Commercialization of Microfinance: Philippines

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© Asian Development Bank 2003

All rights reserved

Published May 2003

The views and interpretations in this report are those of the author and do not necessarily reflect those ofthe Asian Development Bank.

ISBN No. 971-561-490-6

Publication Stock No. 040503

Published by the Asian Development BankP.O. Box 789, 0980, Manila, Philippines

FOREWORD

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CURRENCY EQUIVALENT(AS OF 15 MAY 2002)

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UNDERSTANDING MICROFINANCECOMMERCIALIZATION

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This country study analyzes the progress towardcommercialization of the Philippines’ relativelyheterogeneous microfinance industry.

1 It also

explores the remaining challenges, implications,and positive approaches to the commercializationof microfinance in the Philippines.

METHODOLOGY AND ORGANIZATION

The study on which this report is basedincludes theoretical considerations drawingfrom the “financial systems” paradigm

2 and

practical field experience for analyzing thecommercialization of microfinance. The mainfindings and recommendations presented hereare the product of extensive consultation throughindividual and group meetings with a wide varietyof microfinance stakeholders, includingmicrofinance clients, microfinance institutions(MFIs),

3 government officials, state-owned

commercial banks, private banks, cooperatives,nongovernment organization (NGO) MFIs,international NGOs, funding agencies, andacademics. In addition, relevant domestic andinternational studies have informed this study,as noted throughout.

Responses to questionnaires elicitingstakeholders’ views on microfinancecommercialization and their latest institutionaland financial data have been incorporated wherepossible. In addition to collecting such data andholding a wide variety of stakeholder meetingsin Manila, the author also gathered data duringfield visits to several other provinces.

4 It is

important to note that all institutional andfinancial data were self-reported by the MFIs,unless otherwise noted. Readers should bemindful that self-reported data provided by MFIsare often based on estimates only. This isparticularly an issue with microfinance NGOsthat do not separate microfinance from other

social programs or from traditional loanportfolios.

The remainder of this chapter elaborateson the framework for analyzing thecommercialization of microfinance usedthroughout this study and establishes thecountry context as it affects the microfinanceindustry. Chapter 2 examines the historicaldevelopment of the microfinance industry andevaluates the progress made by current MFIstoward commercialization, assesses MFI accessto commercial sources of funds, and outlines fourmajor trends in the commercialization ofmicrofinance in the Philippines. Chapter 3analyzes how conducive the operatingenvironment is to the commercialization ofmicrofinance by focusing on enabling attributesof the policy environment, the legal andregulatory framework, and the existence of keymicrofinance support institutions. Currentchallenges to microfinance commercialization arethe focus of Chapter 4, which reveals stakeholderperceptions, internal constraints facing MFIs, andexternal impediments in the operatingenvironment. Chapter 5 explores the implicationsof commercialization in terms of expectedchanges in outreach and access to commercialsources of funds, as well as product offerings andtarget markets. The evidence of and potential forcompetition and mission drift

5 are also assessed

in Chapter 5. Chapter 6 recommends positiveapproaches to commercialization forgovernment, funding agencies, various types ofMFIs, and microfinance support institutions.

FRAMEWORK FOR ANALYZINGMICROFINANCE COMMERCIALIZATION

Commercialization of microfinance is arelatively accepted prerequisite to the sustainableexpansion of outreach commensurate with

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demand by the poor in the Philippines. The termcommercialization is associated by manystakeholders in the Philippines, and indeed bymicrofinance professionals worldwide, with “theadoption by MFIs of market-based principles intheir microfinance activities regardless of whetherthey are under prudential or nonprudentialgovernment regulations.”

6 There is a growing

realization that commercialization allows MFIsgreater opportunity to fulfill their social objectivesof providing the poor with increased access toan array of demand-driven microfinanceproducts and services, not only through creditbut also savings, insurance, payments, moneytransfers, etc.

This report adopts a comprehensive view ofmicrofinance commercialization at two levels: theinstitutional factors (MFI commercialization) andattributes of the environment within which theMFIs operate (commercialization of themicrofinance industry).

MFI Commercialization

In this report, MFI commercialization isconsidered as progress along a continuum, whichis depicted in Figure 1.1 and described as follows.

• Adoption of a professional, business-likeapproach to MFI administration andoperation, such as developing diversified,demand-driven microfinance products andservices and applying cost-recovery interestrates.

• Progression toward operational and financialself-sufficiency by increasing cost recoveryand efficiency, as well as expanding outreach.

• Use of commercial sources of funds, such asnonsubsidized loans from apex organizations(wholesale lending institutions) orcommercial banks, mobilization of voluntarysavings, or other market-based fundingsources.

• Operation as a for-profit, formal7 financial

institution that is subject to prudentialregulation and supervision and able to attractequity investment.

Progress toward MFI commercialization isusually hastened by a strategic decision of anMFI’s owners/managers to adopt a for-profitorientation, accompanied by a business plan tooperationalize the strategy to reach full financialself-sufficiency and to increasingly leverage theMFI’s funds to achieve greater levels of outreach.The recognition that the key to achievingsubstantial levels of outreach is building a soundfinancial institution essentially means that theMFI needs to charge cost-covering interest ratesand continually strive for increasing operationalefficiency.

Advocates of this approach rightly argue thatcharging cost-covering interest rates is feasiblebecause most clients would have to pay, andindeed do pay, even higher interest rates toinformal moneylenders. MFIs that charge

Figure 1.1: Illustrative Attributes of MFI Commercialization

Progress TowardCommercialization

Achievement ofoperational

self-sufficiency

Achievement offinancial

self-sufficiency

Increasedcost-recovery

Utilization ofmarket-based

sources of funds

Full CommercializationApplying Commercial Principles

Operation as afor-profit MFI aspart of the formalfinancial system

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cost-covering interest rates are an attractiveoption for this clientele even though the interestrates that an MFI might charge may seem highrelative to the corresponding cost of borrowingfrom a commercial bank. The relevant basis forinterest rate comparisons in the eyes of the clientis the informal sector where she or he usuallycan access funds, not the commercial bankingsector, which rarely serves this market.

8

As an MFI’s interest and fee revenue coversfirst its operating costs and then the cost of itsloanable funds, it may be considered to beincreasingly operating on a commercial basis.MFI profitability enables expansion of operationsout of retained earnings or access to market-basedsources of funds. Operating as a for-profit, formalfinancial institution may be the most completehallmark of MFI commercialization because thisimplies subjectivity to prudential regulation andsupervision and that the MFI has become fullyintegrated into the formal financial system.

However, MFIs strive for varying degrees ofcommercialization; not all aim to become formalfinancial institutions. This decision is usuallyclosely linked to a host of external factorsaffecting the commercialization of microfinance,discussed next.

Commercialization of the MicrofinanceIndustry

Commercialization of the microfinanceindustry involves several factors, including thedegree to which the policy environment isconducive to the proliferation of commercialMFIs, the extent to which the legal and regulatoryframework supports the development and growthof commercial MFIs, the availability and accessof commercial MFIs to market-based sources offunds, and the existence of several principalsupport institutions. The main attributes of theoperating environment that determine thecommercialization of the microfinance industrycan be divided into the following five maincategories.

1. Policy Environment

• Government policies that affect theability of MFIs to make progress towardcommercialization (examples of policiesthat may hamper MFI commercializationare interest rate caps and selective, ad hocdebt forgiveness programs).

• Presence of subsidized government ordonor-supported microcredit programs thatmay stifle the development and growth ofcommercial MFIs.

2. Legal Framework

• The legal framework for securedtransactions�the creation (legal definition),perfection (registration), and repossession(enforcement) of claims�as well as formicroenterprise formation and growth.

9

• The licensing options available to new MFIentrants or semiformal MFIs interested intransforming into formal financial institutions.

3. Regulation and Supervision

• The prudential regulations and supervisionpractices that govern MFIs mobilizingvoluntary public deposits specifically orfinancial institutions in the broader financialmarkets generally, and the institutionalcapacity of the regulating body to carry outits mandate effectively.

4. Money Markets and Capital Markets

• Availability and access of MFIs tocommercial sources of funds, such asnonsubsidized loans from apex organizations(wholesale lending institutions) or banks,mobilization of voluntary savings, privateinvestment funds, or other market-basedfunding sources.

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5. Support Institutions

• Existence of credit information collectionand reporting services, such as creditinformation bureaus and credit ratingagencies, that capture information useful toMFIs regarding borrower creditworthiness,loans outstanding, types of collateral pledged,etc.; or to potential MFI investors. Examplesinclude ratings of MFIs based on theirportfolio quality and asset values,microfinance trade associations andnetworks, microfinance technical traininginstitutions, and providers of businessdevelopment services.

NATIONAL CONTEXT

Socioeconomic development and macroeco-nomic and sectoral stability are importantconsiderations in determining the suitability ofthe operating environment to promote growthof the microfinance industry and its possiblecommercialization. This section presents socialdevelopment indicators, recent macroeconomicperformance, and performance of the country’sagricultural and financial sectors as a basis forestablishing the context for the commercializationof microfinance.

Socioeconomic Indicators

The Philippine archipelago has a totalpopulation of about 80 million persons spreadover 7,107 islands. Population density is around268 people per square kilometer (km2), which ishigher than that of most other countries in theregion.

10 Total land area is 300,000 km2, 94% of

which is on 11 major islands. In terms of human development, the United

Nations Development Programme (UNDP)classifies the Philippines as a “medium levelcountry” and for 2001, the country ranked 70 outof 162 countries.

11 The Human Development

Index rose from 0.603 in 1985 to 0.740 in 2001and all major health indicators reflect similar

positive trends (see Annex 1 for additional socialindicators). Most human development indicatorsare commensurate with those of other countriesin the region; however, the literacy rate in thePhilippines at 94% is among the highest in theregion.

Economic growth in the Philippines has beenmodest but steady since the 1998 economic slumpassociated with the 1997 Asian financial andeconomic crisis, and inflation has been containedat low and stable levels (Annex 2 containssummary economic indicators). Real grossnational product (GNP) grew at 3.7% in 2001 andinflation was contained at 6.1% for the year.

12

However, investment remained conspicu-ously low in 2001 at 16.6% of GNP, comparedwith more than 23% in the mid-1990s. Exportgrowth fell to single digits in 2000 for the firsttime since 1992 and contracted by about 16% (inUS dollars) in 2001, due to the sharp slowdownin the world economy and, in particular, in theworld electronics trade, on which the country hasa high export reliance.

13

Gross national income (GNI) per capita (2000)was $1,040,

14 but high levels of poverty persist.

The incidence of poverty in the Philippines fellsharply in the first part of the 1990s, droppingfrom 34% in 1991 to 25% in 1997, with much ofthe improvement occurring between 1995 and1997.

15 Since then, however, poverty reduction

has stagnated; preliminary data from the FamilyIncome and Expenditure Survey (FIES) 2000suggest that poverty incidence in 2000 of around26% was a little above the 1997 level.

16 The

stagnation in poverty reduction is also reflectedin the absence of any decrease in the proportionof people living on less than $1 per day(equivalent) and less than $2 per day (Table 1.1).

The Philippines had made strong gains ingrowth and poverty reduction in recent yearsuntil it was hit by the 1997 regional financial andeconomic crisis and the 1998 El Niño weathershocks. During 1994–1997, Philippine economicgrowth averaged 5% per annum and theincidence of poverty fell substantially. Duringthese years, the government budget wasbalanced, exports were growing at around 20%per annum, investment was 23% of GNP, and

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there was optimism about the prospects forlasting peace throughout the country. The impactof the El Niño droughts was heavier on therelatively poor agriculture-based householdswhereas the financial crisis affected the relativelybetter off wage earners more severely.

17 Poor

households have not been able to smoothconsumption as well as have other households.

Agriculture Development

The agriculture sector represents an importantbut declining source of income. Agricultureemployed 36.5% of the population or 11.0 millionpeople in 2000. Agriculture as a share of grossdomestic product (GDP) was 21.9% in 1990,falling to 15.9% by 2000. Growth rates forvirtually all crops decelerated in the 1980s andthe early half of the 1990s because of: (1) a declinein expansion of areas under cultivation; (2) thedownturn of world commodity prices; (3) a seriesof natural calamities and droughts; (4) taperingoff in the early 1980s of growth rates associatedwith the green revolution; and (5) policy-relatedfactors including policy uncertainty regarding theComprehensive Agrarian Reform Program andsharp decline in public investments inagriculture.

18

Services increased during the same period,growing from 43.6% of GDP in 1990 to 52.9%by 2000.

19 During 1985–1997, the incidence of

poverty declined twice as rapidly among house-holds dependent on industry and services as

among those dependent on agriculture, but thesectoral composition of poverty remained stable,reflecting the shift of the population out of agri-culture.

20 Agriculture-dependent households cur-

rently account for over two thirds of the poor,but represent only a little over one third of thepopulation.

Faster agricultural growth and a swifterstructural shift out of agriculture are crucial forpoverty reduction. Higher productivity inagriculture is important for improving incomesof the poor. Particularly important are policiesand investments to improve infrastructure andsupport services. Expanding irrigation will helpboost grain yields; strengthening the research andextension system will enhance agriculturalproductivity and facilitate onfarm diversification;and improved rural infrastructure will reducetransport costs and increase accessibility ofmarkets and public services.

Such improvements have the potential toincrease the financial returns to agriculturalproduction, including that of smallholders, andto boost the effective demand for microfinance.However, there are limits to improvingproductivity in agriculture, and accelerating theshift out of agriculture is arguably more importantfor the poor. Labor productivity is lowest by farin agriculture�output per worker is one half thatin services and less than one fourth that inindustry�so that expanding opportunities inhigher productivity sectors will be an importantpart of reducing poverty and promotingeconomic growth.

21 Access to commercial

microfinance will be an important element infacilitating this transition.

Financial Sector Development

Composition of the Financial Sector

The financial system is composed of formal,semiformal, and informal financial serviceproviders. The formal institutions (Table 1.2) arelicensed and regulated by the Bangko Sentral ngPilipinas (BSP) except for insurance companies,which are the responsibility of the InsuranceCommission. BSP was established as an

Table 1.1: Philippine Poverty Statistics

% Population living % Population livingYear on less than $1/day on less than $2/day

1985 22.8 61.31990 19.1 53.31996 14.8 46.51997 12.1 45.21998 14.6 47.71999 13.7 47.12000 12.7 45.9

Source: World Bank 2002a, p.5.

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Table 1.2: The Philippine Formal Financial System

Type of Institution Components

Banking Institutions Universal banksCommercial banksThrift banksRural banksSpecialized government

banksNonbank Financial Investment housesIntermediaries (NBFIs) Financing companies

Securities dealersInvestment companiesFund managersLending investorsPawnshopsGovernment NBFIs

a

Venture capitalcorporations

Nonbank Thrift Mutual building and loanInstitutions associations

Nonstock savings and loansassociations

aGovernment NBFIs include the Social Security System, the GovernmentService Insurance System, and the Home Development Mutual Fund.

Source: Gochoco-Bautista 2000, p. 35.

Table 1.3: Banking System Total Assets, (Gross Outstanding) Loans, and (Domestic) Deposits,as of March 2002

Total Assets Total Loans Total Deposits(P billion) % of Total (P billion) % of Total (P billion) % of Total

Commercial Banks 2,961 90.3 1,616 89.5 2,005 90.4Thrift Banks 243 7.4 143 7.9 163 7.3Rural Banks 74 2.2 46 2.6 49 2.2Total 3,278 99.9 1,805 100.0 2,217 99.9

Source: Philippines Deposit Insurance Corporation 2002.

to engage directly in development banking orfinancing. The Monetary Board, as BSP’s highestpolicymaking body, is composed of tworepresentatives of the government sector and fivefull-time members from the private sector. ThePresident of the Philippines appoints membersof the Monetary Board for terms of 6 years.

The financial sector is dominated by banks,which on a combined basis make up over 90%of financial assets. As of September 2001, thebanking sector was composed of 44 commercialbanks, 107 thrift banks, and 786 rural banks(including 52 rural banks owned bycooperatives).

22 In terms of ownership, the

banking sector included 13 foreign bankbranches, seven subsidiaries (five commercialbanks and two thrift banks) and threegovernment banks.

23

Banking in the Philippines is highlyconcentrated, with the largest six commercialbanks controlling around 60% of all financialassets and 90% of all banking assets (Table 1.3).Commercial banks are often part of family-ownedbusiness conglomerates, and tend to operate asin-house banks for the nonbank business andcommercial operations of the controllingfamilies.

24 The major category of loans made by

commercial banks (24% of the total) in 2001 wasfor manufacturing. The largest category oflending (26%) by thrift banks was “real estate,renting, and business activities.” Total lending byrural banks was predominantly agricultural (40%)and for activities classified by BSP as “wholesale,trade, and repair” (18%).

25

“independent central monetary authority” in1949, but it underwent a substantial restructuringand modernization per the New Central BankAct of 1993. BSP’s main responsibility is toformulate and implement policy in the areas ofmoney, banking, and credit. BSP is not permitted

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Lending investors and pawnbrokers are thedominant providers of credit among the formalnonbank financial institutions. The semiformalfinancial sector is composed of an estimated10,000 (multipurpose and credit) cooperatives,500 NGOs, and more than 50 donor andgovernment target-group oriented creditprograms. The Cooperative DevelopmentAuthority (CDA) registers and regulates thecooperatives while the Securities and ExchangeCommission (SEC) manages NGO registration.The informal financial sector comprises a varietyof actors, including moneylenders, trade creditorsand farmer lenders, self-help groups (such aspaluwagan which are rotating savings and creditassociations), and friends and family.

In terms of banking outreach, commercialbanks are predominantly located in urban areasincluding first-class municipalities. Thrift bankspredominantly serve small- and medium-scaleenterprises outside the national capital region.With the exception of the rural banks, the bankingsector has traditionally been urban based.Because of this, competition among financial

institutions in towns, cities, and first- andsecond-class municipalities is high. However,rural areas in fourth- and fifth-class municipalitiesare often characterized by the presence of onlyone financial institution, which is, in most cases,a rural bank. The majority of rural people mustrely on the services provided by semiformalfinancial institutions and informal financialproviders.

Significant Developments in Banking

Since the mid-1980s, the regulatoryframework for the financial sector has improvedin terms of increasing the efficiency and stabilityof the banking system. A series of measurestightened the regulations related to minimumcapitalization, the limitations and restrictions ofloans to a single enterprise, and the allocation ofloans to management and shareholders (Box 1.1).The capital adequacy ratio is uniform for all banksat 10% of risk-weighted assets. Also, reportingstandards are generally similar and apply to alltypes of banks.

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This chapter focuses on the progress towardcommercialization by Philippine MFIs as a wholeand by institutional type. A historical overviewof the establishment and development of thevarious types of MFIs is provided and theircurrent collective and individual performance issummarized in terms of outreach, financial self-sufficiency, and efficiency. Major governmentand donor efforts to inculcate sustainablemicrofinance practices by institutional type arealso reviewed as are four related recent trends inMFI commercialization: rural bank downscaling,commercialization of cooperatives, NGOtransformation, and new market entry.

In general, rural banks offer enormousmicrofinance potential because of their local-levelownership and knowledge. Cooperatives havegood outreach but need more work on standardsand ensuring self-sufficiency. Most microfinanceNGOs are small and offer little commercialpotential. However, a few of the larger NGOshave demonstrated commercial success and aremoving toward more outreach by transforminginto regulated financial institutions. These fewsuccesses have attracted some new marketentrants that have begun microfinance operationsas commercial institutions from the outset. Theircommercial structure will allow them to growquickly and become bigger microfinance playersin the future.

OVERVIEW

Three main types of retail MFIs currentlyserve the market: a large proportion of the 2,865cooperatives registered with the CDA,

26 about

500 of approximately 900 microfinance NGOs,and at least 100 of 786 rural banks. The oldest ofthese suppliers are the cooperatives,

27 which

began in the early 1900s. Initiated in 1952, therural banks continue to be the dominant providerof commercial micro- and small-scale financialservices to a wide range of rural entrepreneurs.Since the 1980s, the number of microfinanceNGOs has steadily increased, targeting poorpopulations without access to formal financialservices.

Each of these retail MFIs has expanded itsprovision of microfinance due to numerousrecent and ongoing government and donor-supported programs to expand microfinanceoutreach to the poor on a commercial basis.However, while the rural banks and creditcooperatives have a nationwide delivery systemthrough their unit entities and local branches,relatively few of them are familiar withmicrofinance technologies and microfinancemarkets as profitable opportunities. Numerousmicrofinance NGOs are trying to fill the demandgap, but nearly all are small, capacity-constrainedinstitutions that have more of a social thancommercial focus.

28

In addition to these three main types of MFIsare various other formal, semiformal, andinformal providers of microfinance (Table 2.1).In areas with low population density and littlephysical infrastructure where few if any formaland semiformal MFIs operate, informalproviders, such as moneylenders called “5-6ers”

29

or Mumbai,30

provide microcredit for 1—6months, usually at nominal interest rates rangingbetween 10% and 30% (flat) per month. Otherinformal providers include trade creditors andfarmer lenders, self-help groups, such as rotatingsavings and credit associations, and friends andfamily. The most recent estimates suggest thatinformal providers supply about two thirds ofmicrocredit loaned outside the handful of urbancenters and highly-populated rural areas, where

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some local competition exists between formal andsemiformal MFIs.

The total volume of microcredit from formaland semiformal MFIs combined is unknown, butthe estimates of the outstanding balance are inthe range of P6 billion to P8 billion ($121 millionto $161 million). The largest category of poorpeople served by the formal financial sectorcomprises agrarian reform beneficiaries and othersmall agricultural producers who access fundswholesaled by Land Bank of the Philippines(LBP) through some 460 rural banks and 1,700cooperatives. It is estimated that as of December

2000, P6 billion ($121 million) of these wholesaledfunds were onlent to about 600,000 poorborrowers.

31 Estimates of the total number of

poor with access to microfinance services rangebetween 600,000 and 1 million people,

32

depending mainly on whether one includesconsumer (i.e., salary-based) loans that may beborrowed from rural banks for microenterprisepurposes. However, it is clear that even if 1million people are served by MFIs, outreach islow compared to the estimated 5.8 million poorhouseholds;

33 market penetration is slightly less

than 20%.

