1. My Observations about the Microfinance Industry in the Philippines By Carlos Ani

2. Observations My own personal observations of developments, trends, opportunities, challenges and issues within the microfinance (MF) industry of the country.

3. 14 items of observations Some of my observations are from the cooperative sector, and may not apply to other sectors of the MF industry.

4. 1 - environment The policy environment is one of the most conducive and friendly in the world, which encourages the proliferation, and development of MFIs, that serve the grassroots people. There are hundreds of MFIs in the country, 95% of which are small.

5. 1 - environment While it is a free environment and generally vibrant, there have been many fly-by-night operators, that fool and scam poor people. The cooperative sector and the informal lender sector (mostly underground) have the greatest number of microlenders.

6. 2 - regulation The coops are poorly and weakly supervised and regulated by the CDA, which results to poor performance of many small coops. The CDA has developed rules and regulations (MORR) but many coops are still unaware of it. There is an urgent need to educate coops about those new rules.

7. 2 - regulation There are now more than 220 rural banks doing microfinance, but only a handful are so-called Microfinance Oriented Banks. The most popular ones are those operated by former NGOs – like Kauswagan Bank, CARD Bank, Vision Bank, etc.

8. 2 - regulation The BSP has clear rules and policies on banks doing microfinance. It has supervision personnel and enforcement powers unlike the CDA. The cooperative sector and the informal lender sector (mostly underground) have greatest number of lenders.

9. 2 - regulation The least regulated are NGO MFIs. But they are also the most creative, and innovative. There is a clear trend of commercialization of microfinance, including the conversion of unregulated MFIs into formal, regulated entities (such as a rural bank or a development bank).

10. 3 - outreach The NGO-bank MFIs like CARD, OK Bank, etc. have the highest client outreach. Followed by coops. The collective outreach of all MFIs is quite high already (maybe more than 2M by now).

11. 3 - outreach While outreach is high, there is still vast potentials because still millions of poor people have no access to MF services. MFIs can not grow as fast as Bangladeshi MFIs because 1) massive product standardization is not feasible given the diverse financial needs, 2) labor cost is higher in Phils than in Bangladesh.

12. 3 - outreach One limiting factor also is language. There are many local dialects. Field officers must speak local dialects. Another factor is geographic dispersion (islands, mountainous, remote). Then, some areas have serious law and order problems (rebels, kidnappers, hoodlums)

13. 4 – savings All banks are aggressively mobilizing savings and MFIs compete with large and medium banks for those savings. The banking sector is awash with savings money (high liquidity). A few coops are successful in savings mob but majority of them are dependent on outside borrowings.

14. 4 – savings The bank-like approach to savings mob is a proven technology. Some coops have used that approach (MSO) to increase their savings portfolio substantially. Many coops are unaware or not ready to implement a serious MSO plan. Coops and NGOs are subsidy-dependent (relies on cheap loans from donors).

15. 4 – savings MFIs, especially coops, rely on short-term savings of members, and many have not yet developed products that tap long-term savings. More than 85% of coops savings are short-term. Coops can not lend medium term or long- term because of the short-term nature of its financing.

16. 4 – savings Treasury management amongst coops is still very poor. It is not uncommon for coops to fall into dangerous, risky and failed investments. Some coops failed due to corruption and fund diversion by its own leaders, directors and managers. Penalties on abusive leaders and managers are absent and/or weak.

17. 4 – savings Due to weak treasury and internal control, many coops have failed due to corruption and fund diversion by its own leaders, directors and managers. Penalties on abusive leaders and managers are absent and/or weak. This situation is still true today given the weak supervision of the coop sector.

18. 5 – governance Many of the large and medium MFIs have very good directors plus committed talented leaders / managers. Tiny small coops have not yet attain quality leadership and management, although a few have good leaders (but have remained unnoticed). Governance as a whole need to be strengthened.

19. 6 – management Majority of all MFIs need to improve the quality and skills of their managers, so they can better manage their MFIs. Financial management, financial ratios, credit risk management, marketing, product design, delinquency management, etc.

20. 6 – management Large MFIs can afford to pay for high quality manager and staff training, plus some have donor funding. But vast majority of coops need some subsidies in training their managers and key staff. They dont have enough money to pay for full costs of such training.

21. 6 – management Training and provision of TA on Best Practice MFI management have the greatest potentials for success and have been proven success stories: SEEDFINANCE, CUES, MABS, etc. Local people are highly trainable and teachable.

22. 6 – management Blind Replication of Grameen, ASA, or foreign-made technologies have not been really successful. Adaptation is needed. Local MFIs are good in copying, adapting and modifying foreign technologies to suit local tastes and needs.

23. 6 – management A subsidized and serious training program for MFIs can bring greatest impact. But it should not be 100% subsidized, to avoid a supply-driven situation. Counterpart contributions should be and could be required.

24. 7 – ratings There is no independent rating system yet inside the country, but there are now standards: MCPI, PESO, etc. Each of the major wholesalers have their own MFI evaluation criteria and tools, and they dont have a common tool. They utilize the industry performance standards as part of their evaluations.

25. 7 – ratings If not adopted by the major microfinance wholesalers in the country, the use of ratings will not flourish much. The best incentive for wide adoption and use is when MFIs get money (or loans) when their ratings is high.

26. 8 – credit management The credit management systems and policies of most cooperatives need review and improvement. If going to bigger loans (bigger than 50,000 pesos), it is very important that an MFI tighten its credit systems and risk management.

27. 9 – mergers Mergers are happening between MFIs especially if one or two of them are suffering and in the edge of collapse. A merger is the better option instead of closure or failure. But there are pitfalls and dangers in mergers. More mergers should happen.

28. 10 – financial indicators Many small MFIs are not yet familiar with industry standard financial ratios. There is no one collecting financial and operational information indicators from the whole industry, but there are some sub- sector data being collected already.

29. 11 – MIS Many small MFIs do not have robust MIS systems. This is a special technical need that is common to large numbers of small and medium size MFIs. The bigger coops are linking with the banking sectors ATM system. There are new emerging technologies that can increase or improve client services: SMART Money, G-Cash, etc.

30. 12 – micro-insurance Many MFIs offer micro-insurance products but they are poorly designed, risky, unwieldy, and not actuarially sound. Need to improve this product, and organize more, network-wide, and collaborate more, because insurance is a numbers game.

31. 13 – new products MFIs are now starting to develop new products: SME loans (especially for the graduating micros), salary loans, housing loans, etc. Potential products: micro-housing, micro- leasing, and vehicle financing for larger micro-enterprises and GMs.

32. 14 – collaboration Local MFIs like to work and collaborate together. Holding annual conferences where MFIs learn from each other, and help each other will benefit many MFIs with little costs.

33. THANK YOU!