1. International Forum on Microcredit Granting, Its Impact and Regulation 29-31 August San Jose, Costa Rica

2. REGULATORY AND SUPERVISORY MICROCREDIT FRAMEWORK 2

3. Presentation Outline Evolution of national credit/ microfinance policies Mandate and role of the Bangko Sentral ng Pilipinas BSP regulations on microfinance Definition Licensing and branching Incentives Safe and sound operations Expanded activities Issuances implementing various laws Microfinance Today

4. Principles of regulation: –Deposit-taking institutions subject to prudential regulation and supervision –Non-deposit taking institutions subject to licensing and appropriate regulations Regulatory framework: –Bangko Sentral ng Pilipinas for all banks, including those with microfinance operations –Cooperative Development Authority for all cooperatives including those with savings and credit operations –Microfinance Council of the Philippines as designated repository of information for microfinance NGOs (MF-NGOs) Regulatory Framework For MFIs

5. Role of the BSP BSP is the regulatory and supervisory authority over all banking institutions, including those with microfinance operations BSP issues rules and regulations for safe and prudent banking operations The main basis for prudential regulation is to ensure the safety of public deposit taking activities BSP conducts annual and special examination of its supervised institutions BSP checks compliance with banking laws, rules and regulation, and uses the CAMELS instrument for bank supervision Capital Adequacy Asset Quality Management Earnings Liquidity Sensitivity to Market Risks

6. BSP Mandate for Microfinance The General Banking Law of 2000 (Republic Act No. 8791, Sections 40, 43 and 44) mandates BSP to recognize the peculiar characteristics of microfinance in the requirements, terms and amortization of loans and other credit accommodations

7. BSP Program for Microfinance Creation of an enabling policy and regulatory environment for microfinance – Provide incentives to expand scope and scale of microfinance operations in the banking sector – Set performance standards, reporting requirements to ensure sound and sustainable operations – Over 40 issuances and regulations were issued to achieve an enabling environment

8. Training and capacity building –Building banks’ capacity for microfinance in areas of internal controls, portfolio and risk management, governance –Exposure visits of top management to inform policy making –Examiner training to strengthen supervisory capacity –Institutionalization of microfinance within the BSP MSME Finance Specialist Group Microfinance Committee, transformed into Inclusive Finance Committee Microfinance Unit, transformed into Inclusive Finance Advocacy Staff BSP Program for Microfinance

9. Promoting and advocating for sustainable microfinance – Provision of inputs into the legislative process – Partnerships to promote sustainable microfinance (NCC- DOF, MCPI, RBAP, MABS, donors) – Establishing linkages between large financial institutions with retail microfinance institutions – Promoting financial education in microfinance (e.g. Financial learning seminar for microfinance clients and the unbanked) – Promoting consumer protection in microfinance (e.g. transparency and disclosure standards) BSP Program for Microfinance

10. BSP Microfinance Issuances BSP issues circulars, circular letters and memos which set rules/regulations/ guidelines that govern microfinance operations of banks Issuances focus on the following: –Microfinance Definition –Licensing and Branching –Incentives for Microfinance –Rules for Safe and Sound Operations –Expanded Activities –Rules Implementing Various Laws

11. What is Microfinance? Provision of a broad range of services: deposits, loans, payments/ money transfers, insurance For the low-income entrepreneurial poor and their households Based on client cash-flow, character/creditworthiness, sometimes uses collateral substitutes Small amounts, frequent amortization, simple documentation Use of effective microfinance methods (group or individual) with element of social responsibility Market-based interest rates, demand-driven delivery NOT “consumption loan” NOT for “dole-out, for “ultra-poor” or “cure-all for poverty”

12. Microfinance Product Definitions Circular 272 (30 Jan 2001) –Recognizes cash-flow based lending as a peculiar feature of microfinance; –Defines microfinance loans maximum amount of P150,000 Circular 694, Annex A (14 Oct 2010) –Expands the definition of microfinance to include micro- deposits, micro-enterprise loans, micro-agriculture loans, housing microfinance loans and micro-insurance Circular 744 (28 Dec 2011) –Recognizes “microfinance plus” or loans that cater to growing financing needs of microentrepreneurs

13. Microfinance Product Definitions Circular 678: Housing Microfinance Loans (6 Jan 2010) Circular 680 and 748: Micro-Agri Loans (3 Feb 2010 and 13 Feb 2012) Circular 683: Microinsurance (23 Feb 2010)

