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A study on the effects of non-formal financial intermediation in the country.
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NON.FORMAL FINANCIALINTERMEDIATION
IN THE PHILIPPINES:The Experience and Emergent Trends
A Study Prepared tbrougb tbe Assistance oftbeFoundation for Sustainable Society, Inc.
for tlteCaucus of Development NGO Networks,
and tbeCenter for Community Services
Ateneo de Manila University
Decemher 6, 1996
exclusively with the credit Program ln the absenc€ of a sophisticated cost accounting system' this
"p"i"i.""f "Inpfoy* ratio serves as an adequate weighing factor to -distribute overhead and
"i-i""v.tiu" *"ti. The sa\anes of rhe \4 emplo)ees dkect\ in'iolred in credit operations is P 105 ,600 '
Ofthe aemaining P43,185 of salary expenses, P/30,000 arc related to administratjve and management
staff . 64% of these and all non salary administration and depreciation expenses should also be allocat€d
to the credit program. Total administrative exPenses are thw P/30.000+P/50,600+P/6'0O0=P/86'600'
64% of these expenses is P/55,424. Finally, all provision and charge_ofr expenses 6r€ allocated to the
crertit program sfrce they are directly related. Total oPerational exp€nses thus equal to P/199,524, or
36.8% ofthe avemge Portfolio.
Institution % credit ProsramODerational Employees 22 64% t 4
Direct SalariesAdministrative SalariesAdministntive ExpensesLoan Prcvisions
TOTAL
105,60030,00056,60038,500
t00 %64 o/o
6 4 %100 %
105,60019,20036,22438,500
199.524
The lmpute.l cosl of capildl assocjated whh the credit program is calculated on ihe amount ofequity or concesiional loans that is invested in lhe ponfolio, plus 20% ofthe amount of the Portfolio that
is nonnally required for cashflow management. ln the case progtam, 120% of th€ average portfolio i!P/650,400. Tile economic cost of maintaining the real value of this amount with 15% inflation isP97,560. The imputed cost ofcapital is therefore P/97,560 minus the P,€7,000 ofactual financial costs:
P/60,560, or 112% ofthe Ponfolio
The rBsults of this analysis indicat€ the FONDOENMPRESA (housed within a multi-purPoseNCO) g€nentes a 33.2Vo gtoss fuuncial margin fiom its credit oPemlions However' operational
"*p.nr.i ar" 36.8% and thus the net operating margin is a (3,6%) deficit The institution is likely
tin;ncing this deficit by cross-subsidizing the credit opemtion with resources from other progmms.
Imoutediapital costs are an additional I1 2%, resulting a level 3 of(14.8%). The yield on tbe porlfolio
would have to increase by 37% to be sustainable in the long term.
PROFITABILITY ANALYSISlncomeActual Financial Costs
Gross Financial MarginOperating Costs
Operating MarginImputed Capital Costs
TOTAL
40 o/o
6 . 8 %33.2 % Lev€l I36.8 %(3.6 %) Level2
_ _\l]_%14.& r/6 Level3
Subsidy Index 37.5 o/o
88
Arner 6
A Sample ofMeasures Used to Evaluate Macro-level Informal Market performance
Rural informalfollo*ing measules:
a. Objective:
Measure:
credit markets ca! be evaluated vis-a-is the fo owing objectives using the
to provide ciedit facilities for those left-oui by the formal baDking Elstem
il1 mea$ring the actual disbursenrent offilrds to the targeted sectors which arccategorized as special credit programs
membership index (o/o ofmeEbersbonowing to the economically activepopulation; special 6€dit progtbrns likc to rrarrh,ar (coopfype) and theGmeeea-t)?es have m€dbership itrdices of 2.0% !o 1 .8Zo respectively asagaitut the average of 11.170 ro 12.9% for the formal bar*s.
Fdryq(yo of fcna.les in total melDb€rship/clienrele); special redit progfao$have 64,6yo to 84.0yo as against 9. I % for the formal banks.
to provide low-interest credit facilities to suit the needs ofthe poor
Cy€r.aee-interpqt rate Gimple aDDual lates for lending witiout compomding);for the formal baDkr it is I I .4% av.rage while for the special oe&t prograosit is 13,2o/o
to provido sustainable operation for ihe poor creditors
recoverv rate (totsl lepalmeotrepa,,tlent + loans outshnding) ofsbort-term tyear loans; the recovery rate is 5 I .0% to 62.0% for the special credit progamsadminister€d by development banks, while lor the infolD1al coop_typei it is?3.8% and for the clame€n ban*s it is 98,00lo
over-all pedolmarce is mea3ured by Der capita share,/savinc r4rjoh is a measureofthe a$ount ofloan created per saving deposit genemted.
