A deep overview of business and SME loans in the Philippines

Executive summary

In the Philippines today, running a small business can be a means of survival. Micro, small, and medium enterprises (MSMEs) make up 99.6% of all registered businesses and provide jobs for more than 65% of the country’s workforce. They are the pillar of the economy, keeping communities and industries alive. But here’s the thing: getting access to credit is still one of the hardest battles Filipino entrepreneurs face. Banks hold trillions in their loan books, yet only 4.52% of that goes to MSMEs; less than half of what the law requires.

This report takes a closer look at how that plays out, covering the years 2019 to 2024. It explores how traditional banks, government programs like the Pondo sa Pagbabago at Pag-asenso (P3), and new digital lending platforms are transforming the financing journey for small businesses. On one end, informal lending practices like the infamous “5-6” schemes continue to grow, charging eye-watering monthly rates of up to 20%. On the other, fintech apps are stepping in, promising quicker approvals and easier access for entrepreneurs who’ve long been locked out of formal credit.

What becomes clear is that business owners move between banks, fintech, and informal lenders to keep their operations afloat. The big question now is whether the financial system can evolve fast enough to provide  fair and sustainable credit that helps MSMEs grow and survive.

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Background (2019–2024)

The years between 2019 and 2024 marked a period of dramatic change for SME financing in the Philippines. What began as a slow-moving credit environment dominated by cautious banks evolved into an environment transformed by regulatory reform, pandemic-driven urgency, and the rise of digital financial services. Across these five years, SMEs faced both systemic obstacles and new opportunities, as regulators, lenders, and entrepreneurs adjusted to an economy in transition.

2019: Foundation year

In 2019, traditional banking institutions still held firm to their conservative approach toward SME lending. Republic Act 6977 had long required banks to allocate at least 10% of their total loan portfolio to MSMEs, but most fell short of this mandate. Rather than build lending products for smaller enterprises, many institutions simply paid the penalties imposed for non-compliance. This reluctance left a wide credit gap that informal lenders quickly stepped in to fill. The “5-6” lending system, notorious for its high interest rates, flourished and grew into a ₱30 billion industry. For entrepreneurs unable to meet strict banking requirements, these lenders became the default option.

The dominance of informal lending showed how disconnected the formal banking system remained from the realities of small business financing. Entrepreneurs needed flexible, quick-access loans to manage cash flow, pay suppliers, or respond to immediate needs. Banks, meanwhile, remained tied to rigid collateral requirements and credit assessments that excluded most small businesses. The result was a market heavily skewed toward informal practices, setting the stage for both government and regulatory interventions in the years that followed.

2020: Digital banking revolution and pandemic response

Early in the year 2020, the Bangko Sentral ng Pilipinas (BSP) issued Circular No. 1105, introducing a regulatory framework for fully digital banks. These lenders were designed to operate entirely online, with a minimum capitalization of ₱1 billion to ensure financial strength. This regulation opened the door for new players that could bypass the traditional branch-based model and potentially reach underserved segments like SMEs more efficiently.

Then came the COVID-19 pandemic, which hit small businesses particularly hard. Lockdowns disrupted supply chains, shut down retail operations, and dried up customer demand. To keep businesses afloat, the government infused ₱10 billion into the Pondo sa Pagbabago at Pag-asenso (P3) program through the Bayanihan to Recover as One Act. This injection was aimed at providing low-interest alternatives to informal lending during a time of crisis. The combination of digital banking reforms and emergency government support highlighted how innovation and policy could converge in response to an unprecedented economic shock.

2021–2022: Regulatory maturation and fintech growth

By 2021, digital banking had started to take root, but regulators moved cautiously. In August of that year, the BSP announced a three-year moratorium on new digital banking licenses, limiting the market to the six lenders that had already been approved. This pause gave regulators time to monitor how these banks would perform and allowed the licensed lenders to stabilize their operations. At the same time, the BSP began rolling out stronger consumer protection measures, recognizing the risks that came with rapid digitization.

Fintech companies also gained ground during this period. With physical mobility limited due to pandemic restrictions, digital lending platforms became an important source of financing for SMEs. Regulators responded by tightening oversight of these platforms, issuing rules specific to digital credit providers to ensure fair lending practices. These years marked a shift from experimentation to regulation, as authorities balanced the promise of digital finance with the need for safeguards.

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2023–2024: Institutional consolidation and market expansion

By 2023 and 2024, the fintech sector had grown into a central feature of the Philippine financial system. The number of fintech companies surged to about 300, more than doubling from just 115 in 2017. This growth reflected both increased demand for accessible credit and the readiness of technology-driven firms to meet it. In a significant institutional development, the BSP partnered with the Japan International Cooperation Agency (JICA) to launch the Credit Risk Database Philippines (CRDPh). The system introduced automated credit scoring for SMEs, using anonymized financial data to reduce reliance on collateral and provide lenders with more reliable assessments of borrower risk.

The end of the three-year moratorium on digital bank licenses in August 2024 signaled regulators’ confidence in the sector’s stability. With established digital banks gaining traction and new entrants preparing to apply, the stage was set for broader competition and innovation. For SMEs, this period offered a glimpse of a more inclusive financing environment, one where creditworthiness could increasingly be assessed on data rather than traditional collateral, and where both public and private institutions were investing in long-term solutions to close the credit gap.

