

1. Development of Science and Technology 2. Foundation for a Sustainable Society, Inc. 3. Government Service Insurance Systems (GSIS) 4. National Livelihood Support Fund 5. Philippine Business for Social Progress (PBSP) 6. Philippine Export-Import Credit Agency 7. Quedan Corporation (Quedancor) 8. Small Business Corporation 9. Social Security System (SSS)

These institutions provide financing in the following areas:

general/manufacturing, technology improvement, trading and service, environment, education, agribusiness, and tourism and real estate.

A summary of these and other institutions can be found in Tables 7 and 8.

23

Table 7 Micro Financing Programs Financing Program/Program Beneficiary Focus/Project Focus

Financing Institutions

General/ Manufacturing

Agrarian Reform Beneficiaries/

Farmers

Out-of-School Youth

Overseas Workers Below Poverty Threshold

Women

Foundation for a Sustainable Society, Inc.

Microfinance Eco-Enterprise Program

GSIS Family Bank GFB Microfinance Lending Program

Land Bank of the Philippines

Microfinance Program Cooperative Lending Program

National Livelihood Support Fund

Special TIE-UP Program

Livelihood Credit Assistance Program Credit Assistance for Coconut Farmers

Youth Entrepreneurship Financing Facility

Livelihood Development Program for Overseas Filipino Workers

Opportunity Microfinance Bank

Individual Micro Business Loan Group Micro Loan

People’s Credit and Finance Corporation

Microfinance Program

Philippine Enterprise Development Foundation

Balikatan Sa Kaunlaran

SB Corporation SME-Funding Entry Point for Entrepreneurs in Livelihood

Source: Department of Trade and Industry

24

Table 8 Financing Programs for SMEs

Financing Program/Program Beneficiary Focus/Project Focus

Financing Institutions

General/ Manufacturing

Technology Improvement

Trading and Service

Environmental Infrastructure

Education Agri Business

Tourism/ Real Estate

Asiatrust Development Bank

Bank Carry Term Loan Short Term Loan Discounting Line/ Receivables Discounting Domestic/Import Letter of Credit/Trust Receipt

Department of Science and Technology

Small Enterprises Technology Upgrading Program

Development Bank of the Philippines

Credit Line for MSMEs

Sustainable Logistics Development Program

Environmental Infrastructure Support Credit Program KfW-Industrial Pollution Control Loan Project Credit Line for Solid Waste Management

Education Sector Credit Program

Foundations for a Sustainable Society, Inc.

Solid Waste Eco-Enterprise Program Sustainable Partnership for Eco-Enterprise Development Fund for Sustainable Civil Society-Start-Up Eco- Enterprise Development Program

25

Table 8, continued

Financing Program/Program Beneficiary Focus/Project Focus Financing

Institutions General/

Manufacturing Technology

Improvement Trading and

Service Environmental Infrastructure



Government Service Insurance System

GSIS Special Financing Program

Land Bank of the Philippines

Easy Pondong Pang-Asenso SULONG Program Countryside Loan Fund Retail Countryside Fund

Special Financing to Small & Medium Exporters Countryside Loan Fund Program Retail Countryside Fund

Countryside Loan Fund Program Retail Countryside Fund

Accelerating Change in the Countryside Thru Equity Sharing Countryside Loan Fund Program Retail Countryside Fund

National Livelihood Support Fund

Isang Bayan, Isang Produkto, Isang Milyong Piso

Philippine Business for Social Progress

Small & Medium Enterprise Credit Program

26

Table 8, continued

Financing Program/Program Beneficiary Focus/Project Focus Financing Institutions General/






Philippine Export- Import Credit Agency

Special Credit Facility for Export Devt. Short Term Direct Lending Program Medium and Long Term Direct Lending Program SULONG Program Pre Shipment Export Finance Guarantee Post Shipment Export Risk Guarantee Term Loan Guarantee Program

Philippine National Bank

Small Business Loan

Small Business Loan

Planters Development Bank

Revolving Credit Line Mortgage Optimizer Term Loan

Contract to Sell Purchase Facilities

27

Table 8, continued







Quedan Corporation

Urban and Rural Poor Program Philippine Dairy Credit and Entrepreneurship Assistance Program for Agricultural Engineering Students and Organizations Self-Reliant Farmers/Fisherfolk Swine Program Fisheries Quedancor 20-20-20 Program for Palm Oil Small Retail Enterprise Income Augmentation and Livelihood Food & Agricultural Retail Enterprises Livestock and Poultry Quedancor – SME Credit Program for Cassava, Corn, Sorghum & Soybean

28

Table 8, continued







Small Business Corporation

SME-FIRST SME-EFIRST SME-FRIEND SME-FORCE SME-GUIDE SME-GLAS Guarantee for Supplies of Locators of PEZA/BOI SME-GUILD SME-FAST SME-FIRM SME Equity Ventures Program

SME-GEMS SME-GUILD

SME-GRAIN SME-GUILD

Social Security System

SULONG Program Special Financing Program Industry Loan Program

Hospital Financing Program Special Financing Program Industry Loan Program

Special Financing Program for Vocational and Technical Schools Financing Program for Educational Institutions

Industry Loan Program

Financing Program for Tourism Projects Industry Loan Program

Source: Department of Trade and Industry

29

A cursory examination of the lending programs show that of the over than ninety (90) credit facilities available to SMEs, only a handful offer collateral free loans, most of which are in micro financing: 1. Micro Finance

1.1 GSIS Family Bank Micro finance Lending Program 1.1.1 National Livelihood Support Fund 1.1.2 Livelihood Credit Assistance Program 1.1.3 Youth Entrepreneurship Financing Facility Program 1.1.4 Credit Assistance For Coconut Farmers 1.1.5 Special Tie-Up

1.2 People’s Credit and Finance Corporation 1.2.1 Micro finance program (sub-borrowers)

1.3 Philippine Enterprise Development Foundation (For loans less than P 20,000.00, no collateral; for loans more than P 20,000.00, postdated checks)

2. Small and Medium Enterprises

2.1 Department of Science and Technology 2.1.1 Small Enterprises Technology Upgrading Program Set-up

(individual firm should be willing to put up a counterpart cost on the technological intervention)

In addition, programs under the Development Bank of the Philippines or Land Bank of the Philippines such as the SME Unified Lending Opportunities for National Growth (SULONG), or those under the Small Business Corporation (Small Business Guarantee and Finance Corporation) do not decline a loan on the basis of inadequate collateral, but the borrower should be willing to mortgage any business and personal collateral, including assets acquired from the loan. Also, Quedan Corporation does not require real estate collateral, but postdated checks and/or chattel on animals and Joint and Several Signatures (JSS) guarantees. The over-dependence on collateral, especially real estate is one of the reasons why despite the large amount of funding made available to SMEs loan availment is not as fast. This is also the observation in the SME Development Plan of 2004-2010. Foreign Bank Performance Review Since 1994

Since 1994, the dynamic changes in the Philippine banking system have caused some consolidations and realignments in the foreign banks, a summary of which is found in Table 9:

30

Table 9 Realignments in Foreign Banking System

Date of

Acquisition Acquiring

Bank Acquired

Bank Surviving/Consolidated

Bank Sep 1998 Development Bank

of Singapore Bank of Southeast Asia DBS Bank Philippines

Aug 1999 Fuji Bank Industrial Bank of Japan Dai-Ichi Kangyo Bank

Mizuho Corporate Bank, Ltd. (Philippines)

Nov 1999 United Overseas Bank Philippines

Westmont Bank United Overseas Bank Philippines

Jul 2001 Banco de Oro Dao Heng Bank Banco de Oro Aug 2001 BPI Family Bank DBS Bank Philippines BPI Family Bank First Qtr. 2002

ABN AMRO Bank, Inc.

TA Bank of the Phils., Inc.

ABN AMRO Bank, Inc.

Jul 2003

Banco de Oro

Banco Santander

BDO Private Bank (separate entity from Banco de Oro)

Source: Pasadilla and Milo. “Effect of Liberalization on Banking Competition” As far as the foreign banks granted licenses to operate under RA 7721, the only major realignments was the renaming of Fuji Bank to Mizuho Corporate Bank, Ltd. after the consolidation of its parent bank in Japan with the Industrial Bank of Japan, and the Dai-Ichi Kangyo Bank, and the acquisition of Banco Santander by Banco de Oro, which has been renamed as BDO Private Bank. Because of the realignments, the banks that comprise the definition “post RA 7721 foreign banks” for purposes of this study will be as follows:

1. ANZ Banking Group 2. Bangkok Bank Public Co. Ltd. 3. Bank of America, N. A. 4. Bank of China 5. Bank of Tokyo-Mitsubishi Ltd. 6. Citibank, N. A. 7. Deutsche Bank AG 8. Hong Kong & Shanghai Banking Corporation 9. International Commercial Bank of China 10. ING Bank 11. J P Morgan Chase Bank 12. Korea Exchange Bank 13. Mizuho Corporate Bank Ltd – Manila Branch 14. Standard Chartered Bank

31

If we further refine the classification, those considered “post-RA 7721 foreign bank” would not include Bank of America, Citibank, N. A., Hong Kong & Shanghai Banking Corporation, and Standard Chartered Bank. Tables 10a to 10c traces the share of domestic, foreign, and local banks during the 1995, 2000, and 2004:

Table 10a Philippine Commercial Banking Industry

Market Share Summary: Total Assets (for the year ending December 1995 and 2000, as of June 2004)

Foreign Banks Domestic Banks

All RA 7721 Only Government Banks

Year Amount

(P million) % to total

Amount (P million)

% tototal

Amount (P million)

% tototal

Amount (P million)

% to total

1995 817,134 63.7 120,472 9.4 not available 344,362 26.9 2000 1,911,325 64.6 466,692 15.8 not available 578,463 19.6 2004 2,288,692 65.2 575,192 16.4 143,023 4.1 649,044 14.3

Sources: Hapitan, R. (2001). “Reactions to the Entry of Foreign Banks: A Critical Case

Study of Selected Foreign Banks” http://www.bsp.gov.ph In Table 10a, we see that as a percentage to total assets, domestic and foreign banks have gained steadily against the government banks. This would indicate a significant shift in either efficiencies in terms of asset management on the part of domestic and foreign banks and/or more competitive strategies being undertaken in relation to government banks.

32

Table 10b

Philippine Commercial Banking Industry Market Share Summary: Total Deposits

(For the year ending December 1995 and 2000, as of June 2004)

Foreign Banks Domestic Banks All RA 7721 Only

Government Banks

Year Amount (P million)

% to total

Amount (P million)

% tototal

Amount (P million)

% tototal

Amount (P million)

% to total

1995 575,094 69.3 43,311 5.2 3,740 0.4 211,688 25.5 2000 1,124,529 66.8 260,796 15.5 39,685 2.4 297,315 17.7 2004 1,629,833 70.4 284,390 12.3 51,438 2.2 401,963 17.4


Study of Selected Foreign Banks” http://www.bsp.gov.ph In terms of total deposits, there is a significant increase in the share of domestic banks that have been taken out of the foreign banks. It can only be surmised that aggressive deposit taking strategies have worked for the domestic banks to the detriment of the foreign banks. Also noteworthy is the slight drop of total deposits for banks under RA 7721.

