CPBRD Policy BriefNo. 2016 - 05

ImprovIng FInancIng access oF msmes In the phIlIppInes through secured transactIons

Congressional Policy and Budget Research DepartmentHouse of Representatives

The views, opinions, and interpretations in this report do not necessarily reflect the perspectives of the House of Representatives as an institution or its individual Members.

abstract

The lack of acceptable collateral is one of the issues with regard to access to financing. MSMEs have moveable properties that can be used as collateral to facilitate access to credit. There is already an existing legal framework for secured transactions and collateral registry provided under the Chattel Mortgage Law (Act No. 1508). This law, however, has not been fully utilized to facilitate credit access of MSMEs. Moreover, there is currently no unified electronic registry system than can deter the use of one particular moveable asset as collateral in several loan transactions. Thus, it is important to strengthen the legal and institutional framework to facilitate the use of movable property as collateral for both business and consumer loans.

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Improving Financing Access of MSMEs in the Philippines through Secured Transactions*

1. Introduction

The critical role of micro, small and medium enterprises (MSMEs) in reducing poverty and achieving inclusive development was highlighted during the 2015 Asia-Pacific Economic Council (APEC) Meeting. As a source of growth and innovation, the APEC Leaders’ declaration underscored the importance of empowering the MSMEs for them to contribute to and benefit from future growth. Specifically, increased participation of MSMEs in the global trade can have significant impact in reducing poverty through employment creation, productivity improvements and economies of scale.

It was, however, noted that MSMEs are confronted with a number of constraints. These include among others, the cumbersome rules and regulations in registration and the limited access to financing. It was specifically noted that access to finance of MSMEs is crucial for their expansion, internationalization, and productivity improvement.

In the Philippines, the issues of MSMEs are no different from those identified during the APEC Meeting. The MSME Development Plan for 2010-2016 cited high cost of doing business, weak access to finance and market information, inability to penetrate export markets, and low level of productivity and competitiveness as the key constraints to MSME development in the country. These obstacles have prevented them from reaching their full potential and operating in a highly competitive global environment.

Among these constraints, access to financing is seen as the most challenging concern of MSMEs. Poor access to financing limits the much-needed capital under various stages of MSME development from start up to expansion. It also restricts their opportunity to make the business grow and tap export markets. The problem of low productivity which can be traced to weak technological capabilities and failure to adapt to new technology can also be traced to scarcity in financing.

As part of the commitment to support MSMEs and reinforce their role in pursuing inclusive development, the member economies of the APEC recognized the creation of a Financial Infrastructure Development Network that will promote measures that facilitate access of MSMEs to efficient and affordable financial services. These measures include the development of effective credit information systems, secured transactions and insolvency frameworks to facilitate the use of movable assets as collaterals in the credit markets.

This paper focuses on secured transactions. It examines the existing framework for secured transactions in the country as another venue to help address the financing problems of MSMEs.

by Rosemarie R. Sawali

* This paper benefited from the discussions with Service Director Elsie C. Gutierrez, Executive Director Manuel P. Aquino and Director General Romulo E.M. Miral, Jr., PhD.

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It presents the recommended benchmarks/standards for a framework for secured transactions as well as the experiences of other countries in secured transactions financing to facilitate the improvement of the current setup to facilitate MSMEs access to financing in the country.

SMEs in the Philippines

Micro, small and medium enterprises (MSMEs) or those with less than 200 employees reached 941,174 accounting for 99.6% of the total establishments in the Philippines in 2013. Micro enterprises or those with employment size of 9 and below accounted for 90% of the total establishments.

Number of Establishments by Employment Size Economic Contribution of SMEs

57.8

31.935.7 38.7 40

15.8 19 20

29.5

20

0

10

20

30

40

50

60

70

Indonesia Malaysia Philippines Thailand Vietnam

Contribution to GDP (%) Share of Total Exports (%)

Source: PSA Source: SMEs Internalization and Finance in Asia, Yoshino and Wignaraja (2015)

The Department of Trade and Industry (DTI) estimates that MSMEs contribute about 35.7% of the total value-added in the economy. Small enterprises (with 10-99 employees) accounted for the largest share at 20.5% followed by medium enterprises (with 100-199 employees) at 10.3%. While micro enterprises accounted for the highest share to the total number of establishments at almost 90% in 2013, the sector contributed only 4.9% to the total value-added in the economy. Large enterprises which account for only 0.4% of the total number of establishments contributed more than a third of the total value-added at 64.3%. For the period 2009 to 2013, MSMEs accounted for an average of 63.0% of the total employment of all establishments. In 2013, a total of 4.8 million jobs were generated by MSMEs, 75% higher than the 2.7 million jobs generated by large enterprises. Micro enterprises accounted for the highest share at 31.1% of the total employment in 2013 or equivalent to 2.3 million jobs. Average employment size of a micro enterprise during the period is 2.55. SMEs’ contribution to GDP at 35.7% is relatively comparable to ASEAN-5 economies. SMEs in Indonesia has the highest contribution to GDP at 57.8% followed by Vietnam at 40% and Thailand at 38.7%. In terms of share to total exports, Thailand records the highest at 29.5% followed by the Philippines and Vietnam, both at 20%. Even with its more than 50% contribution to GDP, the share of SMEs to the total exports in Indonesia is modest at only 15.8%.