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The regulatory framework

Over the last five years, regulation has had to play a dual role: pushing innovation forward to expand access to credit while also building safeguards to protect borrowers in a rapidly digitizing environment. This balancing act has defined how banks, fintechs, and informal players operate within the financial system.

Banking sector oversight

The BSP is responsible for licensing and supervising banks of all sizes. Each of these institutions is bound by the Magna Carta for MSMEs, which requires them to allocate at least 10% of their total loan portfolio to small enterprises. In practice, however, the mandate has been weakly enforced. As of June 2024, large banks devoted only 4.52% of their lending to MSMEs, a figure far below the requirement. Instead of adapting their products to suit the realities of smaller borrowers, many banks have opted to pay penalties rather than take on what they perceive as higher credit risks. This underperformance shows that while banks remain central to the formal credit system, they continue to underserve the very businesses that drive most of the country’s employment and productivity.

Digital lending regulation

A major change came in December 2020, when the BSP introduced digital banking guidelines. These rules carved out a new regulatory category for lenders designed to operate entirely online. To ensure stability, digital banks were required to hold at least ₱1 billion in capital and meet strict prudential standards covering risk management, governance, and cybersecurity. The framework reflected the BSP’s recognition of digital banking’s potential to broaden access, while also acknowledging the risks of fast-moving innovation. Consumer protection became a central theme, with regulators mandating clear disclosures, complaint-handling systems, and oversight mechanisms to prevent predatory practices in the digital space.

Fintech and alternative lending

The expansion of the regulatory framework also brought digital credit providers (DCPs) under formal oversight. These lenders are now required to register officially, disclose interest rates and charges clearly, and uphold responsible practices in the use of customer data. This move sought to create order in a rapidly growing market where fintech platforms were becoming major players in SME financing. Still, large portions of the lending ecosystem remain outside this net. Informal moneylenders continue to operate with little to no regulation. These matter because they represent the most immediate and accessible credit channels for many small businesses, yet they also expose borrowers to high risks and costs without formal protections.

Types of business and SME loans

SME financing in the Philippines comes in many forms, shaped by the size of the enterprise, the purpose of the loan, and the accessibility of the lender. From large commercial banks to informal lenders in local markets, entrepreneurs navigate a wide range of choices.

• Traditional bank products: Banks offer structured loans like working capital, trade financing, and collateral-backed facilities, but high minimum amounts (₱5–10 million) exclude most SMEs; state-owned banks attempt to fill the gap with smaller loans but still miss many microenterprises.
• Government lending programs: Through SBCorp’s P3 initiative, government loans range from ₱5,000–₱200,000 at capped rates of 2.5% monthly; with billions already disbursed and expanded programs for growth, the focus has shifted from survival credit to enabling long-term SME development.
• Digital and fintech lending: Fintech platforms like First Circle and Investree provide quick-access loans from ₱500–₱10,000 using alternative credit scoring; while amounts are small and terms short, they serve businesses excluded from bank financing.
• Informal lending networks: The “5-6” system persists with 20% monthly interest and instant, collateral-free disbursal; while convenient, it traps many vendors in cycles of reborrowing, highlighting the gaps left by banks and formal lenders.

Future prospects

• Technology-driven credit assessment (CRDPh):  The BSP–JICA Credit Risk Database (CRDPh) gives lenders a way to score SMEs using anonymized financial records instead of just collateral. That can lower the bar for credit approval and speed decisions, though success depends on data quality, lender uptake, and clear privacy safeguards.
• Alternative data and open banking: Fintechs are already relying on utility bills, e-commerce transactions, and mobile-payment footprints to build credit profiles for thin-file borrowers. When paired with open-banking standards that let institutions share customer data securely, these signals can unlock more loans for small businesses, provided regulators set strong consent and security rules.
• Regulatory evolution and digital banking expansion: With the digital-bank moratorium lifted in August 2024, new digital banks can enter and push competition, product variety, and distribution reach. That should spur innovation for SME products, but regulators will need to keep a close eye on consumer protection, operational resilience, and fair market conduct.
• Government program expansion: SBCorp’s ₱8 billion allocation for 2025, including targeted windows for franchises, creative industries, and halal finance, points to a more sectoral approach to SME support. Targeted funds can close gaps, but they must be paired with strong conduit networks and monitoring so funds reach viable businesses and actually boost growth.
• Financial inclusion and education: Improving financial literacy and promoting digital payments make formal finance more approachable for entrepreneurs and reduce reliance on high-cost informal lenders. Practical training, simple digital tools, and coordinated outreach will determine how many SMEs benefit from new credit channels.

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Building fairer paths to SME growth in the Philippines

The future of SME financing in the Philippines won’t just hinge on access to loans but on how well risks are shared and managed. While insurance-linked lending and credit guarantees are still finding their footing, they represent an important step toward reducing the heavy dependence on collateral and personal guarantees that often hold small businesses back. As adoption spreads beyond big cities and more lenders embrace risk-sharing tools, SMEs can look forward to a financial environment where growth is less about what assets they can pledge, and more about the strength of their ideas and operations.