Table 10c Philippine Commercial Banking Industry

Market Share Summary: Total Loan Portfolio (For the year ending December 1995 and 2000, as of June 2004)

Foreign Banks Domestic Banks

All RA 7721 Only Government Banks

Year Amount

(P million) % to total

Amount (P million)

% tototal

Amount (P million)

% tototal

Amount (P million)

% to total

1995 513,879 67.7 67,187 8.8 12,120 1.6 178,314 23.5 2000 973,000 65.9 222,041 15.0 58,336 4.0 281,601 19.1 2004 1,047,253 68.0 258,143 16.8 94,399 6.1 284,883 15.2


Study of Selected Foreign Banks” http://www.bsp.gov.ph We see a different trend, however, when the loan portfolio is considered. After a decline in 2000, domestic banks have aggressively lent to the economy, whereas it is the

33

government banks that have lagged behind. Foreign banks have also increased their lending portfolio quite substantially as a percentage of total loans in 2004. In the year 2000, it was observed that the loss in potential revenues of local banks to foreign banks are substantial which can be partly attributed to the high returns on equity of these foreign banks. Apparently, the situation has not changed in 2004:

Table 11 Return on Equity of Selected Foreign Banks

2000 and 2004

Bank Return on Equity December 2000 June 2004

ANZ Bank 22.1% 28.0% Bank of Tokyo-Mitsubishi 10.0% 10.6% Fuji Bank (Mizuho Corporate Bank) 5.6% 2.8% DBS Bank 4.8% n. a. ING Bank 2.9% 15.4% Korea Exchange Bank 2.0% 4.1% International Commercial Bank of China -5.8% 11.9% Bangkok Bank -10.0% 1.1%


Study of Selected Foreign Banks” http://www.bsp.gov.ph What is dramatic about these changes is that none of the banks in Table 11 have negative returns on equity. In Central Bank figures show that as of June 2004, only the Bank of China (ranked 37 at negative 4.4%) and JP Morgan Chase Bank (ranked 41 at negative 56.27%) are the foreign banks with negative returns. United Coconut Planters Bank at minus 201.8% was the lowest at rank 42.

Central Bank figures also reveal that foreign banks have more than complied with the requirements, and are thus an important contributor to the total credit made available to SMEs.

34

Table 12 Foreign Bank Compliance with the Magna Carta as of September 2003

(% of Net Loan Portfolio)

Bank

6% Small

Enterprises

2% Medium

Enterprises ANZ Banking Group 6.0 2.2 Bangkok Bank 13.8 14.7 Bank of America 6.8 2.0 Bank of China 298.0 149.0 Bank of Tokyo-Mitsubishi 8.9 2.5 Citibank, N. A. 6.3 2.11 HSBC Bank 8.4 2.8 International Commercial Bank of China 14.4 34.6 ING Bank 9.1 3.0 JP Morgan Chase 6.2 15.7 Korea Exchange Bank 14.7 36.7 Mizuho Corporate Bank 22.8 8.3 Standard Chartered 6.0 4.16

Source: Central Bank IV. Study Results and Analysis Thirty (30) SMEs from the NCR, Luzon, Visayas, and Mindanao were used for this study out of an initial database of 120. The rather lower than expected response rate of 25% was attributed to the refusal of many SMEs to divulge financial information that they deemed was “sensitive” despite assurances that this will be kept confidential. In fact, the 30 SMEs in this study still withheld some financial information that would have provided a better for the SMEs in this study. A summary of the respondents is found in Table 13.

35

Table 14

Summary of Selected SMEs

Industry Metro Manila/Luzon

Visayas Mindanao Total

Manufacturing

BAP Besuto Gracies Havela Shing Hao

ABC Rattan Arkwell Adrian Designs BAJ Woodcraft Beve Sea KA Enterprises Nicky Export Exotic Islands Riche Arts Rojas Exports

BF Industries Charlie’s Durian Dati Coco Craft Orlad’s

19

Construction Canusa Enterprise 1 Wholesale & Retail Trade, Repair of Motor Vehicles, Motorcycles & Personal & Household Goods

Davao AB Printers Dillera Printing Mayvenue Gen Mdse Pitoy’s Chicaron

4

Transport, Storage & Communications

Jugro Transpac

Ecotrans 3

Real Estate, Renting, & Business Activities

Obando Uy 1

Other Community, Social & Personal Service Activities

Modista Wind and Wave 2

Total 9 10 11 30

Notes: 1. In Chapter 6, the names of the SMEs surveyed here will be coded. “MML” for

Metro Manila/Luzon, “V” for Visayas, and “M” for Mindanao. The coding was made to maintain confidentiality, a precondition before the responses were given.11

2. The industry classification were based on the PSIC. Industries were there no

SME respondents were omitted. The full PSIC groupings can be seen in Tables 9b and 9d.

11 The author reiterates his gratitude to the SMEs who have participated in the survey and the interview(s) that followed.

36

Other demographic information pertaining to the respondents are worth noting. This is contained in Table 14 below:

Table 14 Demographic Information of SMEs in the Study

Total Number of SMEs Respondents = 30

Demographic Information Number % to total Respondent Profile Owner/President/Proprietor or Equivalent Senior Management

22 8

73 27

Number of Years Company average – 16.8 years Respondents – 13.7 years

Provided Financial Information/Audited Statements Yes No

6 24

20 80

Had Vision/Mission Statements Yes No

8 22

27 73

Had Development Plans/Strategies Yes No

15 15

50 50

Had Organizational Chart Yes No

6 24

20 80

Changed Products/Services Over the Years Yes No

22 8

73 27

Had Plans to Diversify Further Yes No

15 15

50 50

Had Availed of a Loan Yes No

27 3

90 10

Financing Requirements All Equity All Debt Debt-Equity Mix

20 0 10

67 0 33

37

Several observations are worth noting:

1. Despite the number of years in the business, most of the SMEs that have agreed to be participate in the survey either do not have or refused to give financial information. The non-provision of audited financial statements is one of the main reasons why many SMEs are unable to avail of financial assistance from banks and other institutions. Almost all of the respondents felt that financial statements or any administrative requirements are less a priority than starting the business. It is only when the SMEs realize that financial statements are required not only for loans but as part of good governance do they realize that it needs to be done. For many SMEs, it is too late because of the transactions that have to be reconstructed over the years.

2. Those SMEs who have provided financial statements also have an

articulated mission/vision statement. This is consistent with the concept of good governance. Formalized or articulated mission/vision statements are often translated into organizational charts and reports such as budgets and other types of financial statements.

3. The SME environment is very dynamic that many companies had changed

their product lines and services over the years. Since many of the SMEs are entrepreneurial-driven, many of the SMEs had to change their original product lines and moved to other products or derivatives of their original product lines. This is even more evident when (slightly) more SMEs had further plans to diversify. On the part of banks and other financial institutions, they should realize that stability in terms of operations and earnings is not the goal of many SMEs but opportunity taking is. To fuel these opportunities, financial assistance and loans are needed.

4. A good number of SMEs have moved from all equity to a mix of debt and

equity for their capital requirements. Almost all of the respondent SMEs started with personal savings and funding sources. As the business expanded, many of the SMEs had to avail of loans that diluted owner’s equity.

5. Many SMEs are still managed hands-on by the owners. Unlike

corporations which have delegated to senior management many of the operational details, SMEs are still managed by the owners. This implies that while financial information may not be provided by the SMEs themselves, the fact that they are run by the owners, information asymmetry and moral hazard concerns can be reduced. This presents a unique challenge to those who want to evaluate the viability of SMEs.

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An important aspect of SME management is loan management and administration. Unfortunately, only 21 of the 25 SMEs who have loaned shared useful information in terms of their loan management. Table 16 shows how the loan availments of the SMEs in the study, broken down by type of institution:

Table 15 SME Loan Availment by Financial Institution

Type of Financial Institution Prior to 1994 1995-2000 After 2000 Universal 0 5 5 Local Commercial 4 8 10 Foreign Bank 0 0 0 Savings & Thrift 0 1 1 Rural 1 3 3 Cooperatives 1 3 2 Others 5 3 0 Did Not Borrow 9 0 2 No answer 3 0 0 Did not want to answer 7 7 7

Total 30 30 30 A few inferences and can be made from the results:

1. There has been a steady increase in the share of local commercial banks in the SME lending process. This can only be attributed to a form of “reaching out” of local banks (whether universal or commercial) to SMEs, which in an indication of increasing competition to reach to SMEs in general.

2. Years 1995-2000 were the periods loan availment was high. Of the 21

that borrowed during this period, two did not borrow after 2000. The respondents attributed this to difficulties associated with borrowing in addition to operational efficiencies on the part of the SMEs.

3. Credit is an important catalyst for the growth and development of SMEs.

One would expect that with all the loans made by SMEs, borrowing would slow down. As can be seen, borrowing may have slowed down for some SMEs, but the general trend seems to be borrowing will continue for many of these SMEs.

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Table 16

Reasons for Loan Availment (Number of SMEs which ranked 1)

Prior to 1994 % to

total 1995-2000 % to

total After 2000 % to

total Accessibility 7 23 13 43 13 43 Interest Rate Competitive Pricing Flexibility

5 2

17 7

1 1

3 3

1 1

3 3

Processing Time 3 10 2 7 2 7 No Answer Given 13 43 13 43 13 43

Total 30 100 30 100 28 100

Note: Percentage figures may not add to 100% due to rounding. What is significant about the reasons for loan availment of SMEs is the change from interest rate pricing and flexibility before 1994 to accessibility after 1994. This is not surprising because many of the SMEs were starting prior to 1994 and were establishing their businesses based on the opportunities that were present during that time. As competition and expansion set in, the requirements of these SMEs were more on what available credit was there, paying less attention to pricing. Because market opportunities cannot wait, many of the SMEs opted to loan at the earliest possible time. This is not to say, however, that the SMEs do not consider the cost of borrowing. It is just that many of these SMEs are exporters, the dollar earners that can offset most of cost of borrowing.

