Research by: John Paul Flaminiano & Jamil Paolo Francisco
Executive Summary
The development of small and medium enterprises (SMEs) is an essential contributor to economic and social growth in developing economies. However, having limited access to finance impedes firm success. The lack of access to financing is one of the most critical obstacles affecting SME performance, competitiveness, innovation and growth. The Philippines provides relevant context to develop our study because micro, small, or medium enterprises account for over 99% of all firms in the country, about two-thirds of employment, and a third of gross value added (GVA), serving as the backbone of the Philippine economy.
In our paper, we studied the relationship between firm characteristics and credit constraints among SMEs in the Philippines. We examined which firm characteristics were correlated to the predicted probability of being credit-constrained or “quasi-constrained”—i.e., able to borrow, but from informal sources. We also analyzed whether the firm characteristics that were significant in accessing finance solely through formal channels such as banks were also significant when considering informal financing sources such as private moneylenders, family, or friends.
We used data from a survey conducted by the AIM RSN Policy Center for Competitiveness during the second and third quarters of 2018. A total of 480 SMEs were surveyed in the National Capital Region (NCR) and neighboring Calabarzon.
Logistic regressions were performed and the marginal effects at the means (MEMs) provided an estimate of the relationship between firm characteristics and the predicted probability that the average SME in the sample was credit-constrained or quasi-constrained.
Among the firms we surveyed, we found 42% of small and 33% of medium-sized enterprises to be credit-constrained, and 47% of both were quasi-constrained.
By identifying which factors enable access to finance in both formal and informal markets, we can evaluate policy options to make financing more inclusive. We tested the following firm characteristics: firm size, profit growth, employment size, ownership type, industry, firm age, female ownership, administrative region where the firm was located, percentage of employees with a college degree, purchase of fixed assets in the past two years, and the firm’s use of digital technologies for accounting and financial management operations.
From our analysis, we found that firm characteristics (asset size and fixed assets purchase) were significant when accessing finance through formal channels were not significant when accounting for informal sources. In other words, the factors that affect an SME’s predicted probability of being credit-constrained may be different from the factors that affect the probability of being quasi-constrained. We also found the increased use of digital software for accounting and financial management operations to be associated with a lower predicted probability of being credit-constrained and quasi-constrained.
Our study contributes to the literature on SME finance by distinguishing between the types of credit constraints small businesses face – whether they cannot obtain loans from formal sources (credit-constrained) or can obtain loans but only from informal channels (quasi-constrained). This distinction is especially relevant for SMEs in developing countries where informal channels are an important source of financing for small businesses. Moreover, our study also shows that access to finance through formal channels (e.g., banks) has different determinants from access to finance through informal channels, although the use of digital technologies for accounting and financial management is positively associated with increased access to finance in both formal and informal markets. This result is important as it suggests that the use of digital technologies for financial management may help mitigate credit constraints for SMEs in both formal and informal markets.
To cite this article: Flaminiano, J. P., & Francisco, J. P. (2021). Firm characteristics and credit constraints among SMEs in the Philippines. Small Business International Review, 5(1), e332. https://doi.org/10.26784/sbir.v5i1.332
To access this article: https://sbir.upct.es/index.php/sbir/article/view/332
About the journal
Small Business International Review is a peer-reviewed e-journal devoted to the publication of original research articles concerning the broad field of SMEs.
