A recent study conducted by the International Finance Corporation (IFC), a subsidiary of the World Bank, stated that the Philippines has the necessary legal and regulatory foundations to enable the development of Supply Chain Finance (SCF) products.
SCF is a set of technology-based business and financing processes that helps lower costs and improve the efficiency of all the parties involved in a transaction. SCF products can also provide short-term credit that can optimize the working capital of both buyers and sellers.
In a report entitled, “Philippines Supply Chain Finance Market Development,” the World Bank Group study noted that the country already has the basic legal foundations, such as the Personal Property Security Act (PPSA) and the central and online collateral registry, that it can use to be able to develop a nascent supply chain finance market.
However, the country still has much to do in order to create a supportive and dynamic SCF ecosystem.
Infrastructure in place but limited support services to serve SCF market needs
“The Philippine 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 report added that 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.
The findings were presented recently in an online forum led by Jinchang Lai, principal operations officer of IFC’s Financial Institutions Group for Asia-Pacific, and Cliff Entrekin, CEO of Convergence Capital Group.
SCFs can support SMEs during a pandemic
In the case of the Philippines, Lai and Entrekin said that the new COVID-19 disease in 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.
According to the study, 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 readily support SMEs during temporary hardships.
But the country needs to address several market gaps contributing to the tiny SCF penetration, the report said. These gaps include overdependence and reliance on banks to drive the SCF market, with basically no SCF players from the NDTL industry.