Table 17 Bank Relationship Information

Total Number of Respondents = 30

Number % to total Did you approach your bank or were you approached? We were approached We approached them

20 10

67 33

Have you shifted banks? Yes No

5 25

17 83

Are you satisfied with the way your main bank/financial institution in terms of: Product(s)/Service(s) Rendered Provision/Access to Funds Financial Advice Financial Planning

30 30 15 15

100 100 50 50

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From Table 17, it can be seen that part of “reaching-out” of the commercial banks included SMEs, which is the reason why they were able to obtain many SMEs as clients. Likewise, SMEs have expressed satisfaction in terms of the services offered by their main banks, which are mostly local commercial banks. However, while SMEs looked to these banks for products/services rendered and provision/access to funds, they did not feel the same way in terms of financial advice and planning. Since many of the SMEs are still run by the owners, this observation is not all surprising.

Table 18 Foreign Bank Product(s)/Service(s) Availment

Heard Of Availed of

Product(s)/Service(s)

Name of Foreign Bank Yes No Yes No

ANZ Banking Group 7 23 0 30 Banco Santander Philippines 3 27 0 30 Bangkok Bank Public Co., Ltd. 3 27 0 30 Bank of America, NT & SA 15 15 2 28 Bank of Tokyo, Ltd. 6 24 0 30 Chase Manhattan Bank 6 24 0 30 Citibank, N.A. 27 3 7 23 Deutsche Bank AG 7 23 0 30 Fuji Bank/Mizuho Corporate Bank 5 25 0 30 HSBC Bank 27 3 3 28 International Commercial Bank of China 2 28 0 30 ING Bank 8 22 0 30 Korea Exchange Bank 2 28 0 30 Standard Chartered Bank 26 4 1 29

Total No. of Respondents = 30

Table 19 shows a great difference in terms of name recall and product/service availment. While many of the SMEs may have heard of the foreign banks, especially those “pre-RA 7721”, very few if ever have availed of their products and services. These are mainly personal credit cards of the owners, their relatives or their employees. The reason provided are obvious: they are not accessible and even if they are they feel these foreign banks will not seek them out as clients. About 75% of the SMEs surveyed, would, however, like to be approached as a client.

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In terms of their experience during the Asian Financial Crisis, the 9/11 attacks, and the oil crisis, of the 22 SMEs who shared their experiences, more than half (15 to be exact) were able to pay for their loans without interest or penalties since many of the SMEs are exporters. Also, some of the SMEs interviewed realize the importance of a better credit standing that is why they had to look for other sources, including personal borrowing to pay for the loan. Appendix A presents many of these stories.

Table 19 Credit Access and Availability of Loan Programs for SMEs

Total Number of Respondents = 30

Number % to total

Is access to credit a problem for you Yes No

19 11

63 37

Are you aware of the different loan programs available for your business? Yes No

15 15

50 50

Despite of the numerous credit programs available to SMEs, and the number of years they have been in business, those surveyed still feel that credit access is still a problem for them. Even more surprising is the perception that there is still a lack of awareness in terms of the different loan programs available for their businesses. These present serious implications in terms of SMEs, access to credit, and local and foreign bank participation in SME credit. Policy Discussions The SME Development Plan 2004-2010, (Strategy 5) articulates the financing support problems of SMEs:

Access to financing has been a continuing major concern. Past measures and strategies have not fully solved this problem. In formulating this Plan, the following issues were considered:

Overemphasis on collateral

Collateral coverage has been the primary condition of lenders, practically ignoring project feasibility. This has been cited as a major impediment to SME development.

Thus, more accessible and innovative credit guarantee system, through SBC is envisioned. Accessibility is foreseen in the form of lower guarantee fees and increased number of lending programs.

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Lack of credit information and highly centralized examination system Centralized and long processing of loan evaluation created project delays and backlogs.

Reinforcement of the guidance system to SMEs

Only a handful gets commercial bank credit because most SMEs cannot comply with borrowing conditions, like submission of financial statements and business plans. Further, assistance on loan applications is seldom provided by banks.

Financial institutions can provide assistance given their access to information on industries, markets, etc. However, banks do not have enough trained personnel to extend this service. Assistance to SMEs will be improved by exposing bank personnel handling SMEs to the same or related programs for SME Counselors.

Vulnerability of financial institutions

Many financial institutions are themselves small and do not have sufficient loan funds. Their consequent high costs are passed to borrowers. (GFIs mainly lend through these banks. GFI direct lending to SMEs suffers in comparison with “big ticket” lending or other investment opportunities to GFIs.)

Equity Venture Fund Establishment

Equity financing through the Philippine stock market is in its infancy, even as initial stages had been taken recently, thus:

Reinforcement of SME Board in the Philippine Stock Exchange

The SME Board at the Philippine Stock Exchange (PSE) which was to introduce emerging SME companies did not have enough attractive listings; only two. New listings must be followed through. Those with potential for listing should be provided incubation services that move them to IPO stage.

Fostering of investors and investment companies

The establishment of an investment company may be considered (perhaps a SBC affiliate). Since the investment business is substantially different from guarantee loan business in terms of risk management as well as fund management, the initial stage may be considered as a pilot project within SBC and should be spun off later.

Simplifying IPO requirements

The IPO requirements and operation policy may be reviewed to induce companies to do IPOs. The current IPO requirements include authorized capital of P 20-200 million, 25% paid up, net tangible asset of at least P 5 million, and operational for at least two years with positive operating income.

These requirements are too formidable for SMEs. Issues related to SBC credit guarantee system Poor reception by SMEs of financing facilities

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The JICA study findings indicated that half of the SME managers from five commercial banks and 40 SMEs were unaware of the credit guarantee system.

Lack of standard credit data

No organization provides reliable credit data. This significantly delays the evaluation of SME loan applications. According to SBC, it takes 2-3 weeks to examine an application for loan guarantees and, added to bank loan processing, takes three months for a loan to released.

The SULONG Program

Launched in 2003 by GFIs, SULONG accelerates lending to SMEs through the following features:

• A standard accreditation for (conduit) rural and thrift banks • Common guidelines and rates • Common loan application process

Being quite new, no evaluation has been conducted yet. However, early feedback indicates that the program had made significant inroads in promoting financing to the countryside, especially with the aggressive support of DTI field offices. It was indicated also that the program was not able to fund as much and as fast as intended to meet the huge demand for funding since the bulk of SME lending was primarily under the SBC program which limited the capacity of the system.

As a result of this assessment, The Long-term Development Plan recommended two activities (34 and 35) that promote supplementary measures to reduce the risk of SME lending and the development of a personal guarantee system. It is evident that the primary policy considerations revolve around lower the risk of lending to SMEs, a long-held view many agree. In reviewing the considerations and recommended policies and strategies in the SME Development Plan, the following observations can be made:

1. Special lending programs initiated by the government in the past, have at best fair results in delivering access to credit to the intended beneficiaries. As noted by Lamberte (1998), government directed programs did not have a significant impact on the performance of credit unions since credit unions emphasized savings mobilization in their lending activities. There is also an issue of treating special lending programs as a form of account management similar to what commercial banks are doing. Lending programs need to be marketed so that it can reach a wide number of potential clients. As it is, only SBGFC and the SULONG program have this capability. It is no wonder that many SMEs are unfamiliar with most of the 90 or so special lending programs. Credit guarantees can also partly solve the problem but this can result to operating inefficiencies as found by Ong, Habibullah, Radam, and Azali (2003) in studying a credit guarantee scheme in Malaysia.

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2. If government special lending scheme as treated like an account

management program in commercial banks, an incentive scheme can probably be structure for fund managers of these lending programs so that they can aggressive push for the availment of these loans by SMEs.

3. Information remains key in lowering the risk of lending to SMEs. As

pointed out in the SME Development Plan, even under a guarantee scheme, a substantial amount of time is still spent in credit investigation of SME loan applications. While a stand-alone credit bureau can address this problem, the cost of establishing one will not only be expensive but time-consuming. There is also the issue of the quality of information and the possible violation of the country’s Bank Secrecy Laws that may impede the creation of such a bureau.

4. The over-dependence on collateral is an important discussion point.

Given the inherent imperfections of the SME environment in the Philippines such as the lack of financial statements can be addressed by collateral assignment. However, most SMEs can only offer movable collateral given the size and scope of their operations.

5. Because SMEs offer movable collateral, banks and financial institutions

could find themselves in a situation where this collateral may have already been pledged elsewhere and they will only know that when the borrower defaults. A central registry of movable assets, when accompanied with an adequate credit investigation policy and spot audits can greatly reduce the inherent risk of lending to SMEs.

6. The information requirements work both ways. For SMEs, it is important

that they are advised that financial statements are still needed to be accomplished even if they are exempt from paying taxes. For banks and financial institutions, it is also important for them to realize that the because of the dynamic environment surrounding SME activities, they need to be flexible and more understanding in the plight of these entrepreneurs.

7. There is also a rich ground of research agenda recommendations that can

be made:

7.1 Yearly, mid-term, and terminal assessment of the SME Development Plan. This will allow the periodic monitoring of the progress and the adjustments that may be needed to ensure the Plan’s success.

7.2 Evaluation of the effectiveness of the 6% and 2% allocation under

the Magna Carta. As the expiration of the compliance draws near,

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it is essential that a study be made to determine whether there are enough reasons to extend the mandatory allocation.

7.3 Training needs assessment of both SMEs and banks and financial

institutions so that SMEs can be brought into “mainstream” lending. Bridging the gap in understanding lending to SMEs is best resolved by developing credit programs

7.4 Evaluation of the effectiveness of collateral vs. non-collateral

lending. A supplementary study to ones pioneered by Lamberte, et al, can add discussion to whether collateralized lending is more effective that non-collateralized lending.

7.5 In as much as SME lending follows the typical business cycle, an

empirical study can be made to determine the “break-out” in terms of lending requirements and whether there is an optimal credit requirement for SMEs.

There is no further discussion needed when it comes to access of SMEs to credit because all sectors concerned agree that more work needs to be done. As these sectors work towards effective partnershi, we may yet see the resurgence of a vibrant SME sector with formal financial institutions as their main partner in growth.

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Appendix A Case Studies

(Note: The companies in the study are disguised in keeping with the agreement of confidentiality as a pre-condition to agreeing to be interviewed. The coding are as follows: “MML” for Metro Manila and Luzon SMEs, “V” for Visayas”, and “M” for Mindanao. The numbers assigned are random and are in no particular order.)

MML-1 Corporation MML-1 was incorporated in 1999 and started its operations the same year. The factory is located in an adjacent warehouse at Valenzuela, Metro Manila. It is a sub-contractor, engaged in the processing of plastic materials to house ware, motor vehicles and agro-industrial accessories and appliance parts and accessories. The company vision is to be the leading manufacturer in the plastic industry as contained the following mission statements:

1. To provide continuous quality improvement in all its products and services to meet the customers’ expectation through the combined efforts and cooperation of each member in the organization.

2. To serve our external and internal customers effectively and efficiently by understanding and meeting their present and future needs.