For the formal rural barking institutions the measure is 126,6 T1(5. For the cooD-gpes it js l8?.4, rdrile for rhe crameen q?es it is 653. The figrres indicate abjgher oedit rcsouca-generation for the inforDal sector owing mainly to thelo\rer transaction cost.
b. Obje€tive:
Measure:
Objective:
Mealuc:
M$surei
Source: Chowdhury, A and M. Garcia, 1993. Rural lrstitutional Finance in Banstadesh and Nepal: Reviewand Aeenda For Reforms. Asian Development Bank. Manila
89
Anlex 7
Summary ofFindings on Cooperativ€ Credit Unions (CCUS)
l. T.!'o€s ofCCUs
There are 3 qPes ofCCUs defined in the study: (l)the community-based CCUr or the op€n-t?e which
oDerate in a certain co;mudty and is open ro all t ?es ofmernbe*hips; (2) ihe iisiiiution-based or close-t)?e ccus
Jrri"t is open ontv to m"muers shadng a common insitutional affiliation such as being o6c+members; and (3) the
-rr**_o"i"a (r"-;g ,,palengke" literaly) which is based on conmotr trade affiIiation rvhere membe$ are usually
snall market verdors irl ne€d ofdaily seed capital money'
2. services ofccus
srtvingl" nobi|ization n|je form offxed deposits (such as membership fees), savings deposits, and time
depo;its $,ith interest lates offered above the ba$king matket rates
Crcditlacililiessuchaslow-interest(belowbankingmatketmtes),non-collateralforprovidential,production or ernergency loans to members or non_members
Olrer rervrces such as the provision ofloan coltection whereby collectors a& hired to reach far_flung
clients, Foviaiing ofice h;urs b€yong the 8 to 5 routiDe, which lowers the transaction costs for many
"ii"ns,;ap.ouiiiooof'damayan"irndsforemergensybutexclusivelyformembersonly, promoting
livelihood and self-employernrf projects (including taining and seed capital in some areas), and sefling
as a venDe for socialization
operation ofthese ccus
Since lhese are unsupervised by the BSP, lhen they ar€ exenpted from minimum capital requi*menb, not
subjecled to portfolio ceilings, reserved requirements and olher intemrediation taxes iuld measules'
ThereisnoPerceivedlinkagebetweenbanksorothelfofilal6editinstifirtionsandccus,andbanksareseen only as repositodes of surplus funds
There is no overlapping of clie ele. Tthe infordal cr€dit &arket is seen as providing a different set of
products (not offered by the fornal banking s€ctors) and that's why CCUS and local bank b$nches can co_
ixist sidelby-side in one area. In fact, thete arc instaoces whefe depositors ofbanks afe also members of
cCUs
Evaluatinq the ooeration of CCUS
3.
Asinmostofthestudiespreseed,includingthisone,thereisemphasisplacedoothelelativesuccessofCCUS particularly as against the fomal barking sector in t€rms ofsurviving a general economic crisis' and this is
al'udei ro the general bdependence and noD-reliance lo goverfiDmL 6lnds or subsidies'
CCUS are perceived to be successful in servitg lorv_incone ad high-risk clients who camot provide
collateral for loans. However, depositors are penalized in i€rns of low real intetest rates, mDch more for the
informalsectorswhoreql i rememberstopaya$ualdues(rangingfrom?5toP100)plusattendancetopre-membership seminan
S"**J"-b"tt", M 1188;Lamberte, M andJ Balbosa, 1988; Relampagos, J ' M Larnbede, D Dougias' 1990
90
Since trznsaction costs are lower in the informsl oedit ma*et tharl in the fomal credit market, there are
other measures by which th€ lower tr"nsaction costs is compensated for. For instance in making loans, the CCUS
alrcady deduct the hterest, thereby making the real effective mte Buch higher
CCUS are also perceived to enjoy a higher spread and are uatrested by inflationary Pressure's.
In tenns ofgenerzting imds, CCUS mostly rely on the rnernbersfup dues and dePosils generated from
members. Wh€n menbers rrere asked why they join CCUS, one_hau answercd I'to gain access to credit for
consumflion" and the oiher half said "to gain access to credit for production/busine$." A lot (74%) indicated that
they join CCUS to avoid borrowing ftom moneylend€rs (with 5-6 ifierest).
