ASIAN DEVELOPMENT BANK

ASIAN DEVELOPMENT BANK TAR: PHI 36419 TECHNICAL ASSISTANCE (Financed by the Japan Special Fund) TO THE REPUBLIC OF THE PHILIPPINES FOR PREPARING THE PROGRAM TO ACCELERATE SMALL AND MEDIUM ENTERPRISE FINANCING December 2002

CURRENCY EQUIVALENTS (as of 4 December 2002) Currency Unit Peso (P) P1.00 = $0.019 $1.00 = P53.63 ABBREVIATIONS ADB Asian Development Bank BDS business development services BSP Bangko Sentral ng Pilipinas (Central Bank of the Philippines) DOF Department of Finance DTI Department of Trade and Industry GTZ Deutsche Gesellschaft für Technische Zusammenarbeit (German Agency for Technical Cooperation) KfW Kreditanstalt für Wiederaufbau (German Development Corporation) NPL nonperforming loan PhilEXIM Philippine Export-Import Credit Agency SB Small Business Guarantee and Finance Corporation SME small and medium enterprise SMEDC Small and Medium Enterprise Development Council TA technical assistance NOTES (i) (ii) The fiscal year (FY) of the Government ends on 31 December. In this report, "$" refers to US dollars. This report was prepared by E. Sasaki (Team Leader).

I. INTRODUCTION 1. The Government of the Philippines recognizes the need to develop the small and medium enterprise (SME) 1 sector to reduce poverty by generating employment, enhancing worker competence and productivity, and achieving a more equitable distribution of income. Therefore, the Government requested the Asian Development Bank (ADB) during the 2002 country programming mission to provide technical assistance (TA) to prepare a development program for accelerating SME financing. ADB fielded the Reconnaissance Mission on 5 6 August 2002, and Fact-Finding Mission on 14 8 October 2002. This TA paper is based on the understanding reached with the Government on the TA s objectives, scope, financing, and implementation arrangements. The TA also incorporates the views expressed by various stakeholders. 2 Appendix 1 presents the preliminary program framework. II. ISSUES 2. The SME sector is a primary source of growth of the Philippine economy. Together with microenterprises, SMEs value added contribution to the national economy is 32%, absorbing 67% of the total labor force nationwide. A vibrant SME sector can help reduce poverty through employment generation. The Medium-Term Philippine Development Plan (MTPDP) 2001 2004 of the Government focuses on developing SMEs to combat poverty. A summary initial poverty and social analysis is in Appendix 2. With the uncertainties surrounding the global economy in the wake of the terrorist attack on the United States in 2001, the Government seeks to promote economic growth led by domestic demand, and regards the development of the SME sector as a key to such a strategy. 3. The Government also recognizes that one of the most severe constraints facing the SMEs is the limited access to financing for their working capital and capital investment needs. Access to finance is difficult to SMEs despite the fact that the current banking system is highly liquid. The current status of overall liquidity of the Philippine banking system is shown by the banking sector s aggregate loan-to-deposit ratio, which declined from 91.3% in 1999 to 82.0% in 2001. During this period, total deposits grew by 8.95% while loans grew by only 1.2%. Slow growth in loans was caused partly by the reduced financing needs for business expansion in the economy, and mostly by the reluctance of banks to lend particularly to SMEs in the face of increasing nonperforming loans (NPLs); 3 tightened risk assessment of banks in response to the stricter prudential requirement of the Central Bank of the Philippines (BSP), in line with the best international practices; and a general tendency of financial conservativeness. 4. Bank credit has been the primary source of funding to SMEs, especially since Executive Order 138 became effective in 1999. 4 Over 80% of the credit provided by the banking sector to SMEs is sourced from commercial banks, followed by 13% from thrift banks and 5% from rural banks. 5 Recognizing the banking sector s dominance in SME finance and the need to facilitate banks to accelerate their lending to SMEs, the President s Office chairs regular discussions with BSP, the Department of Trade and Industry (DTI), the Department of Finance (DOF), 1 According to Republic Act 8289, a SME is defined as any business activity or enterprise whose total assets, exclusive of land: less than P1.5 million for micro enterprise, P1.5 million P15.0 million for a small enterprise, and over P15.0 million P100.0 million for a medium enterprise. 2 The TA first appeared in ADB Business Opportunities (Internet edition) on 5 July 2002. 3 The NPL ratio in the banking sector rose from 5.4% in 1999 to 16.9% in 2001. 4 Executive Order 138 set a new Government policy to consolidate government credit programs to be operated by government financial institutions through private sector banks as conduits in lending on market-based terms. 5 As of March 2002, there were 44 commercial banks; 100 thrift banks comprising 32 savings and mortgage banks, 34 private development banks, 32 stock savings and loan associations, and 2 microfinance institutions; and 781 rural banks. (Source: BSP)

