Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City

FIFTEENTH CONGRESS
Second Regular Session

HOUSE BILL No,_ 4970

INTRODUCED BY
REPRESENTATIVES ERICO B. AUMENTADO AND JOCELYN S. LIMKAICHONG

EXPLANATORY NOTE
1 TARGET BENEFICIARY

Based on the’ report of the Department of Trade and Industry, there were
780,437 iness enterprises operating in the Philippines as of 2009. Of these, 99.6%
are micro, small and medium enterprises or mSMEs which contributed almost 63.2% of
the total jobs generated that year,

Most, if not all, cooperatives fall under the category of mSMEs. There are
several hundred well-capitalized cooperatives in the country whose economic potential
is waiting to be harnessed. Likewise, there are Many non-govemment organizations
registered with the Securities and Exchange Commission supporting the mSMEs.

Republic Act No, 9520, otherwise known as The Philippine Cooperative Code of
2008, provides the declared policy of the State to foster the creation and growth of
cooperatives as a practical vehicle for promoting self-reliance and hamessing people
Power towards the attainment of economic development and social justice.

i THE PROBLEM

Republic Act No. 9501, otherwise known as the Magna Carta for mSMEs was
Passed into law on 23 May 2008 to strengthen financial and other support mechanisms
to mSMEs. Under the law, banking institutions are required to allocate eight percent
(8%) of their loan portfolio to micro and small enterprises and two percent (2%) to
medium enterprises.

Despite this requirement, banks are still hesitant to extend credit to mSMEs.

including cooperatives in particular because of: (1) lack of acceptable collaterals: (2)
unstable income cash flows; (3) lack of business experience or track record; and (4) low



Thus, a great number of mSMEs are forced to finance their working capital
Fequirements from informal sources that charge unconscionable rates of interest. Such
environment cannot sustain growth of the sector. mSMEs and other productive sectors.
must therefore be made credit worthy and bankable.  .

a. THE SOLUTION

To solve the problem of mSMEs, the Bangko Sentral ng Pilipinas spearheaded
the implementation of a program called “Credit Surety Fund” or CSF for short.

The CSF is essentially a Partnership between the citizens (represented by
members of cooperatives, non-government organizations and community based banks)
and the government (represented by the provincial, city or municipal goverment and
other goverment agencies) and is managed at the Provincial, city or municipal level. It
fs a credit enhancement scheme aimed at democratizing access to credits of mSMES
from formal sources without the need of collateral.

The CSF is a fund generated from contributions by well-capitalized and weil-
managed cooperatives and non-govemment organizations with counterpart contribution
from the provincial, city or municipal goverment at least equal to the amount
contributed by the cooperatives. Other government agencies and financial institutions or
individuals may also contribute to the fund. The CSF is organized by way of a
Memorandum of Agreement among participating cooperatives, non-govemment
organizations, local government units, and other government agencies and financial
institutions.

Through the CSF, mSMEs can have access to credit facility from banks even
without collateral by way of a Surety cover issued jointly by the Member-cooperative and
the CSF Oversight Committee in favor of the creditor bank. Eventually, there will be an
increase in the flow of credit in the countryside.

The first CSF was established in the Province of Cavite; thereafter, CSFs were
Set up in the provinces of Aurora, Bohol, Negros Oriental, Compostela Valley, Davao
det Norte, Negros Occidental, North Cotabato, Davao Oriental, Albay, Occidental
Bindoro, Pangasinan, South Cotabato as well as in the cities of Cebu, toile and

The Bangko Sentral still continues to receive requests from a number of
Provincial executives to set up a Credit Surety fund in their jurisdiction.

Vv. LEAD IMPLEMENTING AGENCY

Under Republic Act No. 7653, the Bangke Sentral ng Pilipinas has the mandate
to provide policy directions in the areas of money, banking and credit. It also has as its
primary objective the maintenance of price stability conducive to a balanced and
‘sustainable growth of the economy, With this unique function, responsibilities, and
Primary objectives, the Bangko Sentral which has the required capability, competence
and resources is the ideal government instrumentality to spearhead the implementation
of the program.


For these reasons, the approval of this bill is eamestfy sought.