3. To provide job security for its members and extend benefits within the capabilities of the company.

4. To protect the interest of stockholders as the company strives to give them the fairest return; and

5. To be socially responsible and law-abiding corporate citizen committed to environment-friendly operations.

Having been recently ISO-9000 certified, it also has a quality policy statement,

that is:

“We are committed to provide continuous quality improvement in all our products, processes and services to meet customers’ required specifications through the combined efforts and cooperation of each member in the organization.”

The company has 23 head office and plant employees of which 4 are

finance/accounting personnel. Since the start of its operations, the company has not changed its basic business

strategy in terms of its core operations, although it plans to subcontract bigger items from its present product lines. Capital requirements were initially based on the cost of

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machinery, leasehold improvements, and working capital. Its operations have remained purely equity, despite its steady business growth.

In fact from a P 900.000.00 loss from operations in 1999, it has achieved net

income after taxes of P 52,575.21 in 2000, P 62,803.26 in 2001, P 50,574.32 in 2002, and P 37,946.95 from net sales of P 7.5 million, P13.3 million, P 12.6 million, and P 10.9 million, respectively, for a return on sales range of about 0.5% average for the past four years.

Its overall strategy can be considered conservative, as the owners chose to finance

its requirements internally, with no dependence on debt financing. It has an authorized capital stock of P 20 million, of which P 18 million have been subscribed.

It conservative approach is also reflected in its banking strategy, as it has

remained to deal with only one bank thus far (Allied Banking Corporation), where it maintains several current/savings (CASA) and time deposit accounts. The company is highly satisfied with the bank’s services thus far and does not see itself shifting to another bank, although if the interest rate is competitive it might be persuaded to do so.

Of all the foreign banks under RA 7721, they are familiar with the International

Commercial Bank of China (ICBC), which is not surprising because of its Chinese origins. However, they have not availed of any of their products or services because aside from their overall satisfaction with their main bank, accessibility in terms of location is a major concern. (They are located in Valenzuela, which is quite far from the main offices or branches of these foreign banks.)

In terms of the future, they see China as a serious business threat, which can

threaten its long-term viability: “(There will be a) slow down in our business since there are lots of plastic products coming from China. (Also) high manufacturing costs (will) hamper us to offer a lower selling price… (There could also be a) possible alternating in the production line or reduction in manpower…12 Nonetheless, access to credit is not seen as a problem because the owners are in a

position to infuse more capital and that there will be more banks that will offer its loan products to them. 12 Actual survey response

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MML-2, Inc. MML-2 was incorporated in 1997, at the height of the Asian Financial Crisis, to handle the outbound shipments from the Philippines to the United States, Europe, and inter-Asia by ocean and air transportation. It initially established business relationships with steamship lines such as OOCL, Norasia, China Shipping, Wan-Hai Lines, and P&O Nedlloyd by supporting them with growing container volumes. It entered into the airfreight business with tie-ups with Nippon Airlines, Gulf-Air, Philippine Airlines, Air Philippines, and Asian Spirit. A year later, MML-2 set up offices in Cebu and Subic to meet the growing needs of companies, primarily exporters as they relocated their production and communication centers in these processing zones and in the process expanded the business as well. At the onset of its incorporation, the company is clear in its customer orientation, through its mission and vision statements:

Vision: MML-2 shall be the primary choice of every customer. We shall become the benchmark and standard by which other global cargo transport management are gauged.

Mission: We shall be your total business associate for cargo management and logistics requirement and your partner in achieving success in the global market by providing services that not only meet, if not exceed, your exacting requirements at all times.

To complement its strong customer orientation, it is a member of several industry associations such as the Air-Cargo Forwarders of the Philippines, Inc. (AFPI), Philippine Shipper’s Council (SHIPPERSCON), and the Through Transport Mutual Insurance Association of London under its mother company (TT Club). It is also affiliated with the Civil Aeronautics Board. As part of the larger group of companies, it has offices in North America (Los Angeles, San Francisco, Dallas, the Great Lakes, and New York in the United States and Mexico City in Mexico) and in Asia (Hong Kong, Singapore, and Beijing, Shanghai, Tianjin, Xiamen, and Shezen). When the business started, the company had decided that the financing requirements would be purely equity, owing to the high interest rates at that time (1997) and that the choice of the bank of bank or financial institution was going to be on the basis of proximity to the main office and through close association with the owners. Its overall organization strategy was based on what it called “entrepreneurial discipline”, the application of an academically based theory for its own strategies and policies.

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As a result of these and other initiatives, from its initial P 2-million capital, the company has steadily grown into a P 12.5 million business with revenues of almost P 85 million in 2003. In 2002, revenues were P 58 million, indicating an impressive growth rate of 43% from 2002-2003. Profits have doubled for that same period, from P 1.2 million in 2002 to P 3.5 million in 2003. The impressive revenue and profit figures have not only allowed the company to expand to packing and crating, customs clearance, and domestic forwarding services, but also lessens its dependence on debt financing. Its relationship with its seven (7) banks are along the traditional services such as current and savings (CASA), time deposits, credit card facilities, and cash backed guarantees as it is in the exporting business. Of the seven banks, three (3) are “foreign”13: Standard Chartered, HSBC Bank, and Citibank. The only loan the company undertook was for a purchase of delivery vehicles as part of its car loan program. The loan application was made with relative ease:

“To be honest, it (the loan) was just a phone call away to our bank informing them of our need of a loan to procure a delivery van and in no time the credit was approved and it was submitted to the truck dealer for the processing and release of the delivery van…I was only required to sign a few documents/contracts for the loan…The collateral was the delivery van itself…”14 The strength of its relationship with one of their banks was tested when the

company almost shifted to another bank because of an unpleasant experience with the manager. This was resolved when the said manager was replaced. While complaints of bank staff, the manager included, are not uncommon, replacing the staff, in this case the manager is quite rare. This, as well, as what the company terms as “the bank’s personal touch”, security, products and services and rates, were the reasons cited for their choice to remain with the seven banks they retain to this date. In fact, most of the banks were with them when they started the business.

This puts the foreign banks in a serious disadvantage. While they have heard of

most of the foreign banks in the survey (ANZ Banking Group, Banco Santander, Bangkok Bank, and International Commercial Bank of China were banks that they have not heard of), they only deal with the three foreign banks mentioned earlier. The company would rather deal with banks they are familiar with:

“…It would suffice to say that not all that provide (banking) services and/or products do it with a heart (sic). It was always better on our part that service and/or product providers were either referred by a family/an esteemed colleague or a personal acquaintance.”15

Shifting to another bank, even a foreign bank is not likely as they are quite satisfied with how their present banks have treated them: 13 The term “foreign” in the context of this study are those that have been granted licenses under RA 7761. 14 Actual interview response 15 Actual interview response

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“(The main bank) treats us always as a first priority whenever we conduct our business at their premises.” Overall, it would come down (sic) to the banks’ personal touch to their clients/depositors, security, services, products, and rates.16

While it was able to quickly establish itself during the crisis years of 1997 and 2001-2003, it sees approaches the future with caution:

“Considering our exports have substantially decreased for the reason that China has become a major player in the exportation of goods and commodities and that new companies in the freight forwarding/logistics industry continue to sprout would definitely mean a fierce competition amongst (sic) import/export service providers; whereas buyers are always on the look-out for better if not best services, the lowest rates and in the least amount of transit time for their goods and commodities.”17

Despite its improved credit standing, the company does not see itself changing its strategy of debt financing, although they are aware of the different loan programs available for their business:

“At present, loan access and availability does not pose a considerable amount of a “tight spot” (sic) since it was beneficial for us (the company) that we were able to establish ourselves early on in the industry…It would then be safe to assume that in the near future, if (we) the Philippines would not place ourselves to increase our exportations (sic)…we would (then) be faced with a definite uncertainty of an unstable foreign exchange and thorny (sic) access to loans and availability to funds.”18

16 Actual interview response 17 Actual interview response 18 Actual interview response

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MML-3, Inc. One of the few businesses which started during the early 1980s at the height of the country’s economic crisis, this company is considered to be a pioneer in the industry. Led by its chairman, who has forty four (44) years of experience in the industry, this company has seen many trials over years and has continued to grow steadily. The owner’s stamp is seen in the company name, which is his moniker. Already ISO certified in 1998, the company believes in the following vision, customer pledge, and value statement:

Our Vision: For MML-3 to be the best provider of an integrated transportation and logistics service with a solid reputation of intensive customer focus through comprehensive quality system.

Our Purpose: To achieve MML-3 success to be a global business corporation exceeding customer’s expectations and meet all transport commitment through responsibility shared by everyone.

Our Customer Pledge: Our customer is our reason for being. We shall have solid reputation for exceeding customer’s expectation. We shall offer (him) service of right quality based on international standards. We shall continuously nurture professional relationships with customers through constantly improving our system. Our name is our promise.

Our Value Statement: Integrity, Quality Service, Customer Driven, Trust, Continuous Learning, Spirit of Champions

The company believes that teamwork, innovation, and a true commitment to customer satisfaction have kept the company at the forefront of the industry. The company draws not only on its own years of experience in freight forwarding, but also in the relentless pursuit of the latest trends and developments in the field. As an ample reward for its effort for almost 25 years, its revenues jumped by almost two and half times to P 32.1 million in 2002 from P 9.3 million in 2001. This is despite the highly competitive pricing prevalent in the industry. The result dramatically increased their net income to close 2002 with a P 1.9 million profit as opposed to a net loss of almost P 2.8 million in 2001. From its authorized capital stock of P 5.0 million, MML-3 is now a P 25.0 million business in terms of assets. At present, it has its main office in Makati, with several branches strategically located all over Luzon. It has also a branch in Cebu City where majority of the exporters in the South are located. It is member of several local and international organizations

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such as the International Air Transport Association (IATA) and the International Federation of Freight Forwarders Associations (FIATA). It has also participated in international exhibitions over the years, the most recent being in Shanghai in March 2003. This company has about 85 employees, mostly located in its head office in Makati. By current definitions, it is considered a medium scale enterprise. Currently into international freight forwarding, warehousing, and brokerage, it plans to move into third party logistics and distribution in the future. The company engages the services of six (6) banks, namely BPI, Prudential Bank, Union Bank, Metrobank, PS Bank, and Security Bank. Most of the products and services that they have availed of these banks are the “common” ones such CASA, investments, time deposits, and dollar time deposits. Location is a primary consideration for the choice of the bank and they have shifted from one bank to another due to its proximity to the head office. They recounted an incident with one of their banks were they considered shifting because of the red tape and tedious set of requirements requested for an approval of their bills purchase, although as of the present they are quite satisfied with the services being offered and being accessible. They feel, however, that the present banks should be more pro-active in providing financial planning and advice. In terms of loans, they have availed only of PS Bank’s loan services, primarily for car, vans, and tractor head financing. All of the loans are still at various stages of maturity. In terms of the foreign banks, while they have heard of most (Banco Santander, Bangkok Bank, Fuji/Mizuho Corporate Bank, and International Commercial Bank of China were the banks they have not heard of), they have not availed of any of their products/services, except for Standard Chartered Bank (for investments), which they have discontinued since. The reason they gave for the non-availment is what they termed “no products/services enhancement”, which meant that the products/services they offer is the same as the local banks. For the future, they see China as a threat as the country continues to offer more incentives for businesses to be set up there. If this happens at a rapid rate, it could seriously affect their forwarding business. As far as the credit market is concerned, however, the company does not have problem with accessing credit and is quite aware of the credit programs available for their business.