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FundamentalsofSecuredTransactions

Secured transactions are credit transactions where a creditor holds an interest in a debtor’s movable property (referred to as collateral) to secure a loan or a debt obligation (International Finance Corporation). This is to ensure against loss in case the obligations under the transaction are not fulfilled. Depending on the framework adopted/established, the security interest can be transferred to a third party who becomes the new secured party. (http://legal-dictionary.thefreedictionary.com/Secured+Transactions)

There are several forms of secured transactions but only three are most commonly used: (i) pledge refers to the delivery of goods to the secured party as security for a debt; (ii) chattel mortgage is similar to a pledge but the debtor is allowed to retain possession of the property that is used as collateral for the debt; and (iii) conditional sale occurs when a debtor uses the borrowed money to buy an item and the creditor receives a lien or claim to the purchased item to secure repayment of the loan.

A collateral serves as the centerpiece of a secured transaction. It serves as the security of a creditor for a debt given. Generally, anything can be used as collateral as long as it is acceptable to the creditor. The collateral that can be used usually depends on the amount, tenor and structure of the loan. The most common types of collaterals required are: (i) real estate (land and building); (ii) plant and equipment; (iii) automobiles; (iv) farm products (crops and livestock) ; (v) inventory (goods held for sale, raw materials, work-in-process); (vi) marketable securities (stocks and bonds, certificate of deposits); and (vii) accounts receivables.

A secured transaction is a written agreement or a contract between the debtor and the creditor or the secured party. It contains a security agreement, either a separate contract or a paragraph in the loan document – which gives the creditor a security interest in the collateral and the legal right to own the collateral if the debtor fails to settle the loan. A secured transaction must meet the following requirements before the creditor's interest in the collateral can be legally enforceable: (i) contains an express agreement between the debtor and the secured party; (ii) describes the collateral; (iii) contains express language granting the security interest to the creditor; and (iv) is signed by both parties. In addition, something of value must be given by one party to another party which is sufficient to create a contract. This can be in the form of a commitment to extend a credit, delivery and acceptance of goods under a contract, etc. Once the requirements are satisfied, the security side of the agreement is complete and legally enforceable which is referred to as attachment.

Another important process in a secured transaction is perfecting which is done to ensure that the creditor is completely secured. This requires the secured party to file a financing statement – a document which fully describes the secured transaction – with the appropriate government agency which makes the claim of the secured party official. The financing statement provides notice to the public over the creditor’s rights to the collateral and gives priority to the secured party over other creditors that could later demand a right to the same collateral. Perfecting the transaction prevents the use of a particular collateral over multiple loans.

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Importance/BenefitsofSecuredTransactions

The importance of a secured transactions law lies in reducing risks associated with borrowing. A credit secured by assets provides creditors other forms of recovery in case of non-payment. When the risk is reduced, it is likely to result in more credit availability as well as increasing the amount of credit and reducing the cost of credit.

Citing the study of Safavian et. al. (2006), the World Bank (2010) noted that in countries where security interests are perfected and where there is a predictable priority system for creditors in cases of loan default, credit to the private sector as a percentage of gross domestic product (GDP) averages 60% compared with only 30%-32% for countries without creditor protection. Further, the World Bank noted the study of Chaves et al (2004) where borrowers with collateral in industrial countries get longer repayment periods (11 times longer), 50% lower interest rates, and nine times the level of credit given their cash flow compared to borrowers without collateral.

The International Finance Corporation (IFC) underscored the importance of facilitating the use of movable collateral in strengthening the financial system through the following:

i. Diversification of assets held by financial institutions efficiently spreading the risk;ii. Reducing concentration in the financial system, by providing banks with profitable

lending opportunities in the SME sector to increase their financial market share;iii. Improved liquidity of assets, especially short-term assets such as accounts receivables;iv. Increased competition for financial services by enabling non-banks to offer secured

loans; andv. Improved ability of regulators to analyze portfolio risks in line with both standardized

approaches and internal risk rating models.

The benefits of a Secured Transactions Law have been documented in a number of countries. Generally, these countries recorded an improvement in SME access to financing.

Vietnam. The legal framework for secured transactions was improved through the promulgation of the Secured Transactions Decree in 2007 by enhancing creditors and debtors rights, increasing the scope of assets that can be used as collateral, making registration of security interest easier, protecting secured creditors, establishing a clear priority scheme in case of default, and facilitating enforcement mechanisms. There was an increase in the number of registrations in the National Registry of Secured Transactions (NRAST) to 120,000 in 2008 from 43,000 in 2005 when the project started.

China. The Property Law in China was enacted in 2007 which was followed by the creation of a national online registry for security interests in receivables. The registry incorporated all the key features of a modern movable collateral registry and is easy to use and efficient. An independent evaluation was conducted in 2011 and reported that over 385,000 registrations with loan value estimated at over US$3.5 trillion was recorded between October 2007 and June 2011. About 68,500 SMEs with about $1.1 trillion benefitted from the improved access to

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credit. The total number of commercial loans involving movable assets grew by 21% per year over 2008-2010 compared to a flat rate over the period 2006-2008.

