MICROFINANCE IN THE PHILIPPINES

MICROFINANCE INDUSTRY ANALYSIS- PHILIPPINES

AN OVERVIEW

Microfinance, in the Philippines, began as a social development initiative to alleviate poverty and has

moved from marginal to the mainstream, toward commercialization and micro-banking. The growth of

the Philippine microfinance in its first ten years from 1992 to 2002 can be described as vibrant, yet

institutionally complex. The sector consists of both regulated and non-regulated institutional players

such as banks, cooperatives, non-governmental and people’s organizations, which use both formal and

informal standards to provide financial services or bank with the poor. During the first decade the

Industry focused on providing non- collateralized credits to the poor and becoming financially viable.

The predominant quest of the sector was to lend to the poor and to ensure that they paid back their

loans. “Zero tolerance for delinquency and “credit discipline” were the slogans of many of the new

players as the sector grew and learned how credit to the poor should be given. It was only at the end of

the decade that attention began to shift to the provision of savings and financial services such as

microfinance. From being a niche market operation undertaken by socially oriented, non commercial

institutions, it has become a more commercial financial service. In 1998, microfinance was

acknowledged as a poverty alleviation strategy with the passage of the SRPAA. The Philippine Banking

Act of 2000 also recognized microfinance, but this time as part of the formal financial sector, The Social

Reform and Poverty Alleviation Act or SRPAA.

DEFINITION

BSP, Philippines’ apex banking body defines Microfinance, as the viable and sustainable

provision of a broad range of financial services such as microcredit, savings, insurance, money

transfers and similar financial products, by the private sector to poor and low-income

households engaged in livelihood and microenterprise activities using nontraditional and

innovative methodologies and approaches. The principle difference between microfinance and

traditional lending arrangements is the absence of collateral with which to secure a loan.

It is pertinent to mention that Microfinance is NOT subsidized credit, NOT a dole out, or salary

or consumption loans. Microfinance can provide long term, stable credit access only when

borrowers have the willingness and ability to meet scheduled loan payments.

Characteristics and features of Microfinance

Characteristics Distinguishing Features

Type of client - Low Income.- Employment in the informal sector;

low wage bracket.- Lack of physical collateral.- Closely interlinked household /

business activities.

Lending Technology

- Prompt approval and disbursement of micro loans

- Lack of extensive loan records- Collateral substitutes; group-based

guarantees- Conditional access to further micro-

credits- Information-intensive, character-based

lending linked to cash flow analysis and group-based borrower selection

Loan Portfolio - Highly Volatile.- Risk heavily dependent on portfolio

management skills.Organizational ideology - Remote from/non dependent on

government.- Cost recovery objective vs profit

maximization.Institutional structure - Decenteralized

- Insufficient external control and regulation.

Source: - Primary data collection with CCT senior management team - BSP guide for examiners.

Who are the MF Players?MICROFINANCE CLIENTS(3.1 million as of March 2006)

MICROFINANCE INSTITUTIONS Rural/Thrift/MF Banks, NGOs,

Cooperatives

(about 1,817 MFIs)

Capacity Building Support Agencies/

Institutions

Policy/Regulatory/ Supervisory Agencies

GFIs/ Wholesalers

DONOR COMMUNITY

Capacity Building Support Agencies/

Institutions

Core Principles for Microfinance1

Microfinance is an effective tool for poverty alleviation.

The poor need access to appropriate financial services.

The poor have the capability to repay loans, pay the cost of loans and generate savings.

Microfinance Institutions must aim to provide financial services to an increasing number

of disadvantaged people.

Microfinance can and should be undertaken on a sustainable basis.

Microfinance NGOs and programs must develop performance standards that will help

define and govern the microfinance Industry towards greater reach and sustainability.

LOGIC OF THE INDUSTRY.

1 Source: Report : The First decade of the Philippine Microfinance : 1992-2002, Prof Marcia F Miranda and Ronals D Chua, AIM, Philippines.

Development Practitioners, policy makers, and multilateral and bilateral lenders recognize the

importance of Microfinance as an effective poverty alleviation strategy and for good reasons:

A. Without permanent access to institutional microfinance, most poor households continue to rely

on meager funds from informal sources which limit their income and production capacities.

B. Microfinance services contribute to the improvement of resource allocation, promotion of

markets and adoption of better technology.