Table 2. 1: Major Providers of Microfinance in the Philippines

Regulated Supervised Main Funding Authorized TargetType Ownership Legal Basis by by Sources Activities Market

Formal Institutions

Equity,commercialloans,deposits

Equity,commercialloans,deposits

Equity,commercialloans

Equity,commercialloans

Thrift Banks

Rural Banks

Pawnshops

LendingInvestors

Privateinvestors

Privateinvestors

Privateinvestors

Privateinvestors

Thrift BanksAct, Law onCorporations

RuralBanks Act,Law onCorporations

GeneralB a n k i n gLaw

GeneralBankingLaw, Law onCorporations

BSP,PDIC

BSP,PDIC

BSP, SEC

SEC

BSP, PDIC

BSP, PDIC

None

None

Savingsdepositsand loans

Savingsdepositsand loans

Pawn loans

Loans

Generalpublic

Generalpublic

Generalpublic

Generalpublic

BSP = Bangko Sentral ng Pilipinas; CDA = Cooperative Development Authority; NGO = nongovernment organization; PDIC = Philippine DepositInsurance Corporation; SEC = Securities and Exchange Commission.

Source: Adapted from Gallardo 2001, p.17.

Semiformal Institutions

(Savings andCredit)Cooperatives

NGOs

Individualmembers

Privatetrustees

CooperativesCode

Law onTrusts andNonprofitFoundations

CDA

AnnualReports toSEC andBSP

None

None

Capital plusmemberdeposits

Grants,donations,commercialloans

Savingdepositsand loansto members

Loans toindividualsand groups

Members

Generalpublic

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Market penetration is highest around urbancenters and highly populated rural areas outsideMetro Manila. In general, commercialmicrofinance has made the most headway inareas with developed physical infrastructure andadequate social service provision. Such areasinclude San Fernando, Bacolod, and Davao aswell as Cagayan de Oro in the three major islandregions of Luzon, Visayas, and Mindanao,respectively. There are a few exceptions to this,including VisionBank’s expansion in fivemunicipalities within the province ofCatanduanes, which has low population densityand traditionally no access to microfinance.

Some thrift and rural banks have not been ableto automate their operations because of theunreliable supply of electricity in their areas.

34

These and other types of MFIs need tocomputerize their systems to be able to processefficiently numerous small-scale financialtransactions in an accurate and timely mannerand expand their geographic coverage.Weaknesses in physical infrastructure (power,telecommunications, transport, etc.) as well asbasic health and education services will continueto constrain effective demand for microfinanceuntil there are substantial improvements in theseareas.

In the areas where MFIs have penetrated,group lending is still predominantly the norm,reflecting the early widespread adoption of theGrameen methodology adopted by the vastmajority of early, major microfinance NGOleaders. With an expansion of commercialmicrofinance, increased individual lending canbe expected as successful group borrowers“graduate” to higher levels of debt capacity andas MFIs of all types widen their market base fromthe entrepreneurial poor as a group to micro andsmall-scale enterprises. The increased provisionof commercial microfinance by formal MFIs,means that deposit mobilization will likely playan increasing role in funding growth. Increasingthe access to voluntary saving accounts shouldbecome more of a focus for the industry.

There are several plausible reasons for the lackof extensive microfinance outreach. Most obviousare the difficulties associated with the geographicdispersion of clients in an archipelagic nation, andtheir cultural and language diversity. The UnitedNations (UN) has recorded a total of 110 regionaland ethnic groups in the Philippines and manydifferent dialects exist, even in the samegeographic area. Other important factors includethe fact that government directed creditprograms, although on the wane now, have beenhistorically costly and unsustainable, leading togross financial sector distortions and inefficienciesand a general weakening of private sectorincentives to innovate. The incorporation ofmicrofinance best practices that balancecommercial and social missions by rural banks,cooperatives, and microfinance NGOs isrelatively new and may also be an explanationfor the low levels of outreach.

Despite the relatively low market penetrationof MFIs to date, many have made substantialprogress toward commercialization and thelargest providers of microfinance can beconsidered to be on a sound commercial footing.Four major trends in the sector support this. First,rural banks and a few thrift banks are increasinglydownscaling their services to tap themicroenterprise market, largely as a result offocused microfinance technical assistance andtraining by donors. Second, donor initiatives tocommercialize cooperatives are also spurringtheir introduction or transformation. Third,several microfinance NGOs have recentlytransformed into microfinance-oriented ruralbanks or thrift banks. Fourth, the microfinancesector is also attracting new entrants. Forexample, a microenterprise-oriented thrift bankwas established in mid-2001 by a mix of domesticand international institutional investors led by theGerman consulting firm, Internationale ProjektConsult (IPC).

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RURAL BANK DEVELOPMENT ANDDOWNSCALING

The roots of commercial microfinance dateback to 1952, when a law was passed that allowedfor the creation of small regulated banks suitablefor providing microfinance on a commercialbasis. Based on private ownership and initiatives,the rural banking system was to “promote andexpand the rural economy in an orderly andeffective manner by providing people of ruralcommunities with the means to facilitate andimprove productive activities and to encouragecooperatives.”

35 The original target market of the

rural banks included low-income, ruralentrepreneurs. Rural banks spread quickly in the1970s, but it was not until the mid-1990s thatseveral of them started engaging in microfinanceon a commercial basis, either independently orwith assistance from the United States Agencyfor International Development (USAID)-sponsored Microenterprise Access to BankingServices (MABS) program.

Historical Overview and RecentPerformance

The Rural Banking Act of 1952 allowed dulyestablished cooperatives to organize rural banksor subscribe to the shares or stock of any ruralbank. Thus, the rural banking system is composedof two subsystems: rural banks, owned andorganized by individuals; and cooperative ruralbanks, owned and organized by cooperatives andother farmer associations.

36 To stimulate the

proliferation and expansion of both types of ruralbanks, the Government offered a number ofincentives, including exemptions from taxes,charges, and fees that would normally be assessedto formal financial institutions, as long as thebank’s net assets were below a certain level.

37 In

addition, BSP provided free technical assistanceand training as well as access to loans andrediscounting facilities at preferential rates. Thesystem enjoyed rapid growth, with 224 ruralbanks acquiring over P140 million in assets by1962. By 1972, there were 591 rural banks and

by 1982, there were 1,033, including more than25 cooperative rural banks.

Unfortunately, government interference in therural banking system nearly caused its demise.Through incentives and moral persuasion, theGovernment convinced rural banks to participatein numerous directed credit programs thatencouraged risky lending practices. One of themost extensive agricultural extension programs,Masagana 99, wreaked havoc on the rural bankingsystem�rural banks served as the major conduitof unsecured loans to small rice farmers duringthe 1970s. BSP allowed the banks to rediscount100% of the loan values at 1% per year; the loansalready had low interest rates of 10–12% perannum. Furthermore, BSP allowed the ruralbanks to exclude arrears under the Masagana 99program in their computation of past-due ratios.This allowed the rural banks to continue toborrow from BSP when their past-due ratios hadexceeded the normal 25% limit.

The rural banks complied with theGovernment’s request for their participationpartly as a result of the threat that new rural bankswould be allowed to open in their geographicterritory if they did not participate. In additionto the adverse impact of their participation inseveral directed credit programs, the rural bankssuffered adverse economic conditions includinghigh inflation, a liquidity crisis, trade imbalances,and large fiscal deficits. These difficulties led totight monetary policies and the partialliberalization of the financial system in the early1980s. From 1979 to 1982, a few assistanceprograms were implemented to rehabilitate therural banks, including capital buildup and loanrestructuring, which resulted in minimal reliefonly. In 1984, the rural banks’ major source ofcredit funds, BSP’s rediscount window, dried upand rural banks’ real assets dropped substantially.The highest rate of rural bank failures occurredin the 1980s when 182 rural banks closed.

38

The Countryside Financial InstitutionsEnhancement Program of 1991 aimed torehabilitate the rural banks and restore risk assetratios to at least 10% for those rural banks thatcould infuse sufficient additional capital. Thisprogram, as well as the passage of the revised

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Rural Bank Act of 1992, indicating theGovernment’s commitment to allow the ruralbanks to compete freely in the market, reversedthe negative trends of the past. By 1992, the ruralbanking system reported positive real growthrates in assets, capital accounts, and net loans,with 787 rural banks reaching 463,000borrowers. Steady growth has continued and therural banks are now poised for significantexpansion. At present, there are over 790 ruralbanks with more than 1,800 branches that cover85% of the municipalities in the Philippines. Asa whole, the system of rural banks has the widestbranch network of any financial institution inthe country. While some rural banks havefocused on larger, more traditional collateralizedloans, most are now returning to lower-incomeentrepreneurs as a growth market.

Gauging rural bank financial performance inmicrofinance operations is extremely difficultbecause there is very little information on theiractivities other than from those that aremembers of the national microfinance networkcalled the Microfinance Council of thePhilippines or from the MABS Project. The 41rural banks that participated in the MicrofinanceCouncil’s survey reported as of June 2001 acombined 105,739 clients, P553.2 million ($11.1million) in outstanding loans, and an average

Table 2.2: Asset and Liability Structure of Banks, as of March 2002

Gross % SmallTotal Outstanding Total Deposits Deposits of

Institutional Assets Loans Total Deposits Valued < P 15,000 all DepositsCategory (P billion) (P billion) (P billion) (P million) (by number)

Commercial Banks 2,961.5 1,615.8 2,005.5 33,452.0 76.0(in 19.4 million accounts) (in 14.7 million accounts)

Thrift Banks 243.4 143.0 162.8 4,640.0 76.5(in 2.8 million accounts) (in 2.2 million accounts)

Rural Banks 73.6 46.4 49.3 5,234.8 90.7(in 4.7 million accounts) (in 4.3 million accounts)

Total 3,278.5 1,805.2 2,217.6 43,326.8 78.6(in 26.9 million accounts) (in 21.2 million accounts)

Notes: The institutional category Rural Banks includes rural banks and cooperative rural banks. Total deposits include only domestic deposits.

Source: PDIC 2002.

outstanding loan per client of P5,231 ($105). Thisaverage outstanding loan amount is only slightlyhigher than that reported by the 22 microfinanceNGOs (P3,742 or $75) and 23 cooperatives(P4,853 or $98) also reporting to theMicrofinance Council.

The rural banks reported value of voluntaryand mandatory savings (referred to in thePhilippines as “capital buildup” (or CBU) wasP184.1 million ($3.7 million). Table 2.2demonstrates that as a whole, the banking sectoris liquid�all bank types have total deposits inexcess of total (gross) outstanding loans,although the rural banking system has the leastliquidity, with its deposit-to-loan ratio of just1.06. Nonetheless, the rural banks mobilize thehighest percentage of small deposits. More than90% of their deposit base is from accounts withP15,000 ($300) or less. In fact, many rural bankshave shown creativity in mobilizing deposits. Forexample, some require only a minimum of P100($2) to open a savings account.

39 A few rural

banks offer checking accounts and automaticteller machines (ATM) to their clients.Aggressive marketing campaigns for deposits areimplemented by many rural banks through printand broadcast media, by sponsoring importantevents in the communities, or by conductingraffles and games.

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Rural Bank Downscaling

Feeling competitive pressures from above(commercial and thrift banks) and below (pawn-shops, lending investors, and finance companies),many rural banks are expanding their provisionof specialized microfinance services (Box 2.1). Forinstance, some rural banks have adopted vari-ous microfinance methodologies, including in-dividual, solidarity, and variants of the Grameenmodel in order to penetrate high-risk, small bor-rowers at low cost. Many rural banks have alsocreated special credit windows for salariedpeople in rural areas whose families are engagedin small and cottage enterprises. All this indi-cates that rural banks are steadily enhancingtheir capabilities to assess credit risks as theyseek to provide specialized microfinance ser-vices for their clients.

40

Given the suitability of rural banks forengaging in the sustainable provision ofmicrofinance (Box 2.2), the USAID-fundedMABS program is working to bring about asizable expansion of loan and deposit bankingservices to microenterprises and other groups atlower socioeconomic levels by assistingparticipating rural banks to significantly increasethe services they provide to the microenterprisesector. The primary local project partner is theRural Bankers Association of the Philippines(RBAP), which has developed a MABS TechnicalServices Unit with technical assistance provided

by the international development firm,Chemonics International, Inc. Using what hasbeen called the “MABS approach,” the programprovides technical assistance, training, andlimited resource support to participating ruralbanks (and cooperative rural banks) so they canprofitably and sustainably expand their loan anddeposit portfolios to microenterprises.

The MABS approach includes intensive one-on-one technical assistance, workshops, seminars,on-the-job coaching, and exposure and trainingvisits to participant banks. Each bank is assigneda technical advisor who checks that the trainingand technical assistance are being deliveredproperly and efficiently. Each participating bankreceives focused attention and support, whichincludes institutional assessment, seniormanagement orientation, market survey, productdevelopment/enhancement, improvement ofmanagement information systems, businessplanning, on-the-job training (including sessionson cash-flow lending and zero tolerance towarddelinquency), and development of in-housetraining capacity.

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Since its inception in 1998, the MABSprogram has helped 81 rural banks/branches,most of which are in Mindanao, to expand theirmicrofinance operations. As of March 2002,MABS rural banks had 23,965 active loan clients,with a total outstanding loan portfolio of P144.8million (Table 2.3). Since the program started,microdeposit balances (accounts with balancesof P15,000 [$300] or less) of MABS partner banksincreased by P128.8 million, corresponding to96,185 additional depositors’ accounts. More than96,000 microdepositors have also opened savingsaccounts at MABS participating rural banks.

Having successfully assisted rural banks inMindanao to achieve profitable microfinancedepartments, RBAP formed the MicrofinanceTechnical Services Unit in November 2000 toreplicate the introduction of the MABS approachin the Luzon and Visayas regions. The RBAP-MABS Technical Services Unit currently workswith eight pilot participating rural banks in Luzonand the Visayas and also provides support to the20 participating banks in Mindanao.

COOPERATIVE DEVELOPMENT ANDCOMMERCIALIZATION

Cooperatives have been actively providingmicro- and small-scale financial services to poorand low-income households since the early1900s, but most have only recently begun tocommercialize their operations and makeheadway in the sustainable provision ofspecialized microfinance based on best practices.

Historical Overview

The cooperative movement was initiallysponsored by civic and regional groups thatregistered the earliest cooperatives under the firstCorporation Law enacted in 1906, followed bythe Agricultural Credit Associations Act of 1915,and the Cooperative Marketing Law enacted in1927. In the late 1960s and early 1970s, thecooperative movement had two major influencesthat would dramatically expand it and shape itsculture.

Table 2.3: Performance Highlights for MABS Rural Banks, as of March 2002

Pilot 1st Rollout 2nd Rollout 3rd Rollout Total/Indicator Banks Banks Banks Banks Average

Number of Bank Branches 4 37 23 16 80Number of Active Borrowers 1,991 14,147 5,348 780 22,266Number of Loan Officers 19 140 117 43 319Value of Loans Outstanding (P million) 14.2 79.7 37.9 12.9 144.7Average Loan Balance (P) 7,141 5,634 7,092 16,557 9,106Average Loan Portfolio per Loan Officer (P) 748,282 569,300 324,154 300,337 485,518Portfolio at Risk More Than 30 Days (%) 3.20 3.37 3.50 0.19 2.57Depth of Outreach (Average Loan Balance/Gross National Product Per Capita, %) 13 10 13 31 16.75

Notes: Pilot banks started operations in October 1998. First rollout banks started operations in September 1999. Second rollout banks started operationsin March 2000. Third rollout banks started operations in July 2001.

Source: Data from RBAP-MABS Program as of 31 March 2002.

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First, responding to the call of the SecondVatican Council for direct participation in thesolution of poverty and social injustice, theCatholic Church in the Philippines passed aresolution in 1967 recognizing the need toorganize cooperatives in parishes. Church effortsresulted in the organization of thousands ofcooperatives that stressed education as a tool foreconomic liberation and on voluntarism and self-reliance as the motivating forces for leadershipand membership in cooperatives.

Second, to support the agrarian reformprogram, former President Marcos repealed theCooperative Marketing Law and issued a newdecree on cooperatives in 1973. Cooperativeswere directed to prepare tenant farmers for theirnew role as landowners and to provide them withbasic economic and social services. Many newcooperatives were organized overnight withgovernment sponsorship. These laws governedthe cooperatives along with some other sectoralregulation until all of them were brought underone law, the “Cooperative Code of thePhilippines,” in 1989. In 1997, the NationalConfederation of Cooperatives (NATCCO) wasorganized with the main objective of providingimproved education and training components forthe primary and secondary member-affiliates.

The movement has historically had a muchstronger social orientation than commercial focusbecause of the influence of church andgovernment use of cooperatives as conduits foragricultural credit. While social values are veryimportant, they are often used as an excuse forpoor business management. This lack ofcommitment to a commercial approach, addedto the fact that there is virtually no regulation orsupervision of cooperatives and they can bestarted with less than $100 equivalent and 15members, has resulted in a large percentage ofcooperative failure. Of some 42,000 cooperativesregistered under the Cooperative Code in 1997,half were inoperative.

41 Lack of prudential

standards has resulted in high delinquency, lowcapital accumulation, and little or no savingsmobilization, which, in turn, has resulted invery high external dependency. Donor effortsto improve the viability of cooperatives have

also allowed a few of them to expand theirmicrofinance operations in a sustainable manner.

As with the rural banks, measuring theperformance of cooperatives’ microfinanceoperations is extremely difficult given the littleavailable information on their activities other thandata captured by those cooperatives participatingin the Microfinance Council or donor-fundedprojects. The 24 cooperatives that participatedin the Microfinance Council’s survey reported acombined 41,248 clients and P200.2 million ($4.0million) in outstanding loans, with an averageoutstanding loan per client of P4,853 ($98) as ofJune 2001. The participating cooperatives alsoreported the value of savings and capital buildupcombined to be P85.0 million ($1.7 million).

The cooperative movement has demonstratedits potential for mobilizing deposits and providingfinancial services to small savers and borrowers,and it has been able to finance its lending fromshare capital and deposits, quite apart from itsrole as a conduit for government funding.

42 Many

well-run cooperatives in the Philippines aresustainable and show positive financialperformance, although the limited financialreporting required of them by the CDA and theirpoor supervision make it difficult to determinehow many fall under this category.

Commercialization of Cooperatives

The focus on the commercialization ofcooperatives and their provision of specializedmicrofinance products and services is relativelyrecent. It is actively promoted by variousgovernment and donor efforts, includingtechnical assistance, training, and fundingsupport. Commercialization is being addressedat two levels: the national federation and selectedprimary cooperatives.

The largest of the four national federations ofcooperatives is NATCCO, which was formedprimarily to coordinate the provision of trainingand educational services at the national level, andserve as the voice of cooperatives belonging toits network. Today, NATCCO is the strongestsuch national federation in terms of geographicreach, membership, financial capacity, and array

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of services. At the core of the NATCCO networkare the 1,200 affiliated primary cooperativeslocated in both rural (75%) and urban areas (25%).Membership is composed of various types ofcooperatives: 18% are pure credit cooperatives;71% are multipurpose cooperatives, with savingsand credit as the bulk of their business; 5% areconsumer or marketing cooperatives; and the rest(6%) are service and producers’ cooperatives anda few cooperative rural banks. Members totalmore than 1 million individuals: farmers andfishers (24%), self-employed (21%), salariedworkers (29%), housekeepers (16%), and studentsand other groups (10%).

Efforts to strengthen the cooperative move-ment as a whole are being supported by a num-ber of donor-funded projects. Through the fi-nancial intermediation component of theSocio-Economic Development of Cooperativesin the Philippines (SEDCOP) project, interna-tional banking standards are being introducedto the cooperatives (Box 2.3). The project aimsto professionalize the cooperatives’ operationsand to build their confidence in undertaking fi-nancial intermediation. Through capacity-build-ing assistance, the NATCCO-Financial Interme-diation (FI) project is attempting to raise the over-all professional capability and profitability of par-ticipating cooperatives by improving their ac-counting and reporting transparency, manage-ment information systems, operating effi-ciency, product diversification including thedevelopment of microfinance products andservices based on local and international bestpractices, and marketing.

As part of SEDCOP’s strategy to improvecooperative financial intermediation, it hasidentified (using the software MASS-SPECC; asof May 2002) 29 primary cooperatives in theNorthern Luzon, Mindanao, and Visayas regionsfor technical support designed to improveefficiency in operations and their ability to meettheir members’ need for loans and capital and,therefore, improve their profitability as well.

These cooperatives have experiencedreduction in their delinquency ratios, increasesin assets, and professionalization of their staff.Delinquency rates of the Mindanao and Northern

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Luzon cooperatives, for example, were reducedfrom around 40% at the start of the project (31December 2000) to around 20% by end-2001(Table 2.4).

Among SEDCOP’s initiatives with the pilotcooperatives is improvement in the accountingand management information systems. Thesoftware MASS-SPECC is able to computerizethe savings and credit operations of thecooperatives using the MASS-SPECC StandardRun-time Edition. The software consolidates thedatabase of the cooperative so that if a member’saccount is called up, all the information requiredto evaluate a loan application, for example, isimmediately available. This information includesoutstanding obligations from previous loans aswell as the size of the member’s capital share andaccount balance. An important feature of thesoftware is its ranking of a member based on thefrequency of deposits and settlement of previousloans. Such ranking guides the loan officer’sappraisal of a loan, which is an incentive formanagement to collect information on delinquentloans and react rapidly to any adverse changes.

The other major donor-funded effort aimedat commercializing cooperatives, the PhilippineCredit Union Empowerment and Strengthening(CUES) program was a $3.7 million project

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As of 30 April 2002, all cooperativesparticipating in the MCUB program weresubmitting quarterly PEARLS ratio reports andunderstood the implications of the financial ratiosin decision making. From December 1998 toDecember 2002, loan loss provisions for loansdelinquent more than 12 months increased from10.3% to 100.0%, while delinquency decreasedfrom 63.0% to 9.6%. In the same time period,member-client outreach increased 499.3% from36,443 to 218,354. Three quarters of thesemember-clients were women. Voluntary savingsdeposits increased by 540.8% from $3.4 millionin December 1998 to $21.6 million in December2002. These and other performance highlightsare shared in Table 2.5.

A unique element of the program was apartnership between WOCCU and FreedomFrom Hunger that enabled credit unions to offera village banking product, Savings and Creditwith Education (SCWE), to poor rural women,in addition to their regular savings and creditservices. SCWE is a microfinance programdesigned specifically to meet the needs of the verypoor rural women in the communities of thecredit unions with demand-driven, commercially-priced financial services. Along with saving andlending activities, trained field agents provideeducation on such topics as breast-feeding,rehydration therapy, and nutrition. For some ofthe women, this is the first access to credit andeducational information they have ever received.