Ghana. The collateral registry in Ghana was established after the enactment of the Borrowers and Lenders Act in 2008. In the subsequent years, some improvements were introduced in the law and in the registry system to align with international best practices. The reform measure has led to the following: (i) More than 20,000 loans have been registered since March 2010; (ii) Total financing secured with movable property accounting for more than US$800 million and (iii) More than 100 local SMEs benefitted in the mining and oil industry which created hundreds of new jobs through the development of productive supply chain financing schemes. The top three types of moveable collateral used by businesses and SMEs are accounts receivables, other investment instruments such as shares, cash, bonds and household assets which account for 64% of the total. The challenge remains in reaching out to rural and community banks as around 63% of banks and other financial institutions use the registry.

GettingCreditinthePhilippines

The financing problem of MSMEs continues to persist in the country in spite of the numerous programs that have been implemented to address the issue. Several laws were also crafted to facilitate access to finance. The Magna Carta for MSMEs (RA 6977 as amended by RA 8289 and RA 9501) requires lending institutions to set aside at least 8% for micro and small enterprises and 2% for medium enterprises of their total loan portfolio for MSME lending. Other laws that facilitate access of MSMEs to financing are presented in Annex 1.

Source: Supervisory Data Center, Supervision and Examination Sector

CompliancewithMagnaCartaforMicro,SmallandMediumEnterprises(In Billion Pesos)

2009 2010 2011 2012 2013 2014 2015 I.TotalLoanPortfolioNetofExclusions 1728.6 1,881.1 2,303.4 2,912.3 3,309.7 4,003.5 4,702.7

II. MinimumAmountRequiredtobeAllocatedfor: A. Micro and Small Enterprises Credit ( 8% of Net Loan Portfolio) 138.3 150.5 184.3 233.0 264.8 320.3 376.2

B. Medium Enterprises Credit ( 2% of Net Loan Portfolio) 34.6 37.6 46.1 58.2 66.2 80.1 94.1

MinimumAmountRequiredtobeSetAside 172.9 188.1 230.3 291.2 331.0 400.4 470.3

III.CompliancewithPrescribedAllocationofLoanPortfolioto: A.MicroandSmallEnterprises Total compliance 167.6 159.1 174.2 186.2 185.1 196.1 204.7 Percentage of compliance 9.7 8.5 7.6 6.4 5.6 4.9 4.4 B.MediumEnterprises Total compliance 141.7 149.4 174.7 201.5 201.9 244.1 291.1 Percentage of compliance 8.2 7.9 7.6 6.9 6.1 6.1 6.2 TotalFundsSetAsideforMSMEs 309.4 308.6 348.9 387.7 387.0 440.2 495.8

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Data from the Bangko Sentral ng Pilipinas show that loans granted to MSMEs have reached P495.8 billion as of end-2015, 12.6% higher than the P440.2 billion in 2014. In terms of compliance to the Magna Carta for MSMEs, loans extended to medium enterprises have consistently surpassed the mandatory requirement of 2% of net loan portfolio. However, there has been a declining trend in the compliance rate from 8.2% in 2009 to 6.2% in 2015. For micro and small enterprises, banks were able to comply with the required 8% of net loan portfolio in 2009 and 2010 recording a compliance rate 9.7% and 8.5%, respectively. The loan compliance rate for micro and small enterprises has also continued to decline to 4.4% in 2015.

There are also programs that facilitate credit to MSMEs. The SME Unified Lending Opportunities for National Growth (SULONG) which is now called the Access of Small Enterprise to Sound Lending Opportunities (ASENSO) by government financial institutions simplifies and standardizes lending procedures to improve SMEs access to funds. A Microfinance Program is also being implemented by the Land Bank and the People’s Credit and Finance Corporation to provide livelihood credit and other microfinance services through partnership with microfinance institutions.

Data from SB Corporation show that total loan releases from the ASENSO Program has reached P207.4 billion from 2011 to 2015. Out of the seven government corporations that participated in the program, the Land Bank of the Philippines accounted for 87.8% of the total

ASENSO Releases(In Million Pesos)

Source: SB Corporation

2011 2012 2013 2014 2015 Total DBP 3,433.86 4,191.72 4,483.96 3,651.91 - 15,761.45 LBP 21,126.27 20,396.34 38,186.93 55,261.13 47,074.00 182,044.66 NLDC 38.84 27.47 10.93 4.00 - 81.23 PhilEXIM 251.81 345.5 451.71 206.96 - 1,255.98 QUEDANCOR - 385.00 - - - 385.00 SB CORP 1,784.36 2,015.4 1,602.78 490.33 819.42 6,712.29 SSS 160.25 354.48 30.94 474.74 186.82 1,207.23

Total 26,795.38 27,715.91 44,767.25 60,089.07 48,080.24 207,447.84

Given the number of policies and programs that ensure availability of funding for MSMEs, the financing issue of MSMEs appears to have less to do with the availability of funds but more on other issues such as limited access to information on the sources of funds and on how to access these funds, as well as difficulty in complying with requirements. Aldaba (2012) cited the joint study by the Ateneo Center for Research and Development (ACERD) and the Financial Executives Institute of the Philippines (FINEX) which pointed out that the problem is not on the supply of funds but on the difficulty of access to these funds.

