Money Talk: Microfinance for Microenterprises Mr. Eduardo C. Jimenez Microfinance Consultant Bangko Sentral ng Pilipinas Business World Entrepreneurs Forum August 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 Like in your respective countries, micro and small enterprises in the Philippines are extremely important. I’m sure our participants from Indonesia can attest that during the Asian Financial Crisis in 1997, it was the micro and small enterprises that helped keep the Indonesian economy afloat. This sector bears the same significance in the Philippines, data has shown that small and medium enterprises comprise 99.6% of all registered business in the Philippine and employ 70% of the population. Of total enterprises make up 97.1%, small enterprises 7.6%, medium enterprises .4% and large enterprises .3%. Another study has shown that micro and cottage enterprises make up about 91% of the total establishments surveyed by the National Statistics Office. Aside from the sheer number of micro and small enterprises, we know that these enterprises are the ones with the most direct effect in the lives of our countrymen. They also, at times, are the ones that keep the resilience of economies.

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 It is important to discuss what microfinance is not because of the many misconceptions about microfinance. (read slide)

“Entrepreneurial Poor” Who are the Clients? “Entrepreneurial Poor” Near Poor E-poor Laboring There is an emphasis on two words, poor and enterprises. This is basically the target client of microfinance, who we usually refer to as the “entrepreneurial poor”. These are those engaged in very small businesses like vending or shopkeeping but are unable to grow their businesses and raise their quality of lives because of the lack of credit available to them. Microfinance, is then, seen as the best intervention for the entrepreneurial poor. Various interventions may be better fit for others. For example, for the ultra poor, microfinance may not be appropriate, instead government social programs and charity may be better interventions. 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

Myths, Misconceptions and Barriers 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 In the past, there was an aversion to microfinance primarily because of the following perceived and actual barriers. (read the slide)

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 Here are some key success factors for microfinance institutions:

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 center Disbursement and collection through center Loans 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 center Disbursement and collection through center Simultaneous disbursement of loans Collateral 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 cashflow Culture of zero tolerance for delinquency

Where Can I Access Microfinance? Banks (Rural, Thrift, Some Commercial NGOs Cooperatives In the past, there was an aversion to microfinance primarily because of the following perceived and actual barriers. (read the slide)

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. It is worth noting that, for the first time, the General Banking Law mandates the BSP to recognize and support microfinance as a banking activity.

Three-Pronged Approach Microfinance “Friendly” Policy and Regulatory Environment Training and Capacity Building within BSP and banking sector Promotion and Advocacy The BSP initiatives and programs for microfinance are three tier (read slide)

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 Just as important as the regulatory and policy environment, the Bangko Sentral is also focusing on training and capacity building within the BSP and the banking sector. We are now among the few in the world, and the first in Asia Pacific, to have a dedicated office and personnel to microfinance within a central bank. The core group of examiners also provide technical assistance to banks in their microfinance operations. At present, USAID is providing assistance to the BSP in modifying the manual of examination to incorporate microfinance operations.

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 The BSP maintains priority in its advocacy efforts to promote microfinance in the country. This year, we launched our regional advocacy program. We have conducted seminars in Cebu, La Union and next week we will be in Iloilo. We remain active in various microfinance activities by the NGO, cooperative and banking sector. The BSP is recognized as an advocate of microfinance both locally and internationally. In April 2001, the BSP regulations on microfinance was published on Grameen Dialogue, the publication of Grameen Trust in Bangladesh. In February 2001, an Business World article on the same regulations were posted on Poverty Net, the virtual library of the World Bank. And just very recently, we were lauded in the recent Microcredit Summit in New York for our advocacy efforts for microfinance.

Banking Sector Exposure to Microfinance As of March 31, 2006 (in millions) Micro Loans Portfolio No. of Amount Borrowers Microfinance-oriented Banks: Thrift Banks (5 banks) 212.400 50,187 Rural 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 As a result, the developments in the banking sector have been encouraging. There are now six microfinance-oriented banks and around 115 rural and cooperative banks with some level of microfinance operations. These banks are now reaching, as I mentioned earlier, over 400,000 micro-borrowers.

Microfinance Unit – (02) 523-6130 Thank you. http://www.bsp.gov.ph/about/advocacies_micro.asp Microfinance Unit – (02) 523-6130