2 government financial institutions, and private sector banks in its efforts to synchronize the public and private initiatives to increase finance for SMEs. 5. Banks generally regard SME lending as potentially a promising business opportunity. Large banks face fierce competition in the corporate lending market with foreign banks and among themselves as financial globalization has deepened. Prominent SME businesses could be important for banks for growth potential and risk diversification. Successful smaller banks have relied on the development of their traditional SME clientele for their own growth and have upgraded services to their customers. The development of the SME sector is strategically important to banks as well as to the national economy. 6. One of the constraints to banks lending to SMEs stems from the current prudential requirements of BSP. Under the BSP regulations, NPLs are defined as loans with principal and/or interest unpaid for 30 days or more after due date. However, even if a current loan is categorized as NPL by the definition, it can still be restructured in various ways, typically by extending the repayment period to better correspond to the borrower s future cash flow. In such a case, additional financing for working capital to match the projected cash flow may be needed. This will help keep the newly restructured loan current. The current BSP regulations, however, require a provision to be made for the possible loss of a new loan in addition to the provision on the original NPL. While these safeguards help enhance the soundness of the banking sector, they also discourage banks willingness to restructure a loan that faces temporary difficulty in meeting debt service obligations. To enhance credit flow to SMEs, the current prudential requirements need to be adjusted so as to rely more on credit assessment of loan accounts by each bank and to the extent that BSP can maintain the integrity of bank loan portfolios through tight supervision. 7. Republic Act 6977 (as amended by Republic Act 8289), commonly known as the Magna Carta for Small Enterprises, requires each bank to lend at least 6.0% of its netlending portfolio to small enterprises and 2.0% to medium enterprises. Currently, these requirements are exceeded on an aggregate basis. 6 However, at the level of each financial institution, the usefulness of this mandatory credit allocation is questionable because it may restrict banks credit decisions based on their own risk assessments and erode the quality of their loan portfolios, deterring the smooth flow of credit to SMEs. Another shortcoming is general noncompliance of this requirement by small banks. Most small-scale thrift banks and rural banks find it extremely difficult to lend to medium enterprises, which are not included in their inherent customer bases. As a result, they opt to pay a fine to BSP as the penalty for noncompliance with the required lending to medium enterprises, and treat the fine as part of the operational costs. 7 The Small and Medium Enterprise Development Council (SMEDC) established under the Magna Carta for Small Enterprises is currently reviewing the provisions of the law in line with the banking liberalization. SMEDC needs help to review the requirements and revise the Magna Carta for Small Enterprises to enhance the flow of market-based credit to SMEs. 8. Banks tend to avoid lending to an SME with no clear business plan and financial statements. The higher risk in lending to such an SME increases the financing cost to the borrower. It is important to strengthen SMEs capacity and skills in preparing viable business plans, and to help them better understand the importance of loan documentation, financial management, managerial skills, and human resource development. To promote bankable 6 As of March 2002, commercial banks loans accounted for 15.27% to small and 9.83% to medium enterprises. Thrift bank loans accounted for 27.53% to small and 32.54% to medium enterprises. Rural banks loans accounted for 32.54% to small and 10.83% to medium enterprises. (Source: BSP) 7 Section 14 of the Magna Carta refers to the penalties, including a fine of no less than P500,000, for noncompliance with the provisions of this act.

