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MICROFINANCING

A. Understanding Microfinance

• What is microfinance?
Microfinance is the 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. By definition, it is
important to note that Microfinance is NOT
subsidized credit, NOT a dole-out, NOT salary or
consumption loans, and a cure-all for poverty.
A. Understanding Microfinance

• Who are the clients of microfinance?


The clients of microfinance are the
economically-active, entrepreneurial poor (e-
poor). Some examples of these are
shopkeepers, ambulant vendors and
household based entrepreneurs. These are
the clients who have a stable economic
activity and will be able to sustain and
enhance these if they are provided with even
a small amount of readily available funds.
A. Understanding Microfinance

• How can microfinance assist the poor?


If provided on a sustainable basis,
microfinance can help increase income, build
viable businesses, reduce vulnerability to
external shocks, empower the client, and
improve the quality of their lives.
A. Understanding Microfinance

• What are the core principles of


microfinance?
The core principles are 1) that the poor need
sustained access to financial services and
products and this sustained access is a
primary issue over interest rates, 2) that the
poor have the capacity to repay their loans
and to save and, 3) that microfinance
institutions can be operationally and
financially self sufficient.
A. Understanding Microfinance
• The Consultative Group to Assist the Poorest
(CGAP) Website points out that “Data from the
MicroBanking Bulletin reports that 63 of the
world's top MFIs had an average rate of return,
after adjusting for inflation and after taking out
subsidies programs might have received, of about
2.5% of total assets. This compares favorably
with returns in the commercial banking sector
and gives credence to the hope of many that
microfinance can be sufficiently attractive to
mainstream into the retail banking sector.”
A. Understanding Microfinance

• Who are the providers of the microfinancial


services?
In the Philippines, microfinance services are
provided mainly by Banks (mainly rural and
thrift), Non-governmental Organizations
(NGOs), and Cooperatives.
A. Understanding Microfinance

• What are the different methodologies of


microfinance?
Microfinance institutions have various methodologies
and technologies depending on their client demand,
and organizational goals and objectives. There are,
however, two main types of approaches: group
methodology is where the microfinancial service is
provided in the context of a group, and the individual
approach or single client lending where repayment and
schedules rely solely on the individual (i.e. character,
cash-flow, etc.)
B. National Strategy and Framework

• What is the National Strategy for Microfinance?


The National Strategy envisions a viable and
sustainable microfinancial market that will help
provide poor households and
microentrepreneurs with greater access to
microfinancial services. It calls for a greater role
by the private in providing credit and guarantee
programs vis-a-vis the non-participation of
government line agencies. Emphasis is on the
adoption of market-oriented financial and credit
policies to ensure viability and sustainability.
B. National Strategy and Framework

• What is the National Framework for Microfinance Regulation?


The Framework covers all types of microfinance institutions with
regulations focusing on portfolio quality, outreach, efficient and
sustainable operations and transparent information.
The basic premise is that all deposit taking institutions (banks,
cooperatives) are subject to prudential regulation, microfinance NGOs
collecting savings greater than the compensating balance are be
subject to regulation and supervision; banks with microfinance
operations are to remain under the regulation and supervision of the
BSP; cooperatives are be under the supervision and the regulation of
the Cooperative Development Authority (CDA); and NGOs while not
regulated, are encouraged to submit information to the Microfinance
Council of the Philippine (MCPI).
B. National Strategy and Framework
• How can the directed credit programs by the
government fit into this microfinance strategy?
In the Philippines, policy has shifted the function
of providing financial services directly to
government financial institutions (i.e. Land Bank
of the Philippines, Development Bank of the
Philippines, etc) that are competent to
implement such programs. Government agencies
(DSWD, DILG, etc) previously handling these are
to focus on areasof a greater competency such as
capacity-building, social preparation, provision of
infrastructure, etc.
B. National Strategy and Framework
• How different is the current microfinance
framework from past failed credit programs?
Past government credit programs (Masagana
99, etc.) focused on providing loans without
the necessary credit discipline. Because of lack
of preparation or other supporting
mechanisms, these programs failed. In
addition, there were massive repayment
problems because government money lent
out was perceived as dole.
B. National Strategy and Framework
• What is the difference between private microfinance
institutions and other government financing programs?
(I.e. Quedancor)
In the case of Quedancor, there was an agreement that it
will leave the retail market and focus on providing
wholesale funds to retail institutions. In the next few
months, adjustments may be seen in Quedancor’s policies
that will address issues of competition with private
financial institutions. Similarly, the People’s Credit and
Finance Corporation (PCFC) which, in the past, was also
involved in retailing, now shifted to providing wholesale
funds; all their project-monitoring units (PMUs) are selling
their portfolios to private microfinance institutions.
B. National Strategy and Framework
• Is the Department of Trade and Industry
program, under the BMBE law, in line with the
national policy of non-participation of non-
financial institutions in credit programs?
Yes, this facility complements the national
strategy insofar as focusing on capacity building,
social preparation and business support services,
which are crucial in the development of a vibrant
micro enterprise industry.
C. BSP Initiatives for Microfinance

• What is BSP's policy for advocating


microfinance?
To be able to reach a larger number of
entrepreneurial poor, the BSP is encouraging the
establishment of microfinance-oriented banks,
and microfinance operations inexisting banks .
The BSP, however, emphasizes that microfinance
is a serious business and institutions that want to
engage in it should be serious, well-prepared and
committed to upholding the best practices and
high performance standards.
C. BSP Initiatives for Microfinance

• What are the BSP initiatives for microfinance?