ELYN'S: CHONG
Representative
1* District- Negros Oriental



Republic of the Philippines
HOUSE OF REPRESENT; ATIVES
Quezon City

FIFTEENTH CONGRESS
Second Regular Session

HOUSE BILL No._ 4970

INTRODUCED By
REPRESENTATIVES ERICO B, AUMENTADO AND JOCELYN S. UMKAICHONG

so cacencted by the Senate and House of Representatives of the Philogines in
assembled:

SECTION 1. Short Title.
This Act shall be known as the “Credit Surety Fund Act of 2011".
SECTION 2. Declaration of Policy.

SECTION 3. Statement of Objectives.
tis the purpose of this Act to:

b. Sustain the continuous flow of credit in the cou le thru, among other

, the creation of a mechanism by which SMEs can collateraliza

their loans from banking institutions through the surety cover issued jointly by

Credit Surety Fund (CSF) and the endorsing cooperative and the concomitant
eligibility for tediscounting by the Bangko Sentral ng Pilipinas of these loans.



. Build up the capability of cooperatives and non-government organizations in
the areas of credit evaluation, loan and risk management, and govemance
principles.

d. Generate more employment and give support to the poverty alleviation
Program of the government.

e. Increase government revenue through collection of taxes, licenses and
registration fees arising from regularization of the business operations of

mSMEs and increased economic activities.
SECTION 4. Definition of Terms.

. Credit Surety Fund, Surety Fund, Fund or CSF — refers to a trust fund generated
from the contributions of well-capitafized and well-managed cooperatives as
determined by the Bangko Sentral ng Pilipinas and non-government
organizations with counterpart contribution from the Local Govemment Unit and
other donors,

. Cooperative — an autonomous and duly registered association of persons, with a
common bond of interest, who have voluntarily joined together to achieve their
‘social, economic, and cultural needs and aspirations by making equitable
contributions to the capital required, patronizing their products and sarvices and
‘accepting a fair share of the risks and benefits of the undertaking in accordance
with universally accepted cooperative principles.

A cooperative as used in this [Acf], may either be:

a. Primary ~ the members of which are natural persons;
b. Secondary — the members of which are primaries; and
¢. Tertiary —the members of which are secondary cooperatives

(Articles 3 and 23(2)(a), Republic Act No. 9520, otherwise known as the
“Philippine Cooperative Code of 2008")

}. Donor - refers to (a) government agencies and instrumentalities such as the
Development Bank of the Philippines, Land Bank of the Philippines, Industrial
Guarantee and Loan Fund, and Smail Business Corporation whose contribution
te the Surety Fund could either be treated as investment or grant and, (b)
individuals who contribute to the Surety Fund which contribution shall be treated
as donation to the CSF.

. Non Government Organization — refers to any non-profit, voluntary citizens’
group that contributes to, or participates in, cooperation projects, education,
training or other humanitarian, progressive, or watchdog activities.

. Local Goverment Unit ~ refers to the provincial, city or municipat goverment
that is authorized under this law to contribute to the surety fund established in
their locality in the form of investment or grant to the CSF, in an amount at least
‘equal to the total contributions of the cooperatives.

. Government Agencies/Instrumentalities — refer to government institutions such
as Development Bank of the Philippines, Land Bank of the Philippines, Industrial


Guarantee and Loan Fund and Small Business Corporation who may contribute
funds to the CSF.

7. Oversight Committee — refers to the goveming body of the Credit Surety Fund
whose members consist of the authorized representatives of the local
government unit and other donors as ex-officio members and elected
tepresentatives of contributor—cooperatives/NGOs to the Fund.

8. Micro Enterprise ~ refers to a business entity whose asset base does not exceed
P3.0 million.

9. Smal Enterprise ~ refers to a business entity whose asset base is over P3.0
million but not more than P15.0 milion.

>
10.Medium Enterprise ~ refers to a business entity whose asset base is over P15.0
milion but not more than P100.0 million.

11.Surety Cover ~ refers to an agreement executed by the authorized
representatives of the CSF Oversight Committee and the ‘sponsoring
cooperative of an mSME-borrower in favor of the lending bank obligaiing
themselves to be jointly and severally liable for the account of the mSME-
borrower in the event of default.

SECTION 5. Establishment of a Credit Surety Fund

A Credit Surety Fund may be established in each province and chartered city aft
over the country. The original contributions to the Credit Surety Fund shall come from
Participating cooperatives and NGOs in each province, city or municipality. The
provincial, city or municipal government shall contribute fo the CSF in an amount at
least equal to the total contributions of the cooperatives. Other govamment agencies
and instrumentalities such as the Development Bank of the Philippines, Land Bank of
the Philippines, Industrial Guarantee and Loan Fund, and Small Business Corporation
Shall provide support to the program by giving a contribution which may or may not be
equal to the total contributions of the cooperatives. Their contributions shall be treated
as investment or grant to the Surety Fund. individuals may also contribute to the Surety
Fund which contribution shall be treated as donation to the CSF.