The MSME Development Plan 2011-2016 acknowledged the availability of funds for MSMEs but also raised the difficulty in accessing funds because of stringent and voluminous requirements, e.g., collateral, financial statements, business plans and slow processing time

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of loan applications. On the other hand, banks are concerned about the bankability of MSMEs and the risk of lending to MSMEs.

The share of SME bank loans to total loans in 2014 was only 10.3% which is small compared to that of Malaysia (16.3%), Indonesia (19.7%) and Thailand (34.5%). Likewise, the share of SME loans to GDP is also low at only 3.1%.

BankLoanstoSMEsinSelectedSoutheastAsianCountries

Source: Shinozaki (2015). Compilation from the Asia SME Finance Monitor 2014

Based on estimates by Wignaraja and Jinjarak (2015) using World Bank Enterprise Survey data, the main source of SME financing in the Philippines in 2009 is internal funds (e.g., equity and retained earnings) at about 76%. Bank financing accounts for only about 9%. The other sources of financing are by supplier credit and equity or stock sales at about 7% and 3%, respectively. Limited access to external financing remains a major hindrance to SME development. Based on data from the IFC (2011) as cited by Wignaraja and Jinjarak (2015), the credit gap1 of SMEs in the Philippines is estimated at $2.0 billion or an average credit gap of $59,000 per enterprise.

One of the areas studied in the Doing Business 20162 report of the World Bank Group is on Getting Credit. Under this topic, two types of institutions and systems that can facilitate access to finance and improve its allocation are measured. One is the legal rights of borrowers and lenders in secured transactions and bankruptcy laws. The other is the coverage, scope and quality of credit information available through credit registries and bureaus. The report emphasizes that these institutions and systems work best together as the availability of information facilitates the assessment of the creditworthiness of borrowers while legal rights promote the use of collateral and facilitate the enforcement of claims in case of default.

1 The difference between formal credit provided to SMEs and total estimated potential need for formal credit.2 The Doing Business 2016: Measuring Regulatory Quality and Efficiency measures regulations affecting 10 areas of the life of a business involved 189 economies. The other areas examined are (i) starting a business; (ii) dealing with construction permits’ (iii) getting electricity; (iv) registering property; (v) protecting minority investors; (vi) paying taxes; (vii) trading across borders; (viii) enforcing contracts and (ix) resolving insolvency. The rank of the Philippines dropped six notches to 103rd from last year’s 97th spot across 189 economies.

SMELoans

to GDP (%) SMELoanstoTotal

Loans(%) Indonesia 7.2 19.7 Myanmar 0.1 - Malaysia 22.4 16.3 Philippines 3.1 10.3 Thailand 36.6 34.5

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GettingCredit

Notes: 1/ Actual rank of the countries in the Getting Credit area of the Doing Business 2016: Measuring

Regulatory Quality and Efficiency. The study which measures regulations affecting 10 areas of the life of a business involved 189 economies.

2/ Measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders and thus facilitate lending.

3/ Measures rules and practices affecting the coverage, scope and accessibility of credit information available through either a public credit registry or a private credit.

4/ Indicates the number of individuals and firms listed in a public credit registry with information on their borrowing history from the past 5 years.

5/ Indicates the number of individuals and firms listed by a private credit bureau with information on their borrowing history from the past 5 years.

Source: Doing Business 2016

Country Rank1

Strength of legal rights

index (0-12)2

Depth of credit

information index (0-8)3

Credit registry

coverage (% of

adults)4

Credit bureau

coverage (% of

adults)5 Cambodia 15 11 5 0 37.0 Singapore 19 8 7 0 58.6 Malaysia 28 7 7 57.0 77.1 Vietnam 28 7 7 41.5 6.9 Indonesia 70 5 6 48.5 0 Lao PDR 70 6 5 5.1 0

Brunei Darussalam 79 4 6 61.2 0 Thailand 97 3 6 0 60.2 Philippines 109 3 5 0 14.0 Myanmar 174 2 0 0 0

The rank of the Philippines in Getting Credit is 109, down from 105 in 2015. Compared to the other ASEAN member states (AMS), the Philippines is the second lowest in terms of ranking, just ahead of Myanmar.

The score of the Philippines under the first index - Strength of Legal Rights – is particularly low at 3. This index looks into the legal framework for secured transactions by examining whether collateral and bankruptcy laws facilitate lending. It includes twelve components – ten aspects related to legal rights in collateral law and two aspects related to legal rights in bankruptcy law. A score of 1 is assigned for each of specified following features of the laws.

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Source: Doing Business 2016

StrengthofLegalRightsIndex(0-12) Does an integrated or unified legal framework for secured transactions that extends to the creation, publicity and enforcement of functional equivalents to security interests in movable assets exist in the economy?

No

Does the law allow businesses to grant a non-possessory security right in a single category of movable assets, without requiring a specific description of collateral?

No

Does the law allow businesses to grant a non-possessory security right in substantially all of its assets, without requiring a specific description of collateral?