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MML-4 Corporation MML-4 is a 10-year old company, primarily dealing with rental of real estate and property development. It has lean staff of five (5) employees and is based in Quezon City. Initially, it opted for a 50-50 debt equity mix based on the initial project. The Asian Financial Crisis made the company more prudent in the financing mix because of the credit tightening that followed. The company uses the services of two (2) banks: BPI Family Bank and East West Bank, for a term loan and CASA, respectively. However, the company’s banking history is worth noting: Prior to 1994 – the company availed of a developmental loan released on a staggered basis from RCBC to commence the development of their first project in Manila. While the loan was accessible and the processing time was sufficient, the loan was not priced competitively and there were some problems in the flexibility of the interest rate. From 1995-2000 – the company availed of a developmental loan from DBP after RCBC cancelled all their unreleased credit line. The Asian Financial Crisis brought about the abrupt cancellation and they had to resort to bridge financing which cost them “an arm and two legs.” They then transferred to BPI Family Bank for a term loan. As in the case with RCBC, interest rate pricing and flexibility was a concern for the company. After 2000 – the company remained with BPI Family Bank. The idea of the term loan was to leverage this with their equity infusion for a project they were involved with. They were able to establish a business relationship with BPI Family Bank through a friend who offered a better price, higher credit amount, and more flexibility. Aside from the usual documentary requirements, they secured the loan with a mortgage on the project/property in Manila. In terms of the foreign banks, they have not availed of any of the services, because they know that they are small company and that their perception is that these banks only service the big multinational firms only. In the future, they see that the current wait-and-see attitude of businessman is affecting their business, although they do not see that access to credit is a problem for them. They would like to be more aware of the different loan programs available to them so that they can get a more flexible term loan to enable them to proceed with their other development projects.

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MML-5 Corporation This ten-year old company is in the manufacture of a well-known ready-to-cook and ready-to-eat prawn crackers. Currently, they have twelve (12) flavors of ready-to-cook and four (4) ready-to-eat prawn crackers. Their head office and distribution facility is based is the Binondo area which has five (5) employees. They also have a manufacturing facility, which has six (6) employees. The company is quite successful in terms of marketing and distributing their products to which they attribute to advertisements and complemented by a wide distribution network. Also, they are able to continuously provide strict supervision in terms of production, finance, and operations so that the high quality of the product is maintained over the years. Proof of this effort, is that while sales may have gone because of competition, overhead costs, rejects, and wastages have also gone down, as there are more efficient ways in manufacturing the product. Much of the company’s growth is internally financed and to the recollection of the person surveyed, they are debt-free and the person could not recall having obtained any loans in the past. In terms of the banking requirements, they have three savings accounts spread over three commercial banks. They have no plans of shifting banks as they are quite satisfied with the service (described as good and reliable by the person interviewed) provided by these banks. Among the foreign banks mentioned, they company has heard of all except Banco Santander, Bangkok Bank, ICBC, and Korea Exchange Bank. Surprisingly, despite being in the Metro Manila area, they are not interested to avail of the products/services of these foreign banks because they have “enough banks to meet (our) needs.” They, however, keep abreast of the performance of their present banks because of recent news involving some banks having liquidity problems because this is the only reason why they would shift to another bank.

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MML-6 Handicraft This seven (7) year-old Baguio-based company operates from the owner’s residence where she makes finishing works of handicraft and hand-woven products such as wallets and bags from the Mountain Province. There are ten (10) regular employees, including the owner, the other seven (7) are her relatives and only two (2) are not related. Being a family-owned business, the owner’s mission is to continue this business and expand in the future. The initial capital requirement was obtained from personal savings. As the business grew in the late eighties and early nineties, she borrowed for additional working capital from a rural bank. She also was a member of several cooperatives and thus was able to avail of a personal loan that she used in the business. After 2000, however, she stopped borrowing from these institutions and just borrowed from friends in the event of additional financial requirements. Accessibility and processing time were the main reasons why the owner availed of a loan during the periods mentioned. Because of the company’s location, they have not heard nor have availed of any of the products/services of the foreign banks mentioned. The owner also feels that since these are foreign banks, they might not be able to meet the requirements. The owner recounts an experience in obtaining a personal loan from one of the cooperative rural banks in the area. A friend referred the said bank to her and part of the requirements was for her to have two co-makers of guarantors who are members or customers of the said bank. The requirements were relatively easy: identification card, barangay, and NBI clearance, and a business permit. Collateral was required and she put up some appliance and the tax declaration for the house. Processing time was estimated at one week, which she was able to get. That loan was eventually fully paid. Since their operations was limited, they were not affected by the Asian Financial Crisis and the 9/11 attacks, although the sales were seasonal as it was dependent on local and foreign tourists. As far as the future is concerned, the main threat to the long-term sustainability of the business is the total ban on logging which could affect their revenues and with the recent typhoons visiting the area; the call for the total ban is becoming a reality sooner than later.

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MML-7 Handicraft From a shop near the owner’s residence that serves as the finishing area, this ten-year old handicrafts company is another family-run business in the Baguio area. Three regular employees run the company and if there are additional orders, other relatives and contractual come in to help. The difference this company with the others in the area is their lower-priced but high quality products which attracts many customers. When the business stared in 1994, the capital required to put up the business was from the owner’s personal savings augmented by borrowing from friends and from cooperatives in the area. As the business grew, the working capital requirements were funded from the said cooperatives. Two commercial banks serve as saving account depository and a current account, respectively, which they have maintained since the start of the business. However, because of the smallness of their account, they have not yet tapped the loan facilities of the commercial banks, opting instead to borrow from the cooperatives. As such, they have not heard of nor plan to avail of the products/services of the foreign banks in the survey. As far as the business is concerned, they are one of the more competitive ones in the area and in the owner feels that the business is doing good. However, their expansion is limited because their access to credit remains through personal loans or through the cooperatives and they do not see themselves being eligible to loan from a commercial bank in the future.

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MML-8 Handicraft The third of the handicrafts SMEs in the Baguio area, their story is similar to the first two. What is difference from this fifteen-year old SME is that they had availed of loans from lending companies and a cooperative in the past, but has since paid for all of them. Because of the difficulties in meeting payments, the company has remained debt-free since 1995 and the owner is not inclined to loan in the future, which explains their non-interest in hearing of, or even availing of any products/services of any of the foreign banks mentioned. This is even more surprising because the company does not have a depository bank for the business, just the owner’s personal account.

In terms of her loan experience, the owner recounted when she applied for a loan with a financing company. Two co-makers where asked from her, aside from an application form, business permit, and a court clearance. No collateral was asked from her, since the co-makers served as guarantors. Accessibility was the main reason for availing of the loan.

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MML-9, Inc. This ten-year old SME based in a residential subdivision in the Makati area initially started in the ready-to-wear, made-to-owner garments business, but has shifted to corporate uniforms. The shift to corporate uniforms was due to the competition from lower-priced garments from China. At present, it has seven (7) sewers and about 24 on call. Their ability to stay strong in the business despite fierce competition is due to their reputation as a former supplier for Rustan’s and they are a sub-contractor for imported brands. The owner describes their designs as “chic yet comfortable” and “the garments are durable.” As in many SMEs, the owner’s personal savings and borrowings from friends provided the initial capital of the firm. As more and more orders came, the financing requirements were obtained from the bank nearest the office/shop. Prior to 1994, there was a back-to-back loan and a mortgage loan made the company. By 1995-2000, the company availed of a two-million loan against T-bills and a five-million backed by a house and lot. All of the loans were eventually fully paid. After 2000, the financing was primarily through bills purchase. Accessibility and pricing were the main reasons for availing of the loans. Despite the many alternatives it had in terms of financing and its proximity to the Makati Business District, it has not availed of any of the products/services of the foreign banks mentioned. The owner feels that these banks have “too restrictive screening procedures” and that they should “act more like business partners and not just after interest or repayments.” Access to credit is seen as a problem by this company and that the owner is unaware of the different loan programs available for the business because they do not know it there are banks that can provide trade loans.

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V-1 Co. First registered in March 1997 under a different name, the company was renamed in January 2000 after a new management took over. It is engaged in the production and processing of rattan poles, wickers, and other rattan by-products for various Cebu-based rattan furniture makers. The new management is evenly divided among two siblings and an outside partner, the latter being invited because of his extensive business contacts with suppliers and buyers of rattan poles. Most of the rattan exporters in Cebu get their requirements from the company because of its reputation for prompt delivery and good quality products. The firm’s factory is located in Mandaue City, with a lot area of 2,000 sq. meters. Two buildings in the lot serve as the production area and the administrative office. At present, it maintains fifteen (15) daily-rate workers and three (3) office personnel. As with any typical SME, the company based their capital requirements on the initial orders they received. Down payments are expected from the buyers before they start. Based on the their financial profile,19 it has had steady but positive net income over the last three (3) years: P 4.2 million in 2000, P 4.3 million in 2001, and P 4.9 million in 2002, or roughly 8% average growth yearly. According to the General Manager, this represents a return on sales average of 20.4%. At this rate, if the sales estimates for 2003-200420 hold, then the income for this period will be close to the 8% average growth from 2000-2002. This rather healthy financial performance is also reflected in its positive capital balances over the past three years. This is also supported by an increasing current ratio of 2.0 in 2000, 3.8 in 2001, and 4.9 in 2002. Net worth is estimated at about P 8.4 million. In terms of credit and collection, even if it gives its buyers a 30-45 day credit term, cash flows are not expected to be tight because they have a high collection rate. This rate of efficiency is also extended in their production process as inventory turnover is estimated at an average of 28 times over the past three (2000-2002) years. The firm’s financial transactions are handled by the General Manager and assisted by an external auditor which also takes care of in administering government and other external requirements. V-1 attributes their success in terms of providing good quality poles, with very little rejects or returns and in excellent working relationships with clients. With the rattan

19 V-1 did not provide financial statements. The figures quoted here are based on the interview with the General Manager. 20 V-1 operates on the fiscal year basis from July to June.

