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LESSONS:

Philippines: Small and Medium Enterprise Development Support Project

sector: Industry and Trade | country: Philippines

Carefully assess effective demand for new instruments. For projects where similar models do not exist in the local market, more exhaustive studies and analyses of the demand and willingness to pay for guarantees covering small and medium-sized enterprises exposure should take place.

An adequate pipeline is needed. More care is needed in establishing a pipeline of participating financial institutions. Due diligence was weak, preventing the participation of more banks before approval or immediately afterwards. Given more participants, the volume of guarantees would have increased and a wider variety of small and medium-sized enterprises could have taken part. More exhaustive due diligence is needed in the future, especially in identifying and assessing participating financial institutions. Poor monitoring and supervision of the project by ADB contributed to the low utilization of the facility. ADB should have been able to identify the issues, problems, and lack of progress more effectively, and it should have been more flexible in changing the project during implementation.

Pricing needs to reflect market demand. The formal price change from ADB came too late to make a difference, since by then the price waivers had been granted. Likewise the first loss provision outlined in the RRP was dropped from the guarantee agreement between ADB and Security Bank Corporation.

Lack of replicability. There has neither been a follow-up project in the Philippines, nor has ADB financed a similar project elsewhere in the Asia Pacific region. The issue of taking on small and medium-sized enterprise (SME) risk against that of the financial intermediary needs resolution before its further application. The partial credit guarantee facility could potentially be adopted in a number of ADB’s developing member countries, but further work is required to adequately measure and assess the risk-return benefits of the instrument for stakeholders. Many variations are possible, such as different stop-loss levels; differentiated risk sharing; financial instruments for different uses (e.g., trade financing, equipment purchases, and other capital investment); and working capital. Some of these adjustments can be explored to assess whether the partial credit guarantee can be made more flexible and better tailored to local conditions.

Underestimating the impact of staff changes. The Private Sector Operations Department (PSOD) preferred to assume financial intermediary risk rather than risk associated with small and medium-sized enterprises, which contributed to the delay in raising the credit limit to Universal Robina Corporation and the selection of new participating financial institutions. ADB staff changes at the project officer level confused SBC and contributed to the lack of continuity and consistency of efforts by ADB.

Better due diligence of financial intermediaries is required. ADB did not adequately assess the risk rating process of Security Bank Corporation or do enough work to understand its processes and procedures. A better understanding of Security Bank Corporation would have enabled ADB to assume more decision-making responsibility on the implementation of the facility. In addition, ADB should have undertaken due diligence of other potential participating financial institutions at appraisal. Leaving the decision to Security Bank Corporation about which small and medium-sized enterprises could participate would not have required extensive ADB staff involvement after participating financial institution selection and might have encouraged other banks to participate.

Need to proactively monitor facility utilization. The need for effective monitoring was stressed in the report and recommendation of the president (RRP), but it was not carried our satisfactorily. Monitoring facility utilization was necessary to guide restructuring, realignment, and modifications, and, where required, to cancel allocations so ADB capital could be deployed more efficiently. ADB originally expected that over time, the partial credit guarantee facility would allow participating financial institutions to become familiar with small and medium-sized enterprise risks and provide guarantees for a wider range of instruments, which would have prompted more participating financial institutions to participate. This outcome would have required better and more proactive monitoring of the utilization of the facility, which would have prompted the inclusion of new participating financial institution and allowed for a wider set of clients and instruments to be tested. Although the partial credit guarantee facility was approved and made available to partner banks for 8 years, ineffective monitoring led to cancellations rather than the reallocation of guarantees, availability periods, and tenors.

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