14. Microdeposits Microfinance savings deposit accounts that cater to the needs of the basic sectors, low-income and unserved/ underserved clients Microdeposits are designed and priced to fit the needs and capacity of the target market: – Minimum maintaining balance not exceeding PhP 100 – Not subject to dormancy charges – Only for individual microfinance clients whose average daily savings account balance does not exceed P40,000

15. Microenterprise Loans Small and short term loans granted to the basic sectors, on the basis of the borrower’s cash flow, for their microenterprises and small businesses. The principal amount of a microenterprise loan can be generally pegged at PhP150,000

16. Microenterprise Loan Plus or “Microfinance Plus” Loans range from PhP 150,001 to PhP 300,000 Borrowers have a track record of at least two microfinance loan cycles in the PhP 50,000 to PhP 150,000 range, demonstrating business success, increasing credit demand and subsequent increased capacity to pay Borrower must have a savings account Microfinance Plus

17. Housing Microfinance Loans Loans granted for home improvements, house construction, house and/or lot acquisition using microfinance principles in accordance with BSP regulations Maximum loan amount generally pegged at PhP300,000 Payment terms up to 15 years Acceptable valuation in cases of usufruct, leases, etc. Loan value up to 90% appraised of real estate mortgage (REM) or acceptable valuation in cases of usufruct, lease, freehold, right to occupy/build

18. Micro-Agri Loans Loans granted for small farmers with farm and off-farm income generation activities Maximum loan amount generally pegged at PhP150,000 Payment terms up to 12 months Frequent amortization, with option for lump sum payment of up to 40% of loan amount For existing borrowers with good track record With prior BSP approval, banks may provide micro-agri products that fit their clients’ production cycle

19. Microinsurance Thrift, rural and cooperative banks can market, sell and service approved microinsurance products of licensed insurance companies to microfinance clients Microinsurance is a financial product or service that meets the risk protection needs of the poor where: –Amount of premiums- does not exceed 5% (now 7.5%) of daily minimum wage rate for non- agricultural workers in Metro Manila; and –Maximum guaranteed benefits - not more than 500 (now 1,000) times the daily minimum wage rate for non-agricultural workers in Metro Manila Insurance Commission approves products and licenses companies

20. Licensing and Branching Circular 273 (27 Feb 2001) –Lifting of bank licensing/ branching moratorium to allow opening of new microfinance-oriented thrift and rural banks and branches –Provides opportunity for MF NGOs to formalize as banks so they can mobilize savings from the general public Requirements for licensing: –Majority of the board with microfinance experience and at least one with actual banking experience –At least 50% of gross loan portfolio shall consist of microfinance loans –Efficient loan tracking system

21. Licensing and Branching Circular 505 (22 Dec 2005) –Allows qualified microfinance-oriented banks and microfinance-oriented branches of regular banks to establish branches anywhere in the Philippines Circular 624 (13 Oct 2008) –Amends branching policy and provides guidelines on the establishment of extension offices and other banking offices (OBOs)

22. Licensing and Branching Circular 669 (22 Oct 2009) –Allows OBOs/LCDPs of microfinance-oriented banks/ branches to service limited withdrawals of microfinance clients Circular 694 (14 Oct 2010) –Amends C624 and C669, classifies OBOs into regular OBO and microfinance OBO (MF-OBO) or microbanking office (MBO) –Expands the range of activities that MBOs can provide to microfinance clients

23. Circular 694: OBOs OBOs: any permanent place of business other than head office/branch/extension office, engaged in any/all of the following non-transactional activities: –Market bank products and services –Accept loan applications, conduct preliminary credit evaluation, perform credit administration support –Host on-site ATMs –Perform customer care services –Perform customer identification, receive account opening documents, facilitate account activation (account opening approval and actual opening of deposit accounts done only head office/branches/extension office) –Other BSP authorized non-transactional banking-related activities

24. Circular 694: MBOs MBOs: primarily cater to banking needs of microfinance clients and overseas Filipinos (OFs) and their beneficiaries. Aside from non-transactional activities, they may also engage in any/all of the following transactional activities: –Accept micro-deposits including initial deposit, and service withdrawals –Accept check deposits for credit to MF clients’ deposit accounts –Disburse/release proceeds of microloans and collect loan amortization payments –Present, market, sell and service microinsurance products –Receive/pay-out funds for authorized remittance transactions

