MANDATORY CREDIT ALLOCATION AND GOVERNMENT GUARANTEE IN THE PHILIPPINES

Abstract

Mandatory credit allocation is a policy intervention to pressure banks to lend to certain sectors that otherwise unfettered finance would not give access to. While some would argue that mandatory credit allocation results in sub-optimal allocation of resources, it has been shown that such intervention results is socially desirable outcome. However, mandatory credit allocation should not be the responsibility of banks only, it must be supported with government guarantees. In the Philippines, there are three sectors in which mandatory credit allocation is given namely the agriculture sector, the micro, small and medium enterprises or MSME sector, and enterprises involved in innovation. In agriculture, the credit allocation is too big and therefore should be reviewed, in MSME too small and therefore should also be reviewed, and in innovation difficult to identify and impractical to implement. In all of these, the banks are left to shoulder the respective mission with practically no government support. Banks either comply or pay the penalty.