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business seen as a gradually increasing over the short to medium term, it has no plans of going into other business, choosing to stick to their field of expertise. The story of V-1 is typical of many SMEs, owners pooling their resources based on orders, using most if not all, equity, and choosing a bank or financial institution based on whom they know. From time to time, they would resort to borrowing money from informal lenders to bridge finance, knowing that when they complete the contract, they will be able to pay back the loan quickly. At present, it has two (2) depository banks, one local and the other the Land Bank, where they also have a credit line. They are quite satisfied with the accessibility, interest rate flexibility, and processing time and are unlikely to shift to another bank. They also have a credit line Phil Exim to augment their resources. As far as the foreign banks are concerned, they have only heard of Citibank and HSBC, but have not availed of their services. They feel that there has not been enough information provided to them by these banks and that they also feel that they are not their target clients. This lack of information is also reflected in their access to credit. They feel that access to credit is problem and that they are not aware of the different loan programs accessible to them. This is rather unfortunate because they see good prospects for the business in the short to medium term.

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V-2 Designs V-2 Designs is a single proprietorship and is engaged in the manufacture and export of rattan furniture. Prior to managing V-2, the owner was a supervisor for an export company based in Mandaue City, Cebu. Seeing an opportunity to have his own business, he established V-2’s forerunner in 1991, serving most of the rattan exports in Mandaue City. In 1999, the owner decided to change the name V-2 Design where he continues to actively manage it until this day. For the past three (3) years21, good sales figures have resulted in a positive net income of P 6.2 million in 2001, P 13.6 million in 2002, and P 25.3 million in 2003. According to the owner, the average profit margin is about 19%. The increasing trend in sales is expected to grow to further grow in 2004; preliminary figures indicate that net income will be slightly higher than the P 25.3 million in 2003, although it is not expected to double as it had been over the past three years. V-2 does not have a problem with working capital and its current ratio has improved significantly in 2003 due a decrease in current liabilities from P 3.2 million in 2002 to only P 0.5 million in 2003. It maintains two factories and has about twenty (20) daily workers, ten (10) on a piece rate basis and eight subcontracts with at least ten (10) people for a total of 110 personnel. It has a lean head office staff of two (2). The success of V-2 is in its ability to provide good craftsmanship and on-time deliveries, a reputation that is quite well known in the Mandaue City area and its immediate surroundings. Because of this, it does not see any problems in getting orders over the next few years. Since most of the business is self-financed, its banking requirements are quite modest. It current maintains two banks, PNB and Land Bank for its deposits. Being satisfied with their products and services, it has no intention of shifting to another bank in the future. It also has a credit line with Phil Exim which it draws on occasions. With Phil Exim, it availed of its credit line to finance incoming orders. While it is not a bank, the procedures in availing of a loan followed a similar process as a bank. It had to submit the usual documentary requirements such as their DTI registration papers, financial statements, list of buyers and suppliers, and company profile. A plant visit was also conducted as part of the requirements. Real estate was part of the collateral that the company had to put up.

21 V-2 Designs did not provide financial statements. The figures are based on the interview with the proprietor.

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In availing of the loan, the company was quite satisfied in terms of the accessibility and pricing, but not as equally satisfied in terms of flexibility and processing time. Unfortunately, they have not heard of any of the foreign banks mentioned. They would like, however, to be informed of their products and services, although they also understand that these banks are not likely to approach them. Further, they are unaware of the different loan programs available to them and they feel that access to credit is a potential problem for them.

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V-3 Export V-3 Export is a single proprietorship engaged in the manufacture and export of rattan furniture such as chair, tables and beds, as well as accessories. The owner has been in the export business since 1983. She was the production manager of Bohol Native Crafts and Arts, a Cebu-based exporter from 1982 to 1988. In 1990, seeing the potentials of a booming business, she decided to establish V-3 Export, initially as an exporter/manufacturer of handmade baskets made of buri and other indigenous materials. Seeing further the better business potential in rattan, she started doing rattan furniture which is the company’s main line until today. The owner’s hands-on management style is reflected in her plant location which is also her residence. The company consists of 110 people, some of them subcontractors while the rest piece rate and daily workers. All of V-3 Export’s products for 2003 were shipped to Australia, where her products are well received. Sales dipped in 2003 because of low shipments. This, however, did not affect the overall business profitability as it earned P 1.9 million. In 2002, income was P 3.0 million and P 0.964 million in 2001.22 In terms of working capital requirements, the company has not experienced problems and most of its operations were internally funded. Raw materials were procured on a 30-day credit term from its Cebu-based suppliers and since there was a down payment per order, borrowings were kept at a minimum. It is significant to note that the shift from buri to rattan entail additional capital and the owner, through the help of her business partner was able to infuse equity, thus lessening the dependence on borrowing. At present, the company maintains two depository accounts and has a revolving credit line with Phil Exim, which it taps from time to time since 2000. Phil Exim was chosen on the basis of accessibility and competitive pricing, and less on flexibility and processing time. While the owner considers Phil Exim as a partner in their business, they cannot say for the two commercial banks where they have deposits. Being a “small time business”23, they company has not heard of any of the foreign banks mentioned and neither do they want to avail of their services, primarily because they are satisfied with their current banks. Further, they feel that credit access is not a problem for them but they are unaware of the different loan programs that are available for their business.

22 V-3 Exports did not provide financial statements. The financial figures were based on the interview with the proprietor. 23 Actual interview response

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V-4 Designs Starting with an initial capital of P 200,000.00, V-4 Designs is a single proprietorship engaged in the manufacturing and exporting of rattan furniture and accessories. In order to maintain capital adequacy, it maintains three banks, one for deposit purpose and the other for their credit line. In terms of their credit line experience, prior to year 2000, they ranked accessibility as very important, where as competitive pricing, flexibility, and processing time less important. After 2000, owing to the credit crunch experience by many small businesses, all of the four considerations were given the highest importance. In availing of (packing) loan from the two banks, rattan shipments and real estate were used a collateral to process the loan. Documents such as DTI registration, financial statements, list of buyers/suppliers, and the company profile were required. And because of this proximity to the bank, no extensive plant visit was made. Since the line was used for job orders where payment to the company was not a problem, they have been able to pay on time and sometimes even earlier, which is why they can easy pay the line without interest charges even during the Asian Financial Crisis. However, they feel that business in the future is going to be slow due to the presence of competitors. Despite calls for a total log ban because of the recent typhoons that hit the country, the owner does not see the same problem with rattan since it is a minor forest product; it does not pose a significant impact to the forest cover. The owner feels, however, that their business needs more help from the government since it is a significant dollar earner.

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V-5 Enterprises V-5 started from the proceeds of the separation pay of its President and General Manager, and a six-month cash advance (without interest) from its local supplier. It is in the business of processing seaweeds (carageenan) with its head office in Cebu. It has a small plant in Zamboanga were the seaweeds are processed. It was not difficult for the owner to look for financiers since he has built a business reputation for over 35 years. This company is his third business venture and is about five (5) years old. As his business expanded, a local commercial bank lent him funds for additional capital with his house and lot as collateral. This was later complemented with a revolving credit line with TIDCORP/Phil Exim. Unlike the loan from the local bank which was long-term, TIDCORP/Phil Exim offered only short term financing. And while the local bank was the first to offer him a long-term loan, he is not satisfied with this bank’s services and would like to look for another bank. Part of his problem is that he has inspite of the product; he has difficulty in getting access to credit and would like to know more about the various credit programs available for him. He has not heard of any of the foreign banks, but he is not interested to avail of their services as he feels he is just a small business.

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V-6, Inc. Exotic Island is a sixteen-year business engaged in the manufacturing of furniture made of rattan, wicker, bamboo, combination of wood, rattan, and abaca, and other indigenous materials. It started out from a loan of its buyers of US$ 10,000.00 provided at no interest. Because of the number of years it is business, it has established a network of local and foreign banks for its requirements. Four local banks are its source of letters of credit, and one foreign bank to handle its dollar transactions. Its audited financial statements in 2001 and 2000 showed net income of P 0.7 million and P 0.5 million from sales of P 21.3 million and P 14.9 million, respectively. As of 2001 it has asset of almost P 10 million. It judicious use of banking services can be seen in its utilization of different banks for its loans prior to 1994, from 1995-2000, and after 2000. While it has used one bank for the two periods, it looked for other banks following the difficulties experienced by their first bank. 24It was also in the 1995-2000 period that they availed of the services of a foreign bank for their requirements, including a personal loan and credit card services. Of the foreign banks surveyed, while they have heard of most banks (ANZ Banking Group, Banco Santander, Bank of Tokyo, Ltd., ING Bank, and Korea Exchange Banks were the banks they have not heard of), it is only the present foreign bank that they have availed the products and services of. They feel that there is no need to look or shift to another bank, as they are quite satisfied with the products and services offered. Because the company earns in dollars, they have not had a problem in cash flow and working capital even during the Asian Financial Crisis, relying primarily on the strength of the US dollar. However, with the resurgence of the other currencies as well as the increased competition, profit margins have been going down.25 As such, access to credit is not a problem for them and that they are aware of the different loan programs available to them. 24 That bank was eventually absorbed by another commercial bank. 25 Only audited financial statements for 2001 and 2002 were provided.

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V-7 Export V-7 Export is an 11-year old exporter of wood and stone cast products. It started out in wrought iron and stone craft furniture and shifted to its current line in 1996. The shift to wood and stone cast products represented a significant change in its operational and financial structure. When it began its business, it had a balanced mix of debt and equity. It had an initial capital of P 600,000.00 and rest was borrowed from two commercial banks. As the business grew, however, it stopped business with one of those two banks and just concentrated on the remaining for its working capital and other loan requirements. Accessibility of both banks was ranked as the main reason for choosing them at that time. At present, the company maintains accounts with eight other banks: Allied Bank – dollar savings account Bank of Commerce – time deposits BPI – time deposits China Bank – time deposits Citibank – time deposits Philippine National Bank – additional working capital loan Standard Chartered – time deposits One unnamed provincial bank – time deposits Realizing the importance of diversifying its operating and financing requirements, the company has heard of almost all of the foreign banks mentioned in the study except for ANZ, Banco Santander, Bangkok Bank, ICBC, ING, and Korea Exchange Bank. In fact it has availed of, and is quite satisfied with the services of the two foreign banks mentioned above and is similarly interested in availing of the services of the other foreign banks enumerated in the survey. The shift to one main bank is quite a story in itself. V-7 is one of those companies candid enough to admit it was affected during the Asian Financial Crisis. When it approached one of the banks, it did not give them a loan to help them during the crisis and as result they had to pay penalties for an existing loan. Consequently, it was decided not to retain the said bank. This sad experience has made the owner handle its own financial planning and feels that even with their main bank, the company feels that it is “just sometimes” a partner in their business. The recovery during the Asian Financial Crisis was again repeated in 2002-2003 and in early 2004, they company sold one of their two factories. The reduction has shrunk their workforce to 80 employees and about 300-400 contractual workers from almost double when they still had two factories.

