MANILA, Philippines – The country’s small and medium enterprises (SME), which account for 35 percent of gross domestic product (GDP), still depend on non-bank entities for credit needs.

According to a joint Deloitte-Visa report titled “Digital banking for small and medium-sized enterprises: Improving access to finance for the underserved,” total SME loan volume from banks stood at only $9 billion in 2014, compared to Thailand’s $171 billion the highest in the region.

SMEs employ 65 percent of the workforce, with majority concentrated in the National Capital Region.

After adjusting for the size of the economy and SMEs’ contribution to GDP, the Philippines lagged behind its neighbors in the domain of SME lending, the report noted.

Personal funds continue to be a dominant source of financing among SMEs, where only 39 percent of respondents citing bank loans as a funding instrument.

A significant proportion of SMEs have to seek funding from alternative sources including: capital leasing, or roughly 24 percent of respondents supplier credit, 24 percent equity financing, 10 percent and grants, two percent.

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“Access to financing is a key challenge for local SMEs, with most Philippine lenders requiring collateral before extending credit. Slow fund disbursement due to lack of credit information, lack of bank and government guidance on preparation of compliance documents, and vulnerability of financial institutions that result to high-cost loans are other financing barriers,” the report said.

SMEs also face non-financing challenges, which include, rising business costs difficulty of finding sustainable, quality labor intense business competition unstable consumer demand and government regulations.

Like the Philippines, Asean SMEs have limited access to financing despite being critical drivers of national growth and employment.

SMEs in Indonesia, Malaysia, Singapore, Thailand and the Philippines collectively contribute 30 to 60 percent of their GDP, and employ 60 to 90 percent of the workforce.

Yet, according to the joint report, less than 60 percent of SMEs across these countries have access to bank loans as a means of financing, with personal funds continuing to be a dominant source.

Deloitte Consulting’s executive director Mohit Mehrotra said as key contributors to their countries’ economies, SMEs should be a priority market for stakeholders such as the government, regulators, and financial institutions. Without adequate financing, they will not be able to build competitiveness and resilience, innovate and be sustainable in today’s competitive climate.

“Key factors that impede SME lending and result in the poor inclusion of SMEs across the five countries include stringent lending regulations, inadequate financial infrastructure, poor distribution of infrastructure, and collateral-based credit risk models,” Mehrotra added.

To overcome these challenges, particularly factors limiting SME lending, the Philippines and its Asean neighbors must adopt innovative business solutions to address SMEs’ varied financial and non-financial needs.

With the digital revolution, banks and financial institutions in the Asean region can develop new business models which involve leveraging on digital solutions providers and forming strategic partnerships with challenger banks, financial technology and e-commerce providers to target SMEs in unconventional ways.

For example, they could finance SMEs through alternative channels use payment data to supplement credit risk models capitalize on digital infrastructure to lower cost and improve distribution channels and offer a comprehensive suite of products and services.