projects, business skills of SME entrepreneurs, managers, and workers need to be enhanced. Nationwide availability of business development services (BDSs) would help SMEs improved access to needed financing. In this connection, collaboration with a BDSs provider and bank credit officers should be strengthened and encouraged. DTI SME development centers in 73 provinces can support this initiative in coordination with the private sector financiers and BDS providers, including local chambers of commerce. 9. Another constraint on lending to SMEs is the lack of credit information. To help banks overcome the difficulty in providing credit to SMEs, the Government-owned Small Business Guarantee and Finance Corporation (SBC) has successfully facilitated SME financing through its guarantee and financing operations, contributing to an increase in the number of bankable SME businesses since it was established in 1991. Cumulatively, SBC has provided more than P8.2 billion in credit guarantees. To help SMEs finance working capital by discounting their acquired promissory notes, SBC facilitated under its Rediscounting Facility, credit amounting cumulatively to P4.7 billion and benefiting 3,311 SMEs. All this information needs to be disseminated to banks to form the nucleus of a credit information system. However, the SBC is far from meeting all the needs of SMEs for credit enhancement and working capital financing because of its institutional and capacity constraints. To assist SME exporters to increase their exports and facilitate imports of inputs, the Government-owned Philippine Export-Import Credit Agency (PhilEXIM) has introduced trade financing facilities, including the preshipment export financing guarantee and postshipment export risk guarantee. However, PhilEXIM has not fulfilled its mandate to fully support SME exporters because of its limited institutional capacity and resources. Strengthening of credit supplementation and alternative financing schemes provided by these Government financial institutions is urgently needed to accelerate credit to SMEs through institutional capacity building and the development of new financial products that meet the financing needs of SMEs. 10. A series of consultations have been held between ADB s other funding agencies and DTI on the possible approach of ADB assistance to the development of SMEs. The World Bank s SME development assistance, along with Japan Bank for International Cooperation (JBIC), is focused on the provision of a credit line to finance SMEs capital investment. The International Finance Corporation, with ADB and the Netherlands Development Corporation, invested equity in Planters Development Bank, the largest SME bank. German Development Corporation (KfW) and ADB have provided credit lines for micro-, small and medium enterprises in rural areas. German Agency for Technical Cooperation (GTZ) is providing a comprehensive private sector development assistance package to DTI, covering the Visayas region. The Japan International Cooperation Agency (JICA) plans to help DTI formulate a long-term SME development strategy. The Canadian International Development Agency (CIDA) has provided TA for private sector development focusing on SMEs. None of the funding agencies has however provided assistance directly focusing on the acceleration of SME financing through improved credit policy framework, credit supplementation such as credit guarantee and guarantees to export-import financing, and provision of working capital requirements of SMEs. ADB will coordinate with other funding agencies during the finalization of the scope of the proposed assistance and its implementation. 11. ADB s country strategy and program update for the Philippines 2003 2005 aims at (i) reducing poverty, (ii) promoting equitable growth, (iii) improving social services delivery, (iv) protecting the environment, and (v) promoting good governance. These objectives are closely aligned with the strategic goals of the Medium-Term Philippine Development Plan of the Government, which advocates developing SMEs as one of its main strategies for poverty reduction. The poverty partnership agreement between ADB and the Government calls for credit 3

