This brief article from Malaya Business Insight speaks to a recent study conducted by the International Finance Corporation (IFC), which is a World Bank subsidiary. The report, called “Philippines Supply Chain Finance Market Development,” concludes that the country is in need of a supply chain finance (SCF) ecosystem, with a legal foundation to support one, but has some work to do for a broader, successful structure.
We’ve covered SCF both on these pages and in member reports. While SCF has grown substantially during the past two decades in developed markets, with digitized marketplaces popping up more recently, the same cannot always be said for developing economies, of which the Philippines is one. Given the pandemic developments and lingering supply chain difficulties across the globe, one might say that SCF is now more important than ever. In a country like the Philippines, where small to medium enterprises will predominate—at a scale lower than western versions—SCF, if robust, could be providing critical cash lifelines to such businesses. Many readers will know that SCF is short term financing (typically 90 days or less) to support cash cycle operations and this can mean the difference between business success or failure, especially in tight economies. So helping to fund inventory, payables and receivables for buyers and suppliers can grease the wheels enough to keep the global supply chain moving along.
The article goes on to say that the underlying report suggests that 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).” In a newly industrialized economy with a GDP of about $1.5 trillion, that’s a hefty sum. While the infrastructure is in place for SCF, there are some issues with gaining the participation of non-bank lenders and appropriate fintech support.
The preferred lenders for SMEs are banks and the institutions have not stepped up to support this lending space. One major issue pointed out in the report is that in many developing economies, financial support is based primarily on “lending money against immovable assets, such as land.” SCF is based on working capital and not robust financial statements. In any event, the piece goes on to say that the NDTLs will need to jump in if this portion of the lending industry is to flourish in the Philippines.
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group.