Of the 18 Mindanao cooperatives participat-ing in the MCUB program, 11 were also partici-pating in the SCWE program. As of June 2002,cooperatives participating in the SCWE Programhad mobilized a total of over 900 active savingsand credit associations with 24,300 womenmembers receiving access to financial services.As of 30 April 2002, a total of 21,432 borrow-ers had P63 million ($1.3 million) in outstand-ing loans and the membership had depositedP10.6 million ($213,000) in savings. Portfolio atrisk (30-days overdue) was 3.78%.

In 2002, CUES was selected to receive theHerb Wegner Memorial Award for OutstandingOrganization/Program from the National CreditUnion Foundation. The project was honored for

Table 2.4: Delinquency Reduction at NATCCO-FICooperatives

Delinquency DelinquencyRate at as at End-Project 2001

Start (%) (%)

Northern LuzonGalimuyod MPC 47 13Suyo MPC 48 22Alilem MPC 63 10Sta. Cruz 16 12BAMARVEMCO 36 38La Trinidad 41 24BABUDEMCO 46 15FATIMA 19 10Average 40 18

Mindanao

AIMPC 78 33BUGEMCO 5 5MCC 76 35MSUIIT MPC 5 2OIC 37 21PMPC 26 16SAFRAGEMC 28 16TCMPC 78 41Average 42 21

FI = Financial Intermediation; MPC = multipurpose cooperative; NATCCO= National Confederation of Cooperatives.

Notes: Initial delinquency rates (project start) were as of end-2000.Delinquency is based on maturity except for Alilem MPC, whichuses a portfolio-at-risk greater than 30 days percentage.

Source: NATCCO 2002.

(1996–2002) funded by USAID’s Office ofMicroenterprise Development and implementedby the World Council of Credit Unions(WOCCU) to extend microfinance services tomen and women in Mindanao. This programaimed to improve financial discipline andsavings-driven growth utilizing the Model CreditUnion Building (MCUB) methodology and thePEARLS (Protection, Effective financialstructure, Asset quality, Rates of return, Liquidity,and Signs of growth) evaluation and monitoringsystem. CUES worked with 18 Mindanao creditcooperatives.

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its success as an innovative effort to provideaffordable financial services to people, especiallywomen, in some of the poorest areas of thePhilippines. The CUES project plans to continueconducting training to incorporate therecommended financial disciplines andprudential standards in an increasing number ofcooperatives.

DEVELOPMENT AND TRANSFORMATIONOF MICROFINANCE NGOS

Historical Overview and Recent Performance

A few NGOs began microfinance activitiesin the 1980s and hundreds more haveincorporated microfinance as part of their servicemenu since the early 1990s due to substantialgovernment, donor, and international NGOfinancial and nonfinancial support. The influenceof the Grameen model of service delivery hasbeen very strong among microfinance NGOs duein large part to various forms of support availableto Grameen replicators. Expansion ofmicrofinance NGOs following the Grameenmodel has been bolstered since 1996 when a $35

million Asian Development Bank (ADB)—International Fund for Agricultural Development(IFAD) project started, allowing funds to bewholesaled through the government apexorganization, People’s Credit and FinanceCorporation (PCFC), to Grameen replicators foronlending by microfinance NGOs to groups ofwomen borrowers. Also since the mid-1990s,other models, such as the Association for SocialAdvancement (ASA) in Bangladesh, have beenpromoted among microfinance NGOs withtechnical assistance provided by UNDP andother donors.

Since 1997, the Government has beenexplicitly incorporating microfinance into itspoverty reduction strategies and encouragingmicrofinance NGOs to develop sustainablemicrofinance programs. High educational levelsand exposure of MFI managers to internationalbest practices in microfinance have helped a fewof these NGOs to progress toward making theiroperations commercially viable. In addition, theexistence of several networks and donor-fundedprojects has strengthened the ability of themicrofinance NGO industry to grow over time.

However, the vast majority of microfinanceNGOs is neither viable nor sustainable. While

Table 2.5: Outreach and Financial Performance Indicators of the 11 (Batch One) and 5 (Batch Two) CUESPhilippine Credit Unions

Indicator End-1998 End-2002 % Change

Number of Members 36,433 218,354 499.3% of Women Members 65.7 74.7 13.7Number of Outstanding Loans 0 107,744Average Outstanding Loan Amount ($) 271Total Outstanding Loans ($) 5,936,546 29,247,584 392.7Average Deposit Size ($) 92 90 -2.2Total Deposits ($) 3,366,164 21,571,135 540.8Average Share Size ($) 110 42 -61.8Total Shares ($) 3,147,164 10,202,805 224.2Total Assets ($) 9,588,614 40,329,441 320.6Deposits / Total Assets (%) 35.1 53.5 52.4Operating Expense / Average Assets (%) 8.1 10.3 27.2Net Income / Average Assets (Unadjusted Return on Assets, %) 2.1 6.1 190.5

Notes: Exchange rate used in Table: end-1998: $1 = P40.2; end-2002: $1 = P50.0. Blank entry means data not available.

Source: WOCCU 2002a.

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microfinance NGOs effectively target and reachpoor clientele (due in large part to widespreaduse of means testing associated with the Grameenmodel), they are not efficient intermediariesbecause of their weaknesses in ownership andgovernance, and institutional capacity. Asnonstock, nonprofit organizations, microfinanceNGOs have difficulty accessing loan capital fromcommercial sources. Considered individually,however, a few of the older microfinance NGOshave achieved financial self-sufficiency and haveefficient operations. Data from the Center forAgriculture and Rural Development (CARD) andTulay sa Pag-unlad, Inc. (TSPI), which both beganas NGOs in the 1980s, are indicative (Table 2.6).

Large-scale Microfinance NGOs

CARD and TSPI are two of only three MFIsthat had loan portfolios exceeding P100 million($2.0 million) as of end-2001. The third was theNegros Women for Tomorrow Foundation(NWTF) (Table 2.7). The Foundation’s combinedloan portfolio of P754 million ($15.2 million)accounts for an estimated two thirds of allmicrofinance NGOs’ combined portfolios. Itscombined outreach of 158,425 clients accountsfor about half of the total of all microfinanceNGOs. With plans for large-scale expansion,these three large microfinance NGOs areexpected to continue dominating themicrofinance NGO sector in terms of outreach,sustainability, and efficiency over the next 3years. CARD and TSPI, in particular, areregarded by the NGO sector as pioneers inmicrofinance commercialization in thePhilippines, in that they have achieved fullfinancial self-sufficiency and charge interest ratesthat more than cover their costs.

The size of CARD’s loan portfolio in 2001 grewby 58% over the previous year. This high growthrate was made possible in large part by its creationof a rural bank and ability to mobilize savings.Repayment rates continued to be maintained atclose to 100% with a portfolio-at-risk ratio of lessthan 0.5%. CARD independently reported anoperational self-sufficiency ratio of 140% and afinancial self-sufficiency ratio of 118% at end-2001.

CARD employs a variety of microfinancemethodologies, but the bulk of its microlendingis based on a modified Grameen model. Itstarget clients are landless female rural workerswho have no regular jobs and have totalmarketable assets of less than P50,000 (about$1,000). CARD provides initial membershiptraining, including value formation andleadership development. CARD also offers itsmature clients the CARD Loan AccelerationProgram, a credit line of up to P120,000 (about$2,400). Effective interest charges of 44% perannum are built into the weekly amortizationplans. CARD’s formalization and its operationaland financial performance continue to make ita leading commercial player in the microfinancesector. Almost all of CARD’s clients live belowthe poverty line in rural parts of the country.About 50% of the clients are in agriculture, 30%in commerce, 15% in manufacturing, and 5%in services.

Established in 1981, TSPI was the firstPhilippine NGO to specialize entirely inproviding microfinance. In contrast to thecombined loan growth rate for CARD (Bank andNGO) of nearly 60%, TSPI’s loan portfolioincreased by 15% in 2001. Repayment ratescontinue to be high and stable at 98.5% whilethe portfolio-at-risk ratio is a reasonable 3.0%.

43

Improvements in TSPI’s operational andfinancial performance are reflected in its self-reported operational self-sufficiency (OSS

44) ratio

of 126.6% and financial self-sufficiency (FSS45

)ratio of 102%.

As of April 2002, TSPI’s total loan portfoliowas P206.9 million ($4.2 million) with 44,044active clients. TSPI offers three loan products:(i) the Kabuhayan (Livelihood) Program, whichuses Grameen methodology to deliver loans ofP3,000–20,000 ($60–400) to poor women ingroups of 20 and carries a flat interest rate of 18%for 6 months; (ii) the Sasakyan ng Bayan (tricycle)loan product, which also uses group guarantees,but with only six members, for loans of P75,000–85,000 ($1,500–1,700) that carry a 36% flat interestrate per annum with a term of 30 months; and(iii) individual loans for business expansion tosuccessful microenterprises that are not yet ready

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Table 2.6: Selected MicroBanking Bulletin Indicators

Indicator CARDa, b

TSPIc

Asia-Pacific All MFIs

Outreach and Institutional IndicatorsAge of Institution (year) 13 19 10 8Number of Offices 21 21 7 13Number of Active Borrowers 28,531 18,344 9,266 10,710Women Borrowers (%) 100 88 77 62

ProfitabilityPortfolio Yield (%) 39.0 43.0 44.0 38.1Adjusted Return on Assets (%) -1.4 -2.5 2.4 -3.7Adjusted Return on Equity (%) -4.0 -5.3 7.3 -8.6Operational Self-Sufficiency

d (%) 102.0 96.0 116.0 102.0

Financial Self-Sufficiency)e (%) 95.0 92.0 110.0 90.0

EfficiencyTotal Admin. Expenses/Avg. Gross Loan Portfolio (%) 30.6 35.8 28.3 30.4Salary Expenses/Avg. Gross Loan Portfolio (%) 16.9 21.7 15.5 16.2

ProductivityAverage Salary (Multiple of GNP/Capita) 1.6 3.0 2.8 5.1Staff Productivity 102.0 83.0 86.0 114.0

PortfolioPortfolio at Risk > 90 Days (%) 0.0 3.7 1.9 2.1Average Loan Balance ($) 129.0 194.0 261.0 466.0Depth (Loans as % of GNP/Capita) 12.3 18.5 40.7 46.0

CARD = Center for Agriculture and Rural Development; GNP = gross national product; MFI = microfinance institution; TSPI = Tulay sa Pag-unlad, Inc.a

CARD operates a rural bank and an NGO and combines the operating results of the two organizations for reporting purposes (Microfinance Councilof the Philippines 2002b, p.7).

bCARD’s MBB-adjusted data presented here (with permission from the MFI) is as of end-1999, the most recent MBB data available at the time of thestudy.

cTSPI’s MBB-adjusted data presented here (with permission from the MFI) is as of July 2000. The data for Asia-Pacific and All MFIs are also as of thisdate. It should be noted that TSPI independently reports its number of active borrowers as of end-2001 as 25,939, its OSS as 126.6%, and its FSS as102%.

dOperational self-sufficiency (OSS) = operating revenue/(loan loss provision expense + operating expense + financial expense). OSS measures howwell an MFI can cover its costs through operating revenues.

eFinancial self-sufficiency (FSS) = adjusted operating revenue/(loan loss provision expense + financial expense + adjusted operating expense ). FSSmeasures how well an MFI can cover its costs taking into account a number of adjustments to operating revenues and expenses for subsidies, inflation,and nonperforming loans. The purpose of most of these adjustments is to model how well the MFI could cover its costs if its operations were notsubsidized, and if it were following international accounting standards and funding its expansion with commercial-cost liabilities.

Source: MicroBanking Standards Project Finance Performance Reports prepared for each institution for inclusion in the MicroBanking Bulletin (MBB).

to access loans from commercial banks. Loansizes under this program are in the range ofP50,000–400,000 ($1,000–8,000) and carry a flatinterest rate of 36% per year with terms of 6–12months.

About half of TSPI’s funds are derived fromclient deposits and most of the remainder iscomposed of loans borrowed at what can be

considered fully commercial interest rates�theinterest rate of their borrowings exceeds theprevailing prime rate by more than 5 percentagepoints on average. Given its good operational andfinancial performance and its significant relianceon commercial sources of funds, TSPI continuesto be a major player in the microfinance marketand its level of commercialization can be

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Table 2.7: Status of Large Microfinance NGOs, as of End-2001 (more than P100 million in outstanding loans)

Indicator CARD TSPI NWTF

Number of Branches 30 26 15Number of Borrowers and Savers 84,037 39,378 35,010Total Number of Staff 337 309 224Number of Field Staff 307 249 163Value of Loans Outstanding (P) 378,991,438 195,630,587 179,429,318Value of Collateral Savings (P) 156,042,718 85,626,502 54,408,927Average Loan Balance (P) 4,110 5,984 5,125Average Portfolio per Field Staff (P) 1,234,500 785,665 1,100,793Repayment Rate (%) 99.9 98.5 99.2Portfolio at Risk (%) 0.43 3.0 2.1Operating Cost Ratio (%) 24.0 35.8 34.4Operational Self-Sufficiency (%) 139.5 122.7 102.4Financial Self-Sufficiency (%) 118.5 100.8 85.7Equity to Asset Ratio (%) 30.4 44.6 32.0Current Ratio 2.3 1.7 2.8Collateral Savings to Loan Ratio (%) 41.1 43.8 30.3

CARD = Center for Agriculture and Rural Development; NGO = nongovernment organization; NWTF = Negros Women for Tomorrow Foundation;TSPI = Tulay sa Pag-unlad, Inc.

Source: Microfinance Council of the Philippines 2002b, p 8.

expected to increase because it plans to obtainapproval for the operation of a microfinance-oriented thrift bank in the near future.

Founded in 1984, NWTF was incorporatedin March 1986 as a nonstock corporation (i.e.,NGO) with the mission to create opportunitiesfor the self-employed by providing poor peoplewith access to integrated credit facilities, and toreduce the exploitation of the poor bymoneylenders through a comprehensive creditprogram. NWTF’s loan portfolio increased in2001 by almost 60% over that in the previousyear and is reported at P179.4 million ($3.6million). NWTF continues to maintain repaymentrates of 99.2% and a portfolio-at-risk ratio of 2.1%.At the end of 2001, NWTF reported OSS andFSS ratios of 102% and 86%, respectively.

NWTF started Project Dungganon in October1989 using the Grameen model to serve womenin rural households belonging to the poorest 30%of the population. Loans are provided based onjoint liability to group members at a flat 32%interest rate per annum. Although this interestrate has allowed NWTF to reach OSS, the

organization has not yet attained FSS, which is,however, a priority. An NWTF senior managernoted that they are striving to achieve FSS by“lowering operational costs, increasing outreach,improving client retention, repackaging loanproducts to suit client needs, improving fundsmanagement, leveraging equity, and providingstaff incentives.” In line with its clients’ needs,loan sizes are small, ranging between P1,500 andP2,000 ($30–40) for the first loan with steppedlending on subsequent loans to a maximum ofP7,000 ($140).

NWTF has other credit products, such aseducation loans, utility loans (for electricity andwater), and family loans (flexible loans for anyconsumer or business purpose). Most of theclients (77%) engage in commerce, with 14% inagriculture, 6% in services, and 3% inmanufacturing/production. NWTF’s strong clientorientation, balanced with its focus on achievingFSS, suggests that this microfinance NGO willprogress along the commercialization continuum,albeit more slowly than CARD or TSPI, becauseNWTF is not yet ready to formalize its operations

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in an effort to fuel further growth via depositmobilization.

Three microfinance NGOs are classified asmedium-sized MFIs: Taytay sa Kauswagan, Inc.(TSKI), Agricultural and Rural Development forCatanduanes, Inc. (ARDCI), and Alalay saKaunlaran sa Gitnang Luzon, Inc. (ASKI) (Table2.8). They have not yet achieved financial self-sufficiency, but planned to focus on efficiency andproductivity of their operations in 2002 whilecontinuing their present growth path. It isexpected that these three MFIs will continue togrow and report improved performance in 2003and beyond.

Small-scale Microfinance NGOs

Six of the leading small-scale microfinanceNGOs are members of the Microfinance Counciland their summary performance data are in Table2.9. Ahon sa Hirap Foundation, Inc. (ASHI) andFirst Consolidated Bank Foundation Inc. (FCBFI)appear to have consolidated their operations withonly minor increases both in outreach and size

of loan portfolios. The other four microfinanceNGOs�Norfil Foundation, Inc. (NORFIL),Milamdec Foundation, Inc. (MILAMDEC),Cebu Micro-Enterprise DevelopmentFoundation, Inc. (CMEDFI), and Jaime V.Ongpin Foundation, Inc. ( JVOFI)�experiencedsubstantial increases in number of clients and loanportfolio size in 2001. All six MFIs areexperiencing repayment rates exceeding 90%and three of them have repayment rates of atleast 97%; however the portfolio-at-risk rates of10% or higher for three of them indicate thatgrowth may be coming at the cost of decliningrepayment performance. Only three are nearing10,000 clients. In terms of OSS ratios, three ofthe six reported ratios exceeding 100%, meaningthat they are covering operational costs fromrevenues derived from microcredit activities.While a few of these small microfinance NGOsoffer some potential for sustainable growth inthe future, the vast majority of the hundreds ofsuch microfinance NGOs is not commerciallyviable and would be forced to close in theabsence of donor funds.

Table 2.8: Medium-sized Microfinance NGOs, as of end-2001 (between P30 million and P100 million inoutstanding loans)

Indicator TSKI ARDCI ASKI

Number of Branches 8 4 6Number of Borrowers and Savers 32,036 13,304 12,479Total Number of Staff 209 78 102Number of Field Staff 126 62 85Value of Loans Outstanding 90,390,116 63,256,221 43,287,351Value of Collateral Savings 30,446,713 21,861,063 10,197,217Average Loan Balance 3,515 9,260 3,469Average Portfolio per Field Staff 717,382 1,032,000 901,820Repayment Rate (%) 97.3 99.5 85.0Portfolio at Risk (%) 7.31 2.4 18.0Operating Cost Ratio (%) 33.3 28.1 41.0Operational Self-Sufficiency (%) 110.6 119.0 85.6Financial Self-Sufficiency (%) 88.7 84.0 82.1Equity to Asset Ratio (%) 28.4 62.1 21.0Current Ratio 3.5 2.5 2.0Collateral Savings to Loan Ratio (%) 33.7 34.0 23.0

ARDCI = Agricultural and Rural Development for Catanduanes, Inc.; ASKI = Alalay sa Kaunlaran sa Gitnang Luzon, Inc.; TSKI = Taytay sa Kauswagan, Inc.


ANO

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Table 2.9: Small-scale Microfinance NGOs, as of End-2001 (less than P30 million in outstanding loans)

Indicator ASHI FCBFI NORFIL MILAMDEC CMEDFI JVOFI

Number of Branches 9 1 9 8 4 1Number of Borrowers and Savers 9,044 3,793 9,778 8,595 3,066 691Total Number of Staff 68 19 53 46 22 8Number of Field Staff 61 14 51 36 18 5Value of Loans Outstanding 28,537,539 23,397,390 19,880,846 17,489,545 7,567,227 1,856,800Value of Collateral Savings 16,999,427 6,221,001 10,287,936 6,854,541 2,741,633 806,401Average Loan Balance 3,155 6,169 2,140 2,495 2,702 3,774Average Portfolio per Field Staff 713,438 1,799,799 389,821 485,821 420,401 372,115Repayment Rate (%) 97.4 91.0 94.0 94.0 97.0 99.8Portfolio at Risk (%) 2.3 15.0 24.0 2.4 12.0 1.1Operating Cost Ratio (%) 43.0 10.0 93.0 34.0 14.0Operational Self-Sufficiency (%) 76.0 124.0 77.0 110.0 86.0 102.6Financial Self-Sufficiency (%) 65.0 104.0 74.0Equity to Asset Ratio (%) 55.0 26.0 43.9 21.0 47.0 -4.7Current Ratio 4.9 2.6 1.8 2.7 3.3 0.08Collateral Savings to Loan Ratio (%) 59.6 27.0 51.7 39.0 36.0 43.4

ASHI = Ahon sa Hirap Foundation, Inc.; CMEDFI = Cebu Micro-Enterprise Development Foundation, Inc.; FCBFI = First Consolidated Bank FoundationInc.; JVOFI = Jaime V. Ongpin Foundation, Inc.; NORFIL = Norfil Foundation, Inc.; MILAMDEC = Milamdec Foundation, Inc.


Microfinance NGOs cannot legally acceptdeposits but are mobilizing substantial savings, ascan be seen in the Tables above. Collectively,almost half their loan portfolios is funded fromsavings deposited by members or funds collectedvia capital buildup programs (both are largely madeup of mandatory deposits). Transformed NGOs,such as CARD, are having better success at tappingvoluntary savings. The savings of all BSP-regulatedentities (including, for example, the thrift banks andrural banks that are active in microfinance) areinsured up to P100,000 (about $2,000) by PDIC.This insurance is generally sufficient to protectformal MFIs’ deposits but not the savings inmicrofinance NGOs or cooperatives, which alsoraise funds via member deposits.

NGO Transformation

Diminishing access by microfinance NGOsto government- or donor-subsidized funds andgrants is increasingly motivating microfinanceNGOs to transform into regulated rural banks orthrift banks to gain access to consumer deposits

as a reliable source of funds. Although apex fundsare available through the government apexorganization (PCFC), many microfinance NGOsfind the terms too restrictive (because most oftheir funds must be used strictly in accordancewith their prescribed Grameen or ASAmethodologies) or the terms are too short(PCFC’s lending terms are further described inChapter 3). The graduated or tiered licensingsystem has been an indispensable element insubstantially expanding the ability of MFIs tomobilize financial resources beyond traditionalgrants and donations.

46 There have been four

cases of NGO transformation to date: CARD Bankin 1997, Opportunity Microfinance Bank (OMB)in 2001, ARDCI’s Vision Bank in April 2002, andmost recently, Banco ng Masa in mid-2002.

An October 2001 survey of institutional plansconducted by the Microfinance Council

47

indicated that although most respondent ruralbanks are content to maintain their institutionalform, 14 of 23 respondent microfinance NGOs,which arguably represent most of leadingmicrofinance NGOs in the industry, were

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planning to establish a bank. Interestingly, therewere also 12 cooperatives that expressed intentto transform into a bank.