No

May a security right extend to future or after-acquired assets, and may it extend automatically to the products, proceeds or replacements of the original assets?

No

Is a general description of debts and obligations permitted in collateral agreements; can all types of debts and obligations be secured between parties; and can the collateral agreement include a maximum amount for which the assets are encumbered?

No

Is a collateral registry in operation for both incorporated and non-incorporated entities, that is unified geographically and by asset type, with an electronic database indexed by debtor's name?

No

Does a notice-based collateral registry exist in which all functional equivalents can be registered? No

Does a modern collateral registry exist in which registrations, amendments, cancellations and searches can be performed online by any interested third party?

No

Are secured creditors paid first (i.e. before tax claims and employee claims) when a debtor defaults outside an insolvency procedure? Yes

Are secured creditors paid first (i.e. before tax claims and employee claims) when a business is liquidated? No

Are secured creditors subject to an automatic stay on enforcement when a debtor enters a court-supervised reorganization procedure? Does the law protect secured creditors’ rights by providing clear grounds for relief from the stay and/or sets a time limit for it?

Yes

Does the law allow parties to agree on out of court enforcement at the time a security interest is created? Does the law allow the secured creditor to sell the collateral through public auction and private tender, as well as, for the secured creditor to keep the asset in satisfaction of the debt?

Yes

Score (number of "yes" responses) 3 The score of 3 for the Philippines means that the country conforms to only three of the desirable provisions of the required laws. One is on collateral law which ensures that secured creditors are paid first (e.g., before tax claims and employee claims) when a debtor defaults outside an insolvency procedure. The other two are related to bankruptcy law: (i) secured creditors are subject to an automatic stay on enforcement procedures when a debtor enters a court-supervised reorganization procedure, but the law protects secured creditors’ rights by providing clear grounds for relief from the automatic stay (e.g., if the movable property is in danger) or setting a time limit for it; and (ii) parties are allowed to agree in the collateral agreement that the lender may enforce its security right out of court, public and private auctions are allowed and the secured creditor is permitted to take the asset in satisfaction of the debt.

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On the other hand, among the features which the existing collateral law lacks include the following: (i) legal framework for secured transactions is integrated or unified; (ii) businesses are allowed to grant a non-possessory security right in a single category of movable assets, without requiring a specific description of collateral: (iii) security rights are extended to future or after-acquired assets; and (iv) operational collateral registry is unified geographically and by asset type and with an electronic database indexed by debtor's name.

The country’s score under the second index - Depth of Credit Information Index – is higher and at par with Cambodia and Lao PDR, but still the second lowest among AMS, just ahead of Myanmar. The index measures the rules and practices affecting the coverage, scope and accessibility of credit information available through either a public or a private credit registry.

In terms of credit registry coverage or the number of individuals and firms listed in a public credit registry with information on their borrowing history from the past 5 years, the country got a score of zero which covers credit registry’s database as of January 1, 2015.3 The Credit Information Corporation (CIC) which is mandated to act as central registry of credit information and to provide access to reliable and standardized information on the credit history and financial condition of borrowers had its soft launching on June 2015. The CIC was created under the Credit Information Systems Act of 2008 (RA 9510) which also prescribed its powers and functions. Other countries which have zero credit registry coverage include Cambodia, Singapore, Thailand and Myanmar. Brunei and Malaysia have the highest credit registry coverages at 61.2% and 57.0%, respectively.

On the other hand, the credit bureau coverage stood at 8.7 million, comprising of 8.5 million individuals and 200,000 firms, or about 14.0% of adult population (age 15 and above). This credit bureau coverage is small compared to Malaysia’s 77.1%, Thailand’s 60.2% and Singapore’s 58.6%.

Secured Transactions in the Philippines/Current Legislative andRegulatoryFramework

The existing legal and regulatory framework for secured transactions in the Philippines is provided for under the Chattel Mortgage Law (Act 1508). However, this law was enacted way back in 1906 and clearly needs to be revisited as it lacks the requirements of an effective and efficient modern secured transactions law.4

3 The credit registry coverage report includes information on the borrowing history of individual and firms within the past five years and those that have had no credit history in the past five years but for whom a lender requested a credit report from the registry in the period between January 1, 2014 and January 1, 2015.4 Abellera (2015) identified related laws that must be taken into consideration in drafting a secured transactions law. These include the following: (i) Act No. 2137 (February 5, 1912) – The Warehouse Receipts Law; (ii) Act 2243 (February 11, 1913) – Record of Mortgages issued by public service corporations to secure bonds, and other purposes; (iii) RA 386 (June 18, 1949) - Civil Code of the Philippines; (iv) Presidential Decree No. 1529 (June 11, 1978) – Property Registration Decree; (v) RA 7393 (April 13, 1992) – Quedan and Rural Guarantee Corporation Act; and (vi) RA 10142 (August 16, 2010) – Financial Rehabilitation and Insolvency Act (FRIA).

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The Chattel Mortgage Law defines chattel mortgage as a conditional sale of personal property as security for the payment of a debt, or the performance of some other obligation. Subject to the provisions of the law, all personal property shall be subject to mortgage and may include cattles and growing crops. The law requires that the description of the mortgaged property shall be clear and contains details that will enable the parties to the mortgage, or any other person, after reasonable inquiry and investigation, to identify the same.

