Financial Innovations1

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Financial Innovations1

  1. 1. Money Talk: Microfinance for Microenterprises Mr. Eduardo C. Jimenez Microfinance Consultant Bangko Sentral ng Pilipinas Business World Entrepreneurs Forum August 25, 2006 - Century Park Sheraton, Manila
  2. 2. Outline of Presentation <ul><li>Microenterprises in the Philippines </li></ul><ul><li>Definition/ Background Information of Microfinance </li></ul><ul><li>Myths, Misconceptions and Barriers to Microfinance Development </li></ul><ul><li>Principles and Success Factors of Microfinance </li></ul><ul><li>Best Practices and Leading Methodologies </li></ul><ul><li>Institutions that Provide Microfinance </li></ul><ul><li>BSP Initiatives For Microfinance </li></ul>
  3. 3. Importance of Micro-enterprises in the Philippines <ul><li>Small and medium enterprises (SMEs) comprise 99.6% of all registered business in the Philippines and employ 70% of the workforce </li></ul><ul><li>Of total, micro-enterprises account for 743,949 (97.1%), small enterprises 61,759 (7.6%), medium enterprises 2, 923 (.4%), and large enterprises only 2,958 (0.3%). </li></ul><ul><li>Micro/ cottage enterprises make up about 91% of total establishments surveyed by the National Statistics Office </li></ul>
  4. 4. <ul><li>Invigorating MICROENTERPRISES through </li></ul><ul><li>access to MICROFINANCE can lead to </li></ul><ul><li>economic growth and development on the </li></ul><ul><li>local and national level. </li></ul>
  5. 5. What is Microfinance? <ul><li>It is a provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance products to the poor and low income households and their microenterprises </li></ul>
  6. 6. Important Features of the Definition <ul><li>It is not just credit </li></ul><ul><li>It has a target market - the poor and low income households </li></ul><ul><li>It is linked to the microenterprise </li></ul>
  7. 7. What Microfinance is NOT <ul><li>Subsidized Credit </li></ul><ul><li>Dole-out </li></ul><ul><li>Consumption/ Salary Loan </li></ul><ul><li>Cure-all for poverty </li></ul>
  8. 8. Who are the Clients? Near Poor E-poor Laboring Ultra Poor “Entrepreneurial Poor”
  9. 9. Features of Microfinance Loans <ul><li>Fit for those who can not access “traditional” sources of financing </li></ul><ul><li>Innovative Product Designs </li></ul><ul><ul><li>Use of collateral substitutes </li></ul></ul><ul><ul><li>Short term loans </li></ul></ul><ul><ul><li>Frequent amortizations </li></ul></ul><ul><ul><li>Inclusion of savings </li></ul></ul><ul><ul><li>Enterprise lending </li></ul></ul><ul><ul><li>Simple Documentation Requirements </li></ul></ul>
  10. 10. Benefits of Microfinance for Microenterprises <ul><li>Increase economic activity and income </li></ul><ul><li>Generate employment </li></ul><ul><li>Save and invest in the future </li></ul><ul><li>Guard against emergencies and shocks </li></ul><ul><li>Better invest in health, nutrition and education </li></ul>
  11. 11. Myths, Misconceptions and Barriers <ul><li>Poor people can not pay market interest rates and can not save </li></ul><ul><li>Microfinance institutions are primarily civic-oriented, non-profit organizations that can not be sustainable and viable </li></ul><ul><li>Microfinance institutions can not access commercial funds </li></ul>
  12. 12. <ul><li>High transaction costs of serving the poor </li></ul><ul><li>Regulatory barriers </li></ul><ul><li>Implementation of government directed credit programs </li></ul><ul><li>Poor are intimidated by formal institutions </li></ul><ul><li>Lack of infrastructure and physical access to formal institutions </li></ul>Myths, Misconceptions and Barriers
  13. 13. New Paradigm of Microfinance <ul><li>From beneficiaries to clients </li></ul><ul><li>From directed credit to market approach </li></ul><ul><li>From evolving programs to evolving institutions </li></ul><ul><li>From donor dependence to financially self sufficient institutions with access to commercial funding </li></ul>
  14. 14. Key Success Factors for Microfinance – 4 “C”s <ul><li>Clearly identified market </li></ul><ul><li>Capable and committed staff </li></ul><ul><li>Creative methodologies and technologies </li></ul><ul><li>Commitment to standards and best practices </li></ul>
  15. 15. Best Practices for Microfinance <ul><li>Appropriate Products for Clients (flexible, accessible, simple in process and documentation, appropriately priced, and permanent) </li></ul><ul><li>Appropriate Delivery </li></ul><ul><li>Clear Organizational/ Institutional Structure (Governance) </li></ul><ul><li>Adequate Risk Management (Use of Portfolio-at-Risk, Zero Tolerance for Delinquency) </li></ul><ul><li>Subscription to Performance Standards </li></ul>
