Should mandatory SME lending be reinstated?

For decades, the Philippines relied on mandated credit quotas to push banks toward underserved sectors.

- BENEL P. LAGUA

The Agri-Agra Law and micro, small, and medium enterprise (MSME) lending requirements under the Magna Carta were intended to correct market failures by steering resources toward agriculture and MSMEs. Yet after years of implementation, one conclusion is difficult to escape: mandated lending targets, as originally designed, did not reliably translate into genuine access to finance.

This assessment is based primarily on my experience with the MSME credit mandate. In the early years, banks were generally compliant. Over time, however, the rapid expansion of bank balance sheets did not result in proportional growth in MSME lending. Larger banks learned how to “game” the system, while smaller institutions struggled under the burden of compliance. The policy was well-intentioned, but design flaws undermined its objectives. These flaws now offer valuable lessons as policymakers revisit the reinstatement of mandatory SME lending.

The Magna Carta required all banks—rural, thrift, universal, and commercial—to allocate 10 percent of their loan portfolios to MSMEs, split into eight percent for micro and small enterprises and two percent for medium enterprises. In theory, this democratized credit; in practice, it ignored the vastly different business models, client bases, and risk capacities of Philippine banks.