The incr€ase h fix€d deposits catr be attnbuted to the following factors: (a) an expansion of
membershipspecially among market-vendor- ard commmity_bssed CCUS, (b) some coops initiaied savings
mobilization programs a'Id special promos such as mfles and other girnoicks to expand sharc capital subscription,
and (c) some coops imposed a loan rct€ntion limit ftolr 1 to 5 percerf loan transaction to inctease th€ borow€r's
fixed deposit (the allormt oiloan is limiied to the borrowels share subscription).
lnspite of increases in Dominal assels, a large number of coops have not been able to mateh this with an
increase in net incomes. This is due to a slrge in operating gxpenses as the coop's dernbership gew Also, thepattem of expenditures allocated fot su4tus funds go mainly to dividends and patronage palments Fe\rr' are ie_
irvested into the cooCs improvesrent ofopentions such as tle Pulcrhase ofcapital equipmerfs for long-l€rm growih
Prospects.
Recofirmetdation:
. Thlre is need for CCUS to expand theL services not only in tenns ofmembe$hiP but more imponantlyin terms of the product t)?es Guch as time'deposils, etc )
. There is a recommendation for iniet-Ccu lending particularly among CCUS who fofm parts of a bigconf€deration, This would put excess frmds lo geater use alld lessen the opPottunity cost of holding iarye
amormts of surplus funds.
. To sustain growth among credit coops, th€y should d€pend less on fxed deposits or increase in membershiP
as a sorrce ofgrol4ih. Financial imovatior! in terms oflntroducing newproducts, must be lnitiated. This
requires updating ofmanagemeflt skills and acquisition ofngw technolory' Portions oftheb net eamugs
could be invested for this.
. New products may be rnboduced such as the infoduction of "discount cards" for the acquisition of
consumer or capital goods such as hand tractorc' Tie-ups can be devleoped betlveen smallscaiemanufactureis of hand-tsactors (which in many cases arc small-scale cottage industry"t,?e of
rnanufachrdng), or drscormt on the Products^ervices ofrered by fellow cooP_members
5. Evaluatinp lhe experi€nce ofccus
. CCUS experience low mte of increase in real assets owing to the high rutes of loan defaults which plague
the operation ofCCUs. ln this 1987 study of6 rural-based CCUS, the raio ofloans outstanding to total
loans is 30.30 perceni Thismeanstlatforeverypesolentout,30centavoswlllbeheldasbaddebt and
would entail geater cost for the CCU. Also the geater portion of overdu€ loans is mor€ than 2 years
(61.03%).
. Still. CCUS are successfirl in reaching low-income savers and borowers ever Dp to the mosl far_flmg areasunserved €vm by rural banks
9 1
CCls sufn've owr {oe)e?$ o$ii\gts Se iac!{oat l!|emtrets srs\araed {oen laniaipehot eilhet as sare$
ofborowsrs, ev€n ifdany CCUS arc plagu€d with large adouDts ofbad debls' Sti[ the oPeration of
CCUS is srral arouS! to sustaitr large losses add th€y have never €xperiences "bark_ruas" since the
borowers arc the lenders themselves (as meEbers-saveN ofthe CCU)
Savinss mobilized by $'al-based ccus are sma . The real outstanding fixed deposits per nemb€r range
h.rwe; P2l to P342. based otr a studv of6 rural-based CCus in 1987.
cCUs .ie not w€lt-organiz€d and there k need for gleater b:aining in bookeeping and simPle accounting'
It wss foluld that therc exists a negative relationshiP between Ccu-mernbership and members's income'
This $rggests tb€ possibitity of gra&Iatirg membels from the infomal CCUS to the fomal bankjDg systen
as they become richer.
In some ar€as, CCUS rcinaitr the ody institution for saving mobilization' and sav€ts tlay not necessarily
bealsothebofiowers.losuchinstance,somefolthedepositinsuanceiscalledforasaDincentiveforgreater saving mobilization.
