Microfinance in PHL at crossroads

FIVE years ago, the Economist Intelligence Unit (EIU) Ltd. ranked the country’s microfinance industry as first in the world. The EIU also included the Philippines as among the top 10 countries in terms of overall business environment for microfinance.

In Photo: Bureau of Small and Medium Enterprise Development Director Jerry Clavesillas facilitates the Microfinance Roundtable Discussion held at the Oxford Suites Makati. Alysa Salen

The EIU credits such lofty place to the development and growth of the Philippines’s policy and regulatory framework with the implementation of the National Strategy for Microfinance (NSM) in 1997.

The NSM has identified the principles that guide the policy formulation for regulation of the Philippines’s microfinance industry. These principles include an enabling policy environment that facilitates the increased participation of the private sector, market-oriented credit policies, nonparticipation of government line agencies in the implementation of credit and guarantee programs, and promoting the role of the private sector or microfinance institutions (MFIs) in the provision of financial services.

Consistency

The country’s microfinance industry has consistently showed growth every year. According to the Microfinance Council of the Philippines Inc. (MCPI), microfinance non-governmental organizations (MNGOs) recorded two years ago a total of 3.034 million active borrowers. Of this figure, banks listed 1.23 million, while cooperatives had 2.459 million borrowers.

These numbers reflect a complete reversal four years prior. According to a 2012 data by the Asian Development Bank (ADB), of the total 2.478 million in 2011, banks had 1.031 million shares, while cooperatives reached only 90,000.

Facilitators, speakers and attendees pose for a group photo after the the Microfinance Roundtable Discussion held at the Oxford Suites Makati.

That year MNGOs recorded P12.701-billion total loans outstanding, P7.207 billion of which was lodged at banks, while cooperatives reported P697 million. By 2015, a loans portfolio of P19.8 billion was recorded for MNGOs, P11.4 billion of which was lodged at banks. No estimates have been made for the cooperatives sector.

“[The] cooperatives [sector] is quite tricky,” MCPI Executive Director Robert Allan Sicat said in a forum last month. “We don’t have the exact number of borrowers and total loans outstanding of cooperatives engaged in microfinance, because they don’t monitor their microfinance portfolio. But many of our cooperatives have small savings and loans that we may consider as microfinance.”

According to Sicat, there are 33,000 cooperatives in the country, nearly half of the total 66,000 recorded a decade ago. He added that 14,700 cooperatives have some sort of small savings and loans operation, with active borrowers of 2.5 million.

Sicat has noted that credit products have also expanded.

Currently, agriculture microfinance and value-chain microfinance products and services are being offered to Filipinos in rural areas. Microfinance in renewable energy, housing, and water and sanitation projects are also being implemented.

“In terms of products and services of existing microfinance loans, some of our members have already engaged in agriculture and value-chain financing,” Sicat said.

Hurdles

A study conducted by Raymund B. Habaradas and Mar Andriel Umali in 2013 pointed out that in spite of the gains of the Philippine microfinance industry, challenges remained.

Titled “The Microfinance Industry in the Philippines: Striving for Financial Inclusion in the Midst of Growth,” the study said the industry still faced three major hurdles.

These are credit access; usage and quality of microfinance products; and the impact on the borrower or consumers welfare after using the microfinance products.

Credit access means the availability of financial products from formal institutions, while usage pertains to the levels of use of different financial services. The authors defined quality as the experience of the consumer, demonstrated in attitudes toward microfinance products that are available to them. Welfare means the impact of a financial product or service on the lives of consumers.

“We are always hearing about there’s so much money [in the country], but seems like the issue is always accessibility. And our MSMEs [micro, small and medium enterprises] are also lacking in terms of, can we really borrow money if we are just starting, or is it money that we can access when we are just expanding, or can we really access funds?” Trade Undersecretary Zenaida Maglaya said in the same forum organized by the Benita and Catalino Yap Foundation Inc. (BCYF).

According to the Bangko Sentral ng Pilipinas (BSP), 591 out of 1,634 cities and municipalities in 2016 still remain unbanked. Usage of microfinance products and services under a level of informality still ranks high, BSP data showed. About 68 percent of those who have savings save at home, while 72 percent still borrow from informal sources.