4 support for SMEs in partnership with the private sector to encourage broad-based growth and equitable development. III. THE TECHNICAL ASSISTANCE A. Purpose and Output 12. The purpose of the TA is to develop a program to increase finance to SMEs by improving policy and regulatory requirements for SME finance, assisting the Government in its efforts to spread BDSs nationwide, and enhancing Government financial and credit institutions abilities to increase financial support to SMEs. 13. The TA will provide necessary inputs for joint formulation of the ensuing program with stakeholders, including BSP, business chambers, DOF, DTI, financing agencies, financial institutions, PhilEXIM, SBC, and SMEs. The inputs needed will be determined based on indepth analysis of the constraints to the SME financing, including a thorough review of the BSP s prudential regulations on SME finance, the provisions of the Magna Carta for Small Enterprises, a survey of the BDSs most needed by SMEs, and the analysis of the organization and operation of the Government credit and credit supplementation institutions. B. Scope 14. The results of the following TA activities will be disseminated among policy makers and financial practitioners, in order to increase their awareness of the need for accelerating SME financing. They are in turn expected to make an active contribution to the TA output through workshops and forums including the SME financing summit meeting to be hosted by SBC under DTI in June 2003, and policy and technical discussions to be conducted under the TA. 15. Regulatory Constraints to the SME Financing. The TA will examine the constraints that banks face in providing credit to SMEs. Based on the findings, the TA will seek options for revised banking regulatory procedures to facilitate SMEs access to finance. The options will be within the prudential norms and international best practices as envisaged under the latest Bank for International Settlement guidelines, and will take into account the current SME financing needs in the Philippines. The provisions of the Magna Carta for Small Enterprises will be thoroughly reviewed and revisions recommended to better respond to SME lending by banks. 16. Business Development Services. Under the TA, currently operating and planned initiatives for DTI s BDSs that are based on commercial principles and private-public partnerships, will be reviewed in detail. Such initiatives include capacity building and skills development to prepare bankable business plans, 8 financial management, managerial skills, application of the latest information and communication technology, and human resource development. Based on the study, the best way to integrate BDSs into SME financing will be evaluated for inclusion in the ensuing program. 17. Government Credit and Credit Supplementation Institutions. Through an in-depth analysis, the TA will determine the key elements for successful credit guarantee schemes and other credit supplementation institutions, based on the comparative study of the facilities, operation, and effectiveness of credit supplementation in the region. A survey will be conducted to analyze SMEs demand for credit and credit supplementation, targeting SME financing institutions and SMEs. Based on the results of the survey, options for appropriate SME 8 Bankable means satisfactory to bankers in providing credit to a business due to prospects for positive future cash flow, business growth and stability, good management, sound financial management, etc.

financing schemes to be funded by the proposed loan will be presented for further discussion with the stakeholders including BSP, DOF, DTI, and potential SME borrowers. The scope, financing schemes and implementation arrangements for the proposed program will be finalized to best cater to the development of the SME credit and credit supplementation. The TA will also recommend sustainable credit supplementation schemes for the long term. C. Cost Estimates and Financing Plan 18. The total cost of the TA is estimated at $575,000 equivalent, comprising $270,000 in foreign exchange costs and $305,000 equivalent in local currency costs. The Government has requested ADB to finance $400,000 equivalent, covering the entire foreign exchange cost and $130,000 equivalent of local currency costs. The TA will be financed by ADB on a grant basis from the Japan Special Fund, funded by the Government of Japan. The Government will finance the remaining $175,000 equivalent of the local currency costs. Details of the cost and financing plan are in Appendix 3. The Government has been advised that approval of the TA does not commit ADB to provide any proposed loan. D. Implementation Arrangements 19. DTI will be the Executing Agency. DTI s Industry and Investments Group will have overall responsibility for supervising the TA implementation. The TA project advisory committee, chaired by the secretary of DTI and comprising Small and Medium Enterprise Development Council, BSP, DOF, National Economic Development Authority (NEDA), SBC and PhilEXIM will be involved in formulating the program. 20. The TA will require about 8 person-months of international consulting services, comprising expertise in SME finance policy, banking supervision, SME finance, SME business development services, and financial analysis. The international consultants will associate with domestic consultants who will provide about 15 person-months of expertise in SME finance, law, taxation, SME BDSs, and financial analysis. A consulting firm will be selected in accordance with ADB s Guidelines on the Use of Consultants and other arrangements satisfactory to ADB for engaging domestic consultants, through the biodata-based selection and on quality and cost based arrangements. The TA will be implemented over 8 months, to commence in January 2003 and finish in August 2003. The outline terms of reference for the TA consultants are attached in Appendix 4. 5 IV. THE PRESIDENT S DECISION 21. The President, acting under the authority delegated by the Board, has approved the provision of technical assistance not exceeding the equivalent of $400,000 on a grant basis to the Government of the Republic of the Philippines for preparing the Program to Accelerate Small and Medium Enterprise Finance, and hereby reports this action to the Board.