C. Microfinance can provide an effective way to assist and empower poor women, who make up a

significant proportion of the poor and suffer disproportionately from poverty.

The main purpose of the Microfinance is to break the vicious “low income- low investment-low profit”

by inserting capital from outside into the economic life of the poor people. According to Adam Smith

“ Money, says the proverb makes money.” When you have got a little it is often easy to get more. The

great difficulty is to get the little”. (Adam Smith 1937: 93). Microfinance provides the “little money”.

Thus it helps to improve the condition of the poor and the extreme poor by raising income and profit,

making them free from poverty and improving their living standard. Its key feature is bringing the bank

to the poor as opposed to the traditional banking system.

STRUCTURE OF THE PHILIPPINES MICROFINANCE INDUSTRY.

The country has a wide range of formal, semi- formal and informal Institutions providing

microfinance services to the urban & rural poor and the underprivileged sections of the

economy.

Financial intermediation and credit activities are under the regulatory jurisdiction of the Bangko

Sentral ng Pilipinas (BSP). The regulatory framework under the General Banking Law of 2000

and a number of parallel laws governing specialized banks and the NBFI have made room for a

tiered structure of licensed financial intermediaries and of financial regulation. The formal &

semiformal sector institutions directly and indirectly providing microfinance services are

detailed in the following Exhibit.

Exhibit I provides a overview of the various Institutions, players involved in the Microfinance

Industry.

EXHIBIT I

INSTITUTION TARGET MARKET AUTHORIZED KEY

SERVICES

REGULATORY AGENCY

Thrift banks Microenterprises; small businesses; individuals or groups

Deposits & Loan Remittances

BSP, PDIC

Rural banks Microenterprises; small businesses; individuals or groups

Deposits & Loan Remittances

BSP, PDIC

Non Bank finance Intermediaries without quasi bank functions

Microenterprises; small businesses; individuals .

Loans SEC

Cooperatives Microenterprises; small businesses; individuals or groups

Deposits & Loans; remittances; Insurance.

BSP, PDIC

NGOs Individuals or groups Microfinance loans SEC

Insurance

Companies

Individuals or groups Insurance IC

The informal system includes small time lenders who still play active role in lending to micro-

entrepreneurs. As a developing country Philippines has a large informal sector comprised of

micro-enterprises. Many of these are severely resource – constrained vendors operating in

public markets, whose survival in business relies heavily on access to financing. This usually

comes from the Informal sector as well as in the form of informal financiers called “5-6”.

Two types of 5-6 financiers are found in the Philippines market, the Filipinos and the Indians.

Regarded initially as resource lenders this group is crucial to the most marginalized micro-

entrepreneurs. Though in the last few years the lending from informal sources has reduced

they are still the most formidable players in Philippines. The most common informal lenders in

the Philippines are called “Bombay 5-6 “2. A key success factor for 5-6 businesses is the

development of a large, good – quality client base which continually borrows and repays

without default. However, as micro-entrepreneurs of tiny businesses , the clients of ‘5-6” are

vulnerable to any shocks – external, such as economic downturns, and internal such as family

sickness. In short, regardless of their willingness, micro-entrepreneurs’ ability to repay tends to

be unreliable. Therefore, an existing “good” business for a ‘ 5-6’ can easily become a “ bad

business”. The key challenge for the lenders here is the need to look for new clients constantly.

The cross- section of MFI’s covered in our primary data survey were unanimous in their opinion

that the Informal lending system plays a complementary role to the formal segment and

groups such as the “ Bombay 5-6” , with their different risk diversification strategies and funds

access can be a asset to the Filipino society, especially during economic downturns.

FUNDING AND SUPPORTING ORGANIZATIONS

Government Financial Institutions.

2 Source: Paper on The “ Bombay 5-6” Last Resource Informal Financiers for Philippines Micro Enterprises, Oct 2003, by Mari Kindo, AIM.

People’s Credit & Finance Corporation (PCFC): The People’s Credit and finance corporation

provides wholesale funds to retail MFIs for on- lending to poor clients. PCFC is a government-

owned finance company that was established in compliance with the social reform agenda of

the government. It is the only government agency mandated by law to provide financial services

to the poor through wholesale funds to retail MFIs clients. It also manages Overseas

Development Assistance (ODA) funds from ADB- IFAD and World Bank coursed through the Land

Bank of the Philippines. Its borrowers are rural banks, cooperatives and NGO , which are called

conduits. PCFC is the only government Institution with sole focus on microfinance. As of 2007 it

reported a total resource base of PhP 3.5 billion and a gross loan portfolio of over PhP 3.0

billion.

