Press Statement
MBC Warns Against Direct Lending by Government Non-financial Agencies

27 September 2006 - The Makati Business Club is concerned over the government’s plans to extend credit assistance through its non-financial agencies and other government-owned and controlled corporations as embodied in Executive Order No. 558, issued last 10 August. The Executive Order repeals an earlier EO (No. 138) issued in the previous administration which adopted successful credit policy guidelines in 1999.

Those guidelines included a greater role for the private sector in providing financial services to the basic sectors; adopted market-oriented financial and credit policies; limited government agencies to providing the proper policy environment, critical support services, and capability-building services; and prohibited government non-financial agencies and government-owned and controlled corporations from directly engaging in credit programs.

The issuance of this policy was drawn from lessons of past administrations that direct lending by government had failed to address poverty and had led to non-payment of loans by borrowers which in turn led to government losses.

Since these guidelines have been put into effect in 1999, the Bangko Sentral has reported that the number of private institutions which have extended credit to the basic sectors has increased from 55 banks to almost 200 private financial institutions with a portfolio of P3.3 billion reaching more than 600,000 beneficiaries. The extension of credit by private institutions has brought back discipline to the markets and strengthened the rural banking system.

The repeal of this policy through the issuance of Executive Order 558 ignores the lessons of the past and once again makes the government vulnerable to losses. The direct extension of credit increases the risk of the loans being treated as a dole-out to borrowers, who will have little motivation to repay. Executive Order 558 will also have the effect of weakening the private microfinance industry and distorting market disciplines to which the basic sectors have become accustomed.

Executive Order 558 should be withdrawn and Executive Order 138 guidelines restored.