CARD Bank

A group of 15 rural development practitionersorganized CARD as an NGO in 1986 with thebasic objective of improving the quality of life ofthe landless rural poor. Part of that originalmission was to establish a bank created for,owned, and managed by the landless rural poor.In 1997, CARD Rural Bank received its operatinglicense from BSP. With an initial capitalizationof P5 million ($167,000 equivalent at the time),12 of CARD’s 25 branches were converted intoCARD Bank; the remaining branches continuedto operate as CARD NGO.

Initially, CARD Bank was owned by CARDNGO (27%), a few members of the board ofdirectors, and management staff (73%). Thisownership has shifted over time away from theboard and staff ownership and to client ownershipthrough the issuance of stock�a process thatstarted in 2000 (Box 2.4). At the end of 2001,CARD Bank’s ownership structure was CARDNGO (44%), CARD Bank and NGO staff andboard membership (26.5%), and clients (29.3%).CARD’s transformation experience has resultedin substantial increases in scale because it has beenable to diversify and expand the funding base.Transformation is also expected to result ineventual, full private ownership through additionalissuance of preferred stock shares to qualifiedclients-investors. CARD plans to transfer fullownership to the landless poor, consistent with theCARD vision. While the empowerment of landlesspoor women is a noble aim, one concern is thatsuch owner-investors lack the “deep pockets” thatmay be necessary to access additional sources offunds should CARD Bank have financialhardship.

48

Opportunity Microfinance Bank

Opportunity Microfinance Bank (OMB) wasestablished in May 2001 to provide a range offinancial products and services to the enterprising

poor. As the first microfinance-oriented thrift bankin the Philippines, OMB is able to supplementtraditional microfinance loan products, such asgroup loans and forced savings, with individualloans, voluntary savings accounts, and certificatesof deposit. The structure of the bank allows it toaccess diverse capital resources (including depositmobilization) and allows both commercial andprivate investors to purchase shares, so as to ensurea deep outreach to those most in need (Box 2.5).As of August 2002, OMB had 19,000 activeborrowers under its group lending program and291 active borrowers under its individual lendingprogram. OMB’s total lending portfolio was P57.0million ($1.2 million). Its deposits amounted toP29.5 million ($0.6 million).

49

OMB was formed initially as a small bankventure under the Philippine Scale-up projectmanaged by the Alliance of Philippine Partnersin Enterprise Development, Inc. (APPEND), anetwork of microfinance NGOs. With financialassistance from the Opportunity International

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Network (OIN), APPEND began forming a“network” bank in consultation with its partnerNGOs. OMB was created when these parties andmember-investors including Kabalikat Para saMaunlad na Buhay, Inc. (KMBI), TSKI, and ASKIsigned a Memorandum of Understanding inDecember 2000. However, it was not until theBSP Monetary Board lifted a ban on issuing newbank licenses in January 2001 that OMB was ableto apply to conduct business. The application wasapproved on 17 May 2001 and OMB beganoperation as a formal financial institution withan authorized capital stock of P800 million ($16.1million) and an initial paid-in capital of P58.1million ($1.2 million).

50

OMB, APPEND, and APPEND’s partnerNGOs are working closely together in thisventure to ensure its successful operation.Although OMB will assume control of the front-line microfinance services, APPEND and theNGOs will continue to coexist with the bank andwill play an important role in helping the bank’snetwork grow. New branches will be formed intwo ways: first, by integrating the branches of thefour partners into the OMB structure; and

second, by utilizing the strengths of the partnerNGOs to develop and run branches in newregions until they are sustainable, at which timethey will be bought by OMB, either for cash paiddirectly to the NGO or as equity in the thrift bank.This arrangement appears to be viable but onlytime will tell if the incentives are properly alignedto induce the NGOs to continue turning overtheir best performing branches to the bank forcash or equity.

51 OMB’s aim is to establish 75

new branches with the ability to support 1 millionpoor families within 5 years.

52

From its inception, OMB has been unique inthat it is the first Christian bank to be establishedby a network of MFIs, expressly for the purposeof providing the entrepreneurial poor with greateraccess to microfinance services. The process ofits establishment will also be used as a model inthe organization of other formal MFIs aroundthe world under the leadership of the OIN, oneof the largest international NGO providers ofmicrofinance in the world.

Agricultural and Rural Development forCatanduanes, Inc. VisionBank

To assist poor farmers and micro and small-scale entrepreneurs in accessing much neededcapital and provide an option to traditionalmoneylenders, the microfinance NGOAgricultural and Rural Development forCatanduanes, Inc. (ARDCI) initiated theestablishment of a microfinance-oriented ruralbank in Bato (Box 2.6). The Monetary Board ofBSP approved the establishment of VisionBank,Inc. in April 2002, the first microfinance-orientedrural bank established under BSP Circular 273,which partially lifted the general moratorium onthe licensing of new thrift and rural banks andallows the entry of microfinance-oriented banks.

The bank is 87% owned by ARDCI and iscomplemented by conversion of savings intoshares of stock, and mobilization of quasi-equityand private investment. The capital position ofVisionBank is P80 million ($1.6 million)authorized capital, P20 million ($400,000)subscribed, and P9 million ($180,000) paid-upcapital. P32 million ($640,000) have been made

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Banco ng Masa54

The Monetary Board of BSP approved theestablishment of the Banco Ng Masa in Calatagan,Batangas, in May 2002, the second microfinance-oriented rural bank established under BSPCircular 273. The newly-approved bank has anauthorized capital stock of P80 million ($1.6million) with an initial paid-in capital of P5 million($100,000). The majority shareholder is the E.Zobel Foundation (EZF), an NGO headed by itschairperson, Enrique Zobel, which implies thatthe Banco ng Masa will not reap the full benefitsof commercial ownership; it will be guided byan NGO representative rather than an investorwith his or her own assets at risk.

EZF is driven by a social mission, establishedin 1986 primarily to help people with disabilities.In 1988, however, EZF shifted to helpingmicroentrepreneurs without access to financialservices. EZF provided microcredit within therange P3,000–30,000 ($60–600) at annualeffective interest rates lower than those offeredby local moneylenders. Banco ng Masa wasconceptualized and organized to take over theEZF Palabra de Honor (PDH) microfinanceprogram based on the Grameen model. ThePDH program was started by EZF in 1998 with14 members, mostly women market vendors,with an initial loan of P165,000. As of 15 April2002, PDH had cumulatively disbursed P29.2million in loans to 1,500 microentrepreneurs.During the first quarter of 2002, PDH disbursedslightly more than P4.2 million ($84,000) in loansand as of 15 April 2002, there were close to 1,000active members.

As a relatively new microfinance NGO, EZFhas made commendable progress in outreach andfinancial self-sufficiency. With the establishmentof a rural bank, prospects for continued goodperformance are even more improved. Despiteits formal structure, however, Banco ng Masa willhave to shift ownership progressively from theNGO toward private ownership in order for truecommercial incentives to be in place and for thebank to operate on a fully commercial basis.

available through grant funds from the EuropeanUnion, but will only be infused gradually to thebank from the paid-up loan portfolio of ARDCI’sfour existing branches. P38 million ($760,000)will come from the retained profits of the ARDCImicrofinance NGO infused to VisionBankgradually. A further P10 million ($200,000) willbe from preferred shares of stock, which will beconverted to common shares as shares are soldto individual ARDCI microfinance NGOmembers using their savings, and to privateinvestors.

53 To encourage deposit mobilization as

a major source of funds, Vision Bank will becomea member of the PDIC. VisionBank was expectedto commence operations in October 2002.

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TSPI

Although TSPI has not yet transformed itselffrom a microfinance NGO into a rural or thriftbank, its process of considering and movingtoward transformation is one of the longest inthe history of microfinance NGOs in thePhilippines and sheds light on some thedifficulties usually associated with transformation.As the first microfinance NGO in the country,TSPI initially considered transformation in themid-1990s as a means to enlarge its operationsand expand its services to the poor. At the time,however, senior management and members ofthe TSPI board were ideologically tied to thepoverty lending approach to microfinance andwere wary that transformation could lead tomission drift away from the poor toward higher-income clients. In addition, virtually no NGOtransformation cases were available at that timeto prove that mission drift was not a necessarybyproduct of formalization.

Following the Asian financial and economiccrisis of 1997–1998, the issue of TSPItransformation again came to the fore, as part ofa consortium of microfinance NGOs making upthe APPEND network that were aspiring tocreate a bank with the help of OIN. Althoughmore cases were available by 1999 to provideevidence that transformation did not necessarilyresult in mission drift away from the poor, theTSPI board saw that the original mission of TSPImight also suffer, because many otherorganizations were involved in the formation ofthe thrift bank that was eventually to becomeOMB. TSPI’s former Executive Director, Dr.Ricardo B. Jumawan, moved from TSPI to OMBto become its Chairperson and the TSPI Boardof Trustees appointed Mr. Ruben C. de Lara tosucceed him effective 1 February 2001. Althoughhe is strongly aligned with the original missionof TSPI, Mr. de Lara brings a decidedlycommercial approach to TSPI’s microfinanceoperations, having served as a senior managerwith multinational corporations for much of hisprofessional life. Dr. Jumawan continues to serveas a member of TSPI’s board, under Mr. de Lara’sleadership.

TSPI has applied for a thrift bank license andis expecting approval. Both the strong financialand other support that TSPI has enjoyed basedon its good performance over the last severalyears and the successful track record that CARDBank has created in keeping to its originalmission, bode well for TSPI’s microfinance bank.

NEW MARKET ENTRANTS

In addition to the transformation ofmicrofinance NGOs into formal banks, themicrofinance market has attracted new entrants.The new market entrants are microfinance NGOsand a microfinance-oriented bank that employsa commercial approach to microfinance. Bothtypes of MFIs are entering the market with amore aggressive and businesslike strategy thanmany older institutions.

Bayan Microfinance

Bayan Microfinance is a program run by thecorporation ABS-CBN, well known in thePhilippines as a leading broadcasting and mediafirm. The company’s social service institution, theABS-CBN Foundation, which mainly carries outrelief activities, began a small microcredit projectin 1993. In 1997, it decided to make the projectinto a major program. Bayan Microfinance runson a business-like basis, without need for majorsubsidies from the company. Its financialstatements show OSS, with interest income onloans exceeding operating expenses. It has goodportfolio control with portfolio at risk (over 30days) less than 5%. The MFI has grownaggressively from 1,500 clients at the end of 1998to 20,450 by September 2001, with the intent toreach 50,000 by the end of 2005.

Micro Enterprise Bank

The Micro Enterprise Bank (MEB) wasestablished as a microfinance-oriented, thrift bankin October 2001 on the initiative of severalmultilateral, bilateral, and local institutions. It wasfounded with the objective of providing financial

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services that are specifically tailored to privatemicroenterprises in the Philippines, a sectorneglected by the formal financial institutions.Therefore, MEB will effectively compete withmoneylenders and will reduce the reliance ofmicroenterprises on self-financing. Theshareholders are convinced that microlendingcan and should be conducted on a profitable basis(Box 2.7). MEB management supports the viewthat by creating a lasting and reliable supply ofmicrofinance in a supportive institutional setting,target group-oriented lending can eventuallybecome donor independent and have asignificant ongoing developmental impact.

MEB was incorporated with a total authorizedshare capital of P100 million ($2.0 million), withan initial capitalization of P60 million ($1.2million) to be followed by a second capitalsubscription of P40 million ($0.8 million). Theinternational shareholders, which together hold60% of the total share capital, are the DoenFoundation and Netherlands DevelopmentFinance Company; the International FinanceCorporation (IFC), which is a member of theWorld Bank Group; and IMI, an investmentcompany based in Germany. PlantersDevelopment Bank, a reputable commercialbank based in Manila with experience in lendingto medium-sized enterprises, is the bank’s localinvestor, holding the remaining 40% of the shares.MEB plans to expand the shareholder structureby adding a local investor from Mindanao, whowill provide invaluable knowledge of that localenvironment.

The shareholders designed a managementteam with extensive experience in theestablishment and management of MFIs. Themanagement team is backed by IPC, which hasmore than 20 years of experience in microfinanceand promotes a commercial approach. While notall of MEB’s shareholders are true commercialinvestors, IMI is primarily owned by individualswho work for IPC. Because several of IPC’sconsultants also have a stake in IMI and,therefore, the performance of MEB, strongincentives exist for the management of MEB todevelop a commercially viable microfinanceoperation. As with other IMI investments, it is

expected that MEB’s reliance on IPCconsultants will be phased out over time to bereplaced by local professionals equallycommitted to following a commercial approachto microfinance.

Microcredit is the main focus of the newinstitution’s business activities. MEB will issuebusiness loans only in amounts according todemand, currently in the range P2,000–300,000($40–6,000), for expansion of inventory andacquisition of fixed assets. Initially, loans will be

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in operation for one year, future loan productsmay include long-term investment loans,agricultural loans, salary loans, and loans tosmall-scale enterprises (in addition tomicroenterprises). MEB estimates that the netloan portfolio will yield an average of 4.5% permonth.

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Compared to other Asian countries, thePhilippines offers a fairly supportive legal andregulatory environment in which MFIs canoperate. The Government has recently takenpositive measures to support the expansion andcommercialization of microfinance, based ondifficult lessons of the past with targeted lendingprograms and subsidized lending to theagriculture sector and the poor. Through BSP,the Government has issued several circulars thatallow for favorable treatment of microfinanceportfolios. Nonetheless, the operatingenvironment for MFIs is still lacking in the sensethat MFIs are not able to meet the stringentborrowing criteria for commercial loans. Inaddition, many of the key microfinance supportinstitutions, including microfinance networks andtraining centers, are geared toward the traditionalNGO model and group lending methodologies,and lack the commercial perspective necessaryto serve the needs of many of the commercialMFIs.

ENABLING POLICIES AND PROGRAMS

Financial reforms in the early 1980s saw thelifting of one of the most effective barriers tosustainable and viable financial intermediation.The removal of interest rate restrictions allowedbanks to price their products and services bytaking into account the full recovery of theiroperational and financial costs.

55 Liberalized

bank entry and branching in the 1990s allowedbanks, and rural banks in particular, to expandaccess to financial services in traditionallyunderserved areas. Liberalization of the financialsector during the 1980s and early 1990s alloweda policy focus on sustainable microfinance toemerge by the mid-1990s.

Policies laying the groundwork specifically forpromoting sustainable microfinance as aninstrument for poverty reduction and economicgrowth began in the mid-1990s and efforts tocreate an enabling policy environment formicrofinance have been gathering momentumsince then. This was conveyed in the 2001 State-of-the-Nation address by President Macapagal-Arroyo wherein she promoted microfinance asa cornerstone in the Government’s fight againstpoverty (Box 3.1).

The Government established the NationalCredit Council (NCC) in 1994 to rationalizegovernment directed credit programs anddevelop a national credit delivery system capableof addressing the issues of poverty.

56 The NCC’s

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focus has been exclusively on small credit andmicrocredit and one of its early tasks was to draftand disseminate “Policy Guidelines for Credit forthe Poor” for government agencies implementinglending programs. In 1997, the NCC publishedthe National Strategy for Microfinance (Annex3) that has set the national framework formicrofinance, emphasizing the role of the privatesector, including MFIs, and the need for anenabling policy environment.

With the National Strategy in place, severallaws and executive directives were issued to makeit effective. The Social Reform and PovertyAlleviation Act of 1998 reinforced the market-oriented approach toward microfinance andfurther emphasized the importance of MFIs byestablishing an institution to enhance theircapacities. It created the People’s DevelopmentTrust Fund to provide grants and other financialassistance, excluding equity, to deserving MFIsfor capacity building. The Government recentlyissued Executive Order 110, which specifies theguidelines to implement the provisions of thatlaw.

57

Also in 1998, the Agriculture and FisheriesModernization Act was passed, calling for therationalization of all agriculture-related creditprograms of the Government. This was followedby the issuance of Executive Order 138,covering not only the agriculture-related creditprograms but also all other government directedcredit programs. The law and the presidentialdirective prohibit government line agenciesfrom directly implementing credit programs andinstead makes use of government financialinstitutions in channeling government funds totheir targeted clientele. To avoid directcompetition with the private sector, theseinstitutions are limited to wholesaling the fundsto participating financial institutions withemphasis on using community-basedorganizations, such as cooperatives andmicrofinance NGOs, as conduits. Theseparticipating institutions are, in turn, to retailthe funds directly to their client-borrowers.

A major donor-funded project has beensupporting implementation of these positiveinitiatives, the Credit Policy ImprovementProject (CPIP), a USAID-supported technicalassistance program to the NCC. CPIP’sobjective is to help the NCC, through thesecretariat, rationalize the government-sponsored credit and loan guarantee programs

58

through the following activities:

• modification of inappropriate policies and/or inefficient practices in government-sponsored credit and loan guaranteeprograms;

• formulation of appropriate savings and creditpolicies to guide the Government in facili-tating access to financial services by the ba-sic sector;

• implementation of viable alternatives todirected credit and loan guarantee programs;and

• increased participation of the private sectorin the delivery of financial services.

CPIP includes policy review, analysis, andadvocacy. For example, CPIP conducts studiesthat review, analyze, and recommend creditpolicies that are consistent with theestablishment of a viable and sustainablefinancial market. CPIP technical assistance tothe NCC has resulted in a number of criticalcredit policy reforms and has contributed to thestrengthening of the NCC as the governmentalinteragency body in charge of credit policyformulation and monitoring. Results of CPIPinclude the national strategy as well as the lawsand executive directives mentioned above.CPIP is currently assisting the NCC in finalizingthe creation of a Standard Chart of Accountsand management standards in support of thecredit cooperative movement. The aim is toensure that bank and cooperative members’funds are safe and that the benefits ofmicrofinance are sustainable.

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ACCOMMODATING LEGAL FRAMEWORK

For some time there has been a legalframework friendly to the establishment offormal, small-scale banks conducive to offeringmicrofinance on a commercial basis. Althoughall banks are regulated by BSP, they are licensedunder different Acts. The most significantdifference among banks is with regard tominimum capital requirements (Box 3.2), rangingfrom as little as $52,000 for rural banks in somemunicipalities to almost $100 million for universalcommercial banks. This tiered licensing structurehas allowed the establishment of many small ruralbanks since 1952. Today, there are around 786rural banks, covering 85% of all municipalities,mainly catering to micro and small-scaleentrepreneurs.

In addition to the tiered licensing systemfavorable to the provision of microfinance on acommercial basis, the recent enactment of theGeneral Banking Law of 2000 (GBL) has set thestage for specific legal and regulatory adaptationsconcerning microfinance. The GBL “has thepotential to initiate a new era for microfinancethrough its explicit recognition of microfinancein Sections 40, 41, and 44, which mandate theformulation of appropriate rules and regulationsfor microfinance operations.”

59 Section 40

describes the information that may be requiredby a bank as part of an applicant’s considerationfor a microloan and recognizes “the peculiarcharacteristics of microfinancing, such as cashflow-based lending to the basic sectors that arenot covered by traditional collateral.” Section 41authorizes the issuance of regulations deemednecessary for unsecured loans, while Section 44states specifically that “in case of loans and othercredit accommodations to microfinance sectors,the schedule of loan amortization shall take intoconsideration the projected cash flow of theborrower and adopt this into the terms andconditions formulated by banks.” The revisedGBL thereby lays the groundwork for the issuanceof new regulations and modified supervisorypractices that are conducive to the increasedprovision of commercial microfinance (Box 3.3).

Section 34 of the GBL also gave the MonetaryBoard of BSP the authority to prescribe theminimum ratio that the net worth of a bank mustbear to its total risk assets. As of July 2001, theMonetary Board-approved guidelines for the risk-based capital adequacy ratio took effect. The newguidelines are patterned after the Basle risk-basedcapital framework, which is currently theinternational standard for setting minimumcapital adequacy requirements.

The Philippine framework has, however,made some modifications to take into accountlocal conditions and practices. It initially coversonly capital requirement for credit risks, pendingthe issuance of supplementary guidelines toincorporate market risks. It sets the requiredminimum ratio at 10%, maintaining the minimumcapital ratio under the current system, while the

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internationally recommended minimum ratio is8%.

The new risk-based capital adequacyrequirement will be applied not only to theinternationally active banks but also to all othertypes of banks including thrift banks and ruralbanks. Changing from traditional supervision torisk-based supervision is important for theexpansion of commercial microfinance becauseit dispenses with the necessity for traditionalcollateral and financial documentation in favorof systems, policies, and procedures todemonstrate ability to manage credit risk.

SUPPORTIVE REGULATION ANDSUPERVISION

To implement the sections of the 2000 GBLdealing with microfinance, BSP has issued fourcirculars. Circular 272 (issued in January 2001)modified BSP regulations, consistent with theGBL, to accommodate cash flow-based lendingrather than lending focused on traditionalcollateral. Circular 273 (February 2001) lifted themoratorium on the establishment of new banksto allow the entry of new microfinance-orientedthrift banks and rural banks. As a follow-up toCircular 273, Circular 340 ( July 2002) elaboratedthe rules and regulations concerning theestablishment of branches/loan collection anddisbursement points (LCDPs) of microfinance-oriented banks established under Circular 273and the establishment of microfinance-orientedbranches/LCDPs of banks that are not whollymicrofinance-oriented. Circular 282 (March2001) opened a special rediscount window toprovide liquidity for microfinance loans meetingBSP criteria.

Adaptation of Bank Regulation andSupervision for Unsecured Microcredit

Circular 272 established guidelines on“microfinancing loans” and implemented severalof the provisions found in Sections 40, 41, and44 of the GBL. In issuing the Circular, BSPrecognized the peculiar characteristics of

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microfinance, particularly its focus on cash flow-based lending that is not normally covered bytraditional collateral.

Microcredit was defined in Circular 272 as“small loans granted to the basic sectors, on thebasis of borrower’s cash flow and other loansgranted to the poor and low-income householdsfor their microenterprises and small businesses.These loans are typically unsecured. Themaximum principal amount of microfinanceloans shall not exceed P150,000 ($3,000), whichis equivalent to the maximum capitalization of amicroenterprise as defined in law.” This definitionof microfinance was important not only to conveya common understanding of what microcredit isbut also what it is not. The emphasis on allowingmicroborrowers flexibility in choosing theiramortization based on the underlying cash flowof their microenterprise is a clear indication thatmicrocredit is not based on the traditional termsof commercial loans. Microfinance loans may beamortized daily, weekly, bimonthly, or monthly,depending on the cash flow condition of theborrowers.

