The Philippines has the basic legal foundation in place to develop the nascent supply chain finance (SCF) market, but the country still has much to do to create a supportive and dynamic SCF ecosystem, according to a recent World Bank Group study.
The report, “Philippines Supply Chain Finance Market Development,” done by the International Finance Corp. (IFC), a World Bank subsidiary, observed the Philippines has the necessary legal and regulatory foundation, such as the Personal Property Security Act (PPSA) and a central and online collateral registry, to enable the development of SCF products.
SCF is a set of technology-based business and financing processes that lowers costs and improves efficiency for the parties involved in a transaction. SCF provides short-term credit that optimizes working capital for both buyers and sellers.
“The Philippines market is estimated to have over $20 billion in readily available SCF assets to be taken up by banks and NDTLs (non-bank lending institutions that do not take deposits),” the study said.
Although the infrastructure is in place, there has not been much growth for a broader SCF ecosystem, with limited participation from non-deposit-taking lenders (NDTLs), technology providers, and collateral management companies, among others.
“There are limited digitalization, support services, and financing providers operating in the Philippines which serve SCF market needs,” the report said.
The study findings were presented by Jinchang Lai, principal operations officer of IFC’s Financial Institutions Group for Asia-Pacific, and Cliff Entrekin, CEO of Convergence Capital Group, in an online forum held last November.
The report said in many developing economies, financial support is based primarily on lending money against immovable assets, such as land. This presents a significant financing gap for businesses, especially for micro, small and medium enterprises or MSMEs, which own limited immovable assets.
A market infrastructure which supports the financing of movable assets, such as accounts receivables and inventory, is necessary for economic development. SCF implements controls and procedures which allow commercial banks and NDTLs to effectively lend money to business entities against movable assets.
In the case of the Philippines, Lai and Entrekin said the new coronavirus disease 2019 has caused major financial issues for businesses and intensified their need for capital. However, their desired sources of funds, primarily banks, are unable to meet their needs.
SCF–which is based on the purchase orders, receivables or inventory of a borrower and not on the strength of the borrower’s financial statements–can support SMEs during temporary hardships, said the report.
But the country needs to address several market gaps contributing to the tiny SCF penetration, it said. These include overdependence and reliance on banks to drive the SCF market, with basically no SCF players from the NDTL industry.