6 Appendix 1 PRELIMINARY PROGRAM FRAMEWORK Design Summary Performance Indicators/Targets Monitoring Mechanisms Assumptions and Risks Goal Acceleration of financing for small and medium enterprises (SMEs) Purpose Increased credit to SMEs Central Bank of the Philippines (BSP) reports Project completion report Sound banking system Peace and security in the country Improve financial regulations, enhance capacity building initiatives, and develop sustainable credit supplementation and alternative financing opportunities for SMEs Revising regulations to facilitate SMEs access to credit Strengthening business development service activities provided by public and private sectors Building capacity of credit guarantee institutions Developing new financing schemes for SMEs SME Development Council reports BSP reports on SME financing Impact assessment reports Annual reports of credit supplementation institutions SME development remains one of the prioritized strategies of the Government The Government s commitment to the budget allocation to Bureau of Small and Medium Enterprise Development Coordination among external financing agencies and nongovernment organizations

Appendix 2 7 SUMMARY INITIAL POVERTY AND SOCIAL ANALYSIS A. Linkages to the Country Poverty Analysis Sector identified as a national Yes Sector identified as a national priority in country poverty analysis? priority in country poverty partnership agreement? Contribution of the sector/subsector to reduce poverty in Philippines: Yes ADB s poverty reduction strategy recognizes support to SMEs as a key aspect of fighting poverty. The Philippines poverty partnership agreement states that in order to achieve the poverty reduction priorities of the agreement the government agrees to encourage broad-based growth and equitable development, credit support for small and medium enterprises (SMEs) will be extended in partnership with the private sector and civil society to create jobs, especially in the rural areas, and to provide the basis for expanding the domestic market. For its part ADB agrees to support Government efforts to increase the efficiency of financial markets and reform industrial policy in order that resources may be allowed to flow towards the more competitive and productive sectors of the economy, particularly microenterprises, SMEs and rural enterprises. The proposed loan is in direct fulfillment of the poverty partnership agreement. B. Poverty Analysis Proposed Classification: growth What type of poverty analysis is needed? The consultants should pay particular attention to the particular barriers and constraints of SMEs at the small end of the scale and in rural areas outside of the major metropolitan regions of Cebu, General Santos, and Metro Manila. C. Participation Process Stakeholder analysis: Technical Assistance paper has adequately identified the stakeholders. Participation strategy required: No D. Potential Issues Subject Significant, Not Significant, Uncertain, None Strategy to Address Issues Plan Required Resettlement None No Gender Not significant Consultants to identify and review for No significance any special financial programs for women entrepreneurs Affordability None No Labor None No Indigenous None No People Other Risks/ Vulnerabilities None No

8 Appendix 3 COST ESTIMATES AND FINANCING PLAN ($'000) Foreign Local Total Item Exchange Currency Cost A. Asian Development Bank Financing a 1. Consultants a. Remuneration and Per Diem i. International Consultants 180 0 180 ii. Domestic Consultants 0 80 80 b. International and Local Travel 35 7 42 c. Reports and Communications 10 3 13 2. Equipment 0 0 0 3. Training, Seminars, and Conferences a. Facilitators 0 20 20 b. Training Program 0 0 0 4. Surveys 10 0 10 5. Miscellaneous Administration and 0 5 5 Support Costs 6. Representative for Contract Negotiations 0 0 0 7. Contingencies 35 15 50 Subtotal (A) 270 130 400 B. Government Financing 1. Office Accommodation and Transport 0 65 65 2. Remuneration and Per Diem 0 50 50 of Counterpart Staff 3. Others 0 60 60 Subtotal (B) 0 175 175 Total 270 305 575 a Financed by the Japan Special Fund, funded by the Government of Japan Source: Asian Development Bank estimates.