  16. 16. Leading Microfinance Methodologies <ul><li>Group Methodology - Microfinance services are provided in the context of a group. </li></ul>
  17. 17. Some Examples of Group Methodolgy <ul><li>Grameen Methodology </li></ul><ul><ul><li>7-8 groups of 5 women forming 1 center </li></ul></ul><ul><ul><li>Disbursement and collection through center </li></ul></ul><ul><ul><li>Loans are provided on a rotation basis (2-2-1) </li></ul></ul><ul><ul><li>Collateral substitute (i.e. JSS, peer support/pressure) </li></ul></ul>
  18. 18. ASA (Association for Social Advancement) <ul><ul><li>7-8 groups of 5 women forming 1 center </li></ul></ul><ul><ul><li>Disbursement and collection through center </li></ul></ul><ul><ul><li>Simultaneous disbursement of loans </li></ul></ul><ul><ul><li>Collateral substitute (i.e. peer support/pressure) </li></ul></ul>
  19. 19. Leading Microfinance Methodologies <ul><li>Individual Methodology - single client lending where repayment and schedules rely solely on the individual (cash-flow, character based lending) </li></ul>
  20. 20. Some Examples of Individual Methodology <ul><li>MABS approach (Microenterprise Access to Banking Service) </li></ul><ul><ul><li>USAID funded technical assistance to rural banks that want to engage in microfinance </li></ul></ul><ul><ul><li>Individual loans are granted based on the character and household cashflow </li></ul></ul><ul><ul><li>Culture of zero tolerance for delinquency </li></ul></ul>
  21. 21. <ul><li>Banks (Rural, Thrift, Some Commercial </li></ul><ul><li>NGOs </li></ul><ul><li>Cooperatives </li></ul>Where Can I Access Microfinance?
  22. 22. BSP Initiatives <ul><li>Anchored on the General Banking Law of 2000, Sections 40, 43 and 44 </li></ul><ul><li>Recognizes the peculiar characteristics of microfinance in the requirements, terms and amortization of loans and other credit accommodations. </li></ul>
  23. 23. Three-Pronged Approach <ul><li>Microfinance “Friendly” Policy and Regulatory Environment </li></ul><ul><li>Training and Capacity Building within BSP and banking sector </li></ul><ul><li>Promotion and Advocacy </li></ul>
  24. 24. Policy and Regulatory Environment <ul><li>Issuance of 13 Circulars governing the practice of microfinance in the banking sector – provides incentives like rediscounting, recognize microfinance loans (no collateral, loan documentations, etc), allow for branching, promote best practices </li></ul><ul><li>Modification of Manual of Examination to include microfinance operations </li></ul><ul><li>Member of the Technical Working Group that established the regulatory framework and performance standards for all types of MFIs </li></ul>
  25. 25. Ways How a Bank can Engage in Microfinance <ul><li>Establishment of a microfinance-oriented bank </li></ul><ul><li>Establishment of a microfinance-oriented branch </li></ul><ul><li>Establishment of a microfinance unit within an existing bank </li></ul>
  26. 26. Training And Capacity Building <ul><li>Creation of a Microfinance Committee and Microfinance Unit </li></ul><ul><li>Establishment of a Core Group of BSP Microfinance Examiners </li></ul><ul><li>Inclusion of microfinance in the Basic Rural and Thrift Banking Courses </li></ul><ul><li>Conduct of training for banks on microfinance best practices </li></ul>
  27. 27. Promotion And Advocacy <ul><li>Regional tour to promote microfinance best practices to practitioners and potential players </li></ul><ul><li>BSP as Chair of the Philippine Celebration of the UN International Year of Microcredit </li></ul><ul><li>Microentrepreneur of the Year Awards </li></ul>
  28. 28. Banking Sector Exposure to Microfinance As of March 31, 2006 (in millions) <ul><li>Micro Loans Portfolio </li></ul><ul><li> No. of </li></ul><ul><li>Amount Borrowers </li></ul><ul><li>Microfinance-oriented Banks: </li></ul><ul><li>Thrift Banks (5 banks) 212.400 50,187 </li></ul><ul><li>Rural Banks (4 banks) 230.992 34,984 </li></ul><ul><li>Traditional Banks: </li></ul><ul><li>Thrift Banks (9 banks) 144.666 </li></ul><ul><li>Rural Banks (159 banks) 2,373.291 410,110 </li></ul><ul><li>Cooperative Banks (27 banks) 696.803 97,899 </li></ul><ul><li>Total (204 banks) 3,658.052 593.180 </li></ul>
  29. 29. Thank you. http://www.bsp.gov.ph/about/advocacies_micro.asp Microfinance Unit – (02) 523-6130

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