MICROFINANCE INDUSTRY ANALYSIS- PHILIPPINESAN OVERVIEWMicrofinance, in the Philippines, began as a social development initiative to alleviate poverty and hasmoved from marginal to the mainstream, toward commercialization and micro-banking. The growth ofthe Philippine microfinance in its first ten years from 1992 to 2002 can be described as vibrant, yetinstitutionally complex. The sector consists of both regulated and non-regulated institutional playerssuch as banks, cooperatives, non-governmental and people’s organizations, which use both formal andinformal standards to provide financial services or bank with the poor. During the first decade theIndustry 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 theirloans. “Zero tolerance for delinquency and “credit discipline” were the slogans of many of the newplayers as the sector grew and learned how credit to the poor should be given. It was only at the end ofthe decade that attention began to shift to the provision of savings and financial services such asmicrofinance. From being a niche market operation undertaken by socially oriented, non commercialinstitutions, it has become a more commercial financial service. In 1998, microfinance wasacknowledged as a poverty alleviation strategy with the passage of the SRPAA. The Philippine BankingAct of 2000 also recognized microfinance, but this time as part of the formal financial sector, The SocialReform and Poverty Alleviation Act or SRPAA.
DEFINITIONBSP, Philippines’ apex banking body defines Microfinance, as the viable and sustainableprovision of a broad range of financial services such as microcredit, savings, insurance, moneytransfers and similar financial products, by the private sector to poor and low-incomehouseholds engaged in livelihood and microenterprise activities using nontraditional andinnovative methodologies and approaches. The principle difference between microfinance andtraditional 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 salaryor consumption loans. Microfinance can provide long term, stable credit access only whenborrowers have the willingness and ability to meet scheduled loan payments.
Characteristics and features of MicrofinanceCharacteristics Distinguishing FeaturesType of client - Low Income. - Employment in the informal sector; low wage bracket. - Lack of physical collateral. - Closely interlinked household / business activities. - Prompt approval and disbursement of micro loansLending Technology - 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 selectionLoan 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.
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.1 Source: Report : The First decade of the Philippine Microfinance : 1992-2002, Prof Marcia F Miranda andRonals D Chua, AIM, Philippines.
LOGIC OF THE INDUSTRY.Development Practitioners, policy makers, and multilateral and bilateral lenders recognize theimportance 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. Thegreat 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 bankto 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 providingmicrofinance services to the urban & rural poor and the underprivileged sections of theeconomy.Financial intermediation and credit activities are under the regulatory jurisdiction of the BangkoSentral ng Pilipinas (BSP). The regulatory framework under the General Banking Law of 2000and a number of parallel laws governing specialized banks and the NBFI have made room for atiered structure of licensed financial intermediaries and of financial regulation. The formal &semiformal sector institutions directly and indirectly providing microfinance services aredetailed in the following Exhibit.Exhibit I provides a overview of the various Institutions, players involved in the MicrofinanceIndustry.
EXHIBIT IINSTITUTION TARGET MARKET AUTHORIZED KEY REGULATORY AGENCY SERVICESThrift banks Microenterprises; Deposits & Loan BSP, PDIC small businesses; Remittances individuals or groupsRural banks Microenterprises; Deposits & Loan BSP, PDIC small businesses; Remittances individuals or groupsNon Bank finance Microenterprises; Loans SECIntermediaries small businesses;without quasi bank individuals .functionsCooperatives Microenterprises; Deposits & Loans; BSP, PDIC small businesses; remittances; individuals or groups Insurance.NGOs Individuals or groups Microfinance loans SECInsurance Individuals or groups Insurance ICCompaniesThe 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 ofmicro-enterprises. Many of these are severely resource – constrained vendors operating inpublic markets, whose survival in business relies heavily on access to financing. This usuallycomes 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 reducedthey are still the most formidable players in Philippines. The most common informal lenders inthe Philippines are called “Bombay 5-6 “2. A key success factor for 5-6 businesses is thedevelopment of a large, good – quality client base which continually borrows and repayswithout default. However, as micro-entrepreneurs of tiny businesses , the clients of ‘5-6” arevulnerable to any shocks – external, such as economic downturns, and internal such as familysickness. In short, regardless of their willingness, micro-entrepreneurs’ ability to repay tends tobe unreliable. Therefore, an existing “good” business for a ‘ 5-6’ can easily become a “ badbusiness”. 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 opinionthat the Informal lending system plays a complementary role to the formal segment andgroups such as the “ Bombay 5-6” , with their different risk diversification strategies and fundsaccess can be a asset to the Filipino society, especially during economic downturns.2 Source: Paper on The “ Bombay 5-6” Last Resource Informal Financiers for Philippines Micro Enterprises, Oct2003, by Mari Kindo, AIM.
