Assessing Mandated Credit Programs: Case Study of the Magna Carta in the Philippines

Abstract

This paper examines the Magna Carta Law in the Philippines, which mandates banks to allocate 2% of their total loan portfolios to medium-sized firms and 8% to micro and small firms. The paper highlights three findings. First, although total lending to micro, small, and medium enterprises (MSMEs) grew slightly, MSME loan shares declined drastically from 30% in 2002 to 16.4% in 2010. Second, there was a sharp rise in noncompliance after loan targets increased in 2008. Third, there is increased heterogeneity in optimal loan portfolio across banks. Most surprisingly, total MSME lending by rural and cooperative banks declined since 2008. Abolishing Magna Carta target for medium-sized enterprise loans would most likely yield little adverse effects.