(
92
Annex 8
Sumrnary ofFindings on Credit CooperatiYes
I. From: Ltado, G., '"Ihe Financial Structure and Perfomhnce ofPhilippine Credrt Cooperatives", PIDSDiscussion Paper Sedes No. 94'04
1. Based on sample swvey of 104 credit coopentiv€s from mne regions in the colllltsy,
2. Major shrdy findings and conclusions:
a- Based on cdteria such as capital adequacy and proteclion, asset quality, mte of r€trm and costs,liquidity and solvency, the study concludes that credit coopemtives were able to mobilize hugefinancial resources and wete able to provide credit and saviflgs seffices to a large base, at astandard comparable to lhat of fomal fina$ial ifftihrtiots.
b. In the period 1990-1992, 16 ofthe sample 104 oedii cooperatives 'Baduat€d' into becoming 4large credit cooperatives and 12 m€dium credit cooperatives with more members aDd biggerflnancial resouces.
c. Loans to membe$ constituted the biggest use (aboul 780lo) of a$et use. Investnents were a mere4% of assets; shares in the fedemtion, 1 % and cash on hand and in bah.ks, 7%.
d. Crcdit cooperatives as a utnle had positive net €amings on assets of about 14 p€rcent as of end1992. This is conparable to what the small saver or investor could eam fion altemative finatcialinstruments that ale accessible to him
e. Sixty percent ofthe total income ofcredit coop€mtives came torn lending activities.
f. Credit cooperatives arc very liquid, judging from the compuled liquidily ratios. Cash on hand,cash ilr baJ* and short term investmetts were fout times as latge as deposils and boffowings.
g. There exists a saong case for establishing an appropriate supervisioDs and regulatory syslem forcr€dit cooperatives. Although the CDA has the supervisory authority over these instihrtions, it isnot appropriately gquipped. It does Dot have the Professional ard iistitutional expeftise tosupervise a raPidly gowing credit coopentive system
h. The credit cooperatives serves a particular market niche consistiDg of small savers andborowers, both individuals ard small busin€ss enterprises
i. The creation of a small stabilization fund is necessary to improve the viability of creditcooperatives and to bolster confidence in this type of iDstitutions. A corollary conclusion is theneed to detelmifle the apFopriateness ofa deposit inswance or gua&ntee scheme at safeguardingmember capital and savings as well as improving the liability ofdedit cooPerative.
IL Fromr Ltanto. G.. E. Garcia and R Callanta, "An Assessment ofthe Capacity and Financial Pefomanceof Microfinance lnstihrtions: The Philippine Cas€", Discussion Paper Series No. 96-12
1 . Based on cas€ studies ol 7 Microfinatce lnstitutions (MFI), composed of 5 sedil NGOS, onecooperative rural bank and one Grameen bant r€plicalor.
93
The study addresses four areas that wiil enable MFls to be self_sustaining financial itstitutions
serving the poor:a. outreach and imPactb. viability and $stainability
2. Major findings and concLusiolrs:
a. Re: Expsndine outr€ach
1. Outr€ach remains snall and limit€d, aithough lhe poor borrowers and saverspredominate among MFI clientele. Tllis limited reach is attsibuied lo:
a. weak i$titutional caPacityb. lack of an extensive and viable deliv€ry systemc. a relatively small finan€ial base
2. The principal problen faced by cr€dit NGOS is the lack of iegal persoDality and
authority to act as reai financial intermediaries. This also results in a very limited capacity
to develop and legally offer iinovative financial products.
t. Tmnsform credit NGOS into full pledged formal financial institutions' e.g private barlk, finatce
company, non-stock savings and loan association or credit cooPerative; or credit NGOS may invest
in formal financial institutions.
2. Promote linkage banking with private banks which are interesled in Providing micro-finance
s€rvices for the poor.
3. Invest in tsainilg existing nfal bad<s, CRBs and credit urions in ricrofinatce lechnologies.
b. MII viabiliw and sustainabililv
1. Many MFIS are not viable or sustahable due to their inlernal ilnancial policies and
organizalional praclices and procedr:res lnprovements are needed in the irstallation of
sound financial reporting and monitoring syst€m, Portfolio management, assessment and
management of risk, product packaging and pricing, management of loan anears and
slrategic business Planiing.
2. There is a need to upgmde in itstitutionalize Performatc€ standards, particularly loan
repayment, appreciation of loan default ajld aging of delinquent accounts
Recommendations:
1. Building up the equity base of MFIS by infusing more capiial ilom exrsting o}lners and
2. Diversiry loans, savings and other financial productvservices according to client demand.
3. Professionalize managemeni and slaf of MFk.
ANNEX 9
GO''IERNME]{T CREDIT PROGRAMS
L Dulch Rnral Dd€lop 19871ot992
2. Ndtional Recodciliation Rebel renh*, Bo.afidetendt-setdels, syhpatlize*,
NOOs
Developnenl (LEAD).
