Chapter 6

Review of Existing Policies affecting

Micro, Small, and Medium Enterprises
(MSMEs) in the Philippines December
2004
• The Medium Term Philippine Development
Plan (MTPDP) 2004-2010 recognizes the
significant contribution of micro, small and
medium enterprises (MSMEs) in the country’s
development as they constitute 99.6% of
businesses, generate 70% of jobs and 30 % in
value-added.
• As of 20 May 2003, the Department of Trade
and Industry (DTI) has identified 107 laws and
regulations affecting small and medium
enterprises (SMEs) in various areas of their
business.
 major obstacles confronting the private
sector
1. poor adherence to the rule of law,
2. unclear or inconsistent policies, laws, and programs, •
3. unclear property rights, inefficient dispute settlement
mechanisms,
4. low institutional effectiveness/capacity of supervisory and
regulatory authorities, overlapping functions and lack of
coordination among government implementing agencies, •
ineffective competition policy,
5. • significant involvement of the government in commercial
activities,
6. declining labor productivity in many sectors of the economy,
7. inefficient infrastructure system are. All this reduces incentive to
private sector participation in the economy.
 Key National Programs in SME and
Implementation Issues
1. KfW-SBC SME Credit Line: This project aimed
to provide funds for re-lending to SMEs. It
worked to improve the business climate,
create jobs, and reduce poverty. It also
assisted the government of the Philippines to
open markets to broaden investment and
trade opportunities, reduce corruption and
increase
 Key National Programs in SME and
Implementation Issues
2. Private Enterprise Accelerated Resource
Linkages Project II: This CIDA project aimed to
assist SMEs in enhancing international
competitiveness and building international
alliances. The project initially focused on 2
main sectors: furniture and houseware sectors
and implemented 3 components including
sectoral enhancement component,
partnership development facility, capacity
development for investment promotion.
 Key National Programs in SME and
Implementation Issues
3. Business Advisory Project by the Canadian
Executive Services Overseas: This project was
designed to strengthen the capabilities of
small and medium enterprises (SMEs), as well
as non-governmental organizations serving
SMEs through high impact business advisory
services.
 Key National Programs in SME and
Implementation Issues
4. Growth with Equity in Mindanao (GEM)
Program: This program assisted small and
medium business firms in making new
investments and prospective investors to
make them aware of opportunities for working
with local SMEs.
 Key National Programs in SME and
Implementation Issues
5. Rural Microenterprise Finance Program: This
project aimed to provide adequate and
appropriate financial services to the rural poor
in order to finance livelihood
project/microenterprises.
 Key National Programs in SME and
Implementation Issues
6. Credit Lines for SMEs: This is KfW project
involved the provision of sub-loans to finance
importation of capital and intermediate goods
and spare parts
 Key National Programs in SME and
Implementation Issues
7. Third Rural Finance Project: This project was
funded by the World Bank and involved the
provision of short/medium-term loans to
finance private investments in the
countryside.
 Key National Programs in SME and
Implementation Issues
8. Promotion of Small Enterprises Project II: This
project, funded by KfW ,involved the provision
of sub-loans to SMEs to finance their working
capital and fixed asset investments.
 Key National Programs in SME and
Implementation Issues
9. Enhancement of Global Competitiveness for
Quality Standards and Performance Project:
This Spanish funded project aimed to
strengthen the Philippine Bureau of Standards
to improve its capacity to provide services
standardization, certification of the country’s
industrial quality.
 Key National Programs in SME and
Implementation Issues
10. Microfinance Loan Fund: This project was
funded by the Spanish government and aimed
to provide credit line facility on wholesale
basis for eligible MFIs to finance microfinance
sub-projects of their sub-borrowers.
 Key National Programs in SME and
Implementation Issues
11. Creation of an Enabling Environment and
Building Capacities for the Growth and
Protection of the Informal Sector: This UNDP
project aimed to provide capacity building
assistance to the informal sector for increased
access to productive resources, improved
working conditions and strengthened
participation in decision making.
 Key issues facing SMEs
1. Low growth domestic SMEs. Over 70% of
SMEs are either not oriented to growth or do
not succeed in growing, and have no
international activity. In aggregate they make a
rather static contribution to the economy;
although they employ a significant proportion
of people, they do not contribute a lot to
employment growth
 Key issues facing SMEs
2. Entrepreneurial fast growth SMEs. Evidence
suggests that as much as 70% of net job creation
and much longer term economic dynamism is
attributable to a small proportion (perhaps only
5% to 25%) of SMEs that are growth oriented and
entrepreneurial. These SMEs are especially
important in restructuring existing industries (e.g.
finding better ways to provide services) and
generating new industries (e.g. software,
multimedia services etc).
 The main problems and issues which
are of relevance to these SMEs are:
1. Identification of opportunities - Obtaining
reliable information about market opportunities
and about relevant regulations is sometimes
difficult for new products, services or techniques.
2. Identification of suitable network partners and
joint venturers - In many cases these SMEs need
to engage in joint ventures, networks, or
alliances for internationalization. Finding suitable
partners is often difficult.
 The main problems and issues which
are of relevance to these SMEs are:
• 3. Protection of intellectual property in a cost
effective way - Most economies in the region now
have some form of recognition and registration of
intellectual property, such as brand names,
patents, and copyright.
4. Skills for management and staff
5. Start up assistance - Starting up a business from
scratch can be particularly difficult. It may help to
provide special start up grants to help
entrepreneurs get going, and provide training
packages for aspiring managers.