Appendix 4 9 OUTLINE TERMS OF REFERENCE FOR CONSULTANTS A. Overview 1. The technical assistance (TA) will help develop an integrated strategy for accelerating credit to small and medium enterprises (SMEs). This is achievable through (i) in-depth review of the banking regulation relating to SME financing and the efficiency of the provisions of the Magna Carta for Small Enterprises, (ii) seeking options for the effective harmonization between the efforts in building capacity of SMEs and the banks lending to SMEs, and (iii) designing the assistance of the Asian Development Bank (ADB) to the SME credit and credit supplementation. B. Policy and Regulatory Review 2. The TA will analyze banks SME lending operations and examine regulatory requirements imposed by the current Central Bank of the Philippines (BSP) prudential norm, the lending policy of the Monetary Board (BSP s policy making body), and the Magna Carta for Small Enterprises. The study results will be disseminated through workshops, among policy makers representing BSP, Department of Trade and Industry (DTI), Department of Finance, National Economic Development Authority, government financial institutions, private sector banks, and other stakeholders for the further discussion and to recommend amendments to the current SME financing policy and regulations. Such recommendations will take into a due account the best international prudential practices and the current SME financing needs in the Philippines and keep a good balance between them. A survey will be conducted to find credit demand from SMEs as a base for the recommendation. C. Business Development Services 3. The TA will review in detail (i) commercially operating business development services (BDSs) to SMEs, (ii) DTI s initiative for the development of such services, and (iii) BDSs operated in a private-public partnership. It will examine the effectiveness and efficiency of these business development services, and seek new methodologies for integrating them into the lending to SMEs, to facilitate SMEs access to the needed finance. The application of information and communication technology to the BDSs will also be examined. A survey will be conducted to determine the demand for various BDSs, the same time as the survey for credit demand as a base for the recommended new methodologies. D. Small and Medium Enterprise Credit and Credit Supplementation 4. The TA will make a comparative study of the credit guarantee schemes and other credit supplementation institutions in the region, including the Philippines, to find the current status of development in terms of scale, institutional capacity, and operation of the SME credit and credit supplementation schemes in the Philippines. In particular, the TA will thoroughly review the institutional, operational, and financial status of the two Government-owned credit and credit supplementation institutions, i.e., Small Business Guarantee and Finance Corporation (SBC) and Philippine Export-Import Credit Agency (PhilEXIM), as the candidates for the recipients of the proposed ADB loan. A survey will be conducted, in concurrence with the survey for credit demand and demand for BDSs, to determine the demand for SME credit guarantee, alternative financing such as credit against receivables, export-import credit guarantees, and discounting facilities as a base for designing appropriate SME financing schemes to be funded by the proposed ADB loan.

10 Appendix 4 E. International Consultants 1. Team Leader and SME Financing Policy and Credit Expert (6 personmonths) 5. The team leader will have a good knowledge of SME financing, including lending, credit supplementation such as credit guarantees and export/import credit guarantees, discounting, SME financing policy at the national level, financial regulations, and the latest Basel Committee on Banking Supervision prudential guidelines. The team leader will do the following: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) Take a leading role in coordinating other international and domestic consultants activities to deliver a successful TA outputs. Review the volumes and trend of SME lending by direct bank lending and lending with credit enhancement. Design a survey of demand for SME credit and credit supplementation and BDSs that can facilitate SMEs access to finance, in collaboration with banks, business chambers, and other experts. Negotiate and discuss the implementation of the survey with a survey company, and supervise the survey. Based on the survey results and the consultation with banks, SBC, PhilEXIM, business chambers, SMEs, BSP, the Small Business Development Council (SMEDC), external financing agencies, and other stakeholders of SME financing, prepare an overview of the SME financing in the Philippines, focusing on financial regulation, the need for BDSs to be integrated in SME financing, and the potential growth of the credit supplementation schemes drawn from the successful development in the region. Analyze the policy and regulatory issues in SME finance acceleration, such as BSP s current prudential requirements for banks, needs for capacity building so SMEs can better access finance, and impediments to a sound development of credit supplementation such as credit guarantees and export-import credit guarantees and alternative financing such as discounting, lending against receivables (factoring), financial leasing and lease purchase. Disseminate the study results among policy makers, banks, government financial institutions, business chambers, SMEDC, funding agencies and other stakeholders, though workshops and forums including the SME financing summit to be hosted by SBC in June 2003. Based on the study results, design and recommend modalities for the proposed ADB loan for accelerating SME financing. Analyze in detail the institutional, operational, and financial aspects of SBC and PhilEXIM as candidate recipients of the proposed ADB loans. Conduct poverty assessment in line with ADB s guidelines for loan processing.