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Quality, however, has remained high and their markets in Europe and the United States are satisfied with their workmanship. In fact, the owner is now optimistic of its medium to long-term prospects and plans to diversify into other raw materials and accessories. V-7 is quite unique as it is one of the companies which has a vision-mission statement, in that it wants to achieve “profits with social obligation”. Aside from more than adequate hospitalization and other benefits to its employees, it has scholarship program which it started last year. As far as the future is concerned, the company sees that it has no problem in terms of access to credit and is quite aware of the different lending programs available for its business to grow as it sees higher interest rates as the 2004 progresses.

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V-8 Corporation V-8 is a 25-year old exporter that started out using buri and rattan as raw materials but has since diversified into wood, wrought iron, and cast stone. Its main markets are in the United States and Europe. Being one of the oldest companies in this survey, V-8 is highly diversified in terms of financial and banking requirements. With its initial capital of about P 1-million, it complemented its financial requirements with omnibus (“clean”) line from its main bank as well as a raw material loan from State Investment House, a local financial institution. This enabled the company to quickly expand its business and allowed it to venture into more markets. It prides itself on being able to delivery quality products at a reasonable price plus on time delivery. It has two factories employing 300-400 contractual/piece work personnel and plans to open a third plant in 2005. The diversity of its financial requirements is found in the following banks and financial institutions where it does it business at present: Development Bank of the Philippines – long-term loan Equitable Bank – long-term loan Metrobank – credit line Solid Bank – export credit line Technology Livelihood Resource Center (TLRC) – long-term loan UCPB – long-term loan Union Bank – export credit line In addition, it had obtained various loans from Far East Bank and Solid Bank where it has since been consolidated with BPI and Metrobank, respectively. Its main reason for availing of loans with several banks and financial institutions is interest rate, followed by accessibility, and processing time. As it keeps abreast with the different loan programs available, it’s very much familiar with all of the foreign banks mentioned except Bangkok Bank and Bank of Tokyo. As a matter of fact, it had a letter of credit with Bank of America and is currently maintain a (credit card) loan with Citibank. V-8 is one of the companies in the survey that has not had a problem in loan access and paying up their loans.26 They claimed not to have been affected by the Asian Financial Crisis or any slowdown in demand and earnings and is quite aggressive in terms of its outlook in the future. 26 No financial statements were made available and the financial status is based on the interview with the owner.

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V-9 This ten-year old woodcraft company started as a sub-contractor and is now into direct exports. When the business started, the capital requirements were funded from the owners (a husband and wife team) personal savings. As soon as the orders increased, they had to resort to borrowing from formal and informal moneylenders. It was when they opened several depository accounts that they decided to apply and was granted a credit line with a maximum term of 180 days. The credit line was a big help to them as it allowed the company to expand their business. At present, they maintain three depository banks, two of which have extended a credit line for their business. Accessibility, interest rate, and processing all ranked the highest in terms of the main reason why the loans/credit lines were availed of. To augment their credit standing, they applied and were granted a credit line with Phil Exim. As for the foreign banks in the study, they have only heard of Citibank and HSBC Bank but have not availed of any of their products and services. Since business is doing well, they have not encountered any problem in paying off their loans and that credit is not a problem for them. They also are aware of the different credit programs available to them and they plan to use them as they expand their business in the future.

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V-10 V-10 is a single proprietorship that is engaged in the carton business. It started as a supplier of carton boxes to exporters and its initial capital was from the owner’s (husband and wife) savings. However, the business closed as competition increased and they are not a sub-contractor for a big Cebu-based exporter. Just like many in the business, the growth of the business was funded by borrowings from formal and informal moneylenders. Unfortunately, the cost of lending proved costly for them as they were unable to generate enough sales to pay for it and they had to scale down their operations. At present, they have three banks which serve as their depository accounts. The said banks also provided a credit line for them which they use on occasion. As far as they are concerned, they are satisfied with these banks and they have no plans of shifting.

The company also has a credit line with Phil Exim which they have availed of previously.

Citiabank, HSBC, and Standard Chartered are banks which they have heard of, but they have not availed of any of their services or any of the foreign banks mentioned. They, would however, like to be approached as a client. Because of the precarious situation they were in, they were unable to pay for a previous loan during the Asian Financial Crisis. They also feel that credit access is a problem to them and they are not aware of the different loan programs available to their business. They remain confident, nonetheless of their credit standing in the future because they already have a credit line.

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D-1 Company D-1 started with an initial capital of P 145,000 and sells durian products for almost ten years now. Its main market is the Davao area. Its owner, a doctor by profession looked at the business as a past time at first and decided to fully venture into it after seeing the numerous potentials. It prides itself as having good quality in terms of taste and service and as being reasonably priced. The novelty in their approach is the custom-design of its bottles that resembles cans and its attractive packaging makes it a hit among its buyers. Including the owner, the business is small, having five workers in all. The smallness of its operations is also reflected in its financial and banking requirements where it has stuck to one bank (China bank) all of this time where it maintains a current and savings account (CASA). It has not ventured to establish any business relationship with other banks and is quite satisfied with the products/services its present bank has provided them. While not directly related to its current business, it availed of a loan with DBP to plant rubber trees, using the land as collateral. The cumbersome, time consuming, and bureaucratic procedure of getting a loan turned off the owner that he decided that it would not avail in the future of any form of financing. It is not a surprise therefore that it has not heard and would not want to avail of any products/services of the foreign banks mentioned in the study. While the owner sees good short to medium term prospects for its business, it is not that optimistic in the long-term.

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D-2 Company D-2 is a ten-year old printing company that was set up from the savings of its owner. Initially, they had a small printing press and one offset machine that were only capable of printing deposit slips, manuals, and other materials that did not require pre-numbers. In about a year into its operation, they were able to upgrade their machines so that it can be capable of producing pre-numbered materials. This is one instance when the timely intervention of its bank was able to increase the business several-fold. The amount that was borrowed diluted their capital structure from 100% equity to a 75% -25% debt to equity ratio. At present it maintains two depository banks, the more recent was the one that provided them with the loan that allowed them to upgrade their machines. The other bank is not only their depository bank, but it is also one of their main clients. As a result, the company is able to have a standby loan and credit line arrangements should the need arise. They used to have a savings account in the cooperative bank nearby but have since withdrawn their account. In terms of the reasons for availing of the loan, pricing and processing time ranked the highest for the standby loan, whereas for the credit line it is accessibility and processing time that was ranked the highest.

Because of their limited financing and banking requirements, they have not heard of any of the foreign banks except for Citibank where several of the employees (numbering about 20) have a credit card. Besides except for Citibank, none of the foreign banks mentioned have a branch near their office/plant.

As far as the future is concerned, the company plans to further expand their

business by offering more products and upgrading their equipment to enable them to produce materials faster and more efficiently. The company feels that money will be tight in the near future and they feel that access to credit is a problem and that they are unaware of several financing programs available to them.

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D-3 Company D-3 is a five-year old business engaged in the manufacturing and selling of wax, candles, and candle making materials. It has one office in Davao City which serves as its selling area and one plant nearby. It has a total of 11 employees, 8 of which are based in the plant. Being a relatively small business, it financing requirements are quite limited. When it started the business it had 100% equity based on the owner’s personal funds. It has not availed of any loan since its inception, preferring to manage its growth through internally driven funds. When there are working capital requirements, the owner supplies from her own pocket. It maintains a CASA in two banks, Metrobank and China Bank and has not shifted and does not plan to shift to any other bank in the future. In both banks, they were ones who approached the banks, instead of the other way around. Since it is relatively debt-free and chooses to remain debt-free, it is not interested in any of the foreign banks mentioned. They, however, admit that while sales are “alright” the profit margins have reduced. 27

In terms of the overall credit situation, access to credit is not a problem for them

and they are aware of the different loan programs available for their business.

27 No financial statements were provided and the sales and profit margin claims are based on the interview with the owner.

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D-4 Company When the company offered early retirement for its employees, the owner (who was a chemist in the said company) decided to take up the offer and from the proceeds of her retirement pay set up a distributorship of construction chemicals servicing the Mindanao area. Initially, she was allowed to have a credit limit of P 1 million and together with the retirement pay formed the capital structure of the distributorship. At present, the company operates in Davao, where the head office and warehouse is located. There are six (6) regular employees for the warehouse and one (1) driver, as well as a secretary and an accountant. Contractual workers are also hired on a case-to-case basis to augment special orders. The construction chemicals in the distributorship are primarily used for waterproofing and as an “applicator”. Because of the owner’s vast experience in chemicals, she sees the distributorship branching to manufacturing in the future. At the start of the business, the sales effort was maximized because the arrangement was on a consignment basis. However, collection problems particularly from those consigned to the government, proved costly to the company and because of this, it was decided to have products sold on “COD”. The sales revenues went down as result, but at least it strengthened the cash flow. 1997 was a challenging year for the company as it had to struggle with the peso depreciation and the company considered availing of a loan to augment its dwindling capital. It was also a year when it had to consolidate its banking network and by 2004, they were dealing with only two banks from ten banks and financial institutions. Because of the slowdown in the construction industry, business had gone down, they encountered some cash flow problems but because they were diligently looking for clients, they were able to generate enough cash flow to pay off their loans without penalties. At present, their existing loan is with the Small Business Guarantee and Finance Corporation (SBGFC) under its “Sulong Program” and while details of the loan were not disclosed, the company is said to be satisfied with the arrangements that they are not inclined to look for other source of financing in the future. Accessibility and processing time were the main reasons for availing of the credit, with interest rate rated least. In terms of the foreign banks, while they have heard of Bank of America, Bank of Tokyo, Chase Manhattan, Citibank, HSBC, ING, and Standard Chartered, they are not interested to avail of their products/services. Not only are these banks inaccessible from their area, they are quite satisfied with the SBGFC loan, although a lot of paper work was required and they were asked to put a collateral in the form of real estate and some of their vehicles. Despite the slowdown in the construction industry, there were some signs of recovery in late 2004 and that is expected to continue until 2005 and 2006. And while

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they are confident that their product will always be bought, they still have to be more cost effective to increase their margins. They are also hopeful that more information on loan program be made available to them so that they can use it for their expansion. D-5 Company The company started its operations in 1978 when the owner sold home made tocino, chorizo, and other native products to offices and near-by households. Seeing an opportunity to diversify, they studied how to make chicharon where it is their main business until now. Its main office is in Davao, although they have a satellite office in Manila and one cooking station not far from the head office in Davao. It is run by a husband and wife team, with the husband handling operations and the wife the financial and other administrative matters. They have 21 regular employees, 3 probationary, and 4 in the Manila office. Their products used to be sold directly, but they have expanded to include supermarkets and other stores. In order for them to start, they borrowed from a bank P 10,000.00 (which was quite a sum in the late 70s) which was granted as a character loan. Since then, their financing and banking requirements have expanded to include the following banks and other financial institutions: Banco de Oro – suppliers credit arrangements

