Money Talk: Microfinance for Microenterprises

Mr. Eduardo C. JimenezMicrofinance Consultant

Bangko Sentral ng Pilipinas

Business World Entrepreneurs ForumAugust 25, 2006 - Century Park Sheraton, Manila

Outline of Presentation Microenterprises in the Philippines Definition/ Background Information of

Microfinance Myths, Misconceptions and Barriers to

Microfinance Development Principles and Success Factors of Microfinance Best Practices and Leading Methodologies Institutions that Provide Microfinance BSP Initiatives For Microfinance

Importance of Micro-enterprises in the Philippines Small and medium enterprises (SMEs) comprise

99.6% of all registered business in the Philippines and employ 70% of the workforce

Of total, micro-enterprises account for 743,949 (97.1%), small enterprises 61,759 (7.6%), medium enterprises 2, 923 (.4%), and large enterprises only 2,958 (0.3%).

Micro/ cottage enterprises make up about 91% of total establishments surveyed by the National Statistics Office

Invigorating MICROENTERPRISES through

access to MICROFINANCE can lead to

economic growth and development on the

local and national level.

What is Microfinance?It is a provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance products to the poor and low income households and their microenterprises

Important Features of the Definition

It is not just credit It has a target market - the poor and low

income households It is linked to the microenterprise

What Microfinance is NOT

Subsidized Credit Dole-out Consumption/ Salary Loan Cure-all for poverty

Who are the Clients?

Near Poor

E-poor

Laboring

Ultra Poor

Features of Microfinance Loans

Fit for those who can not access “traditional” sources of financing

Innovative Product Designs Use of collateral substitutes Short term loans Frequent amortizations Inclusion of savings Enterprise lending Simple Documentation Requirements

Benefits of Microfinance for Microenterprises Increase economic activity and income Generate employment Save and invest in the future Guard against emergencies and shocks Better invest in health, nutrition and

education

Myths, Misconceptions and Barriers Poor people can not pay market interest

rates and can not save Microfinance institutions are primarily

civic-oriented, non-profit organizations that can not be sustainable and viable

Microfinance institutions can not access commercial funds

High transaction costs of serving the poor Regulatory barriers Implementation of government directed

credit programs Poor are intimidated by formal institutions Lack of infrastructure and physical access to

formal institutions

Myths, Misconceptions and Barriers

New Paradigm of Microfinance

From beneficiaries to clients From directed credit to market approach From evolving programs to evolving

institutions From donor dependence to financially self

sufficient institutions with access to commercial funding

Key Success Factors for Microfinance – 4 “C”s Clearly identified market Capable and committed staff Creative methodologies and technologies Commitment to standards and best

practices

Best Practices for Microfinance

Appropriate Products for Clients (flexible, accessible, simple in process and documentation, appropriately priced, and permanent)

Appropriate Delivery Clear Organizational/ Institutional Structure

(Governance) Adequate Risk Management (Use of Portfolio-

at-Risk, Zero Tolerance for Delinquency) Subscription to Performance Standards

Leading Microfinance Methodologies

Group Methodology - Microfinance services are provided in the context of a group.

Some Examples of Group Methodolgy Grameen Methodology

7-8 groups of 5 women forming 1 centerDisbursement and collection through centerLoans are provided on a rotation basis (2-2-1)Collateral substitute (i.e. JSS, peer

support/pressure)

ASA (Association for Social Advancement)

7-8 groups of 5 women forming 1 centerDisbursement and collection through centerSimultaneous disbursement of loansCollateral substitute (i.e. peer

support/pressure)

Leading Microfinance Methodologies

Individual Methodology - single client lending where repayment and schedules rely solely on the individual (cash-flow, character based lending)

Some Examples of Individual Methodology MABS approach (Microenterprise Access

to Banking Service)USAID funded technical assistance to rural

banks that want to engage in microfinance Individual loans are granted based on the

character and household cashflowCulture of zero tolerance for delinquency

Banks (Rural, Thrift, Some Commercial NGOs Cooperatives

Where Can I Access Microfinance?

BSP Initiatives

Anchored on the General Banking Law of 2000, Sections 40, 43 and 44

Recognizes the peculiar characteristics of microfinance in the requirements, terms and amortization of loans and other credit accommodations.

Three-Pronged Approach

Microfinance “Friendly” Policy and Regulatory Environment

Training and Capacity Building within BSP and banking sector

Promotion and Advocacy

Policy and Regulatory Environment

Issuance of 13 Circulars governing the practice of microfinance in the banking sector – provides incentives like rediscounting, recognize microfinance loans (no collateral, loan documentations, etc), allow for branching, promote best practices

Modification of Manual of Examination to include microfinance operations

Member of the Technical Working Group that established the regulatory framework and performance standards for all types of MFIs

Ways How a Bank can Engage in Microfinance Establishment of a microfinance-oriented

bank Establishment of a microfinance-oriented

branch Establishment of a microfinance unit within

an existing bank

Training And Capacity Building

Creation of a Microfinance Committee and Microfinance Unit

Establishment of a Core Group of BSP Microfinance Examiners

Inclusion of microfinance in the Basic Rural and Thrift Banking Courses

Conduct of training for banks on microfinance best practices

Promotion And Advocacy

Regional tour to promote microfinance best practices to practitioners and potential players

BSP as Chair of the Philippine Celebration of the UN International Year of Microcredit

Microentrepreneur of the Year Awards

Banking Sector Exposure to Microfinance As of March 31, 2006 (in millions)

Micro Loans Portfolio No. of

Amount BorrowersMicrofinance-oriented Banks:

Thrift Banks (5 banks) 212.400 50,187Rural Banks (4 banks) 230.992 34,984

Traditional Banks:

Thrift Banks (9 banks) 144.666 Rural Banks (159 banks) 2,373.291 410,110

Cooperative Banks (27 banks) 696.803 97,899

Total (204 banks) 3,658.052 593.180

Thank you.

http://www.bsp.gov.ph/about/advocacies_micro.asp

Microfinance Unit – (02) 523-6130