1988-91
4. Daecay Op€Bdon fotLivelihood DevelopmentrBOLD).
\'l\,lYC, Siate Collegd
NCOs.5. Livelihood Skills
Dev.lopment ProerMn-sDPl
NMYC, srar. collesG
NGOs.
(DEI\'R)
6. Contract Relorcnralion 1988.1992 SENRO &R.ENRO/DENR
0sFP)
1982 &srill
DE IR
D DENR(conrd)
8. Inlegrat.d SusBinableRaedch & Develophl
ISF AJe6 in te Phils.
DENR
Developnent PrcErm
0.IRDP) Rebel Retude
Regiois I to XIL.C.US,NGOq
(DrLP).
NCOS & PVOS
95
ANNEX 9
GO\'ERNMENT CRXDIT PROGRAMS
Employnent & Ente-preneushiP Dev. Pro-
vt,vm, D( & cAx)16. Working Youd Centrel?. Developnenl of Inpact
18, Fund for RuralgnploY-ment & En ryd* Devl.
NGOS & PVOS
2l Cuiilower Developmenls
groeeu &GFSME
22. Equipment Acquisihon
Enreryriss (EASE)
on'going
23. Fr$.hise & Enfiepre-ne! rsh ip DevelopfentProsr@ (IED)
Ehirepri*s (GFSME)
raciriry(RGF)
& 8 NGO'S
Ent.rlnses Cudertee
below P2 5 M,NationPide.
GFSME, CAN'LGU
96
ANNAX 9
GOVERNMENT CRTDII fROGRAMS (ContId
EnrdPris4 (GFSME)
On-eoing
(rLRC)
36 Balil.ta sa (.buhayoR€t6VI'I-RC
llRC
Baye Progr.n/ILRCDBP, LBP, LBP
38. SdfEhploynent O.-goine DS$/D Nehrr'ork
39. hdustrial
P.ogru oCLF-\,fP)
On-going
Philippina (PMIP);
(CEBU'EPZCEIIo1PCCI: IINEX.
Plosran (MEDP)
Continuing
Procld (TSI)On-going
NCOs
97
ANNEX 9Page 4
GOITERNMEI{T CREDIT PROGTIA,Dr$ (LiO!I
Finacirg Progrd for
the Cooierciaiianon
Inigations SFterns forEristing lris.tion
m)
systm (GslS)
16. GSIS Membd Alsrsloc.for lhc Dcvdopmcnt ofEnuepHcu$hiP 0i.1ADE)
GSIS ncrnb.rs (NGOS. On-going
M. Land Bdtk continuing
Fm.ls Coopqadves.
49. Snall Mek t vendoBLoe (SMVL Progan. abiliry
93
ANNEX '
GOITRNMENI CIiIIDIT PROCRAMS
Nq/EaGtins
ofP5M.
Billion
o. t2. Kabalika! Sa
lnduslriya (X-ASAID insiiturio$ (PIh)(37 in numbe's)
99
5E 5
F:,i
$F3J
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BANKBUrcPINHEADOFFICC
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Helyetas, "A Case Study of Credit atrd Savings Project ofMindoro hstitute for DeveloDment-Itrc , (MIND), tom Profles on Credit Prograrnmes of Southem Luzon parttrers, HelvetasPhilippine Programme Office, 1993.
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Jamon, V.P., "Sectoml Study: Strategic Assessment ofNGOS in population, FamilyPlanning, Health atrd Social Welfare" in,4 S*ategic Assessment of Non-Governmental Orgcmizqtions in the Philipprzeq A.B. Quizon and R. Reyes,ANGOC, 1989
Lamberte, M., 'rThe Role and Performance ofCooperative Credit Unions in the RuralFinancial Markets: Some Preliminary Resuits", Presented du ng the ACpC-pIDS-OSU Seminar on "Financial Intermediation in the Rural Sector: Research Resultsand Policy Issues, 22-26 Sept. 1984
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106
TABLE OF CONTENTS
Table of ContentsList of TablesList of FiguresAuexesAclonlms
Execritive Summary
1. Introduction
A Shift in Thinking aad Approaches to MicrofimnceA Shift from Regulation to LiberalizatiorThe Study : Objectives and Methodology
2. The Client Systems
A. Targetted Clieds ofcredit ProgramsB. Who are the Poor aad Where Are They Located?C. Norms for Identifing the PoorD. What Are the Credit Needs ofthe PoorE. sources ofCredit ofthe PoorF. What are the Savings Pattems of the Poor?