FUNDING AND SUPPORTING ORGANIZATIONSGovernment Financial Institutions. 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 fundsThe Philippines has several sources of ODA and technical assistance including those fromUSAID, UNDP, European union (EU), World Bank. In addition international organizations withlocal offices in the Philippines also provide wholesale fund and technical support to MFIs. ClientSavings is becoming a major source of funding for the regulated MFIs. Historically thedependence of MFIs on subsidized credit from Government donors, and lending agencies ledtoweak savings mobilization. As the savings deposits increased so did the amount of resourcesfor MFIs to improve services and expand outreach. Some MFIs have access to loans fromcommercial 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 InstitutionsManagement & Training Institutes such as the Asian Institute of Management ( AIM); Punla SaTao Foundation help build the capacity of the microfinance institutions to provide financialservices 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.
CompetitionThe major bases in appreciating the competitive landscape were the MFI’ perspectivesgarnered during the primary data collection and secondary data sources.In the Philippines, an indication of increasing competition in the MF Industry is the risingincidence of ‘credit pollution’ among MFI Clients. This term refers to a situation whereborrowers take advantage of the availability of credit by borrowing from multiple MFIs. This is aresult of the growing number of microfinance providers such as NGOs, rural banks &cooperatives operating in similar geographic areas within the country. Additionally the lendingcommunity within the Informal system e.g the Loan sharks, 5-6 lenders offer credit with fasterloan releases though with higher interest rates. Competitive activity is pronounced in areaswith 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 PHILIPPINESMFI GEOGRAPHY TYPE OF MFI TECHNOLOGY UNIQUE FEATURESCentre for Southern Luzon NGO, Bank Combination of Pioneer in GBA.Agriculture GBA ( Grameen Pioneer inand Rural Bank Approach) CapacityDevelopment & ASA ( Building. Association for Biggest MF NGO social in terms of development) outreach.Negros Woman Visayas NGO GBA Pioneer in GBA.for tomorrow Pioneer inFoundation 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 Purely Individual Lending. 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 MicrofinanceMicrofinance is playing an extremely important role in empowering the poor and as a valuable tool toassist 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 thepoor people. According to Adam Smith “ Money, says the proverb makes money. When you have got alittle 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 theextreme poor by raising income and profit, making them free from poverty and improving their livingstandard. 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 ofmicrofinance to reach the very poor should be a primary objective of the donor community and thelending agencies. Greater participation of the private sector could provide a significant impetus to thegrowth of Microfinance Industry. There is fortune t o be made at the bottom of the pyramid and thelending community should recognize the poor as resilent, creative entrepreneurs and value consciousconsumers.Despite several challenges, microfinance industry and the process of sustainable micro entrepreneurshipcombine to offer a potential solution to the poverty crisis of the 21st century.
IMPACT OF MICROFINANCEImpact on Financial SectorOne of the key findings in a study conducted by ADB in 2002 was the integration of Microfinance intothe mainstream of the formal financial system the formal financial system by gaining the participation ofrural banks, thrift banks, cooperative banks and the NGOs. The traditionally conservative and collateralconscious rural banks , thrift banks and cooperatives have emerged as a major providers of microfinancein the Philippines.Impact on Poor SectorThe economics of microfinance makes it a compelling anti-poverty strategy. In terms of social anddevelopment impact, the Microfinance Industry has led to significant improvements in quality of the lifefor the poor entrepreneurs.According to an ADB study on Project Performance Evaluation Report on Rural Microenterprise FinanceProject in the Philippines, conducted in July 2006 average annual income of families of borrowers washigher by 22% compared to non-members and 12% higher than drop outs from the microfinanceprogram. 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 andpersonal lives of 91% of the active borrowers and 89% of dropouts. As financial services support helpedthe poor expand their economic activity, it promoted a sense of entrepreneurship, increase theirincomes and assets, & increase their self- confidence and esteem. Large scale sustainable microfinancehas helped create an enabling environment to reintegrate the poor in the formal networks of theeconomy and sustainable development of local communities.