 The main problems and issues which
are of relevance to these SMEs are:
6. Cultural awareness and support of
entrepreneurship - A career in entrepreneurship is
still frequently regarded as less attractive and
socially responsible than a career with a large firm
or in a profession. Increasing the status of
entrepreneurs in the community (by awards and
special recognition), and increasing awareness of
the importance of entrepreneurship (by
entrepreneurial education in schools for example)
can be effective ways for economies to encourage
more entrepreneurs.
 The main problems and issues which
are of relevance to these SMEs are:
7. Telecommunications - Access to reliable
telecommunications (phone, mobile phone,
pagers, fax, Internet, etc) at reasonable rates is
especially important to small international
firms.
 Key issues facing SMEs
• 3. Internationalized subcontracting or supply
industry SMEs. Subcontracting SMEs are those
which have integral links with a larger foreign firm,
or to a domestic firm which is exporting. There are
relatively few SMEs that are international
subcontractors, probably less than 2% of non
agricultural SMEs, but they are economically
significant because they tend to be larger on
average, employ more people, and use more
sophisticated technology than other SMEs.
 Implementation Guidelines
• The above benefits and incentives under the law
implicate a number of government agencies (i.e.. Dept
of Finance for exemption from incomes taxes: the
LGUs under the DILG for exemption from or reduction
of local taxes, fees, and charges: DOLE for exemption
from the minimum wage law; the BSP for access to
credit; specialized government agencies for technology
transfer, trade and investment promotion). Section 15
of the law (Implementing rules and Regulations)
deputizes the Secretary of the Department of Trade
and Industry to formulate the necessary rules and
regulations and to implement the provisions of (the)
Act”
 Department of Trade and Industry
• In accordance with Section 15 of the Law, the Secretary of DTI
issued DAO (Department Administrative Order) No. 01 formulating
necessary rules and regulations to implement the provisions of the
Act. This was after consultation with the DILG, the DOF and the
BSP and the other concerned agencies. The DAO clarified that the
BMBE “shall include any individual owning such business
entity/enterprise, partnership, cooperative, corporation,
association or other entity incorporated and/or organized and
existing under Philippine laws; and registered with the office of the
treasurer of a city or municipality in accordance with these (sic)
implementing rules and regulations.” Further, under Section 4
(Who are eligible to register), it clarified that any person, natural
or juridical, cooperative or association may apply so long it has the
following qualifications: ƒ have an asset size of not more than
three million pesos, excluding land, before applying for BMBE
registration
 Department of Finance
• Department Order no. 17-04 (April 20, 2004,
“Guidelines to Implement the Registration of
Barangay Micro Business Enterprises and the
Availment of Tax Incentives under R.A. 9178) has
the long list of supplementary rules and
regulations on the IRR of the BMBE Act. The DOF
issued the guidelines on the registration of the
business enterprise and on the duties of the LGU
and of the registered BMBE in the availment of
the income tax and the Gross Receipts tax (GRT)
exemption.
Department of Labor and Employment
(DOLE)
• The DOLE issued Department Order No. 45-03 as
“Guidelines for the Implementation of Section 8 of
RA No. 9178”. Among others, the Guidelines state
One of the incentives granted to register BMBE is
exemption from the Minimum Wage Legislation as
provided under Section 8 of the Act. This
incentive, however, should be in harmony with the
Constitution and the Labor Code which mandate
the State to regulate relations between workers
and employers and to protect workers from
possible exploitation
 • Thus the BMBE law allows for exemption of
coverage of the BMBE from the MWL However,
the same DO specifies that :
a. all employees under this Act shall be entitled to
the same benefits given to any regular
employees such as social security and healthcare
benefits;
b. b. Workers in BMBEs shall continue to be
covered by all applicable labor laws and benefits
under the Labor Code including the
non-diminution of wages.
 Bangko Sentral ng Pilipinas (BSP)
• Regarding credit delivery, the BSP enjoined the
Land Bank (LBP), the Development Bank of the
Philippines (DBP), the Small Business
Guarantee and Finance Corporation (SBGFC)
and the People’s Credit the Finance
Corporation (BCFC) as well as the government
non-banks, the GSIS and the SSS to set up a
special credit window to service the financing
needs of duly registered BMBEs
 Bangko Sentral ng Pilipinas (BSP)
• The said financial institutions are “encouraged to
wholesale funds to accredited private financial
institutions including community-based
organizations such as cooperatives, NGOs and
people’s organizations engaged in granting credit
for relending to BMBEs.” ƒ
• Interest on BMBE loans must be just and
reasonable as may be determined by the
management of the concerned entity to be
consistent with its credit policies.
• For microenterprises to register under the Act, the
granting of tax incentives by the Law assumes that
they stand to benefit from them. And yet, those
that are expressly targeted by the Act, namely the
microenterprises belonging to the informal sector
of the economy, work effectively outside the
purview of any law. In other words, by being part
of the informal economy, they have already
exempted themselves from the constraints
imposed by the regulatory framework
 Examples of such virtual exemptions
are as follows:
1. Income tax exemption: They do not pay taxes on whatever net
incomes they receive from their businesses. ƒ
2. Local tax exemption or reduction: They do not pay local taxes and
fees at the local level resulting from the operation of their
business, since they manage to operate without having to secure
a mayor’s permit. ƒ
3. MWL exemption: They are not covered by the Minimum Wage
Law to the extent that the DOLE, unaware of their existence,
does not run after them for possible violations.
4. ƒ Access to credit: They could have access to credit, except that
they probably do not go the banks and non-banks to borrow
under a registered name. They turn instead to other sources,
usually relatives, or to the local “5-6 lender” 14.
• Any Questions?