Land Bank of the Philippines (LBP): The LBP is a government financial institution that

was created under the Agrarian reform Law enacted by Congress in 1963. Its mandate is

to undertake microfinance programs for the poor.

Development Bank of Philippines (DBP): The main purpose of DBP is to provide banking

services principally to small and medium enterprises ( SMEs), its mandate to undertake

microfinance operations is spelled out under the BMBE Act of 2002. As of December 31,

2007, DBP reported total resources of PhP 160 billion and a loan portfolio in excess of 80

billion.

Small Business Corporation (SB): The mandate if the SB corporation is included in the

BMBE Act of 2002. With a loan portfolio in excess of PhP 45 million , it has been active in

extending financial services to cooperatives and rural banks.

Other Sources of funds

The Philippines has several sources of ODA and technical assistance including those from

USAID, UNDP, European union (EU), World Bank. In addition international organizations with

local offices in the Philippines also provide wholesale fund and technical support to MFIs. Client

Savings is becoming a major source of funding for the regulated MFIs. Historically the

dependence of MFIs on subsidized credit from Government donors, and lending agencies led

toweak savings mobilization. As the savings deposits increased so did the amount of resources

for MFIs to improve services and expand outreach. Some MFIs have access to loans from

commercial banks such as the Philippine National Bank and Bank of Philippine Island (BPI).

HSBC, one of the largest international Banks, is also a active provider of loans to retail MFIs.

Support.

Policy and Advocacy

The Bangko Sentral ng Pilipinas (BSP) was mandated by the General Banking Law of

2000, to establish rules and regulations for the practice of microfinance within the

banking sector. Subsequent to this law, the BSP declared Microfinance as its flagship

programme for poverty alleviation. It has focused its microfinance initiatives on policy

and regulatory environment, training and capacity building, and promotion and

advocacy.

The National Credit Council (NCC) was established by the government to create an

enabling policy environment to encourage greater private sector participation in the

delivery of financial services to the poor. The NCC published the National Strategy for

Microfinance, the regulatory framework for Microfinance, and the Performance

standards for all types of Microfinance Institutions in the Philippines.

NAPC: The National anti – poverty commission, is the government agency responsible

for coordinating all government – supported poverty reduction programs.

Networks

Microfinance Council of the Philippines (MCFI); A network of retail MFIs and service

providers, providing support services to MFIs through promotion of best practices ,

policy advocacy and performance benchmarking.

Regional & Tertiary networks such as the Alliance of Philippine partners for enterprise

development (APPEND)- a network focusing on Christian development organizations

focusing on microfinance, Rural bankers association ( RBAP), National confederation of

cooperatives ( NATCCO) are some other network groups catering to MFIs operating in a

certain region or community, regional affiliations .

Training Institutions

Management & Training Institutes such as the Asian Institute of Management ( AIM); Punla Sa

Tao Foundation help build the capacity of the microfinance institutions to provide financial

services to the poor by offering training programs in market research, delinquent management,

business planning , information systems, operational risk and allied subjects.

_________________________________________________________________________________Source:

JBIC Pilot study on Sustainable Microfinance for Poverty Reduction in the Philippines, November 2004 Microfinance Handbook, Bangko Sentral Ng Pilipinas, August 2005.

What Does the BSP Do to Promote Microfinance ?- A speech by BSP Monetary Board Member Antonio L. Alindogan.

“ Delivering to the Poor”: A search for successful Practices in Philippine Microfinance”, United Nations Development Programme, National Anti- Poverty Commission, People’s Credit and Finance Corporation, and Asian Institute of Management entitles December 2003.

Performance Standards for all Types of Microfinance Institutions in the Philippines, national Credit council- Department of Finance.

Competition

The major bases in appreciating the competitive landscape were the MFI’ perspectives

garnered during the primary data collection and secondary data sources.