As stated in Circular 272, interest onmicrocredit shall be “reasonable but shall not belower than the prevailing market rates to enablethe lending institution to recover its financial andoperational costs.” This is a clear indication thatBSP is interested in promoting viable, financiallyself-sufficient MFIs and overtly discouragessubsidized lending. As an incentive, Circular 272noted that all microfinance loans shall counttoward compliance with mandatory creditrequirements for small and medium-sizedenterprises. To ensure the safety of lendingfinancial institutions, BSP outlined severalconditions for compliance. These include thesetting up by lending banks of: (1) well-definedstandards, credit policies, and procedures formicrofinance loans; (2) a loan portfolio and otherrisk-asset review system; and (3) specific measuresto ensure collections.

Facilitating Transformation and Branching

BSP partially lifted the general moratoriumon the licensing of new thrift and rural banks in

Circular 273 to allow the entry of microfinance-oriented banks on a very selective basis. Marketsnot yet fully served by existing rural banks are tobe given preference in licensing consideration.Subject to the standard requirements for theestablishment of branches, microfinance-orientedbanks are also exempted from the generalmoratorium on the establishment of bankbranches. Further, existing microfinanceorganizations may be allowed to convert theirexisting branches/offices into branches of theproposed bank by applying for such authority.These measures support the commercializationof microfinance and the transformation of NGOsinto regulated microfinance institutions.

An applicant microfinance-oriented bank,either a thrift bank or a rural bank, should meetcertain conditions in implementing Circular 273,including that capital should be owned by privatepersons, multilateral entities, or a combinationthereof. In addition, there are minimum capitalrequirements (see below).

Moreover, organizers must have the capacityto engage in microfinancing. Among theindicators of this principle are: (1) at least 20% ofpaid-in capital of the bank must be owned bypersons with track records in microfinancing; (2)the majority of board members must haveexperience in microfinancing, with at least onemember having actual banking experience; and(3) the proposed bank must have, as a minimum,an adequate loan tracking system that allows dailymonitoring of loan releases, collection andarrearages, and any restructuring and refinancing.

In addition, the organizers must submit a clearvision and mission statement of theircommitment to reach low-income clients,including a written manual of operations inclusiveof the administrative and credit program systemsand procedures. Once operational, themicrofinance-oriented bank is required tomaintain at all times its microfinance loanportfolio, as defined under existing BSPregulations, equivalent to at least 50% of thebank’s gross loan portfolio.

Building on Circular 273, Circular 340 laysout the regulations for the establishment ofbranches/LCDPs of microfinance-oriented banks

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and the establishment of microfinance-orientedbranches/LCDPs of banks that are notmicrofinance-oriented. For microfinance-oriented banks, capital requirements for eachbranch/LCDP were set at P20 million (about$400,000) for commercial banks, P5 million($100,000) for thrift banks, and only P2.5 million($50,000) for rural banks.

60 The bank’s risk-based

capital adequacy ratio at the time of filing theapplication must not be lower than 12%. Forbanks that are not microfinance-oriented, at least70% of the deposits generated by the branch tobe established shall be actually lent out toqualified microfinance borrowers and themicrofinance loans of the branch shall at all timesbe at least 50% of its gross loan portfolio. Formicrofinance-oriented banks, the only additionalrequirement is that they have been profitable forat least 1 year.

Rediscounting Window for Microfinance

Circular 282 contains the guidelines foraccessing liquidity assistance from BSP bymicrofinance-oriented banks. This circular isexpected to encourage rural banks to expandtheir microfinance activities by providing themadditional liquidity to fund their lendingoperations. The new rediscounting windowshould also help microfinance institutions todiversify their funding sources to enhance theirability to serve a greater number of low-incomecommunities with microfinance services.

Under the new scheme, rural banks/cooperative rural banks have to meet thefollowing eligibility requirements: a 1-year trackrecord in microfinance lending; at least 500active microfinance borrowers; and (3) anefficient loan collection performance. Thecriteria for efficiency are a ratio of past due loansto loans outstanding less than 5% as of thepreceding month, and a collection ratio of at least95% based on the ratio of total collections to totalloans (inclusive of past due loans) during thepreceding 12-month period.

The loan value of rediscounting credits formicrofinance shall be equivalent to 80% of theoutstanding balance of the microfinance

borrower’s promissory note. The maturity ofrediscounting credits extended by BSP is up to360 days and their interest rate is based on the91-day T (Treasury)-bill rate for the last auctiondate of the preceding month.

Loans to small and medium-sized enterprisescan be rediscounted with BSP as long as theymeet certain requirements. Moreover, in recentyears the monetary authorities have approved theopening of various rediscounting windows toimprove access to credit by other productivesectors of the economy. These windows includethe Exporters Dollar and Yen Rediscount Facility,which provides dollar- or yen-denominatedcredits to banking institutions against eligiblepapers of their exporter-borrowers; therediscounting window for low-cost housing,which allows banks to rediscount amortizationscovering principal payments due within 1 yearfrom the date of the rediscount; and therediscounting of both export and importdomestic-use bills of exchange arising from thesale or movement of goods, excluding capitalgoods and deferred payments in letters of creditssecured by a trust receipt. These effortsdemonstrate that BSP is continuously reviewingits rediscounting facilities to ensure greater marketorientation and availability to a wider sector ofthe economy.

61

Regulation of Cooperatives

Although cooperatives have been in existencesince the early 1900s, their potential to be viableand sustainable MFIs has been neglected.Previous government efforts have been moretoward the promotion and proliferation ofcooperatives (and their registration) than towardstrengthening and encouraging financial self-sufficiency. Realizing this potential, the NCC, incoordination with the CDA and major creditcooperative representatives, initiated moves tostrengthen the cooperative sector by formulatinga Standard Chart of Accounts and itsaccompanying Manual of Accounts. Theapproved Standard Chart of Accountsapproximates that of the banking sector. TheCDA Board of Administrators issued a circular

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requiring all cooperatives engaged in creditactivities to use the standards by January 2003.

62

SOURCES OF COMMERCIAL FUNDS

People’s Credit and Finance Corporation

PCFC was established in 1995 as an apexorganization (wholesale lending institution) forlending to the poor. PCFC is a registered financecompany and its Articles provide for it to beprivatized. In 1995, it also received ADB-IFADfunding for onlending to MFIs, in particularthose following the Grameen model. It is alsothe executing agency of UNDP’s MicroStartProgram for institutional development of ASAreplicators. PCFC funds MFIs, including NGOs,rural banks, cooperatives, and otherintermediaries as conduits for onlending to thepoor. These intermediary organizations arerequired to operate in a self-sustaining andoperationally viable manner.

63 PCFC started

operations in 1996 by taking over the capital andloan portfolio of LBP under an earlier anti-poverty initiative, the National LivelihoodSupport Fund, with an initial (common) capitalcontribution of P100 million. This wasaugmented in 1998 by P900 million (preferred),earning dividends of 5% per annum.

64

PCFC also plays an informal supervisory role.As lender to a wide range of small MFIs, it has alegitimate concern to safeguard its resources byrequiring their adherence to appropriateaccounting and reporting standards andoperational methods. In addition, it has concernfor capacity building among its clientorganizations. In this regard, it cooperates withthe People’s Development and Trust Fund, whichwas created specifically for capacity building ofMFIs. PCFC maintains dialogues with MFIs,their networks, and with such external agenciesas the Washington-based Consultative Group toAssist the Poorest (CGAP), which is influential indefining performance standards for MFIs.

The interest rate that PCFC chargesborrowers can be considered commercial in thecurrent interest rate environment: 12% per

annum (via its investment credit line) on adeclining balance basis (the average primelending rate by commercial banks at the time ofthis study was around 8% on the same basis). Anotable requirement for accessing PCFC fundsis that the participating organizations borrowingunder the ADB-IFAD Rural MicroenterpriseFinance Project (for Grameen replicators) mustcharge a minimum 24% (flat basis) annual interestrate, ensuring an adequate return for PCFC’sborrowers.

At the end of 2001, there were 193participating organizations borrowing from oneor more of PCFC’s three wholesale lendingprograms (one for Grameen replicators, one forASA replicators, and one for subwholesalers offunds for onlending to their primary members).PCFC’s outstanding loan portfolio of P1.39billion ($28.0 million) grew 31% during 2001 andcollection rates remained high at 98.6% and pastdues stable at 2.5%. At the end of 2001, the activeparticipating organizations by institutional typeincluded 94 rural banks (including 26 cooperativerural banks), 63 cooperatives, 30 microfinanceNGOs, 5 thrift banks, and 1 lending investor.These participating organizations onlent PCFCfunds to some 158,000 clients in 2001, acumulative total of 482,000 clients from inceptionof the program.

65

Donor-funded Second-tier Loan Funds

Two second-tier loan funds funded byinternational NGOs also deserve mention�theResponsible Investments for Solidarity andEmpowerment (RISE) program of CatholicRelief Services (CRS) and the Small EconomicActivity Development (SEAD) program ofCARE�because they are incorporating termsand conditions facilitating microfinance NGOaccess to market-based sources of funds inaddition to enhancing their technical capacities.

RISE Program

RISE was officially certified as a financialcompany in April 2000. While it charges cost-recovery interest rates, RISE is not very

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commercial in the sense that it is partly ownedby CRS along with four other NGOs. RISE is afor-profit financial company established for thepurpose of lending to Grameen Bank replicatorsin the country. Although RISE indicates that itlends to microfinance NGOs at commercialinterest rates, its own structure is not completelycommercial primarily because of its NGOownership. Despite this, RISE’s financial servicesand the capacity-building assistance of CRS toMFIs continue to play an important role indisseminating information on currentmicrofinance trends and best practices, as wellas developing the efficiency of partnerorganizations. CRS also aims to create a learningcenter that will provide capacity-buildingassistance to RISE borrowers and their clients.

Since the mid-1990s, CRS has been nurturing10 church-linked microfinance programs. To date,8 of them have registered as NGOs specializingin microfinance. These microfinance NGOs areall self-sufficient and successfully mobilizing clientsavings, albeit without regulation and supervision.CRS and RISE are working together to improvethe outreach and sustainability of thesemicrofinance NGOs. As of September 2001,borrowers from RISE collectively had disbursed$1.4 million in microloans to a total of 29,618borrowers. The clients are disadvantaged butentrepreneurial poor nationwide, and 99% ofthem are women. RISE envisions increasing theemployment opportunities and householdincome of poor women by improving their accessto loans. The RISE target is to reach a total of80,000 poor female entrepreneurs by 2006.

SEAD Program

The SEAD program assists poorentrepreneurs, mostly women, to increase incomeand savings for household livelihood security byproviding continuous access to savings, credit,and business development services through localpartnerships. The SEAD program operates inmore than 15 provinces with 13 full-time staff.The program implements two subprojects. Firstis the MicroEnterprise Assistance Program(MAP), a credit, savings, and capacity-building

program; it is also a performance-based lendingprogram, whereby loans are released contingentto meeting agreed performance standards.Current MAP focus areas are the provincesadjacent to the National Capital Region (NCR).The second project is MicroEnterprise Assistancethrough Cooperatives for Real Outreach(MACRO). It is an offshoot of MAP to addressthe issue of scale in outreach and sustainabilityof services. It aims to develop technically morecompetent and efficient financial intermediationamong cooperatives.

At the end of 2001, there were just over 100partner organizations in the SEAD program,most of which were cooperatives. MAP funds areavailable on a commercial basis to cooperatives,rural banks, and microfinance NGOs at 14% plusa 2% technical assistance fee based ondiminishing balance. Credit lines range fromP500,000 to P4 million ($10,000–80,000), payablein 2 years (maximum) per drawdown. Succeedingdrawdowns are based on how the partnerorganization can maintain the standards set bythe program. These organizations then onlendfunds to their clients at cost-recovery interest ratesranging between 1.5% and 4.0% per month (flat)rate payable from 3 months to 1 year. In total,the partner organizations had an outstandingmicroloan portfolio of P72 million ($1.5 million)to 48,815 borrowers (80% women) at the end of2001. The average loan size was P8,490 ($170)and repayment rates averaged 96%. The totalamount of savings and CBU generated frommembers was P215 million ($4.3 million). Totalnet income generated by the partnerorganizations was P29 million ($580,000) andCARE estimated its MAP to have OSS and FSSof 132.6% and 121.4%, respectively.

Private Bank Loans to MFIs

Most private commercial banks in Asia andthe Pacific have been extremely tentative in theirapproach to microfinance.

66 While there is a long

tradition of government-subsidized loanschanneled through banking systems, lending toMFIs as a profitable business is comparativelyrare.

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Although MFIs are generally not able to meetthe stringent borrowing criteria required forcommercial loans in the Philippines, there aresome cases where private commercial banks havemade lines of credit available to particular MFIs.However, in one case this occurred at asubmarket rate of interest (below prime) and inanother, the bank concerned channeled themoney through its charitable foundation to allowfor a tax write-off in case the loans failed.

67

Good performance by certain NGOsencouraged some banks to risk lending to them,but the crisis in 1997 cut short this experiment.At that time a single NGO, TSPI DevelopmentCorporation, had eight loans from three leadingcommercial banks and its financial performancewas exemplary. TSPI’s funders for 2000 and 2001included Bank of the Philippine Islands (BPI),the BPI Foundation, Inc., Development Bank ofthe Philippines; LBP; and Small BusinessGuarantee and Finance Corporation. Most loansthat TSPI and other microfinance NGOs haverecently accessed from private commercial banksare at interest rates above prime and could,therefore, be considered commercial or marketbased. However, interviews suggested thatpersonal relationships between board membersof TSPI and senior bank executives were theprimary motivation for these arrangements.

68

EXISTENCE OF KEY SUPPORTINSTITUTIONS

The existence of several microfinancenetworks and training institutions has helped themicrofinance industry to grow and strengthenover the last 10 years. However, many of thesesupport institutions are geared toward thetraditional NGO model and group-lendingmethodologies and lack the commercialperspective necessary to serve the needs of manycommercial MFIs. The Philippines lacks somekey support institutions, such as credit bureausand credit rating agencies, to support a trulycommercial microfinance environment.

Microfinance Networks

There are three major MFI networks thatprovide a means for coordination and limited self-regulation. Each has only small membershipcompared to the total number of MFIs (includingmicrofinance-oriented NGOs, rural banks, andcooperatives), although they were established inthe early 1990s. There is also a regional network,CASHPOR, Inc., in which many of the Grameenreplicators in the Philippines are quite active.These networks are described below.

Microfinance Council of the Philippines

The Microfinance Council is the largestdomestic network with 17 regular members and6 associate members (comprised of a mix ofmicrofinance-oriented NGOs, rural banks, thriftbanks, and cooperatives) and 6 allies: ADB, BSP,NCC, PCFC, UNDP, and USAID. With highcredibility among practitioners, governmentagencies, and donors, the Microfinance Councilundertakes five major activities: coalitionforming, research, developing and promotingstandards, training, and advocacy. TheMicrofinance Council began with USAIDfunding for the creation of a Coalition forMicrofinance Standards and continues withsignificant counterpart contributions frommembership of the now renamed MicrofinanceCouncil of the Philippines.

One of the major early achievements of thepredecessor of the Microfinance Council was theformation of a coalition of 69 microfinanceNGOs, government agencies, microfinancenetworks, government and donor-fundedmicrofinance programs, and other supportinstitutions; and their agreement on a set ofperformance standards to guide thetransformation of microfinance NGOs into viableand sustainable operations. Standards were setin 1998 to cover performance areas, such asoutreach, portfolio quality, collection efficiency,sustainability, capital adequacy, and liquidity.Major activities of the Microfinance Council nowinclude producing a semiannual newsletter thatincludes performance comparisons of members,

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and running specialized microfinance trainingprograms. The latest of these was a MarketResearch for Microfinance course that wasdeveloped by microfinance experts associatedwith MicroSave Africa, a project funded byUNDP, CGAP, and the United KingdomDepartment for International Development.

In 2002, the Small Enterprise Education andPromotion (SEEP) Network selected theMicrofinance Council as one of 10 participatingnational networks worldwide to join SEEP’sTechnical Assistance and Action Research Project(TAARP). SEEP will assist the MicrofinanceCouncil in delivering demand-driven fee-basedservices to members and MFI clients, improvingdissemination of international and domesticmicrofinance best practices, improving themonitoring and benchmarking of themicrofinance industry, increasing transparencyin MFI financial performance, and representingmembers’ interest to the Government andfunding agencies. As such, selection by SEEP toparticipate in the TAARP project has the potentialto strengthen significantly the MicrofinanceCouncil’s ability to assist in professionalizationand commercialization of the microfinanceindustry in the Philippines.

PhilNet

PhilNet, the Philippine Network for Helpingthe Hardcore Poor, Inc., is a national network of10 Philippine microfinance NGOs employing theGrameen Bank approach. PhilNet works toreduce extreme poverty in the Philippines,targeting women particularly, through livelihoodand business enterprises for the very poor. Withan emphasis on poverty reduction, PhilNet doesnot have a clear mission to support commercialMFIs. Instead, the network promotes and initiatesstart-up microfinance NGOs and provideslinkages through exposure training and sharedadvice. PhilNet strengthens current programs byserving as an information and technical sourcefor member MFIs. PhilNet also facilitates andconducts research to seek advancement for itsmember MFIs while mobilizing resources fromfunding agencies.

In 1999, PhilNet began working withCASHPOR under an $837,000 agreement withthe Finnish Government to strengthen Grameenreplicators in the Philippines. CASHPOR is anetwork of 22 Grameen Bank replicators in nineAsian countries working to reduce poverty in theregion through financial services to poor women.The CASHPOR network was established in 1991through the felt need of Grameen replicators foran organization to strengthen their capacity toexpand and to provide management training,quarterly monitoring, technical assistance, andinformation exchange. CASHPOR workedjointly with PhilNet so that the latter could takeover the full range of training and technicalassistance required by its members.

PhilNet has been a major actor in themicrofinance scene in the Philippines for sometime. Four of the members�ASHI, CARD,Project Dungganon, and TSPI�have been inexistence for more than a decade and havealready overcome the problems of start up andinstitutionalization. CARD has a rural bank aswell as a microfinance NGO, while ASHI, ProjectDungganon, and TSPI are professionally-runmicrofinance NGOs. These four PhilNetprograms are responsible for nearly half of thecurrent clients currently reached by PCFC. Inaddition, PhilNet has run a “Basic Series” ofmanagement training workshops several times.Its members have an in-house training capacityused by PCFC and donors to train start-up MFIsin the Grameen methodology. Despite thelongevity of PhilNet, its influence seems to bewaning, because its largest members appear tobe more active in their participation in theMicrofinance Council. The latter has attractedsignificant membership and credibility, with aclear mission to support a broader range ofcommercial MFIs than does PhilNet.

Alliance of Philippine Partners in EnterpriseDevelopment, Inc.

Incorporated in 1991, APPEND has themission to promote national economictransformation by harnessing and strengtheningthe resources of Christian development

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organizations involved in microfinance.APPEND has a number of core microfinanceNGO members: ASKI, Center for CommunityTransformation (CCT), Hagdan Sa Pag-uswagFoundation, Inc. (HSPFI), KMBI, Rangtay saPagrang-ay, Inc. (RSPI), Talete King PanyulungKampangan, Inc. (TPKI), TSKI, and TSPIDevelopment Corporation.

APPEND’s main sources of funds are fromconsulting to other organizations, onlendingmembership dues, and training. Also and ifAPPEND secures project funding for a member,it receives 10% of the project amount. Thenetwork’s main programs and services are to

• manage projects and funds;

• oversee network relations and provide asecretariat;

• act as the regional representative ofOpportunity International;

• provide bridge (loan) funds to memberorganizations;

• provide microfinance and microenterprisedevelopment training and field exposure tolocal member organizations, other NGOs, andinternational partners;

• assist partners in fundraising throughpackaging proposals, negotiation with localand international donors, etc.;

• lead and facilitate the development andinstallation of effective and efficient systemsof products and service delivery, managementinformation systems, human resourcesdevelopment, governance, transformation,and resource mobilization; and

• assist partners in setting up such structures asrural banks.

Consultancy services have included setting upmicrofinance projects (e.g., the president ofAPPEND was instrumental in establishing

microfinance projects in Latin America and Asiausing a group methodology that produced branchviability within 12 months), impact evaluations,microfinance project and fund management, andbuilding capacity of new and advanced MFIs.As part of Opportunity International, Inc.,APPEND has helped microfinance NGOs toextend loans totaling more than $100 million tomicroenterprises in the Philippines. APPENDbelieves that it is only through banks that memberMFIs can sustain the burgeoning needs of microand small-scale entrepreneurs and poor families.As discussed in Chapter 2, this thinking led mostof the members of the APPEND network to formthe OMB in 2002.

Training Institutions

A variety of microfinance training institutionsexists in the Philippines. CARD’s microfinancetraining center is perhaps the best known andmost widely used to date. In addition, the AsianInstitute of Management (AIM) Center forDevelopment Management and the Asian Centerfor Entrepreneurship, with its leadership andcreativity program, offer advanced training andcertificate programs in areas such as projectmanagement, social development, andentrepreneurship. The institution that hasarguably provided the most specializedmicrofinance training on a regular basis is thePunla sa Tao Foundation (Punla). It has thepotential to serve as the “one-stop shop” thatcould help the microfinance industry build thetechnical capacity it needs for furtherprofessionalization and commercialization. Muchdepends on whether Punla’s managementdecides to tailor its training programs in asustainable fashion to a wide range of MFIscommitted to commercial microfinance and ableto pay for high-quality, demand-driven technicaltraining in microfinance.

Punla is a nonprofit foundation organized tobuild the capacity of institutions to providefinancial services to the poor in the Philippinesand elsewhere in Asia. It is a social enterprisethat offers entrepreneurial management servicesof training and consultancy, market research,

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program management, and social investments tomicrofinance institutions, donors, and investors.Punla currently manages capacity-buildingprograms for various government departmentsand funding agencies, including an P8 milliongrassroots banking program for the InternationalLabour Organization in six rural and urbancommunities. These multiyear programscurrently seek to develop the institutionalcapacities of 19 cooperatives, 5 NGOs, andseveral people’s organizations. It has managedsimilar capacity-building programs for theCanadian International Development Agency(CIDA), the CDA, and the Department of Laborand Employment, benefiting some 17cooperatives and NGOs since 1996. Theseprograms, totaling P14.3 million, represent amajor capacity-building investment inmicrofinance.