SECTION 6. Implementing Government Agency

Pursuant to its mandate to provide policy direction in the areas of money,
banking and credit under Republic Act No. 7653, and to complement its microfinance
advocacy to enhance credit creation in the rural areas, the Bangko Sentral ng Pilipinas
Shall spearhead the promotion, encouragement, creation and organizational
development of Credit Surety Funds all over the country. In addition, the Bangko Sentral
shall, as it may deem necessary to achieve the objectives and purposes of this Act,
Provide assistance such as training, technical services, and facilitation measures.

SECTION 7. Administration of the Fund
The CSF will be governed by an Oversight Committee, whose members consist

of the authorized representatives of the local government unit and donor institutions as
ex-officio members and representatives elected by contributor-cooperatives and non-


government organizations. Each contributor shall be entitled to only one (1) vote,
regardless of the amount of its contribution. The governing Oversight Committee shall
designate any bank authorized to accept govemment deposits as administrator of the
Fund subject to the eligibility requirements of the Bangko Sentral ng Pilipinas.

SECTION 8. Powers of the Oversight Committee.

The Committee shaif have the authority to:

a.

Determine and formulate the general policies and guidelines on the proper
administration and management of the Surety Fund and authorize its
investment, reinvestment and disposition,

. Act as Administrator of the Fund unt such time that a trustee bank is

designated or appointed as Administrator;

. Designate @ bank duly licensed and highly rated by the BSP to accept

government deposits to act as administrator/investment manager of the
Surety Fund;

|. Promulgate such rules and guidelines governing the infusion of additional

contributions to the Surety Fund and admission of new members;

. Enter into contracts and transactions involving, affecting or relating to the

Surety Fund;

Periodically review the Surety Fund's assets as well as its investment,
reinvestment and disposition and is responsible for taking appropriate
action on the audit of the financial condition and operations of the Surety
Fund;

. Create committees and appoint other officers as it deems necessary;

. Delegate to the Chairman, Vice-Chairman, or any member of the

Oversight Committee, any of its powers whenever deemed necessary for
the best interest of the Surety Fund and as allowed by law:

Exercise general supervision of all the affairs of the Surety Fund and shail
be directly accountable to its general membership;

Issue a surety cover jointly with the endorsing cooperative in favor of the
lending bank to secure the loans of member-mSMEs with that bank; and

. Perform such acts and exercise such powers and duties as may be

necessary and proper in order to achieve the purpose for which the Surety
Fund was created or for any purpese which will redound to the benefit of
the Members of the Surety Fund as well as any acts necessary of
incidental to achiava the foregoing purposes.


SECTION 9, Withdrawal of Contributions.

A contributing cooperative or non-government organization may withdraw ail or
part of its contributions only when it has ne outstanding obligation with the Surety Fund
on account of the surety covers issued.

SECTION 10. Dissolution of the Surety Fund.

The Surety Fund may be dissoived by a majority vote of the members of the
Oversight Committee and confirmed by 2/3 vote of all the contributing mambers of the
‘Surety Fund. For the purpose of dissolving the Fund, each contributing member shalt
have only one voie each regardless of the size of its contribution to the Fund.

The Oversight Committee shtll act as liquidator and shall distribute the remaining
assets of the Surety Fund to its stakeholders pro-rated according to their respective
Contributions. Thereafter, the Oversight Committee shail be dissolved.

SECTION 11. Tax incentives.

Considering that the stakeholders of the Surety Fund are mostly cooperatives,
that play a vital role in the attainment of economic development and social justice and
are given support only by the donors, ail income of the Surety Fund shall be exempt
from tax.

SECTION 12. Miscellaneous.

Nothing provided herein shall preclude the contributors from converting the
‘Surety Fund to a more formal corporate body to carry out its purposes subject to the
implementing rules and regulations as shall be prescribed.

SECTION 13. implementing Guidelines.

Within sixty (60) days from approval, the Bangko Sentra! hg Pilipinas shalt issue
guidelines to implement the provisions of this Act.

SECTION 14, Effectivity Clause.

This Act shall take effect fifteen (15) days after its publication in the Official
Gazette or in two (2) newspapers of general circulation.

Approved,