experience microentrepreneurship

1. 6.02.2013 | A CLOSER LOOK AT THE MICROFINANCE MARKET IN THE
PHILIPPINES
A closer look at the microfinance market in the Philippines
An interview with Jocelyn Gigantone, Investment Analyst for Asia, based in Symbiotics'
Singapore offices
Jocelyn, you have recently been to the Philippines. Can you briefly describe the microfinance
landscape there?
The Philippines' microfinance sector continues to be highly fragmented although if it is looked at it
purely from the perspective of financial inclusion, we can see that a lot of progress has been made.
On one hand, you can find the rural banks run by wealthy families and catering mostly to the salaried
part of the population. On the other hand, you have a network of NGOs catering to the lower income
population group. One can also find many small cooperatives scattered across the rural areas. In
addition to these players, private lending companies and individual moneylenders also proliferate.
Compared to other microfinance markets which have been mainly reliant on foreign funding, the
Philippines' microfinance players have been mainly funding their growth through deposits (this is
especially the case for rural banks where the deposits-to-loan ratio is high) or borrowings from
public financial institutions such as People's Credit Finance Corporation (PCFC), Small Business
Corporation (SBC), National livelihood Development Corporation (NLDC) or civil society
organizations such as the Foundation for a Sustainable Society (FSSI), etc. Putting all other issues
aside, the presence of these local funders has been the main reasons why the Philippines has been
very difficult for foreign investors to penetrate, despite being one of the biggest markets for
microfinance. However, the drive for growth, increasing competition, and calls for increased
professionalization of the sector have pushed some of the players to become open to offshore
funding recently.
The Economist Intelligence Unit has ranked the Philippines among the best regulated
microfinance market for several years in its annual review of the state of the sector. What
makes the success of this legal framework?
Over the years, the Bangko Sentral ng Pilipinas (BSP) or the central bank, has ensured that an
enabling environment exists for those microfinance players that fall within the loop of their regulation,
notably the rural banking sector. This has been accomplished by having a clear definition of
microfinance, laying down clear prudential ratios to maintain, promoting wider outreach by allowing
them to establish microbanking offices (MBOs) in areas where microfinance banking services are
not yet available. Headway has also been made early this year when the Senate passed the law
allowing foreign entities to own up to 60% equity stakes in rural banks. While the rural banks greatly
benefit from this regulatory environment, NGOs which fall under the purview of the Securities and
Exchange Commission (SEC) and Cooperatives which fall under the supervision of the Cooperative
Development Authority (CDA) remain largely un-regulated. The BSP lacks authority over NGOs and
Cooperatives while both the SEC and the CDA lack the capacity to fully regulate these two entities.
Does this mean that there is a two-speed microfinance system?
This naturally leads to a dichotomy in the microfinance sector. On one hand you have a well-
regulated rural banking sector and on the other hand, you have the unregulated players, mainly
large NGOs. The NGOs, while serving a relatively poorer segment of the population are not

2. regulated and supervised therefore not allowing them to develop soundly. This results in poor
financial and operational management capacities. Notably, no legal framework was provided so far
to enable such institutions to transform into privately-owned companies and, while a few large NGOs
have managed to establish their own rural banking arm, most NGOs are constrained to grow as
pressures on leverage and capital adequacy arise.
Is there any disparity among provinces when it comes to the delivery of microfinance
services?
The Philippines is an archipelagic country and while rural banking has been mainly confined to
certain regions and provinces, some big NGOs have managed to pull up a nationwide presence. In
some cases, this has resulted in a higher incidence of multiple borrowings, otherwise known as
credit pollution in certain areas, especially highly-urbanized cities e.g. Cebu, Iloilo, etc. where many
players are present. Competition in Northern Mindanao is also increasing. In general, many players
still see some patches, especially outside town centers, where there is still a potential for growth and
to achieve wider financial inclusion.
What are the operational challenges faced by the MFIs in the Philippines?
The Philippines' geographical location makes it prone to natural disasters such as typhoons,
earthquakes, landslides, floods, etc., creating some inherent risks for the microfinance sector. This is
reflected in the high PAR of the microfinance players which on average reaches way above the 5%
PAR30 international benchmark. Also, efficiency is a concern and is aggravated by the archipelagic
geographical distribution which creates a toll on the operating expenses of the institutions especially
those with a nationwide operation. The former calls for a more rigorous risk management approach
while he latter calls for wider use of technological innovations to help shave off costs e.g. mobile
banking, etc.
What would be required for a sound development of microfinance in the country and what
products do you think are still missing today?
I think in terms of products and services, the Philippines microfinance players offer one of the widest
ranges, especially NGOs, compared to other counties in the region. The Philippines is one of the
few countries where the micro insurance outreach has really gained momentum, whether it be
through the mutual-benefit associations or partnerships with third-party agents. Enterprise skills
enhancement, training and business development services have also been at the forefront of many
of the large NGOs activities. There is a high level of innovation being made by most of the big
players who are offering mobile banking, remittances and a wide range of other services.
Notwithstanding this, some inflexibility in the business model remain especially for those players
that are still heavily into group lending. I believe that would definitely be needed across the local
microfinance industry is for the credit bureau Microfinance Data Sharing System (MiDAS) to
materialize and the professionalization of the governance structure in general. The former would
calm fears of rising client over-indebtedness in some areas while the latter would generate investor
confidence especially now that rural banking equity has been opened to foreign participation.
Increasing efficiency and maintaining a fairly decent portfolio quality within the framework of the
natural operational constraints due to the archipelagic nature of the country and inherent risks (being
prone and susceptible to natural disasters) of the country will continue to be a challenge.
Can you tell us about a small business or micro entrepreneur that you met during your last
field visit that exemplifies the Philippines situation today?

3. During one of my more recent field visits, I met a client who produces and sells earthenware pottery
used for home and yard decoration. She obtained a loan from an NGO for around USD 300 and
another loan for the same amount from a rural bank - both loans were availed under a group
arrangement. The client would have preferred to obtain an individual loan and to borrow the
combined amount from just one institution. Judging by the client's cash flow and the income stream
from her business, it was largely within her capacity to obtain a loan of this size. For me, this is a
classic example of the inflexibility that unfortunately still pervades amongst some of the microfinance
players in the Philippines today - sticking to the group arrangement and being constrained by their
self-imposed standard loan limits
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