The banking sector in the Philippines serves as a critical pillar of the country's economy, providing essential financial services and supporting businesses across various sectors. However, like any other industry, the banking sector is not immune to turbulence and disruptions.
The World Bank has forecasted that global economic growth in 2023 will decelerate to its third-lowest rate in nearly three decades. Nevertheless, it is anticipated that many major markets will manage to avoid a recession, and the World Economic Forum suggests that the economic challenges faced will be temporary.
A new risk emerged for the global economy due to high inflation and monetary policy responses: turbulence in the banking sector. Prior to these events, only 12% of business leaders considered interest rates or access to funding as significant threats. However, the disruptions experienced by Silicon Valley Bank, First Republic, and Credit Suisse demonstrate how shockwaves can propagate rapidly throughout the market.
During periods of banking sector turbulence, small and midsize enterprises (SMEs) often face significant challenges in obtaining loans and credit from banks. Heightened risk aversion and stricter lending criteria make it harder for businesses to secure the necessary funding for their operations, expansion plans, and investment opportunities. This limited access to funding can hinder growth prospects and restrict business development.
Banking sector disruptions can lead to increased borrowing costs for SMEs. Higher interest rates, arising from factors like bank failures, credit market instability, or reduced liquidity, can have detrimental effects on profitability, cash flow, and the ability to finance growth initiatives. Businesses may find it more expensive to service their existing debt or secure new loans, impacting their financial stability and hindering strategic investments. Such events can erode confidence in the financial system and have a profound impact on SMEs. A loss of trust and liquidity crunch can hinder their ability to conduct day-to-day operations, access credit, and engage in long-term planning. Moreover, the domino effect of banking sector turbulence can reverberate throughout the broader economy, affecting various industries and sectors.
Relying heavily on a single banking institution for financial services exposes SMEs to concentration risk. If that institution faces disruptions, businesses may experience severe consequences, such as frozen accounts, delayed transactions, or limited access to critical financial services. Diversification of banking relationships becomes essential to mitigate concentration risk during periods of banking sector turbulence.
Diversifying Banking Relationships
Maintaining relationships with multiple banks can help SMEs mitigate the risks associated with disruptions in the banking sector. By diversifying banking relationships, businesses can spread their risk and avoid overdependence on a single institution. This approach ensures continuity of financial services even during turbulent times and provides greater negotiating power for favorable terms and conditions.
Exploring Alternative Financing Options
In addition to traditional bank financing, SMEs should explore alternative financing options. Non-bank lenders, peer-to-peer lending platforms, or crowdfunding can offer viable alternatives for securing capital during periods of limited access to traditional bank funding. However, businesses must carefully evaluate the benefits and considerations of each option and ensure compatibility with their unique financial requirements.
Building Strong Financial Management Practices
Robust financial management practices are crucial for SMEs in mitigating the impact of banking sector turbulence. Implementing effective financial forecasting, cash flow management, and risk assessment processes allows businesses to proactively identify potential challenges and develop contingency plans. Strong financial management provides the foundation for adaptability and resilience, enabling businesses to navigate uncertain times successfully.
Conclusion
Banking sector turbulence can significantly impact SMEs in the Philippines, creating challenges in accessing funding, increasing borrowing costs, and exposing businesses to financial instability and concentration risk. However, by implementing proactive strategies, businesses can effectively manage these challenges.
As published in The Manila Times, dated 28 June 2023