Punla’s most active service is to trainmicrofinance workers on how to bank with thepoor. Punla offers customized courses toinstitutions as well as public offerings attendedby participants from around Asia. Punla is alsothe Southeast Asian partner of the CGAP and

offers both Punla-designed and internationalCGAP courses. Its CGAP courses are beingoffered in partnership with the AIM faculty andare constantly updated to reflect new findingsfrom global practices. Current CGAP coursesoffered are Delinquency Measurement andSetting Sustainable Interest Rates, Accounting forMFIs, Financial Analysis for Microfinance,Business Planning with Microfin, andInformation Systems for Microfinance. Theobjective of these courses is to provideparticipants with practical, immediately-usabletools. The skills and knowledge gained in thesecourses often lead to better institutional andoperational policies for the MFI.

Punla does not advocate a particular MFItechnology but leaves the choice to the institution.Thus, it is able to serve all MFI institutionaltypes�rural and cooperative rural banks,cooperatives, and NGOs. From 1997 to 2001,Punla trained more than 2,000 professionalmicrofinance workers from 500 rural banks,cooperatives, and microfinance NGOs in thePhilippines as well as some from other Asiancountries.

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Expanding access of the poor and near-poor tosustainable microfinance is the greatest challengefacing the Philippine microfinance industry.Many microfinance stakeholders see provisionof commercial microfinance as the way to achievethis goal. However, several challenges tomicrofinance commercialization exist at themicro (institutional) and macro (operationalenvironment) levels. Below are a few of the mostpressing challenges.

INTERNAL CONSTRAINTS

Perhaps one of the most pervasive internalconstraints to commercial microfinance is theperception problem. Because the microfinancemarket is not monopolized by microfinanceNGOs, a big internal challenge faced by someplayers or potential players in the market (e.g.,rural banks and cooperatives) is the lack ofappreciation of the viability and sustainability ofmicrofinance as a market niche.

69 Both the rural

banks and the credit cooperatives have long beenin operation but have only been recently engagedin the microfinance business. It is believed thatthe inadequacy or lack of appreciation of “successstories” testifying to the profitability of the ventureis a major challenge to the commercialization ofmicrofinance.

The perception problem, however, is partiallybased on the lack of ability or flexibility of theexisting systems of rural banks and cooperativesto accommodate the unique features ofmicrofinance technologies (e.g., daily or weeklymonitoring of small repayments, and smalldeposits). Although most banks (especially thriftbanks) have the ability to undertake marketresearch, existing market research capabilitiesmay not be appropriate to discern the needs anddemands of microfinance clients.

70

Most other internal constraints faced byexisting MFIs and potential new entrants havesignificant differences according to institutionaltype. The internal constraints in rural banks,cooperatives, and microfinance NGOs areexamined below.

Rural Banks

Rural banks are ideally suited to the provisionof commercial microfinance in that they areformal financial intermediaries run on a for-profitbasis and have a wide client base over which todiversify risk. Unlike commercial banks in whichmanagement rotates every 2—3 years, rural banksare managed on a continuing basis with the samestaff. This helps to keep information costs lowwhen selecting micro- and small-scale borrowersand helps to build trust and confidence amongclients who want to deposit small savings. Theserelations between customers and the bank,characterized by mutual trust, also attract someclients who could deposit with commercialbanks.

71

The other internal constraints to microfinancecommercialization are relatively minor. Lack ofa network, however, poses a constraint to theoperation of microfinance programs by ruralbanks in terms of ability to distribute credit riskgeographically and to provide customers withpossibilities to withdraw savings or otherwiseaccess their accounts in other areas. The onlysolution for gaining access to regional markets isto establish strategic alliances with other financialinstitutions or to branch out aggressively.

72

Access to support services is also a constraint.73

The development of new microfinance productsand services, the training of staff, and theenforcement of effective auditing and controlmechanisms are expensive. The costs involvedare too high for a single rural bank. To compete

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over the long term, financial institutions like ruralbanks need effective support services that can beprovided by a national apex organization orregional federations, or by alliances with otherfinancial institutions.

Cooperatives

Cooperatives are also well suited tomicrofinance provision. Like rural banks, theyare close to their communities and have goodaccess to information on their membership.Member-clients also have a stake in the continuedfinancial success of their cooperative, which helpsto reinforce discipline in management andoperations.

However, unlike rural banks, cooperatives areconsidered semiformal institutions; they areregulated and supervised by the CDA but thissupervision is known to be weak. Lack oftransparency has historically been a majordifficulty in assessing cooperative performancebut, with the recent agreement by the NCC on aStandard Chart of Accounts and the COOP

74

administrative standards and PESOS75

financialstandards, the remaining challenge lies in thewidespread adoption and use of these standards.

Cooperatives, like the rural banks, sufferfrom a lack of an effective network, althoughthis is improving through the CIDA-fundedNATCCO-FI project. Access by cooperatives tosupport services also remains weak. Furtherstrengthening of NATCCO will be necessary inorder for it to assist the cooperatives in manyimportant areas, including managementinformation systems, internal audit and control,human resource development, market research,and product development.

Microfinance NGOs

With the growing scarcity of donor funds formicrofinance onlending, most microfinanceNGOs are now faced with the challenge offinding funds from commercial sources or fromdeposits of their member-clients. Becausedeposits are considered a cheaper source of fundsthan commercial loans, the inability of NGOs

to mobilize deposits legally poses a significantinternal challenge. Lack of legal identitystemming from weak ownership and governancestructures poses the greatest challenge tomicrofinance NGOs in accessing funds to providemicrofinance on a commercial basis.

Commitment to balancing social andcommercial objectives is also an importantinternal challenge faced by most microfinanceNGOs. The majority, especially smallmicrofinance NGOs, have an inordinate focuson providing microcredit as a social servicewithout adequate appreciation of or attentionto sustaining themselves as a “going concern.”Most microfinance NGOs, therefore, remainsmall and weak and dependent on freshinfusions of subsidized funds for their survival.Those that have taken a more balancedapproach in their provision of microfinance,such as CARD and TSPI, provide ampleevidence that their commercial approach tomicrofinance operations is compatible withtheir desire to assist the poor in gaining accessto diversified, demand-driven microfinanceproducts and services.

Related to constraints stemming from smallsize and weak capacity, many microfinanceNGOs face the constraint of poor access toappropriate systems and support services. Thisissue was reflected in a January 2002 report bythe Microfinance Council

76 containing survey

responses from 90 leading MFIs in thePhilippines (including all major microfinanceNGOs and many leading rural banks andcooperatives with microfinance operations),which indicated what they saw as the majorconstraints to expanding their microfinanceoperations. Participating microfinance NGOsnoted inadequate management informationsystems

77 and the lack of capacity to undertake

market research as two major constraintscurtailing their growth. The report indicated that“although computerization of systems has beenidentified as essential to the growth of MFIs, therestill appears to be a supply problem in terms ofaffordable, commercially available, off-the-shelfsoftware packages that suit the system andinformation requirements of MFIs.”

78

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Software is a particularly acute problem formicrofinance NGOs that, because of their limitedfunds, have had to develop ad hoc managementinformation systems that are unable toaccommodate sustained increases in outreach.Coupled with this problem in most microfinanceNGOs is the lack of a research and developmentfunction to conduct market research on a regularbasis. Market research is a relatively new concernfor most MFIs, prompted by increased client exit(heightened drop-out rates) and the desire toimprove repayment performance. Given thestrong recent interest in undertaking marketresearch, the need to build this capacity in MFIsis great, especially in microfinance NGOs, whichface limited funding to support their increasedlending.

CONSTRAINTS IN THE OPERATINGENVIRONMENT

Private Sector “Crowding Out” byGovernment Microcredit Programs

Executive Order No. 138 abolishedsubsidized, directed credit programs and laid theframework for all government directed creditprograms to be transferred to financialinstitutions. These phaseout and transferprocesses began in 1999 and were supposed tobe completed by February 2002, but they arestill ongoing. In addition, several newgovernment poverty reduction programs havebegun, giving what are essentially grants thinlydisguised as interest-free loans. Such continuedaccess to subsidized government credit programs“crowds out” provision of private, sustainablemicrofinance services.

Mandatory Lending and Investment

Presidential Decree 717, otherwise known asthe Agri/Agra Law, mandates that all banks setaside 25% of their net loanable funds foragricultural lending, of which 10% is supposedto be lent to agrarian reform beneficiaries. While

minimum lending requirements have beeneasily exceeded for the agricultural group, giventhe good number of creditworthy agribusinesses,compliance has not historically been met interms of lending to the agrarian reformbeneficiaries.

79 The main reason is that banks

are not established to manage profitably theprovision of small loans to the widely dispersedbeneficiaries.

Even though the Government has providedother means for complying with this law, such asinvestment in various types of bonds andsecurities, the regulation essentially acts as anunnecessary tax, particularly on large banks,without addressing the root causes of lack oflending to small farmers.

Another regulatory measure, Republic Act6977, the so-called Magna Carta for SmallEnterprises, acts as a similar drain. Under the Act,all lending institutions are now required to setaside at least 6% of their total loan portfolio forsmall businesses and at least 2% for lending tomedium-sized enterprises. Only instrumentsissued by the Small Business Guarantee andCredit Corporation, which do not pay interest,and noninterest bearing deposits with BSP aredeemed alternatives for complying with thisregulation.

80

Threat of Policy Reversal

The very convenient nature of direct creditprovision by government makes it politicallyexpedient and tempting for policymakers torevert to the previous policy of regulating interestrates and supporting directed credit programs(Box 4.1). The challenge to prevent this lies notonly with the Government but also with privatesector MFIs. It is imperative for all types of MFIsto close ranks and advocate actively that theGovernment continue moving away fromoutright credit provision and focus itsinterventions where it has distinct comparativeadvantage (e.g., provision of basic supportinfrastructure and an appropriate policy andregulatory environment, social preparation, andcapacity-building activities).

81

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Unclear Regulation and SupervisionConcerning Microfinance Operations

Significant improvements have been made inthe last few years by the Government and BSPin recognizing microfinance and adaptingregulation and supervision to the specializednature of microfinance operations. However, theprocess of implementing several sections of the2000 GBL is still in progress. Until the rules ofengagement of formal financial institutions inmicrofinance are complete, uncertaintiesregarding the final form of regulation andsupervision of microfinance-oriented banks maycurtail efforts by formal institutions to downscaletheir operations.

Illegal Deposit Mobilization byMicrofinance NGOs

A survey in 2001 of 23 of the largestmicrofinance NGOs showed that almost half oftheir combined outstanding loan portfolio wasfunded by a combination of savings or CBU,

82

despite the legal prohibition against depositmobilization from the general public except withBSP licensure. Under the GBL, nonstock andnonprofit organizations are not permitted toaccept savings and deposits in any form. So far,BSP has ignored the practice because the savingsmobilized are only from microfinance NGOmembers and are mainly compulsory deposits,making the vast majority of members netborrowers.

Inadequate Access to Commercial Sourcesof Funds

One of the consequences of not being able tomobilize deposits overtly is that manymicrofinance NGOs remain highly dependent onexternal funding, which has historically comefrom donors. In recent years, PCFC has grownto become the largest single provider of wholesalefunds to the microfinance sector. The interest ratethat PCFC charges borrowers can be consideredcommercial in the current environment becausein 2001, it was lending at 12% based on a decliningbalance (via its investment credit line), whereasthe average prime lending rate by commercialbanks then was around 8%. However, these fundshave been mostly directed toward participatingorganizations following the Grameen Bankapproach,

83 hindering use of its funds by MFIs

that follow other models.84

Commercial bankloans to MFIs have been extremely rare, mainlydue to a lack of transparency in the operationaland financial performance of microfinanceNGOs and cooperatives. The commercial loansthat have been issued were in some cases backedby collateral, such as real estate, and alwaysfacilitated by personal relationships.

No Credit Information Bureau that CapturesMicrocredit Information

A private, nationwide credit bureau run bythe Bankers Association of the Philippines (BAP)has been in operation since 1990. As of January2002, this negative-file information systemcontained data on more than 1.4 millionborrowers. However, it is only accessible to

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commercial banks and does not capturemicrocredit information that would be useful tothe full range of MFIs engaged in microfinance.With increasing microcredit provision bymicrofinance NGOs, rural banks, andcooperatives, creation of a credit bureau thatcaptures microcredit information from theseactors is becoming increasingly vital to thecontinued health of the industry.

Lack of Microfinance Training Centers

There is a variety of microfinance trainingprograms. However, no “one-stop shop” yet ex-ists for the provision of regularly scheduled, de-mand-driven, and affordable technical courses onmicrofinance program management and opera-tion. CARD’s microfinance training center isperhaps the best known and most widely used,but it cannot be considered as a wholly profes-sional training institution that would attract a wide

variety of regular students from different types ofMFIs. AIM’s Center for Development Manage-ment and Asian Center for Entrepreneurship andits leadership and creativity program offer ad-vanced training and certificate programs in suchareas as project management, social develop-ment, and entrepreneurship. However, AIM hasnot yet designed public training programs forMFI managers that exclusively address com-mercial microfinance issues. The institutionthat seems most suitable for offering additionalmicrofinance training on a regular basis isPunla, provided that its management focuseson developing demand-driven courses suitablefor a wide range of viable MFIs. To serve asthe one-stop shop to build the technical ca-pacity that the industry needs for furtherprofessionalization and commercialization,Punla will need to shift its focus more towardserving the complex and varied needs of com-mercial microfinance providers.

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So far, this analysis of the progress ofmicrofinance commercialization and thechallenges that remain has assumed thatcommercialization would have a positive impacton poverty reduction, including increasedoutreach, improved efficiency, and long-termviability of microfinance providers. For MFIs,commercialization is expected to pave the wayfor the entry of private capital. This, in turn, willprovide more capabilities for expansion intountapped markets and more diverse microfinanceproducts. However, some stakeholders areconcerned that further commercialization couldhave negative social impact or result in missiondrift, such as shifting the target market frommicroentrepreneurs and poor households tosmall enterprises and household at or above thepoverty line. This chapter reviews a few of themost common likely implications of microfinancecommercialization and addresses the relatedconcerns.

INCREASED OUTREACH ANDCOMPETITION

As more microfinance providersdemonstrate the profit potential ofmicrofinance, more entrants will be attractedto the market. In this sense, increasedcommercialization is likely to have a positiveimpact on outreach in the future, resulting inmore clients served and increased competitionamong MFIs. However, given the fact that onlyabout 20% of the market is currently served,few negative repercussions of such competitionare likely to result in the next 5—10 years, exceptin a handful of urban and highly-populated ruralareas where some localized competition isbeginning to increase.

Growth in the sector is not likely to come fromthe gradual growth of the vast majority of existingmicrofinance NGOs. It is likely that other typesof organizations (for example, rural banks,cooperatives, microfinance-oriented banks, etc.)will increasingly enter microfinance, as itbecomes clear that the poor can be bankable, andas the methods for reaching the poor becomebetter understood. This has happened in othercountries with relatively developed financialsectors as microfinance has matured (particularlyin Latin America). Only a few microfinanceNGOs will likely become self-sufficient and ableto raise resources without resorting to donors andthese will offer most of the outreach bymicrofinance NGOs. Most of the oldermicrofinance NGOs that have not yet brokenthrough the threshold of 5,000 active clientsappear to be steeped in a multisectoral, social-service orientation that is fundamentallyincompatible with large-scale outreach andviability and unlikely to change. Given the sizeof the Philippine market for microfinance, thereis clearly a role for a number of MFIs, as long asthese organizations can achieve genuine financialviability. As for expanding geographic coverage,it will take a mix of large nationwide or regionalorganizations and smaller local providers to coverthe whole country.

85

IMPROVED EFFICIENCY

As discussed in Chapter 3, the legal andregulatory environment is becoming increasinglyconducive for MFI geographic expansion andthis is creating some friction. Before MFIs achievefinancial self-sufficiency, the players in the fieldare generally allies but once they break-even andbegin to strive for scale, they act more like

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competitors (Chu 1997). Striving for competitiveedge in large part depends on an MFI increasingits level of operational (or cost) efficiency.Competition is one factor that can lead MFIs todrive down costs so that they can provide moredemand-driven products and services onincreasingly favorable terms to their clients. Thisallows MFIs to expand breadth and/or depth ofoutreach simultaneously while increasingprofitability.

This trend has been demonstrated by a rangeof MFIs in the Philippines over the last few years.Cooperatives offering the SCWE loan productas part of their participation in the CUES projectincreased their OSS from 109% in 1996 to 126%by 1999; CUES cooperatives that did not offerthe poverty product showed a smaller increase,from 111% to 119%, during the same period.

86

In addition, Freedom from Hunger, acollaborating partner on the project, reported thatparticipating cooperatives offering the SCWEproduct generally earned a better return on assetsthan other cooperatives and lowered theiroperating expense ratio after introducing SCWE(Table 5.1). The World Council of Credit Unions,as the technical partner for the CUES project,reported that the operating expense ratio of allparticipating cooperatives decreased from 9.8%in 1996 to 8.0% at the end of 2001.

87

Also, rural banks participating in the RBAP-MABS program are increasingly bringing down

their costs through adoption of time- and money-saving technologies (Box 5.1). Use of linkages tocut costs via ATM technology is also helping toachieve greater efficiencies at TSPI (Box 5.2).Other microfinance NGOs, such as NWTF (Table5.2), have increased their administrative andoperational efficiency without sacrificing thequality of products and services.

88 Once NWTF

achieves FSS, it can be expected to concentrateon providing microfinance on increasinglyattractive terms to clients in order to increase itsoutreach.

INCREASED ACCESS TO COMMERCIALFUNDS

Increased commercialization has alreadyresulted in improved access to commercialsources of funds, especially in terms of savingsmobilization, but also through private equityinvestment. As more and more rural banks andcooperative savings and credit banks enter themarket, they bring with them the ability tomobilize savings deposits, including microsavings(amounts under P15,000) from low-incomepeople, in a cost-effective way. Rural banksmobilize a significant amount of microsavingsdeposits: P5.3 billion ($106.0 million) in 4.3million accounts as of March 2002. CUES-supported cooperatives have nearly tripled their

Table 5.1: Profitability and Costs of CUES Cooperatives

1996 1997 1998 1999

Return on Assets (%) Cooperatives w/ SCWE (8) 2.4 3.4 3.3 4.4 Cooperatives w/o SCWE (4) 2.3 2.6 2.5 4.1 All CUES Cooperatives (12) 2.4 3.2 3.0 4.3

Operating Expenses/Average Total Assets (%) Cooperatives w/ SCWE (8) 10.6 10.7 9.1 9.7 Cooperatives w/o SCWE (4) 8.2 8.6 8.0 9.8 All CUES Cooperatives (12) 9.8 10.0 8.7 9.7

CUES = Credit Union Empowerment and Strengthening; SCWE = Savings and Credit with Education.

Source: Stack and Thys 2000, p.12

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way, commercial MFIs serve an underservedmarket for small savings accounts while alsosatisfying their own need for a source of fundsfor onlending.

Commercialization often paves the way forthe entry of private capital, which, in turn, allowsfor expansion into untapped markets and morediverse microfinance product offerings. ThePhilippines presents some early evidence that thisis indeed the case. For example, as part of itstransformation, CARD Bank tapped into anotherprivate source of funds by selling shares to clientsand staff alike (Box 5.3). Other cases oftransformation have potential to yield similarresults. In addition, at least one MFI as part of itstransformation is accessing loans from a globalsocial investment fund at what are arguablycommercial interest rates (13% per annum). Theformation of MEB with a mix of donor and socialinvestor capital also portends the future increasedflow of private risk capital to formal MFIs.

However, large-scale inflow of private riskcapital to formal MFIs in the Philippines is likelystill several years off because of at least two majorfactors. First, the track record of transformedMFIs is still extremely short. Second, theparticulars of regulation and supervisionpertaining to microfinance-oriented banks are stillunclear. Until there is clearer profit potential(based on at least 2 years of performance by thenewly transformed NGOs and new entrant MEB)and the regulatory and supervisory frameworkis clarified, the microfinance sector will likelyhave to wait some time for the entry of substantialprivate risk capital.

EXPANDED ARRAY OF MICROFINANCEPRODUCTS AND DELIVERY

TECHNOLOGIES

Despite the historical emphasis on theGrameen model of microfinance delivery in thePhilippines, other models are increasingly beingadapted and local innovations are emerging fromrecent formal entrants into microfinance. Ascompetition increases from new and expandingMFIs, microfinance providers will need to

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microsavings in just 3 years from $3.3 million atthe end of 1998 to $9.3 million the end of 2001,despite a decline in the average savings balancefrom $92 to $86 in the same time period. In this

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Table 5.2: NWTF Selected Efficiency Indicators

1997 1998 1999 2000 2001

Administrative Efficiency 61.20 42.50 45.10 40.93 34.71 (Administrative Costs

a Excluding

Financial Costs as % of AverageNet Loan Portfolio)

Operational Efficiency 79.00 35.66 29.59 32.63 31.87(Operational Costs

b as % of Average

Loan Portfolio)Personnel Costs as % of Total 51.00 65.00 63.01 63.70 59.72

Administrative CostsNumber of Active Loan Clients per 235 206 147 263 278

Loan Officer (Year End)Outstanding Portfolio per Loan 468,797 588,779 452,233 995,954 1,407,502

Officer (Year End) (Pesos)Number of Clients per Branch 1,176 1,378 1,413 2,010 2,334

Office (Year End)

NWTF = Negros Women for Tomorrow Foundation.

Notes:a

NWTF’s administrative costs include nonfinancial expenses directly related to the provision of financial services or other services that form anintegral part of their financial services relationship with their clients. Examples include personnel expense, depreciation, utilities, supplies,advertising, transportation, training, communications, and consulting fees.

bNWTF’s operational costs include all administrative expenses, but exclude all financial expenses and loan loss provision expenses.

Source: ADB 2002c, p.15.

become more sensitive to the specific needs oftheir clients and develop an array of productsand delivery mechanisms that keep customerssatisfied.

In addition to microcredit productdiversification, different types of flexiblesavings services are being designed specificallyto attract microsavings in a cost-effective way.Microinsurance is another product attractingincreasing interest. In addition, remittanceservices are being tested and leasing servicesmay be on the horizon for M FIs. Newtechnologies are helping to expand the arrayof microfinance products offered (see Boxes5.1 and 5.2). All these trends should helpincrease access to microfinance over the nextfew years to an expanded set of clients in morediverse geographic locations.