BPI – bills purchase loan, including previous loans from City Trust and Far East Bank which were transferred/consolidated with BPI, character loan Metro Bank – deposit accounts

PB Com – character loan PNB – cottage industry and guarantee loan Rural Bank of Tagum (Davao) – character loan Santa Ana Cooperative – personal loan which was used additional capital Security Bank – character loan From 1994 to 2000, the company made full use of loans to expand their business and by 2000, they were debt-free. Pricing and flexibility were the main reasons why they availed of the loans, with accessibility, and processing time ranked second and third, respectively. Part of the reason why they were able to avail of character loans is because the brother of the wife is a bank manager and they were referred to several banks, including the bank where the brother worked. Despite their successful loan experience, the wife is actually afraid to borrow. This is reflected in their personal finance transaction when they had to cancel their credit card with HSBC, staying with Citibank, which are the only two foreign banks they know of. Fortunately for them, while they were affected by the Asian Financial Crisis, the SARS scare, and the 9/11 attacks, these were temporary and they were able to recover. In the future, the company plans to capitalize of the “meatier” chicharon they sell by actually going to meat products. Because of their good credit history, they are confident that they can finance their expansion, although they feel that they still have

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some problems accessing credit especially in complying with some documentary requirements. D-6 Corporation What started out as hobby of windsurfers turned into a business venture for this 10-year old company. The interesting about this company is that its loan application in several banks was rejected 20-30 times until they were given a loan by the Small Business Guarantee and Finance Corporation (SBGFC) under its “Sulong Program”. At present it has 20 employees, 18 divers and 2 in accounting/head office and has diversified its operations into scuba diving and island tours. It also operates in the famous tourist destination, Pearl Farm. Its venture into windsurfing was borne out of a lack of trained windsurfers during that time and while it was difficult to get business at first, with the popularity of Davao as a tourist destination went with it the company’s business opportunity. As such it rode with the tourism boom. It wasn’t hit with the Asian Financial Crisis, but was severely affected by the kidnappings in Palawan and it was only in 2004 that they were able to recover again. The rocky situation the company had faced is already reflected in its limited relationships with banks, as they are able to maintain current accounts with three banks and credit cards with HSBC and Citibank. As mentioned earlier, the only loan that they were able to avail of was with SBGFC and is outstanding as of the present. They hope to further improve their business so that they can get a better credit standing and avail of credit for future expansion.

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D-7 Company Operating from a residential village in Davao City, this 10-year old printing press company has had a rough time in terms of looking for financing from commercial banks until it was granted a loan by the Small Business Guarantee and Finance Corporation (SBGFC). Four (4) regular and four (4) contractual personnel plus the husband and wife owners comprise the labor force of the company. It stopped operations in 1997 to 1999 due the Asian Financial Crisis but has continued since then, where most of its sales are from outsourced requirements of the larger printing presses. It avails of the products and services of the following banks: Metro Bank where is has an outstanding loan and has an insurance arrangement, Anchor Saving Bank where it maintains a savings account, and Mindanao Network Bank where it maintains an account for its clients outside Davao but within Mindanao. Because of its limited credit history, it is significant that it was able to obtain an initial loan from SBGFC and was later rediscounted so that it can pay for the monthly amortization of its equipment. Accessibility was the main reason why it availed of the loan. It is less optimistic of its business to grow in the future, unless it is able to look for more clients and upgrade its equipment. But since commercial banks are unwilling to lend to it, the company will just have to rely with the SBGFC for its requirements.

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D-8 Company This ten-year car rental company started with one second-hand van which was financed through personal loans. Since the company is not a mix of 25 vehicles that offers self-drive and chauffer driven vehicles. At present 40% of the business consists of monthly rentals from multinational corporations and the other 60% from walk-in clients. Because of the limited scale of operations, there are only three (3) employees the company, the owners (husband and wife) and one other administrative staff. The rest are contractual personnel, like the drivers/chauffeurs. Initially, the company was financed through the owners’ personal funds as well as from other family members. As the business grew, the company was able to avail of loans that lowered the owner’s share to about 80% with the other 20% from loans with equity participation. Part of the financial planning, particularly the choice of banks was “dictated” by the wife who worked in the bank. The present financial set-up is an interesting mix of banks and type of loans: BPI Family Bank – housing/car loans China Bank – car loan Metrobank – housing car/loans Orix/Metrobank – used car loans When the company started in 1994, accessibility of the loan was the primary reason for choosing the bank, with flexibility, pricing, and processing time next in ranks respectively. However, by 2000, pricing was the primary consideration with accessibility ranked next in terms of the used car loans, and processing time for the other car loans. The selection criteria continued until after 2000. Because the vehicle itself was the collateral, it was easier to borrow prior to 2000, as was the experience of many that time. This shift also represented a change in terms of their banking relationships. When told by their main bank that they had already borrowed too much, the added more banks to their list so that they can avail of loans for future expansion. Despite of their search for additional banks, they have not heard nor have they availed of the products/services of the foreign banks mentioned. Because of steady demand for car rentals and not being totally dependent on tourism income, this company has had a steady business as well. They did not suffer that much during the Asian Financial Crisis, nor during the 9/11 attacks, although high gasoline prices have taken away some of their margins. As a result, they were able to pay for their loans without any penalties or interest charges and they have continued to enjoy a good credit standing with their banks.

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In the future, the company plans to expand their fleet of vehicles so that they can offer their services to larger companies. To be able to borrow, the company feels that while the access is there it would help if they were guided on available and where to get the most competitive rate. D-9 Company This company started in 1983, but gave way to new management in 1988. It is in the business of manufacturing hand painted/handcrafted products from coco wood. It has a factory and a showroom that serves also as a retail outlet in one of the more popular shopping centers in Davao. The company was set up to sustain the needs of the family, while at the same time providing work to its employees, which it also sees as a sort of mission. Two head office and eight plant employees make up its work force.

The company had to shift to coco wood because of legislation covering the cutting down of certain types of lumber. It also plans to use other raw materials to mix with coco wood as supplies are expected to dwindle. In terms of sales performance, the company enjoyed good sales from 1983 to 1998. By 1999, depressed demand brought about by the Asian Financial Crises took its tool and while it recovered a year later, it further went down during the 9/11 attacks. At present, they are struggling in terms of sales while there are some encouraging signs in the latter part of 2004. The company maintains a separate savings account from three commercial banks in the area. One of the commercial banks also serves a clearinghouse for supplier payments. The company relies on two loan facilities for their requirements. Since of the owner is a member of a cooperative, they usually borrow from that cooperative occasionally. Their main source of financing is from the Small Business Guarantee and Finance Corporation (SBGFC) where it is covered by real estate collateral. In terms of the foreign banks in the study, they have heard only of those banks under pre-RA 7721, and they have only availed of the credit card facility of Citibank. Because of their general satisfaction with their loan from SBGFC, the company is not inclined to actively look for other banks or financial institutions for future loans, although they are open to the idea.

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D-10 Corporation This company started in 1972 selling animal feeds. The owner however saw a potential in granulated charcoal and within a few year expanded their line to include charcoal briquettes and activated charcoal. About 40% of their sales are exported to Japan Fifteen (150 head office, 165 regular and 20 contractual plant employees make up the work force. Clients are actively searched, and they participate in trade fairs, advertisements, and recently, they have their own website. The diversity of the business has also increased their capital from P 10 million to P 50 million to now P 100 million. The first significant jump in capital was due to their Japan venture and the more recent increase was due to modernization and expansion. Despite the complex operating requirements needed to run the company, they only have a few banks they deal with. In fact, they have been doing business with their main for almost 25 years now and this relationship has been marked by numerous loans, export bills and a revolving credit line. Pricing and flexibility are the main reasons why the loans were availed of. In terms of their depository accounts they only have two, including already their main bank. To them, they are quite satisfied with their services and they have no plans to shift to another. They did recall an incident when they approached their main bank for an activated charcoal project. The said project was rejected without any clear reason. According to the company representative interviewed, they were only able to learn about the reason about two years later. By then, they had approached another bank but were likewise rejected. They presented the same project to their bank but were fortunately approved. Their knowledge of foreign banks is quite impressive, because they have heard of all but three: Banco Santander, Bank of Tokyo, and Korea Exchange Bank. However, they have not availed of any of the service of these banks. The company was slighted affected by the Asian Financial Crisis but timely cost savings enabled them to survive. They were not affected by the 9/11 attacks, although as far as the future is concerned, the viability of the business will be affected by the sourcing of the raw materials, especially the country’s logging laws.

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D-11 Company The present company was part of a much larger family business that was reorganized in 1998. In that reorganization, the surviving entity’s remaining assets which were machines and some finished products, plus proceeds from the sale of the previous company’s inventory formed part of the starting capital. The rest of the capital was from the proceeds of a loan of the owner, whose wife is a member of a cooperative. Since that time the company has grown into diversified coco products from hand painted and hand crafted gift items and souvenirs to lampshades made of abaca and coco wood, to fashion accessories such as wallets and necklaces. Ten (10) regular employees and about 20-30 contractual working form part of its workforce. In terms of attracting customers, the company is an active participation of trade fairs and does direct selling. Through the trade fairs, the company is able to develop the attitude of being customer-oriented and they believe that a large part of their success is their ability to retain the old and attract the new customers. As a SME, the company has a vision of competing globally, while at the same helping those who are unemployed, which is also the owners’ mission. Also part of its mission is to maintain the current workforce and avoid laying off its workers. During the time the company was reorganized, the owners had no credit history except for the wife’s membership in a cooperative. To meet the financial requirement, they had to avail of the “5/6”. By 1999, they decided to apply for a loan with the Small Business Guarantee and Finance Corporation (SBGFC) but were declined. They used this experience in building their credit standing. And their efforts were rewarded when in 2000; they were fortunate enough to get an unsecured loan from the Mindanao Network Bank. They were able to avail of the loan through a purchase order for one of their clients.

By 2003, four (4) years after their initial request, they were finally granted a loan by SBGFC.

When they sought the loan from the Mindanao Network Bank, accessibility was the primary reason. However, the SBGFC loan was availed due to pricing and flexibility. At present they have only two banks, where they maintain a savings account. Except for ANZ, Deutsche, Fuji, and ING, they company has heard all of the foreign banks mentioned. But because, they are not accessible in Davao, it is only with HSBC where they tried to avail of a credit card. This was declined. According to the company, the Asian Financial Crisis and 9/11 attacks did not affect them. They were, however, affected by the SARS epidemic. With enough clients,

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the company was able to recover and they look forward to further expanding their business but with their difficulty in getting access to credit, they are going slow on such plans. The owners are hopeful that as they build their credit standing, the will be able to

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