Appendix 4 11 2. SME Business Service Expert (2 person months) 6. The expert will do the following: (i) (ii) (iii) (iv) (v) (vi) Collaborate with the team leader in designing a survey of demand for BDSs that can facilitate SMEs access to finance. Make a thorough review of BDSs that support SME access to financing. Such BDSs include the ones provided by SME banks, chambers, and non-government organizations, and those supported by DTI, other government agencies and external funding agencies. Based on the findings from the research, propose new schemes for integrating BDSs into SME financing. Seek to apply the latest information and communication technology to the BDSs for inclusion in the loan proposal. Disseminate the study results and proposals among policy makers, banks, government financial institutions, business chambers, SMEDC, external funding agencies and other stakeholders, though workshops and forums, including the SME financing summit to be hosted by SBC in June 2003. Conduct an environmental assessment of the program in line with ADB s guidelines for loan processing. F. Domestic consultants 1. SME Financing Policy and Regulatory Expert (6 person-months) 7. The expert will do the following: (i) (ii) (iii) (iv) (v) Coordinate the discussion on the revision of SME policy and regulation affecting SME financing among policy makers and private sector stakeholders, through seminars and workshops, and based on the studies conducted under the TA. Assist the team leader to design a survey of demand for SME credit and credit supplementation. Participate in the analysis of the survey results. Identify the policy and regulatory issues to accelerating SME financing. Assist the team leader to organize workshops and seminars and make the necessary administrative arrangement. 2. SME Finance Expert (4.5 person-months) 8. The expert will do the following:

12 Appendix 4 (i) (ii) (iii) (iv) (v) (vi) Coordinate the discussion on the development of SME credit and credit supplementation among policy makers and private sector stakeholders, through seminars and workshops, and based on the studies conducted under the TA. Assist the team leader to design a survey of demand for SME credit and credit supplementation. Participate in the analysis of the survey results. Identify the impediments to a sound development of credit supplementation such as credit guarantees and export-import credit guarantees in the Philippines, drawing on successes in the member countries of the Asian Credit Supplementation Institution Confederation. Identify the needs to develop alternative financing such as discounting, factoring, financial leasing and lease purchase. Assist the team leader to organize workshops and seminars and help the SME financing policy and regulatory expert make the necessary administrative arrangements. 3. SME Business Development Service Expert (4.5 person-months) 9. The expert will do the following: (i) (ii) (iii) (iv) (v) Coordinate the discussion on the development of SME business services that will facilitate SMEs access to finance among policy makers and private sector stakeholders, through seminars and workshops, and based on the studies conducted under the TA. Assist the team leader to design a survey of demand for BDSs and supervise the implementation of the survey. Participate in the analysis of the survey results. Identify the needs for the capacity building of SMEs and the development of BDSs that will facilitate SMEs access to finance. Assist the team leader to organize workshops and seminars and help the SME financing policy and regulatory expert make the necessary administrative arrangements. G. Reporting Requirements 10. The team leader will submit the following reports to ADB and the Government: (i) An inception report will be submitted within 2 weeks of commencement of the team leader s services. The report will outline the methodology to be used in reviewing the SME finance policy and regulation, currently operating and planned BDSs to facilitate SME financing, and credit supplementation and alternative SME financing. The report will outline expected inputs from domestic and

Appendix 4 13 international consultants, and stakeholders through consultation, identify available data, and describe how to coordinate and consolidate such inputs into the reports for ADB. (ii) (iii) (vi) A midterm report will be submitted within 3 months of commencement. The report will be based on survey results, consultations with stakeholders, and draft reports prepared by the domestic and international consultants. The report will contain (a) overview of the SME sector and SME financing; (b) review of SME financial regulation and identification of a policy agenda for the acceleration of SME finance; (c) recommendations for amendments to regulatory requirements within the best international prudential norms; (d) proposals for schemes providing BDSs to facilitate SMEs access to finance; (e) project proposals for strengthening credit supplementation and alternative financing opportunities; and (f) proposals for streamlining the legal, tax, and regulatory framework affecting SME financing. A summary of the midterm report will be disseminated to the participants to the SME financing summit to be held in June 2003. A draft final report will be submitted within 5 months of commencement. The report will consolidate all inputs from all consultants and present a comprehensive strategy for the SME credit facilitation, refined and detailed policy agenda, and strengthened proposals for the proposed ADB loan program in the standard ADB reporting from. A final report will be submitted within 3 weeks of having received ADB s and the Government s final comments on the draft final report. 11. The international expert will provide, within 1 week of commencement, (i) an inception report outlining methodologies to be used, and issues to be addressed; (ii) a draft final report, 3 weeks before the end of the assignment, containing preliminary analysis and results, recommendation, proposed project design, and other related matters; and (iii) a final report, within 2 weeks of having received ADB s comments on the draft final report. 12. The consultants will submit to ADB and Government all reports, data, and materials in hard and soft copies.