Microcredit Products

Although much of the microfinance industryin the Philippines still draws from the Grameenmodel based on group lending, this is increasinglychanging, as new methodologies (includingindividual lending, such as that of the ASA, arebeing adapted to the Philippines context. Inaddition, there is domestic experimentation andinnovation by rural banks and cooperatives, asmarket research techniques are being promotedby several major donor-funded technicalassistance projects. Moreover, new entrants areimporting their particular brand of provenmicrofinance methodology, as in the case ofMEB. These forces are contributing to aburgeoning in the types of microfinance productsand services offered as well as achieving scalethrough reductions in average transaction costs.

89

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Leasing

MFIs are uniquely positioned to play an activerole in the expansion of the leasing market forsecond-tier equipment, particularly becausemicroenterprises comprise the largest segment ofmanufacturing, commerce, and industry in thedeveloping world. Leasing provides MFIs withnew opportunities to reach borrowers andexpand into existing markets. The rapid growthof leasing in a number of developing countriesindicates that leasing is addressing an importantunsatisfied demand for financing. Leasing has thepotential to develop into an effective financingtechnique that MFIs can use to reach thoseenterprises with financial needs that cannot besatisfied by traditional microfinanceapproaches.

90

Remittance Transfers

BSP reported that remittances in 2001 were$6.2 billion, of which about 60% was from theUnited States and Canada.

91 Formal institutions,

such as rural banks, are increasingly tapping intothis large market niche and, given the scale ofremittances, may become an important part ofthe microfinance service menu for many. Somerural banks have been developing linkages withinternational remittance transfer companies, suchas Western Union or commercial banks.

92 Rural

banks are prohibited from foreign exchangetransactions; thus, they enter into an arrangementwith commercial banks, which are allowed toperform foreign exchange transactions, so thatthe Philippine peso equivalent of the foreignexchange earnings of overseas workers can beremitted to their accounts with rural banks.

The scale of remittance transfers in thePhilippines suggests that the development ofremittance services may have high potential toexpand the customer base of MFIs and add totheir profitability. Indeed, some experimentationby CARD Bank in providing remittance servicesin cooperation with a domestic money transferservice provider has already taken place. Inaddition to the fee income generated by remittanceservices, other benefits for MFIs also may lay in

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their ability to cross-sell other services. For theconsumer, the advantages of MFIs as transferagents may include lower costs compared to thoseof established transfer agencies, transparencyabout exchange rates disclosed at the point of sale,and increased reliability/security and speed.

Microinsurance

MFIs in the Philippines are increasinglyexperimenting with offering microinsuranceproducts and in doing so are following both socialand commercial agendas. With regard to theirsocial missions, several microfinance NGOs arerecognizing households’ needs for protectionagainst risk. Microinsurance is seen as a meansfor clients to reduce their vulnerability whentaking advantage of economic opportunities. Inaddition, access to insurance from the socialperspective allows clients to reduce the impactof losses that could exacerbate their povertysituation. Regarding their commercial agenda,MFIs venturing into microinsurance desire toenhance their sustainability and profitability byreducing the impact of client risk on MFI loanand savings portfolios, by generating additionalrevenue, and by having better services than theircompetitors (Box 5.4).

93

CARD Bank has ventured intomicroinsurance with well-balanced commercialand social perspectives. CARD Bank learned thatwhen members died, their family members wereoften unable to pay back the loan. CARD set upan insurance fund called the Members MutualFund to cover death, disability, and pensionbenefits, based on actuarial recommendationsconcerning pricing and benefits. Themanagement of the Fund was turned over to themembers in September 1999 and it has beenregistered with the SEC as a separate legal entitycalled the CARD Mutual Benefit Association.Now CARD Bank, through its Mutual BenefitAssociation, provides life insurance, loanredemption, and provident fund/retirementsavings. Fully owned by the clients, themanagement of the Association was turned overto them in 1999. It is now governed by its ownboard elected from among their ranks. Total assets

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are valued at more than P42 million ($845,000),with benefits paid amounting to P2.7 million(about $54,000) to date.

POTENTIAL FOR MISSION DRIFT

The potential for mission drift is mainly a con-cern of those institutions, mainly microfinanceNGOs, that provide microfinance to the lowestlevel of entrepreneurial poor. The potential formission drift is less of an issue for new or poten-tial entrants.

94 Debate centers on whether trans-

forming credit NGOs into banks and subjectingthem to formal regulation and supervision willlead to a loss of focus and sense of mission to thepoor.

Two issues associated with NGO transforma-tion are at the forefront when considering thepotential for mission drift. The first has to do withthe legal requirement to include at least two in-dependent members as part of the board of di-rectors. The second concerns the requirement todilute ownership of the NGO in the new bank tono more than 40% within 5 years of transforma-tion (Box 5.5).

The case of CARD Bank is instructive.Although these two legal requirements were notin place at the time of CARD’s transformation,its performance provides some evidence thatdisputes concerns for mission drift in terms oftarget market, loan sizes, and effective interestrate. CARD has the longest experience withNGO transformation in the Philippines and itsexperience gives some indication of howtransformation might affect other recently-formed, regulated commercial MFIs with regardto mission drift.

As part of its transformation, CARD raised theeffective rate of interest on its loans by charging aservice fee of 4% from 1996 and increased theinitial loan amount from P1,000 to P2,000,suggesting possible mission drift. However, from1998 to 31 May 2002, the yield on CARD Bank’sloan portfolio actually dropped from 46% to 41%.This is comparable to that of other providers inthe sector, including microfinance NGOs whosenominal interest rates range between 24% and 36%

(flat) plus service charges generally in the range of2–4%. In addition, its average loan balance ofP5,450 was only about P1,000 higher than it wasin 1998 (which means it actually declined in realterms). This is also in line with others in theindustry (Box 5.6).

How much mission drift occurs in variousmicrofinance NGOs and the microfinanceindustry as a whole depends on a variety offactors. One is the extent to which microfinanceNGOs seek to transform into regulated entitiesas a prerequisite to mobilize significant voluntarysavings (to allow them to increase their outreachsubstantially and sustainably). Becoming aformal, regulated financial institution can resultin targeting higher-income clients with largerloans, because of profit pressures from equityshareholders.

Mission drift will also depend on the“friendliness” to microfinance of the ultimateregulatory and supervisory framework. Giventhat the prudential standards being developed formicrofinance-oriented banks are appropriate for

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formal MFIs (such as reporting requirements,limits on unsecured loans, requirementsconcerning loan documentation, supervisionmethods, and branching restrictions), thereappear to be no regulatory or supervisory reasonsfor institutions to shift focus up-market to ensurecompliance.

For those microfinance NGOs that are contentto serve a localized market on a competitive basis,there will likely be little to no mission drift. Butsuch institutions will likely enjoy feweropportunities to diversify their risks and not beable to take advantage of economies of scale intheir operations. Despite the advantages of beingclose to their target market, these institutions canbe expected to remain relatively weak comparedto other types of MFIs that may expand theirgeographic coverage or their client base. In otherwords, some diversification of target markets canbe beneficial to MFIs to minimize risks andimprove their ability to recover costs.

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Commercialization of microfinance in thePhilippines holds the promise of capitalizing onthe achievements in outreach that MFIs havemade to date. General improvements in MFIs’financial self-sufficiency are promising, but theindustry is far from reaching all the potentialbenefits of microfinance commercialization.Many stakeholders have a role in movingmicrofinance commercialization further in thePhilippines, including the Government,donors, MFIs, and support institutions. Thischapter draws conclusions from the study andmakes recommendations for each of these keystakeholders.

ROLES OF THE GOVERNMENT

The main roles the Government should playin commercialization of microfinance are tocreate and maintain an enabling macroeconomicand sectoral policy environment and anappropriate legal and regulatory framework formicrofinance. The Government is key to thesuccessful advancement of microfinancecommercialization, which requires the followingactions.

Complete the Phaseout of GovernmentDirected Credit Programs

Progress with abolishing subsidized, directedcredit programs and transfer of the remainingcredit programs to financial institutions arebehind schedule; the process was to have beencompleted by February 2002. This process shouldbe accelerated. In addition, new governmentprograms that employ subsidized or interest-freeloans instead of grants are hurting the repaymentculture necessary for commercial microfinance.

Even though these new programs are understoodto be of limited scale, the damage that they do interms of damaging the culture of repayment maytake significant time and effort on the part ofMFIs to overcome.

Remove Mandatory Lending and Investment

Regulations under the Agri/Agra Law and theMagna Carta for Small Enterprises act as animplicit tax on banks and should be removed.As mentioned earlier, the Government hasprovided means other than direct lending forcomplying with these laws, such as investmentsin various types of bonds and securities. But theregulations act unnecessarily as a tax, particularlyon large banks, without addressing the root causesof lack of lending to small farmers and enterprises.Ample experience worldwide over the last 30years has proven the failure of similar measuresto accomplish their aims of greater bank lendingto farmers or small businesses in an efficient andsustainable manner.

Continue to Adopt Appropriate Regulationand Supervision for Microfinance

BSP has taken several very positive stepstoward adopting appropriate regulation andsupervision of microfinance through its issuanceof several circulars implementing provisions ofthe GBL of 2000. It should continue to balancecarefully the need to adapt regulation andsupervision to account for the specialized natureof microfinance operations with the need toprotect the financial health of banks. Theintegration of risk-based supervision techniques,especially for microfinance operations, promisesto be effective both for supervision and riskmanagement.

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Clarify Deposit Mobilization by NGOs

BSP cannot ignore for much longer thepractice by microfinance NGOs of acceptingdeposits illegally. If a single microfinance NGOfails and runs away with its member-clientssavings, the whole microfinance industry couldbe affected and negatively affect MFIs legallyauthorized to accept savings. Considerationshould be given to allowing microfinance NGOsto accept savings if these will only be for thepurpose of compensating any outstanding loansthe clients have with the microfinance NGO.Such deposits are often technically referred to inother sectors as cash collateral or hold-outdeposits.

95 Microfinance NGOs are not currently

regulated by any authority and the Governmentis currently considering requiring standardizedfinancial reporting by NGOs to ensure thatdeposits do not exceed outstanding loan balances.The adoption of a Standard Chart of Accounts formicrofinance NGOs is, therefore, imperative, alongwith the widespread use of uniform disclosureguidelines for microfinance NGOs to report onoperating and financial performance.

Strengthen the Regulation and Supervisionof Cooperatives

Consistent with the recent circular issued bythe CDA to have all cooperatives use the newlyapproved Standard Chart of Accounts and itsaccompanying Manual of Accounts, the CDAshould transform itself from a purelydevelopmental entity to an effective regulatoryagency. The regulatory framework formicrofinance

96 recommends the creation of a

special regulatory unit within CDA. BSP shouldassist CDA in developing the appropriateprudential rules and regulations based on theagreed COOP and PESOS standards forcooperatives undertaking savings and creditactivities.

Develop Microfinance PerformanceStandards that Cut Across Institutional Types

As part of the rules to be established forminimizing risks in microfinance, theGovernment should also initiate theestablishment of performance standards that cutacross all types of MFIs.

97 The ingredients for

such generalized performance standards couldbe PESOS, the CAMEL

98 rating system for

banks, and the microfinance NGO performancestandards developed by the MicrofinanceCouncil. Establishment of these standards wouldallow MFIs to compare their performance againsteach other objectively. Also, the adoption of thesestandards to gauge the performance of MFIs isespecially important for private investors andwholesale lenders who would like to invest in anMFI. Commercialization involving the entry ofprivate risk capital will only be possible ifinvestors have sufficient and reliable transparentinformation for making their investmentdecisions. Such standards may also form the basisfor ensuring in the future a level playing field foraccess to deposit insurance, based on meetingcertain criteria.

Allow Expanded Use of PCFC Funds and itsPrivatization

Currently, due mainly to stipulationsassociated with the bulk of its funding, PCFCprovides wholesale funds to Grameen and ASAreplicators replicators only. Ideally, access towholesale funds should depend more on thefinancial health of the participating organizationand not the methodology it employs. PCFCshould work to streamline its lending criteriawhile adequately containing its credit risks.

In addition, to support microfinancecommercialization, PCFC should allow itswholesale lending interest rate to vary accordingto the interest rate environment, at a spread thatwill ensure institutional viability and require thatthe onlending interest rate employed by aborrowing MFI is high enough to cover the MFI’scost of lending as well. Finally, PCFC’sprivatization is overdue because of inappropriate

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implementation arrangements. Considerationshould be given to allowing partial privatization(given PCFC’s large capitalization) and openingthe bidding beyond cooperatives, NGOs, andpeople’s organizations. Privatizing the PCFCshould increase its emphasis on lending tosustainable institutions and reward financiallyhealthy institutions with lower interest rates. Thiswill support the commercialization of microfinanceby allocating funding sources to the most efficientMFIs rather than to donor-dependent MFIs.

ROLES OF FUNDING AGENCIES

The donor community has several major rolesto play in the commercialization of microfinancein the Philippines, in close coordination with theGovernment. These are discussed below.

Support an Effective Policy Environment andLegal and Regulatory Framework

First, donors should work with theGovernment to ensure an enabling environmentfor microfinance conducive to MFIs’ progresstoward financial self-sufficiency. This includesadvising on macroeconomic and sectoral policiesas well as the legal and regulatory framework.Donors should continue building the capacity ofBSP and CDA to implement effectively theevolving regulatory and supervisory frameworkfor microfinance. In addition, donors shouldsupport the adoption, installation, andimplementation of the appropriate informationsystems needed by regulatory authorities in theiroff-site and on-site supervision of MFIs.

An important element in the regulation andsupervision of all types of MFIs will be donorsupport to establish a system of accreditation ofexternal auditors for use by governmentregulatory agencies and MFIs. Assistance willalso be required in the development ofcommonly-accepted organizational, operating,financial, and reporting standards, especially tosupport effective self-regulation by theMicrofinance Council of member microfinanceNGOs.

Build MFI Institutional Capacity

Donors should help to build institutionalcapacity by providing exposure to and trainingin microfinance best practices. In addition totraining, donors should offer performance-basedtechnical assistance support so that MFIs canexpand their outreach and develop cost-effective,sustainable operations (through the use of fee-based assistance channeled through localproviders). In other words, donors should providetechnical assistance rather than direct capitalsubsidies to MFIs to avoid creating distortionsin the market.

If onlending funds are provided by donors atall, they should be coupled with time-bound,quantitative performance indicators, theachievement of which determines the timing andamount of subsequent funding within a maximum2—3-year time horizon on continued funding access.

With regard to building institutional capacity,it will be especially important for donors to focuson increasing the domestic availability ofmicrofinance training courses and programs, suchas helping Punla to become a veritable one-stopshop for affordable, demand-driven courses onmicrofinance management and operations.

Assist in the Development/Dissemination ofManagement Information Systems

There are several management informationsystems currently on the market for MFIs.However, there still appears to be a supplyproblem in terms of affordable, commerciallyavailable, off-the-shelf software packages that suitthe system and information requirements ofMFIs. There are a few programs that aresomewhat adaptable to the varying needs ofmicrofinance, including MicroBanker and RuralBanker 2000 (RB2000), which was developedunder the MABS program and has already beenintroduced into more than 50 rural banks.MicroBanker operates very similarly to atraditional bank platform, but has been simplifiedand adapted for microfinance operations.RB2000 is a windows-based system that has beenspecifically designed for rural banks to manage

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microfinance group and individual loan productsas well as manage savings and other services.

Donors should support an objectiveevaluation by the Microfinance Council ofexisting systems including RB2000, using theevaluation criteria already developed by theCGAP. Such an evaluation could serve as a usefulstarting point for MFIs considering the positiveand negative attributes of different systems intheir quest to improve their managementinformation systems.

Encourage Innovation in EnterpriseDevelopment

Donors should promote the development ofinnovative microfinance methodologies andproducts as well as complementary, grant-basedsocial-service and business development serviceprograms in cooperation with the Government.This is especially important in the areas of socialmobilization (group formation and amalgamation),basic skills development, business training, andbuilding physical infrastructure, especially in ruralareas. In addition, assistance from the donorcommunity will be important for developing andpiloting new or adapted delivery methods andproducts that can be used to increase access byunderserved groups to financial services.

Promote Linkage Development

Finally, donors should promote developmentof linkages between commercial banks andmicrofinance NGOs as a means to increase thelatter’s access to more commercial sources offunds. Efforts by donors to improve transparencyof MFI operations and financial performance, asdiscussed above, may assist in removing some ofthe obstacles between MFIs and commercialbanks so that mutually beneficial businessrelationships can develop between them.

ROLES OF MICROFINANCEINSTITUTIONS

MFIs have several roles to play in their owncommercialization and that of the industry.Common to all MFIs, whether they be ruralbanks, cooperatives, or microfinance NGOs, isthe need to improve their institutional capacityto reach scale in their microfinance operations(through increasing depth and breath of outreachas well as financial self-sufficiency) and to strivecontinually to reduce transaction costs and toincrease operational efficiency. Some roles,however, can be segregated by institutional typeand a few of these are elaborated below.

Rural Banks

Explore Opportunities to Expand GeographicCoverage and Access Support Services

In an increasingly competitive financialmarket, community-based banks must explorepossibilities of linking to regional networks inorder to allow their customers to access theiraccounts in other areas of the country. Onepossibility may be the opening an apex bank forthe system of rural banks. Investments in humanresource development and product developmentare very costly and cannot be covered in the longterm by a single bank with a small capital base.Thus, access to support services is crucial for arural bank involved in microfinance. Activeparticipation in RBAP or the development ofstrategic alliances with other financialinstitutions could be means to access theseservices at low cost.

Maintain Liquidity above the Average forCommercial Banks

Financial institutions with a small capital base,such as rural banks, engaged in mobilizingmicrodeposits should maintain a high liquidityratio. This means maintaining liquidity at leastabove the banking industry’s average. In thePhilippine context, a 20% liquidity ratio for

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microfinance institutions appears to be sufficientto meet unexpected situations.

99

Cooperatives

Explore Opportunities to Access Support Services

Similar to the rationale used for the ruralbanks, cooperatives with microcredit and savingsservices should consider actively participating inNATCCO or develop strategic alliances withother financial institutions. Participation will helpto ensure the standardization of cooperativeoperations and help them to improve theirsustainability.

Improve Transparency of Operational andFinancial Performance

External regulation and supervision remainweak and are under development within theCDA; thus, internal regulations and supervisorymechanisms are crucial. Adoption of the StandardChart of Accounts and the accompanying Manualof Accounts was to take place as soon as possible.Tracking and use of the COOP and PESOSstandards should begin thereafter. Closecooperation with NATCCO during this transitionperiod will also be especially important.

Microfinance NGOs

Overcome Weaknesses in Ownership andGovernance

Weaknesses in ownership and governanceshould be acknowledged and minimized throughthe establishment of clear lines of responsibility,staff incentives that promote sustainable outreach,and adequate systems to monitor progress towardcommercialization. Accountability andtransparency need to be built in throughintegrated systems and practices and a culture ofprofessional management.

Ensuring that boards of directors includemembers who understand business and financeis crucial. Preparing standard income statementsand balance sheets and having them audited will

increase the transparency of operations ofmicrofinance NGOs and enable improvementsin their performance. Ultimately, theseimprovements should facilitate access tocommercial sources of capital. Transformationinto a regulated entity should also be consideredas a means to access deposits as a source of fundsand to become a bona fide part of the formalfinancial system.

Improve Institutional Capacity

Given that institutional and managementcapacity in the majority of microfinance NGOsis weak, improvements in several areas shouldtake top priority. Missions should be clarified toincorporate a sustainable view of microfinanceprovision, balancing the social mission with acommercial approach. Increased attention shouldbe given to building human resource strength infinancial analysis and banking at least to theextent that strategic planning and business plansto operationalize such planning can take place.Active participation in the Microfinance Councilshould also take priority in order to exchangepositive and negative experiences, learn aboutlocal and international best practices, and accessvarious types of professional microfinancetraining services, such as the recently completedmarket research courses.

Increase Cost Efficiency

An emphasis on cost efficiency is in line withthe social objectives of microfinance NGOs inthat increases in cost efficiency allow forcommensurate reductions in the interest rate thatneeds to be charged for cost recovery. CARDBank’s achievements in this regard are proof thatdramatic cost efficiency can be attained, evenwhen serving poor clients. All MFIs have aresponsibility to reduce costs in order to providetheir clients with the most affordable, demand-driven microfinance services possible.

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ROLES OF KEY SUPPORT INSTITUTIONS

Several types of support institutions can beconsidered to be vital in the development andgrowth of a microfinance industry. The roles ofa few support institutions, such as PCFC, havebeen addressed above, based on theirgovernment ownership or close ties with fundingagencies. Roles for other, key, stand-alonesupport institutions include the following.

Microfinance Networks

The three microfinance networks, incooperation with PCFC and other microfinancestakeholders, should continue to work towardintroducing a Standard Chart of Accounts andreporting among members. Other MFIs shoulddo the same. The efforts of PCFC related tospreading acceptance of established performancestandards for microfinance NGOs (standardizedaccounting practices, subjectivity to externalaudit, and standard presentation of financialswith an eye toward eventual ratings) arecommendable and should also be continued. Thenetworks should continue to play a role in linkingtheir members with PCFC funds and, wheneverpossible, with commercial bank credit.

With donor assistance, the MicrofinanceCouncil may also consider conducting theobjective assessment of various managementinformation systems described earlier as one ofits services for members. This is especiallyimportant because the bulk of members listedthese systems as their main constraint toexpanding their microfinance operations in asustainable manner.

Support Expansion of a Credit InformationBureau Including Microcredit

With increasing microcredit provision bymicrofinance NGOs, rural banks, andcooperatives, there is increasing need for a creditbureau that captures microcredit from theseactors. The credit bureau run by BAP wasrecently expanded to include microcredit

information and could expand to include agreater number and additional types of MFIs.An expanded private sector credit bureau couldplay an increasingly important role in stabilizingthe microcredit market in a few highlycompetitive areas and in discouraging clientover-indebtedness.

100 Instead of potentially

creating new credit information bureaus tosupport expansion of the microfinance industryin the Philippines, donor support to increase userfriendliness of this system and its accessibility ismerited.

Microfinance Training Centers

The training institution that has arguablyprovided the most specialized microfinancetraining on a regular basis is Punla. It has thepotential to serve as the one-stop shop that couldhelp the microfinance industry build thetechnical capacity it needs for furtherprofessionalization and commercialization. Itshould conduct market research to explore whatmanagerial and operational courses would bemost attractive to microfinance professionals atvarious levels within different types of institutionsand to determine their willingness to pay.