For the chattel mortgage to be valid, it should be registered with the Register of Deeds where the mortgagor resides but should also be registered where the property is located if it is not the same as the former. Further, the mortgage is not valid against third persons if it is not registered.

The fees for chattel mortgage registration with the Registry of Deeds are provided for under PD 1529 (Amending and Codifying the Laws Relative to Registration of Property and for other purposes).

ChattelMortgageRegistrationFees

Service Cost (Pesos)

Entry or presentation of any document P5.00 Filing and recording Chattel Mortgage i) Mortgage Amount up to P6,000 ii) P6,000 < Mortgage Amount < P30,000

iii) P30,000 < Mortgage Amount < P100,000

iv) P100,000 < Mortgage Amount < P500,000

v) P500,000 < Mortgage Amount

P7.00 for first P500; P3.00 for each additional P500 P48.00 for first P8,000; P8.00 for each additional P2,000 P150.00 for first P35,000; P14.00 for each additional P5,000 P352.00 for first P110,000; P20.00 for each additional P10,000 P1,162.00 for first P520,000; P30.00 for each additional P20,000

Recording Instrument of Sale, Conveyance, Transfer of Property

Same as rate for filing and recording Chattel Mortgage but the base amount is only 10% of the mortgage amount

Notice of Attachment P8.00 Release of Mortgage 5% of amount of mortgage Release of Attachment P5.00 Sheriff’s Return of Sale P7.00 Recording Power of Atty., appointment of guardian, administrator, trustee

P10.00

Recording of instrument relating to a recorded mortgage

P5.00

Certified copies of records As allowed by law Issuing of Certificate relative to the existence or non-existence of entry in the registration book

P5.00 for up to 200 words; P1.00 for each additional 100 words

Research Fee P2.00 per document The existing legal and regulatory framework provided by the Chattel Mortgage Law is not fully utilized to facilitate credit access of MSMEs. Analysts are in agreement that there are untapped funds that can be utilized by MSMEs. However, lack of acceptable collateral has constrained banks from lending to MSMEs.

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The report on Doing Business 2016 deems Act 1508 as insufficient or inadequate to cover the requirements of an effective secured transactions law. It noted that the Philippines does not have an integrated or unified legal framework for secured transactions that extends to the creation, publicity and enforcement of functional equivalents to security interests in movable assets. According to the report, the weakness in the legal rights index which measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders and thus facilitate lending has adversely affected the getting credit rating which is one of the ten criteria in the assessment of doing business ranking.

There is currently no unified electronic registry system that can deter the use of one particular moveable asset as collateral in several loan transactions. However, the Land Registration Authority (LRA) has started efforts to improve chattel mortgage registration in the country by upgrading and modernizing the existing collateral registry and moving towards a web-based system. One initiative is the development of an enhanced Chattel Mortgage Query System that serves as due diligence tool for financing institutions. The existing system is being enhanced to allow queries at the Registry of Deeds, Kiosks and LRA Extension Offices and, subsequently launched through the web. The LRA is also developing a Self-Service Chattel Mortgage Registration System to allow partner institutions to register their own Chattel Mortgage transactions which will have the same legal effect of registering through the Registry of Deeds. This was scheduled for live testing last March 2016 in existing LRA Extension Offices at several major banks. This will also be made available through the web once the system has stabilized. In addition to the registration fee, information technology fees will also be collected to enable a reasonable rate of return for the computerization project of the LRA which was implemented under a Build-Operate-Transfer (BOT) arrangement.

FeaturesofaModernSecuredTransactionLaw

APEC economies agree and commit to internationally accepted principles on Secured Transactions citing the United Nations Commission on International Trade Law (UNCITRAL) Legislative Guide on Secured Transactions as the main reference for drafting a Secured Transactions Law. The following key features of a modern secured transactions framework were mainly based on the IFC (2007) work on secured transactions reform in Vietnam which follow the UNCITRAL Legislative Guide on Secured Transactions.

BroadScopeofPermissibleCollateral. The scope of acceptable collateral must be extensive to enable SMEs to have wide choices of their assets. It must include both tangible and intangible properties that do not exist yet or owned by the debtor (future assets), and a changing pool of assets. To cover future and changing assets, the collateral must be described generally and generically which is a requirement for modern inventory and receivables financing.

Ease of Security Interest Creation. Requirements for the creation of security interests should be kept to a minimum. Anyone may use movable properties as security and any person may take them. The written agreement that identifies the collateral and the secured obligation must be signed by both parties. The security agreement must enable involved parties to address

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concerns such as defining warranties and covenants, events of default, and remedies. Further, it should not require special terminology, forms, or notarization.