In the Philippines, an indication of increasing competition in the MF Industry is the rising

incidence of ‘credit pollution’ among MFI Clients. This term refers to a situation where

borrowers take advantage of the availability of credit by borrowing from multiple MFIs. This is a

result of the growing number of microfinance providers such as NGOs, rural banks &

cooperatives operating in similar geographic areas within the country. Additionally the lending

community within the Informal system e.g the Loan sharks, 5-6 lenders offer credit with faster

loan releases though with higher interest rates. Competitive activity is pronounced in areas

with high concentration of MFIs such as metro Manila, Central Luzon and Southern Tagalog.

Greater competition has had positive outcomes in terms of:

Broadening of service offering to include savings, micro-insurance, and micro-

agricultural loan products.

Value added Non Financial service offerings by providers. This includes client trainings,

livelihood skills development, product development and marketing.

KEY MFI PLAYERS IN PHILIPPINES

MFI GEOGRAPHY TYPE OF MFI TECHNOLOGY UNIQUE FEATURESCentre for Agriculture and Rural Development

Southern Luzon NGO, Bank Combination of GBA ( Grameen Bank Approach) & ASA ( Association for social development)

Pioneer in GBA. Pioneer in

Capacity Building.

Biggest MF NGO in terms of outreach.

Negros Woman for tomorrow Foundation

Visayas NGO GBA Pioneer in GBA. Pioneer in

Capacity Building.

Mallig Northern Luzon Rural bank GBA Capacity BuildingBansalan Mindanao Cooperative CLUES-SCWE Performance,

100% repayment rate for four years.

Uplift NCR NGO Own Individual Lending.

Purely Individual lending.

Pioneer in integrated MF with total family development approach.

Source: “ Delivering to the Poor”: A search for successful Practices in Philippine Microfinance”, United Nations Development Programme, National Anti- Poverty Commission, People’s Credit and Finance Corporation, and Asian Institute of Management entitles December 2003.

Role of Microfinance

Microfinance is playing an extremely important role in empowering the poor and as a valuable tool to

assist the economic development process. The main purpose of the Microfinance is to break the vicious

“ low income- low investment-low profit” by inserting capital from outside into the economic life of the

poor people. According to Adam Smith “ Money, says the proverb makes money. When you have got a

little it is often easy to get more. The great difficulty is to get the little”. (Adam Smith 1937: 93).

Microfinance provides the “little money”. Thus it helps to improve the condition of the poor and the

extreme poor by raising income and profit, making them free from poverty and improving their living

standard. Its key feature is bringing the bank to the poor as opposed to the traditional banking system.

How can MFI move ahead in a developing country.

Microfinance has the potential to bring greater equality and economic security within the society. Collaboration between the various Industry constituents to promote the capability and the capacity of microfinance to reach the very poor should be a primary objective of the donor community and the lending agencies. Greater participation of the private sector could provide a significant impetus to the growth of Microfinance Industry. There is fortune t o be made at the bottom of the pyramid and the lending community should recognize the poor as resilent, creative entrepreneurs and value conscious consumers.

Despite several challenges, microfinance industry and the process of sustainable micro entrepreneurship combine to offer a potential solution to the poverty crisis of the 21st century.

IMPACT OF MICROFINANCE

Impact on Financial Sector

One of the key findings in a study conducted by ADB in 2002 was the integration of Microfinance into the mainstream of the formal financial system the formal financial system by gaining the participation of rural banks, thrift banks, cooperative banks and the NGOs. The traditionally conservative and collateral conscious rural banks , thrift banks and cooperatives have emerged as a major providers of microfinance in the Philippines.

Impact on Poor Sector

The economics of microfinance makes it a compelling anti-poverty strategy. In terms of social and

development impact, the Microfinance Industry has led to significant improvements in quality of the life

for the poor entrepreneurs.

According to an ADB study on Project Performance Evaluation Report on Rural Microenterprise Finance

Project in the Philippines, conducted in July 2006 average annual income of families of borrowers was

higher by 22% compared to non-members and 12% higher than drop outs from the microfinance

program. This meant that these families had more income to build assets, spend on food, basic services,

medical and productive purposes. Participation in microfinance significantly improved the family and

personal lives of 91% of the active borrowers and 89% of dropouts. As financial services support helped

the poor expand their economic activity, it promoted a sense of entrepreneurship, increase their

incomes and assets, & increase their self- confidence and esteem. Large scale sustainable microfinance

has helped create an enabling environment to reintegrate the poor in the formal networks of the

economy and sustainable development of local communities.