The BSP further added that an estimated P170 billion is still present in terms of unmet demand for SME loans. The Central Bank data showed that 50.2 percent of MSMEs do not save and 49.5 percent still do not tap lending facilities.

“The goal really for us is to be able to empower the excluded segments, which involve the underserved and unserved sectors, including MSMEs,” BSP Bank Officer Jenny Romero said.

According to Jerry T. Clavesillas, the current challenge still being faced by the microfinance industry is in terms of the costing and the tedious process of getting loans from MFIs.

Clavesillas, director of the Bureau of Small and Medium Enterprises Development of the DTI, explained that documentary requirements should be lessened and processes should be streamlined.

“The reason we are actively participating in partnerships with private organizations and foundations is that the government on its own cannot do all the things required by our constituents,” Clavesillas said. “We’ll be stronger with the private-sector partners. They are the ones willing to give us the client-satisfaction feedback. That is the reason they are very important.”

Redefinition

THE discussion by stakeholders at the BCYF-led forum has led participants to recommend that government review and revise the definition of the classification of MSMEs in the country.

In addition, the industry stakeholders are proposing the formulation of the implementing rules and regulations for the Magna Carta of MSMEs.

Under the current Magna Carta, microenterprises are classified as businesses with an asset amounting to P3 million and below, while small businesses have an asset base of P3 million to P15 billion. The charter defines medium enterprises, meanwhile, as having P15 million to P100 million in terms of assets.

CARD SME Bank Inc. Vice Chairman Mary Jane A. Perreras is proposing that a ceiling on the cap on asset amount for MSMEs should also be reviewed.

Perreras said a P1-million ceiling will be stable for micro businesses instead of the P3 million, which is deemed high.

“That is why we have an initiative at the Chamber of Thrift Banks [CTB] to actually request the redefinition of MSME, because when you say micro, a P3-million asset, they do not have that yet,” Pererras said. “For small enterprises, a P15-million asset [is absent or not easy to raise], especially within the rural areas.”

She added the definition of MSMEs has “a lot of implications because the regulation on compliance of MSME, we cannot comply because our small enterprises are still micro in the eyes of BSP.”

In 2014 MSMEs comprised 99.6 percent of all Philippine businesses, generated 62.8 percent of all jobs in the Philippines and contributed an estimated 35 percent to the country’s GDP.

Perreras said their bank pays penalties to the BSP often because “there’s a mismatch in the definition of the enterprises.”

“The business that we have lent money to may be deemed by the BSP as micro but, as for us, it may fall under small enterprise already.”

Regulations

On November 3, 2015, President Benigno S. Aquino III signed into law the Microfinance NGOs Act or Republic Act (RA) 10693, which underscores the implementing rules and regulations (IRR) for the microfinance industry. The rules include accreditation of MNGOs by the Microfinance NGOs Regulatory Council (MNRC).

Under RA 10693, an accredited MNGO is eligible for preferential tax treatment of 2 percent tax based on their respective gross receipts from microfinance operations. The law defines microfinance as the viable and sustainable provision of a broad range of financial services to poor and low-income individuals engaged in livelihood and microenterprise activities.

RA 10693 also mandates that MNGOs are required to maintain a compensating balance, defined as the proportion of the total loan of a microfinance client, which is retained with the microfinance institution as capital buildup, or microsavings.

Under the law accredited MNGOs will have access to government programs and projects as well as any form of technical assistance from the government, donors and support organizations.

Initiatives

THE Pondo sa Pagbabago at Pag-asenso (P3, fund for change and progress) provides microenterprises with an alternative source of financing that is easy to access and at a reasonable cost. It aims to boosts the development of entrepreneurship and the MSME sector, particularly the microenterprises.

“Our current initiative, as far as microfinance is considered, especially now with the flagship program of the current administration which is called the P3,” Clavesillas said.

The program was pilot-tested in three areas in the country, namely Mindoro, Leyte and Sarangani, which is among the country’s poorest provinces. Under the 2017 General Appropriations Act (GAA), a budget of P1 billion was earmarked for the facilitation of the P3 program.

The P3 program stemmed from the pronouncement of President Duterte to replace the “5-6” money-lending system and provide an affordable microfinancing program for the country’s MSMEs. It was designed to bring down interest rates of microfinance services and products to cater to microentrepreneurs or enterprises.