Clear,ComprehensiveandPredictablePriorityRules. The concept of priority enables the simultaneous existence of security rights but with different priority status in the same assets which allows the debtor to maximize the value of its assets by utilizing the same asset as security in securing a loan from more than one creditor but informing each creditor about the priority of its security right. The process of perfecting - which requires the filing of a financing statement with the appropriate government agency - sets the priority rules over a particular collateral when a debtor defaults. Priority rules must be clear and precise to enable a creditor and other persons dealing with the debtor to determine with a high degree of certainty the legal risks in granting secured credit. The priority rules follow the "first in time, first in priority" which means that the first to register or perfect has priority. CentralizedPublicitySystem. The central registry must be able to provide electronic means for registration and for searching/verifying of notices of security interests. This is an important feature of a modern secured transactions law as it notifies third parties of the existence of the security interest, and it establishes the priority status of a security interest based on the date of registration. The following are the features of an efficient registry: (i) Centralized and on-line; (ii) Allowed for all types of security interests in movables; (iii) Registered by creditors; (iv) Requires minimum registration information (identification of the debtor and the creditor and a general or specific description of the collateral should suffice) with no underlying documents; (v) Offers the public broad access to information even without proof of any particular capacity or need; and (vi) Levies reasonable fees. The role of registry officials must be limited to administrative function and they are not responsible for nor should they have the authority to determine the authenticity, accuracy or validity of the information provided in the registration document.

EffectiveEnforcement. A fast, fair and reasonably priced mechanism is important to realizing security interests. In cases of default, parties to a secured transaction must be able to agree on the process of recovering possession and disposition of the collateral outside the judicial process. Disputes brought to court usually take a long time to be resolved. Citing the World Bank Doing Business Report, Dennis (2015) noted that it took an average of 427 days in APEC to resolve a simple contract dispute at an average cost of over a third of the value of the claim in 2015. The World Bank (2010) cited two ways of extrajudicial recovery of the secured asset/s: through seizure by either the secured creditor or a specialized agent and through recovery via award or settlement agreement using alternative dispute resolution (ADR) mechanisms such as arbitration, mediation, and conciliation. The World Bank also noted that ADR mechanisms have been proven very effective in resolving disputes in a fast, low-cost and non-adversarial way in many countries.

However, when the recovery and disposition of the collateral calls for judicial intervention, the World Bank recommends that the recovery process must be fast enough to permit recovery before the asset losses its value and without undue risk of concealment or surreptitious sale of the assets by the debtor. If possible, the law must include a special provision that includes

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specific fast-track judicial procedures for the seizure and disposition of movable collaterals. RA 10142 or the Financial Rehabilitation and Insolvency Act (FRIA) which was enacted in 2010 adopts international best practices on insolvency which can support secured transactions requiring judicial settlement. The law provides three modes of rehabilitation: court-supervised, pre-negotiated and out of court or informal restructuring agreements.

SummaryandConclusion

With a more liberalized trade and investment environment brought about by various regional cooperation initiatives, it is imperative for MSMEs to be more competitive to be able to connect to the global supply chains. Addressing the concerns of MSMEs is critical for them to have greater participation in the global market. The proposal to create a framework for secured transactions seeks to further improve MSMEs’ access to financing by expanding the number of acceptable collaterals and improving the existing legal and regulatory framework for movable collaterals.

MSMEs have moveable properties that can be used as collateral to facilitate access to credit but are currently not acceptable due to lack of legal framework that governs these assets. Recognizing the importance of reforming the framework for secured transactions, it has become a critical part of the Financial Integration Pillar of the Cebu Action Plan where member economies agreed and committed to internationally accepted principles on Secured Transactions.

In reforming secured transaction law, the UNCITRAL underscored the importance of balancing the interests of stakeholders such as debtors, creditors, affected third persons (e.g., buyers and other transferees of encumbered assets) and the government.

An effective secured transactions law also requires a dependable insolvency framework and judicial process. In cases of default, there should be a high level of predictability that the creditor will be able to recover the outstanding obligation through the disposition of the collateral. Another integral part of the law is an efficient and effective registry that will promote transparency of secured transaction. Effective implementation of the international standards of secured transactions would go a long way in encouraging banks and other financial institutions to accept movable assets as collaterals.

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References

Abellera, Chester. Case study: Philippine Secured Transactions Law. Presented during the 2015 APEC FMP Conference on Reforming Asia-Pacific Financial Infrastructure. 12 November 2015

Aldaba, Rafaelita M. (2012). SMEs Access to Finance: Philippines. Discussion Paper Series No. 2012-05. Philippine Institute for Development Studies.

Bureau of Small and Medium Enterprise Development. Department of Trade Industry. Financing Programs for Micro, Small and Medium Enterprises. 2015

__________________. Email Communication. 25 May 2016.

Dennis, Mike. Modern Secured Transactions Reform & MSMES: Collaborating Across APEC. Presentation during APEC FIND. March 15, 2016, Makati City, Philippines

Dugger, Ashley. Secured Transactions: Examples & Explanations. http://study.com/academy/lesson/secured-transactions-examples-explanations.html

Facility for Investment Climate Advisory Services (FIAS) and International Finance Corporation - Mekong Private Sector Development Facility (IFC-MPDF). 2007. Vietnam Increasing Access to Credit Through Collateral (Secured Transactions) Reform

Guide to R. A. 9178: Barangay Micro Business Enterprises (BMBEs) Act of 2002. Bureau of Small and Medium Enterprise Development – Department of Trade and Industry

International Finance Corporation. World Bank Group. Secured Transactions and Collateral Registries.