25. Circular 694: MBOs Continuation of allowable MBO activities: –Act as a cash/money in and cash/money out for e-money –Collect premiums/pay out benefits of social security institutions (GSIS, SSS, PhilHealth, Employees’ Compensation Commission, other government authorized pension and benefit systems) –Pay-out benefits under government-sponsored conditional cash transfer (CCT) scheme –Accept utilities payments –Purchase foreign currencies up to the maximum equivalent of USD300 per client per day for credit to micro-deposit accounts

26. MF Incentive: Rediscounting Circular 282 (19 Apr 2001) –Opens a rediscounting facility for rural/cooperative banks to refinance their microfinance loan portfolios Circular 324 (2 Mar 2002) –Opens a rediscounting facility for thrift banks engaged in microfinance Circular 515 (3 Mar 2006) amends C282 and 324: –One year track record –At least 500 active microfinance borrowers –Portfolio-At-Risk of not more than 5% –Repayment rate of 95%

27. MF Incentive: Reduced Risk Weight Circular 364, as amended by Cir. No. 688 (26 May 2010)reduces risk weight applicable to small and medium enterprises (SMEs) and microfinance loan portfolios that meet prudential standards to 75% –Claim on MSME as defined; –Must be a direct loan or unused letter of credit; –Highly diversified portfolio (at least 500 borrowers); –All claims must be current

28. Relaxed Documentary Requirements Circular 549 (9 Oct 2006) and Circular 746 (3 Feb 2012) –Exempts microfinance clients from the required submission of documents (income tax return, financial statement) for the granting of loans up to 31 Dec 2014 Circular 608 (20 May 2008) –Revises rules on acceptable identification cards, lessened the ID requirement to 1 valid card (previously required 2) and widened the range of acceptable IDs

29. Ensure Safe, Sound, Sustainable Operations Circular 409 (14 Oct 2003) –Sets rules, regulations and standards for microfinance operations of banks, specifically the measurement of Portfolio at Risk and Loan Loss Provisioning Portfolio-At-Risk (PAR): –Outstanding principal amount of all loans that have at least one installment of principal past due for one day –Includes entire unpaid balance, including both past due and future installments but not accrued interest –Includes restructured or rescheduled loans

30. Circular 409: Loan Loss Provisioning for Microfinance Loan Loss Provision Current1 % PAR 1-30 days2 % PAR 31-60 days/ R120 % PAR 61-90 days50 % PAR over 90 days/ R2100 % Note: Microfinance loans past due for over 91 days and are fully provisioned may be written off

31. Circular 607 (30 Apr 2008) –Identifies the reportorial requirements for all banks engaged in retail microfinance; –Sets guidelines on how the report should be accomplished; –Defines non-performing MF loans Circular 725 (16 Jun 2011) –Provides the framework for governance arrangements and contractual agreements between a bank with microfinance operations and its related microfinance NGO

32. Mobile Technology Circular 649 (09 Mar 2009) –Guidelines governing issuance of electronic money (e-money) and operations of electronic money issuers (EMIs) –Defines e-money as electronic surrogate for cash, redeemable at face value, not a deposit –Ensures that bank/non-bank EMIs have the necessary capacity (e.g. capital requirements, IT systems and security features and internal controls) –Ensures compliance to anti-money-laundering rules (e.g. KYC, recording, reporting suspicious transactions, transaction caps) –Ensures consumer protection Related regulations on e-money network service providers (C704) and technology risk management (C808)

33. Microfinance Institution Rating Agencies Circular 685 (7 Apr 2010) – Creates an enabling environment for the use of objective, credible and competent third-party ratings of MFIs –Ensures that MIRAs Demonstrate commitment to comply with relevant rules and regulations Possess technical capability, experience and organizational resources to provide objective and transparent ratings Use a rating framework that reflects all material facets of microfinance operations, its attendant risks and operational challenges. –BSP recognition valid for three years and may be renewed

34. Implementing Various Laws Circular 730 (20 July 2011, effective 1 July 2012) –Enhances loan transaction transparency, as mandated in the Truth in Lending Act –Requires banks to only charge interest based on the outstanding balance of a loan –Defines effective interest rate and requires that this will be the only rate used in all loan documents and marketing materials –Requires a uniform disclosure of the loan terms –Requires banks to post in conspicuous places the revised format of disclosure statement. The posters shall include an explicit notification that the disclosure statement is a required attachment to the loan contract and the customer has a right to demand a copy.