The BSP’s initiatives focus on: creating an enabling
policy and regulatory environment; increasing the
microfinance know-how, capacity and skills of the BSP
employees and the banking sector; and promoting and
advocating for sustainable and viable microfinance
operations within the banking sector. To achive this,
the BSP has established a top-level Microfinance
Committee, a Microfinance Core Group of Examiners,
and a Microfinance Unit making it among the first
central banks in the Asia-Pacific Region with a
permanent office dedicated to the endeavor.
C. BSP Initiatives for Microfinance

• What was the driving force of the BSP in promoting


microfinance?
The BSP is mandated by the General Banking Law of 2000
to recognize microfinance as a banking activity, and to draft
the guidelines for its operations within the banking sector.
If properly sustained, the BSP sees this as an effective
intervention for poverty alleviation.
Also banks, especially rural and thrift banks which fall
under BSP supervision, are channels of microfinance
because they have the infrastructure to provide such
services to the countryside. As long as the BSP closely
monitors their operations, then microfinance in the
banking sector is ideal.
C. BSP Initiatives for Microfinance

• What are the key success indicators of the program?


The BSP has made notable strides in its microfinance
program. The main success indicator is the increase in the
number of banks engaging in sustainable microfinance.
Another is the increase in the number of provinces that are
now covered by the program.
In addition, the operations of PCFC, a major source of
wholesale funds, reflects that most of its conduits are from
the banking sector which also has the highest volume of
loans and most extensive outreach. This is beneficial in that
it allows for a modality for savings mobilization, which
presents a huge potential for expansion.
C. BSP Initiatives for Microfinance
• Is the focus of the BSP Microfinance Program
exclusively for banks?
The BSP’s mandate is to focus on the banking
sector. However, our interest in the other sectors
such as the NGOs and cooperatives relate to the
following: 1) transformation of non-bank MFIs
into banks, 2) other infrastructure needed for
microfinance development (i.e., developing
uniform set of standards), and 3) promotion of
best practices for sustainable operations within
banks, NGOs and cooperatives.
D. Some Operational Issues for
Microfinance in the Banking Sector
• If you are not a microfinance-oriented bank, and
have unsecured loans under PhP150,000, is this
considered microfinance?
No. Not all loans below PhP 150,000 are
considered uner the microfinance program.
These are loans given to low income households
to finance microenterprises. The terms are based
on the cash flow of the client and are usually
unsecured. Salary and consumption loans are not
considered microfinance.
D. Some Operational Issues for
Microfinance in the Banking Sector
• If you are not a microfinance-oriented bank, and
have unsecured loans under PhP150,000, is this
considered microfinance?
No. Not all loans below PhP 150,000 are
considered uner the microfinance program.
These are loans given to low income households
to finance microenterprises. The terms are based
on the cash flow of the client and are usually
unsecured. Salary and consumption loans are not
considered microfinance.
D. Some Operational Issues for
Microfinance in the Banking Sector
• If you are an existing rural bank, do you have
to establish a separate organization to
engage in microfinance?
No. You can either set up a microfinance unit
in your existing bank or apply for one or more
of your branches to undertake microfinance
activities.
D. Some Operational Issues for
Microfinance in the Banking Sector
• Once transformed into a microfinance
branch, can we use same personnel?
One key success factor of microfinance is to
have capable and committed staff.
Microfinance operations require special skills
so it is incumbent that management and staff
are trained or have experience in
microfinance operations.
D. Some Operational Issues for
Microfinance in the Banking Sector
• What is needed to start a microfinance
operations?
The answers to this question may differ based on
what the bank’s objectives and goals are.
Typically, it takes 18 months for a branch to be
viable. This operation will have around PhP 5
million loans outstanding with 1,000-1,500
clients. The staffing of this sample operation is
about 5 technical officers. Other approaches
however can make a branch viable within 12
months of operation with just 1,000 clients and 3
full time personnel.
D. Some Operational Issues for
Microfinance in the Banking Sector
• What services and incentives are offered to
banks engaged in, or want to engage in
microfinance?
To encourage engagement in microfinance,
the BSP has created an enabling policy and
regulatory environment. In addition, a
rediscounting facility is open for banks to
access for their microfinance loan portfolios.
The End