Investment Climate Advisory Services I World Bank Group. Secured Transactions Systems and Collateral Registries. International Finance Corporation. January 2010

Lim, Francisco Ed. Secured Creditors under the Financial Rehabilitation and Insolvency Act

Micro, Small, and Medium Enterprise Development Plan for 2011 to 2016

Ortile, Ronald A. Update on the Self-Service Registration (SSR) of Chattel Mortgage Transactions. 15 March 2016

Santos, Gay. Presentation on Secured Transactions. International Finance Corporation. World Bank Group

Secured Transactions. http://legal-dictionary.thefreedictionary.com/Secured+Transactions

Secured Transactions Reform in Vietnam: on the Right Path to a Modern Secured Financing System. https://www.wbginvestmentclimate.org/advisory-services/regulatory-simplification/secured-transaction-and-collateral-registries/secured-transactions-reform-in-vietnam.cfm

Shinozaki, Shigehiro (2015). Financing SMEs in Global Value Chains. In Integrating SMEs into Global Value Chains; Challenges and Policy Actions in Asia. Asian Development Bank, Asian Development Bank Institute

Types of Collateral. http://www.streetdirectory.com/travel_guide/183687/loans/types_of_collateral.html

United Nations Commission on International Trade Law. UNCITRAL Legislative Guide on Secured Transactions. United Nations New York 2010

Wignaraja, G., and Y. Jinjarak. 2015. Why Do SMEs Not Borrow More from Banks? Evidence from the People’s Republic of China and Southeast Asia. ADBI Working Paper 509. Tokyo: Asian Development Bank Institute. Available: http://www.adbi.org/working-paper/2015/01/09/6523.why.do.sme.not.borrow.from.banks/

World Bank. Brief on Small and Medium Enterprises (SMEs) Finance. September 2015. http://www.worldbank.org/en/topic/financialsector/brief/smes-finance

World Bank Group, Investment Climate Advisory Services (2010). Secured Transactions Systems and Collateral Registries

World Bank Group (2016). Doing Business 2016. Measuring Regulatory Quality and Efficiency. International Bank for Reconstruction and Development / The World Bank

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Annex1

LawsthatFacilitateMSMEAccesstoFinancing

• Barangay Micro Business Enterprises (BMBEs) Act of 2002 (RA 9178) encourages the formation and growth of barangay micro business enterprises by granting incentives and other benefits such as:

(i) Income tax exemption from income arising from the operations of the enterprise;(ii) Exemption from the coverage of the Minimum Wage Law (BMBE employees will

still receive the same social security and health care benefits as other employees);(iii) Priority to a special credit window set up specifically for the financing requirements

of BMBEs; and (iv)Technology transfer, production and management training, and marketing assistance

programs for BMBE beneficiaries

• Go Negosyo Act (RA 10644) seeks to strengthen micro, small and medium enterprises to create more job opportunities in the country.

(i) Establishment of Negosyo Centers in all provinces, cities and municipalities nationwide;

(ii) Establishment of a Philippine Business Registry Databank under the Department of Trade and Industry (DTI) to serve as a database of all business enterprises in the country;

(iii) Establishment of a Start-up Fund for MSMEs to be sourced from the MSME Development Fund and BMBE Fund;

(iv) Technology Transfer, Production and Management Training, and Marketing Assistance for SMEs;

(v) Recomposition of the MSME Development Council and its additional functions

• Credit Surety Act (RA10744) mandates the creation of local cooperatives to administer credit surety funds (CSF) to improve the accessibility of MSMEs, cooperatives, and non-government organizations (NGOs) to the credit facility of banks.

Source: Department of Trade and Industry

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Annex2ConcernsonAccesstoFinance

1. Funds are available but MSMEs find these difficult to access because of stringent and voluminous requirements as well as the slow processing time of their loan applications.

2. MSMEs find it difficult to borrow funds from banks because of the collateral requirements. 3. MSMEs find the minimum loan requirement and the short repayment period restrictive. 4. The financial packages for MSMEs in several regions are only available in urban areas. 5. There is a mismatch of financing programs for MSMEs. 6. MSMEs in several regions lack the capacity for financial management. 7. MSMEs in several regions do not have the capacity to borrow from formal sources. 8. MSMEs do not have access to venture capital funds. 9. It is difficult to restructure loans. 10. MSMEs have limited access to information regarding the sources of funds for MSMEs and

on how to access these funds. 11. Financial institutions do not consider the environment when they lend to MSMEs. 12. The interest rate charged by financial institutions to MSMEs is very high. 13. There is lack of government financial support to MSMEs. 14. Banks in several regions are not keen on lending to MSMEs. 15. Policies related to access to finance are not gender-responsive. 16. There are no funds available for start-up MSMEs in several regions. 17. Government-owned and controlled corporations’ funds for MSMEs are not well utilized.

Source: MSME Development Plan 2011-2016

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Congressional Policy and Budget Research Department3/F Main Building, House of Representatives

Batasan Hills, Quezon City, Metro Manila, PhilippinesTel. No. (DL) 931-60-32 (Fax) 931-65-19

http://cpbrd.congress.gov.ph