35. Implementing Various Laws Circular 374 (11 Mar 2003) –Implements provisions on credit delivery for Barangay Micro Business Enterprises (BMBEs) –GFIs to set up a special credit window that will service the financing needs of BMBEs either thru retail or wholesale lending Circular 570 (24 May 2007) –Allows wholesale loans of universal/commercial banks and branches of foreign banks to non-bank MFIs as compliance to the 6% mandatory credit allocation to small enterprises

36. Implementing Various Laws Circular 625 (14 Oct 2008) –Implements the Magna Carta for MSMEs: –Mandatory allocation of at least 8% for micro and small enterprises and at least 2% for medium enterprises of their total loan portfolio for a period of 10 years (2008-2018) –Submission of compliance reports to BSP on a quarterly basis

37. Philippine Microfinance Today Wide range of services for microfinance clients Technological innovation helps increase scale and efficiency of operations (e.g. mobile banking) Philippine microfinance regulatory environment consistently ranked as best among 55 countries (The Economist Intelligence Unit, Global Microscope for Microfinance, 2009-2015) Industry has attracted microfinance institution rating agencies Microfinance data sharing system (MiDaS) piloted by 8 MFIs (banks and NGOs) Central Credit Information Corporation currently being established (mandated by Credit Information System Act of 2008)

38. Results so Far 167 banks with microfinance operations serving over 1.9 million clients with outstanding loans of PhP 10.746 billion and savings of PhP 5.783 billion Housing microfinance 17 banks PhP694.5 million Micro-agri loans 29 banks PhP 251.3 million Micro-insurance 34 banks have been issued “No Objection Notices” 24 E-money issuers - banks 3 E-money issuers -nonbanks Over 23,781 e-money agents In 2015, there were over 327 million e-money transactions amounting to PhP 916 Billion MBO 575 operating MBOs as of June 2016 67 municipalities do not have regular bank branches but have MBOs EXPANDED PHYSICAL REACH EXTENDED VIRTUAL REACH WIDE RANGE OF PRODUCTS

39. Impact of policies and regulations…

40. Lessons Learned In addressing financial access issues, market based solutions, like microfinance, are feasible and should be encouraged. It is necessary to establish a supportive regulatory environment for the said market based solutions to work. These solutions present real and valid risks but these are concerns that can be managed. Financial service providers must be proportionately regulated to allow them serve the financially-excluded at the same time address concerns of safety and soundness.

41. Links to relevant information on BSP website Annual reports on BSP microfinance/financial inclusion initiatives: http://www.bsp.gov.ph/about/advocacies_micro.asp http://www.bsp.gov.ph/about/advocacies_micro.asp Report on the state of financial inclusion in the Philippines: http://www.bsp.gov.ph/downloads/Publications/2012/Financial%20Inclusion.pdf http://www.bsp.gov.ph/downloads/Publications/2012/Financial%20Inclusion.pdf Quarterly publications on financial inclusion in the Philippines: http://www.bsp.gov.ph/publications/regular_fip.asp http://www.bsp.gov.ph/publications/regular_fip.asp BSP Circulars related to microfinance and financial inclusion: http://www.bsp.gov.ph/about/advocacies_micro_circ.asp http://www.bsp.gov.ph/about/advocacies_micro_circ.asp BSP Circulars search page: http://www.bsp.gov.ph/regulations/regulations.asphttp://www.bsp.gov.ph/regulations/regulations.asp BSP organizational chart: http://www.bsp.gov.ph/about/org.asphttp://www.bsp.gov.ph/about/org.asp Financial education/consumer assistance initiatives: http://www.bsp.gov.ph/about/advocacies_fin.asp http://www.bsp.gov.ph/about/advocacies_fin.asp Advisories/primers for financial consumers: http://www.bsp.gov.ph/publications/primers.asp http://www.bsp.gov.ph/publications/primers.asp Manual of Regulations for Banks: http://www.bsp.gov.ph/regulations/reg_MORB.asp http://www.bsp.gov.ph/regulations/reg_MORB.asp

42. Inclusive Finance Advocacy Staff Office of the Deputy Governor Supervision and Examination Sector 10th Floor, Multi-Storey Building BANGKO SENTRAL NG PILIPINAS Mabini Street, Manila, Philippines (632) 708-7701 local 2896 (632) 708-7482 Eduardo C. Jimenez, BSP Microfinance Consultant (ejimenez@bsp.gov.ph)ejimenez@bsp.gov.ph Pia Bernadette Roman Tayag, Director, IFAS (proman@bsp.gov.ph)proman@bsp.gov.ph Rochelle D. Tomas, Bank Officer, IFAS (tomasrd@bsp.gov.ph)tomasrd@bsp.gov.ph Contact Information

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