The 2017 GAA has included an initial funding of P1 billion for financial assistance for micro and small businesses in the next five years. Such funding is part of the planned P19-billion financing initiative.

“The government is now allocating a substantial amount of P1 billion for lending to our microenterprises,” Clavesillas said. “In fact, the World Bank has been telling us before, why don’t we focus on the guaranty system and then let the banks go on their own.”

According to the DTI, the program’s fund will be lent out in the business centers of the poorest provinces where the participating MFIs and the Small Business Corp. (SB Corp.) can operate. SB Corp. is an attached agency of the DTI tasked to administer the P3 program.
Priority beneficiaries include microenterprises and entrepreneurs that do not have easy access to credit, or are accessing credit at very high cost, such as micro-entrepreneurs, market vendors, agri-businessmen and members of cooperatives, industry associations and co-operators.

Loanable amount per end-borrower under the P3 program can range from P5,000 for start-ups to P300,000, with maximum interest rate of 26 percent per annum with no collateral requirement. This rate is significantly below the 20 percent per day charged by “5-6” lenders. It is also lower than what is charged by most MFIs.

It allocates P100 million for direct lending by SB Corp., while the minimum loan amount will be P300,000 with interest rate capped at 10 percent per annum with or without collateral cover.

SB Corp.’s goal for this year is to achieve P1.016 billion in wholesale regular loans for microenterprises. The P3 program only requires four documentary requirements from the MFIs, with P1.8-billion capitalization and gains of P2.5 billion, to further encourage entrepreneurship.

“The direction now of the current administration is to give direction to these MSME or microenterprises, so that is going to be delivered by the government,” Clavesillas said. “But there are limitations to the government since we are always confined to rules and regulations.”

Clavesillas noted the role of the private sector and its partnership with the government.

“We can use our strengths together.”

In response, BCYF Chairman Tony Yap said his group is “focused on the idea that social development must be part of economic development”.

“Once you do that, we have to talk about microentrepreneurs.”

STA

ANOTHER initiative of the current administration is the enactment of the Secured Transactions Act (STA). The STA proposes for moveable assets, instead of traditional assets like real estate or property, to be part of the collateral MSMEs use.

This bill is actually a priority bill for the 17th Congress, according to International Finance Corp. Financial Sector Specialist Gay Santos. He added the bill is being sponsored by Senators Bam Aquino and Francis G. Escudero.

“The rationale behind this reform is actually because we have a dead law,” Santos added. “And the existing law already provides for existing moveable assets to be used as collateral, but begs the question why is there no confidence among banks to expand their portfolios to MSMEs.”

Under Senate Bill 354, MSME financing is still considered unattractive given the perceived risks, without traditional collateral such as land and other real property. And the business owners assets being personal in nature, making it difficult for MSMEs to meet bank requirements to get loan approvals.

“To make the secured transaction reform a very comprehensive reform, we have to take into account first establishing a strong legal and institutional framework,” Santos said. “We are trying to do [that] now through the bill, that is, for the legislators and the government to have a sustained political will to see this reform through.”

The STA seeks to enable financial institutions to rethink how they view collateral and reduce the perceived risks, by providing protection for framework to govern lending transactions that involve the use of personal property as collateral.

It also pushes for the review of the design, establishment, and operation of a unified, centralized, online notice-based national collateral registry to assure banks that the collateral being submitted has not already been utilized for another loan.

“The finance institutions have to shift their mindsets and increase their confidence in terms of lending based on moveable assets,” Santos added. “Lastly we are taking that parallel effort to educate every Filipino about good financial management. The ultimate goal for this comprehensive reform is really to achieve financial independence or financial interdependence to families and friends when it comes to borrowing.”

“I think in terms of recourse at the end of the day, it is still the enabling law. At the end of the day it will still be based on the list management system and process of the banks,” Santos said. “So what we are trying to pursue as the next step is to work with the banks on how to simplify the process for micros.”

“Partly, I agree that there are microbusinesses that are growing that need to have secured moveable collateral, but basically most of the micros are not yet used to it,” Sicat added.

Image credits: Alysa Salen

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