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Assessing Mandated Credit Programs: Case Study of the Magna Carta in the Philippines

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  • Khor, Niny
  • Jacildo, Ryan
  • Tacneng, Ruth

Abstract

We examine the effects of a mandated credit program to small and medium enterprises in the Philippines (Magna Carta Law) using a panel dataset compiled from official data published by the Bangko Sentral ng Pilipinas. The final sample of 109 financial institutions represented over 90% of total finance sector assets in the Philippines. We highlight three important findings. First, although the total lending levels to micro, small, and medium enterprises (MSMEs) grew slightly, the percentage shares of loans allocated to MSMEs declined drastically from a peak of 30% of total loans in 2002 to 16.4% in 2010. Second, following the upwards revision of the loan target (from 6% to 8%) for smaller firms in 2008, there was a sharp increase in noncompliance especially amongst universal and commercial banks. On the other hand, total loans to medium enterpriseswere still more than threefold larger than the targeted 2%. Third, there is an increased heterogeneity in optimal loan portfolio across banks. Most surprisingly, the absolute level of MSME lending by rural and cooperative banks declined since 2008. Direct compliance amongst universal and commercial banks decreased beginning in the late 2007, while that of thrift banks increased to almost 100%. Abolishing the Magna Carta targets for medium-sized enterprise loans would most likely yield little adverse effects. Meanwhile, efforts to improve financial access to MSMEs should focus on alternative nondistortionary ways to increase financing supply, such asimproving institutional framework for informational availability and development of equity and bond markets for MSMEs.

Suggested Citation

  • Khor, Niny & Jacildo, Ryan & Tacneng, Ruth, 2016. "Assessing Mandated Credit Programs: Case Study of the Magna Carta in the Philippines," AGI Working Paper Series 2016-09, Asian Growth Research Institute.
  • Handle: RePEc:agi:wpaper:00000106
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    References listed on IDEAS

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    1. Milo, Melanie S. & Pasadilla, Gloria, 2005. "Effect of Liberalization on Banking Competition," Discussion Papers DP 2005-03, Philippine Institute for Development Studies.
    2. Mr. Jean-Claude Nascimento, 1990. "The Crisis in the Financial Sector and the Authorities' Reaction: The Case of the Philippines," IMF Working Papers 1990/026, International Monetary Fund.
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    Cited by:

    1. Ilmiawan Auwalin, 2021. "The effect of a credit policy change on microenterprise upward transition and growth: evidence from Indonesia," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 11(4), pages 611-636, December.

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    More about this item

    Keywords

    financial inclusion; financial markets; financial policy; Philippines; SME; targeted lending; financial inclusion; financial markets; financial policy; Philippines; SME; targeted lending; G21; G28; O16;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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