Punla should also build on its relationshipwith the CGAP to seek additional strategiclinkages with national, regional, or internationalnetworks, such as the Microfinance Council orthe Small Enterprise Education and PromotionNetwork based in Washington, D.C., to expandits course offerings based on market researchresults. Building local linkages with existing,smaller microfinance training programs, such asthose run by RBAP and CARD Bank, would beideal for developing microfinance trainingmodules in the Philippines.

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Opportunity International, Inc. (OII). 2002. Country Profile: Philippines. Available: http://www.opportunity.org.au/Philippines.htm. Sydney: OII.

Opportunity Microfinance Bank (OMB). 2002. Annual Report. Antipolo, Philippines: OMB.

Otero, M., and E. Rhyne (eds.) 1994. The New World of Microenterprise Finance: Building HealthyFinancial Institutions for the Poor. West Hartford, CT: Kumarian Press.

Philippines Deposit Insurance Company (PDIC). 2002. Philippine Banking System. Manila: PDIC.Available: http://www.pdic.gov.ph/bpmc/index.aspx.

Poyo, J., and R. Young. 1999. Commercialization of Microfinance: A Framework for Latin America.USAID Microenterprise Best Practices Project, Bethesda, MD: DevelopmentAlternatives, Inc.

Rhyne, Elisabeth. 1998. The Yin and Yang of Microfinance: Reaching the Poor and Sustainability.MicroBanking Bulletin No. 2, 6–8 July. Washington, D.C.: Consultative Group to Assistthe Poorest.

. 1999. MicroStart Philippines —Case Study for the Midterm Evaluation. MicroStart Philippines:Midterm Evaluation Report. New York: United Nations Capital Development Fund.Available: http://www.uncdf.org/sum/mcst/midterm/philippines.htm.

Stack, K., and D. Thys. 2000. A Business Model for Going Down Market: Combining VillageBanking and Credit Unions. MicroBanking Bulletin No. 5, September 2000. Ontario.

TSPI Development Corporation. 2002. TSPI News. January 2002. Makati, Philippines: TSPIDevelopment Corporation.

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United Nations Development Programme (UNDP). 2001. Human Development Indicators. NewYork: Oxford University Press.

Valenzuela, L., and R. Young. 1999. Consultation on Regulation and Supervision of Microfinance: AWorkshop Report. USAID Microenterprise Best Practices Project. Bethesda, MD:Development Alternatives, Inc.

VisionBank. 2002. VisionBank, Inc.: A Rural Bank. Catanduanes, Philippines: VisionBank.

Von Pischke, J.D. 1988. The Financial Systems Approach to Development Finance and Reflections on itsImplementation. Baltimore, MD: Johns Hopkins University Press.

Wehnert, U. 1999. Rural Bank of Panabo (RBP), Philippines (Case Study). Working Group on SavingsMobilization. Consultative Group to Assist the Poorest (CGAP). Eschborn: CGAP.

White, V., and A. Campion. 2002. Transformation: Journey from NGO to Regulated MFI. In TheCommercialization of Microfinance: Balancing Business and Development, edited by D. Drakeand E. Rhyne. Bloomfield, CT: Kumarian Press.

World Bank. 2000. Philippines Poverty Assessment, Volume 1: Main Report. 14 June 2000. Washington,D.C.: World Bank. (Draft).

. 2001. World Development Report 2000/2001: Attacking Poverty. Washington, D.C.: WorldBank.

. 2002a. Philippines Development Policy Review: An Opportunity for Renewed Poverty Reduction.Poverty Reduction and Economic Management Sector Unit, East Asia and PacificRegional Office. Report No. 23629-PH. Washington, D.C.: World Bank. February.

. 2002b. World Development Indicators Database. Available: http://www.worldbank.org/data/wdi2002/. April.

World Council of Credit Unions (WOCCU). 2002a. Philippines Program in Brief. WOCCU.Available: http://www.woccu.org/development/md_country.php?cid=13.

. 2002b. Mainstreaming Microfinance Practice: Basis, Principles, Methods, & Performanceof Cooperative Financial Institutions. Presentation by Lucy Ito at the World Bank FinanceForum 2002. June 19–21 2002, Chantilly, Virginia. Available: www.worldbank.org/wbi/banking/finsecpolicy/financeforum2002/ pdf/ito_mainstreamingmicrofinance.ppt

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ANNEX 1: SOCIAL INDICATORS

Item 1985 1990 Latest Year

Population IndicatorsTotal Population (million) 54.7 62.0 75.6 (2000)Annual Population Growth Rate (% change) 2.5 3.2 1.8 (2000)

Social IndicatorsTotal Fertility Rate (births per woman) 4.4 (1984) 4.1 (1993) 3.4 (2000)Maternal Mortality Rate

(no. per 100,000 live births) 213 (1980–1986) 36.8 35.3 (1998)Infant Mortality Rate

(below 1 year; per 1,000 live births) 45.3 36.8 35.3 (1998)Life Expectancy at Birth (years)

Female 64.9 68.8 71.0 (2000)Male 61.3 63.3 67.0 (2000)

Adult Literacy (% of people aged 15+) 83.3 (1980) 94.0 (1990) 94.0 (1994)Primary School Enrollment

(% of school-age population) 84.6 (1990–91) 89.2 (1995–96)Secondary School Enrollment

(% of school-age population)Female 65 75 (1996)Male 64 71 (1996)

Child Malnutrition (% of under age 5) 33 (1982) 34 32 (2000)

Population below Poverty Line (%) 49.3 45.3 (1991) 37.5 (1998)Income Ratio of Highest 20% to Lowest 20% 10 11 (1991) 13 (1997)

Population with Access to Safe Water (%) 71 81 81 (1998)Population with Access to Safe Sanitation (%) 68 70 74 (1998)

Public Education Expenditure as % of GDP 1.8 3.1 3.9 (1998)Public Health Expenditure as % of GDP 0.6 0.8 0.52 (1998)

Human Development Index 0.603 (1980) 0.677 (1992) 0.740 (2001)Human Development Ranking 92 100 70 (2001)

Note: 2001 data are from UNDP 2001, 2000 data from World Bank 2002b, and all other data from ADB 2000b.Blank entries mean no data available.Years in parentheses are those from which data were taken when not in the year indicated at the top of the column on their left.

Sources: ADB 2000b, p.25, UNDP 2001, and World Bank 2002b.

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ANNEX 2: ECONOMIC INDICATORS

Item 1996 1997 1998 1999

Income and GrowthGDP per Capita ($, current) 1,200.4 1,164.0 909.0 1,046.0GDP Growth (%, constant prices) 5.8 5.2 -0.5 3.2

Agriculture 3.8 2.9 -6.6 6.6Industry 6.4 6.1 -1.9 0.5Services 6.4 5.4 3.5 3.9

GNP Growth (%, in constant prices) 7.2 5.2 0.1 3.6

Savings and Investment (at current market prices, % of GNP)Gross Domestic Saving 18.5 19.6 22.3 19.8National Saving 23.0 24.9 20.4 18.8

Government Finance (% of GDP)Revenue 18.2 18.7 16.6 15.2Expenditure 17.9 18.6 18.3 18.8Overall Surplus/Deficit (-) 0.3 0.1 -1.8 -3.6

Balance of PaymentsMerchandise Trade Balance (% of GNP) -13.1 -13.0 0.0 5.4Current Account Balance (% of GNP) -4.6 -5.1 2.3 9.0Export ($) Growth (annual % change) 17.7 22.8 16.9 18.8Import ($) Growth (annual % change) 20.8 14.0 -18.8 4.1

Money and Inflation (Annual % Change)Broad Money (M3) 15.8 21.0 7.4 9.3Consumer Prices (1994 = 100) 9.1 5.9 9.8 6.6

External Payments IndicatorsInternational Reserves ($ billion, end of

period – months of imports) 11.7 8.8 10.8 15.1External Debt Service (% of goods and services) 12.7 11.6 12.7 13.1External Debt (% of GNP) 48.6 53.1 70.0 65.0

a

Memorandum ItemsGDP (current prices, P billion) 2,171.9 2,421.3 2,667.1 2,989.1GNP (current prices, P billion) 2,261.3 2,522.9 2,794.1 3,137.9

a As of April 2000.

Source: ADB 2000b, p.24.

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ANNEX 3: NATIONAL STRATEGY FOR MICROFINANCE

The Vision

The vision is to have a viable and sustainable private micro (financial) market, with the governmentproviding a supportive and appropriate policy environment and institutional framework to that market.

The Objective

The objective is to provide access to financial services to the majority of poor households andmicroenterprises by the year 2005.

This will be achieved in a liberalized and market-oriented economy where the private sector playsa major role and the government provides the enabling environment for the efficient functioning ofmarkets and the participation of the private sector.

Realizing the Vision and the Objective

The Policy Framework

The government’s microfinance policy is built on the following principles:

• Greater role of the private sector/MFIs in the provision of financial services;

• An enabling policy environment that will facilitate the increased participation of the privatesector in microfinance;

• Market-oriented financial and credit policies, e.g. market-oriented interest rates on loan anddeposits;

• Non-participation of government line agencies in implementation of credit/guarantee programs.

The government will pursue market-oriented financial and credit policies that create incentives forgreater private sector participation in the financial markets. It will avoid costly, unsustainable anddistorting credit subsidies that in the past failed to reach their intended beneficiaries, led to the weakeningof the rural banking system, and saddled the government with a huge fiscal burden.

A distinction is made between credit and welfare policy. In the past, there has been confusionbetween the need for welfare assistance by really poor households and legitimate credit demand bypoor households/microenterprises. Those needing welfare will be provided assistance through theappropriate government departments. Welfare will never be provided through concessional credit,loan quotas and other financially repressive measures and never through government or private financialinstitutions.

On the other hand, the credit demand by poor households/microenterprises will be met through avariety of innovative financial products provided by the private microfinancial market. The governmentwill be ready to provide assistance to build the institutional capacity of microfinance institutions and

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the appropriate supervisory and regulatory framework to make markets more efficient and institutions,more viable.

The Institutional Framework

The respective roles of various players in microfinance are determined by the policy frameworkand their relative comparative advantages in providing financial services to the poor. Thus, theirrespective roles are as follows:

• Microfinance Institutions (MFIs): to engage in sound, sustainable and viable microfinanceintermediation;

• National Government through the National Credit Council: to provide a market-oriented financialand credit policy environment which will promote efficient financial markets, and help privatemicrofinance institutions broaden and deepen their microfinancial services;

• National Credit Council (NCC): as microfinance policy making body, to ensure such policyenvironment;

• People’s Credit and Finance Corporation (PCFC): as the government credit corporation focusedon poor households and microenterpises, to provide wholesale (loanable funds) and technicalassistance to the MFIs and support the development of innovative financial products/servicesfor poor households/microenterprises;

• Government financial institutions: to provide wholesale funds (including those sourced fromforeign borrowings) to MFIs which do not have access to wholesale loans from private commercialbanks;

• Commercial and other private banks: to provide wholesale funds and financial services to MFIs;

• NGOs: to provide technical assistance in facilitating the linkage between the poor households/microenterprises and microfinance institutions, community organizations and capacity buildingof the target clientele;

• Donors: to provide assistance to social preparation activities, and those that will lead to thebroadening and deepening of microfinancial services such as: development of microfinanceproducts, training in microfinance technologies, and upgrading of performance standards,operating systems and procedures. Donors will be encouraged to provide assistance in thoseareas that have been clearly identified from a consultation process with the NCC and microfinanceinstitutions.

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The Strategies to be Pursued

To realize the objective of providing poor households/microenterprises greater access tomicrofinancial services, the following strategies will be pursued:

• Provision of a policy environment that is conducive to the effective and efficient functioning ofthe financial market. This will be carried out by doing the following:

- Implementing a market-oriented interest rate policy in microfinancial intermediation (bothon the savings and lending side).

- Pursuing financial policy reforms with the end in view of removing existing distortions inthe financial market, e.g., loan quotas, earmarking of public funds for direct lending, etc.

- Rationalizing all existing government credit and guarantee programs toward the objectivesof implementing microfinance programs in a market-oriented setting and encouraging greaterprivate sector participation in the delivery of microfinance services.

- Establishment of a market-oriented financial and credit policy environment which isconducive for the broadening and deepening of microfinancial services. Broadening anddeepening mean the development of new product lines and services, the design andimplementation of new microfinance technologies and practices which will result to increasedmicrofinance intermediation between the target clientele and MFIs.

This will be accomplished through the following:

• Provision of appropriate supervisory and regulatory framework for MFIs which will enablethem to engage in the development of new and innovative product lines and services appropriateto the demand for financial services/products by poor households and microenterprises;

• Establishment of standards of performance and business practices to guide the operations ofMFIs;

• Promotion of broad-based savings mobilization, linkage banking technology and othermicrofinance technologies;

• Provision of information and training on best practices in microfinance to MFIs.

Implementation of a capacity-building program for MFIs. The program will be implementedthrough the following:

• Provision of technical assistance to MFIs. The following areas of capacity building will be givenemphasis in the provision of technical assistance: (1) local deposit mobilization, (2) financial andproject management, (3) use of information technology, (4) development and establishment ofmicrofinance technology, innovative product/service lines.

• Documentation, packaging and dissemination to MFIs of practitioner-based training and technicalservices. This will be done through the PCFC.

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• Encouraging research and academic institutions to conduct studies, convene policy leveldiscussions that will promote awareness of microfinance as a sound commercial investment.These institutions will identify best practices in microfinance, develop and install training andmicrofinance technology packages.

*��0 + �� '��'��335�

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ENDNOTES

1This country study adopts the Asian Development Bank’s definition of microfinance providedin its Microfinance Development Strategy: “Microfinance is the provision of a broad rangeof financial services such as deposits, loans, payments, services, money transfers, and insuranceto the poor and low-income households and their microenterprises” (ADB 2000a, p.25).Microcredit in the context of the Philippines generally refers to loans up to P150,000 (about$3,000) (as defined in Section 3 of the Magna Carta for Small Enterprises [Republic Act No.6977, as amended by Republic Act No. 8289]), although the industry’s average microloan ismuch lower, averaging around P5,000 ($100) in 2002.

2The financial systems approach to microfinance considers microfinance as part of a country’sgeneral financial services market, focuses on the development of sustainable (subsidy-free)financial institutions, and recognizes that microfinance clients are willing to pay the full costof these services, if they are designed and delivered consistent with their specific needs (VonPischke 1988; Otero and Rhyne 1994).

3An MFI is defined herein as a single organization (for example, a nongovernment orgovernment organization providing microfinance) or a unit whose primary business ismicrofinance within a diversified institution (for example, a microfinance unit within acommercial bank).

4Microfinance client group meetings were held in several chartered cities and peri-urban areasof five major provinces of the Philippines. From north to south, the provinces visited wereTarlac, San Pablo, Negros Occidental, Cagayan de Oro, and Bukidnon.

5Similar to Christen’s (2000, p.5) use of the term, mission drift in this study refers to the shift inMFI focus from targeting microfinance services to the poor or poorest to relatively higher-income clients.

6Almario 2002, p.3.

7“Formal institutions are defined as those that are subject not only to general laws and regulations,but also to banking regulation and supervision. Semiformal institutions, are those that are formalin the sense of being registered entities subject to all relevant general laws, includingcommercial laws, but informal insofar as they are, with few exceptions, not under bankingregulation and supervision. Informal providers (generally not referred to as institutions), arethose to which neither special banking law nor general commercial law applies, and whoseoperations are such that disputes arising from contact with them often cannot be settled byrecourse to the legal system” (Ledgerwood 1999, p.12–13).

8Internationale Projekt Consult GmbH 2002.

9Fleisig 1996, p.45; Lyman 2000, p.39–41.

10McGuire, Conroy, and Thapa 1998, p.231.

11UNDP 2001.

12Bangko Sentral ng Pilipinas 2002a.

13World Bank 2002a, p.2–3.

14World Bank 2001, p.1. GNI (formerly referred to as GNP) is used here as a basis for calculatingper capita income because it measures the income generated by a nation’s residents frominternational and domestic activity. In the context of the Philippines, GNI is preferred to GDP,which only includes income generated from domestic activity of residents (and nonresidents) of

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the country. Overseas workers’ dollar remittances comprise a large portion of the country’s GNI(amounting to $6.3 billion in 2001) and account for the generally half a percentage point differencebetween GDP and GNI (BSP 2002b).

15According to World Bank (2002b) estimates.

16The Family Income and Expenditure Survey 2000 estimates of inflation-adjusted averagefamily income indicate a decrease of 3.9% over the same period. The preliminary officialpoverty estimates using income-based poverty lines (used by the Government) indicate asomewhat larger increase in poverty incidence, from 36.8% of the population in 1997 to40.0% in 2000. Family incomes declined in 10 of the 16 regions of the country (World Bank2002a, p.4).

17World Bank 2000, p.v.

18Mundlak, Larson, and Benzer 2002, p.33.

19World Bank 2001, p.1

20World Bank 2000, p.ii.

21Ibid., p.iii.

22The number of banks as of end-September 2001, which had a total number of 6,644 branches(BSP 2001c, p.61).

23BSP 2001c, p.1.

24World Bank 2002a, p.33.

25BSP 2002a.

26As of 1997 according to ADB 2001, p.3.

27There are six types of cooperatives in the Philippines: (1) credit cooperatives, (2) consumercooperatives, (3) producers’ cooperatives, (4) marketing cooperatives, (5) service cooperatives,and (6) multipurpose cooperatives. As of September 2000, there were 56,557 cooperativesregistered with the CDA. Considerabley fewer are active, but no reliable estimate is availablebecause not all cooperatives submit annual reports to CDA, despite the requirement toprovide such reports and financial data to CDA (Cosio and Kanda 2000).

28Llanto 1997, p.2.

295–6ers earned their name because people who borrow from them have to pay back P6 forevery P5 borrowed.

30For more than a century, Indians in the Philippines have been the source of cash to launchmicroenterprises. Most of these Indian moneylenders are referred to locally as “Mumbai,”the Hindi name of Bombay.

31ADB 2001, p.1.

32Based on estimates included in Microfinance Council of the Philippines 2002b, p.5; Llanto2000, p.253; and Lamberte 2001, p.1.

33The percentage of those in the lowest 40% income strata having a business (70.4%) washigher than that in the highest 60% income strata (54.5%) (National Statistics Office 1999).

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34Lamberte 2001, p. 17.

35Agabin and Daly 1996, p.II–6.

36Lamberte 2000, p.5.

37The level was initially pegged at P1 million, with benefits declining for rural banks with netassets of P1 to P3 million.


39Ibid. p.16.

40 Ibid. 2000, p.16.

41McGuire, Conroy, and Thapa 1998, p.238.

42Llanto 2000, Council of the Philippines 2002b, p.6.

43The portfolio-at-risk percentage included here follows the Microfinance Council standardsfor reporting. It is the outstanding balance of all loans overdue longer than 30 days dividedby the total loan portfolio (as opposed to the longer-than-90-days overdue criterion for pastdues reflected in Table 2.6, following the MBB reporting format).

44Operational self-sufficiency (OSS) = operating revenue/(loan loss provision expense +operating expense + financial expense). OSS measures how well an MFI can cover its coststhrough operating revenues.

45Financial self-sufficiency (FSS) = adjusted operating revenue/(loan loss provision expense +financial expense + adjusted operating expense ). FSS measures how well an MFI can coverits costs taking into account a number of adjustments to operating revenues and expenses forsubsidies, inflation, and nonperforming loans.

46Gallardo 2001, p.19.

47Microfinance Council of the Philippines 2002a, p.13.

48Campion and White 1999, p.83.

49ADB 2002a, p.8.

50OMB 2002, p.3.

51A similar arrangement with BancoSol in Bolivia failed to offer adequate incentive for itsfounding NGO, PRODEM, to turn over its most profitable branches over time.

52Opportunity International, Inc. 2002.

53VisionBank 2002.

54Reference for this section is the Business Section, Philippine Star newspaper, 8 May 2002.

55Almario 2002, p.1.

56Conroy 2002, p.21.


58A survey conducted by the CPIP of NCC reported that in 1997, there were 86 directed creditprograms implemented by 21 executing agencies. Nonfinancial agencies of the Governmentimplemented 37 programs while government financial institutions handled 31 programs.

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Government nonbank financial institutions and state-owned corporations handled the otherprograms (Llanto 2000, p.260).

59Gomez, Fitzgerald, and Vogel. 2000, p.29.

60While branches require initial capitalization of P2.5 million, the rural banks (and cooperativerural banks) themselves require unimpaired capital accounts of at least P10 million ($201,000)in order to establish a branch or loan collection and disbursement point.

61BSP 2001b.

62Almario 2002, p.2–3.

63Llanto 2000, p.260.

64Conroy 2001a, p.21.

65Does not include those clients reached through a partner organization’s use of other sourcesof funds.

66Goodwin-Groen 1998.

67Ibid.

68Ibid, p.27.


70Ibid.

71Wehnert 1999, p.11.

72Ibid.

73Ibid.

74COOP stands for Compliance to administrative and legal requirements, Organizationalstructure, Operation and management, and Plans and programs.

75PESOS is the acronym for Portfolio quality, Efficiency, Stability, Operations, and Structureof assets

76Microfinance Council of the Philippines 2002a.

77The lack of “well supported hardware, software, and development tools” was cited as themain constraint in this regard (Microfinance Council of the Philippines 2002a, p.15).

78Ibid.


80Lamberte 2001, p.8-9.


81Microfinance Council of the Philippines 2002a, p.5.

83In accordance with the terms of the $35 million ADB-International Fund for AgriculturalDevelopment loan agreement, which has funded much of PCFC’s activities since 1995.

84However, PCFC has recently added a credit line to address the funding needs of ASAreplicators.

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85Rhyne 1999.

86Stack and Thys 2000, p.12.

87WOCCU 2002b.

88ADB 2002c, p.16.

89Christen and Drake 2002, p.14.

90Bass and Henderson 2000, p.10.

91BSP 2001c, p.28.


93Brown 2000, p.3.

94Chua 2002, p.14.

95Almario 2002, p.4-5.

96The Executive Committee of the NCC approved the regulatory framework for microfinanceon 9 July 2002 (Almario 2002, p.5-6).

97Ibid.

98The CAMEL rating system is a supervisory tool for evaluating the soundness of financialinstitutions on a uniform basis and for identifying those institutions requiring special supervisoryattention or concern. Under the CAMEL rating system, a bank is assigned ratings based onperformance in five areas: the adequacy of Capital, the quality of Assets, the capability ofManagement, the quality and level of Earnings and the adequacy of Liquidity.

99As suggested by Wehnert 1999, p.26.

100Campion and Valenzuela 2002, p.269.

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