3. Government Lending Programs for the Poor
A. Lending to Agricultural HouseholdsB. Lending to Microentrepreneu$
4. The Services oflnformal Financial Intermediaries
A. Tlpes of Infonnal Financial lntermediariesB. Segmentation of MarketsC. Mobilization of Savings by Non-Formal
Financial IntermediariesD. Participatioo in Financial Decision MakingE. Contracts and Terms ofDifferent Types oflnstitutionsF. Interest Rates, Repayment Schemes and other Issues
Page
iiiiiii
122
35'7
89
l4
l5
16l6
20
2023
2632
5. NGOs and Cooperatives as Financial Intermediaries
A. Sources ofFunds and SustaimbilityB. Lending and Savings Mobilizationi. ,q' C"it-*"i"f g""k Owned by Cooperatives : Baok Bukopir
in Indonesla
6. Issues on Access ofthe Poor to Financial Services
A. Risk and Transactiol Cost Factors Affecting Access to Credit
1. High Risk ofSmaI Bo'rowers2. High Ttansactions Cost of Small Loans
B. Other Factors Affecting Access
C. Preferr€d Sources ofCredit and Savings Services
7. Effective Credit and Savings Programs for the Poor
A. Current / Evolving Approaches to Microfinaace
I The New View2. The Financial Systems APproactr
B. Learning from Programs and lnstitutions That work
I ieplicability of Successful Microfinance Schemes
2. Ouireach and Welfare Effects ofEffective Programs
3. Factors Behind Successful Microfinance Programs
C lmplications for Institutions a[d Programs h the Phi]ippines'
A. Principles for Financial Service Delivery to the Poor
I Features ofEffective Credit Delivery
2 Etrective Savings PrinciPlesB lnstitutional DevelopmeltC. Evaluation ofthe Performance ofNon-Formal
Markets and lnstitutionsI Financial AnalYsis2 Aftlyzing Operational Productivity3 Evaluating Target Group Orieotatton^4 Measures ofPoor Orga$zatlonal Pertormance
a SubsidY DePendence Indexb Measure of Decapitalization
8. Key Issues and Recommendations
ll
34
35
J f
3640
41
4 l
45
48
5 U
50
59
Table 1Table 2
Table 3Table 4Table 5Table 6Table ?
Table 8
Table 9
Table 10
Tabl. I ITable 12Table 13Table 14Table 15
P^ge
6
101 l13l819
28
29
37
384 l!')
495053
422
Figure 1
Figure 2
LIST OF TABLES
Target Clients of Mictofinance ProgramsDistribution of Borrowers, Urban and Rural Philippines,Metuo Manila, by Source of Credit, 1986 and 1987Share oflnformal Credit in Shrdy CoultriesLending Scheme for Micro-, Small and Medium EnterprisesSuggested Disaggegation ofthe Rural Credit MarketSoulces ofFormal and Informal Loans, Selected SurveysTerms and Conditions of Formal and Non-Formal FinancialIntemediaries (I)Terms and Conditions of Formal and Non-Fotnal FinancialInteimediaries (II)Borrower Transactions Cost, Formal and InformalFinancial lntermediariesLender Transactions Cost, Formal and Infomal Financiallntermedia esThe Financial System and Its Sub-SystemsAppropriate Strategies for lnstitutional Adjustmentlnstitutional Development for Effective MicrofinanceNCO Characteristics Necessary for Financial IntermediationA Framework for Evaluating Finance Programs
LIST OF FIGURES
The Formal and Informal Sectors ofthe PhilippineFinancial SystemMajor Types oflnformal Finance
l11
Anne\ I Financial lnnovations in the Phil ippines
case Sludv f i l . Replrcal ing rhe Gfameen Bank: Project Dungganon""' "
J""* r"ul I l Project Dungganon Area Profile
en""" fuUrc 1 2 Project Dunlganon Summary ofLoans Granted
AnDex Table l 3 Types ofProjects Financed ^eon"* futf" f + fio;ect Dungganon' Total Savings Generated
cur" StuOy pz Project Linking Banks and Self-Help Groups
iine* Tabte Z l Self-Help Promoling lnstitr'rtions (SHPIs)
in the Linkage Prolecl
Annex Table 2 2 Data on the Philippine Linkage Prolect
C"r" Sttay *l ft't*tking the Private Moleylender: thecase
of Calabanga Retailers' Cooperative Credit Union
Annex 2. Case Studies ofCredit Providers
A. lnformal SectorCooPerativesNGOThe Govelnment AgencyThe Guaranlee Providel
B Formal SectorThe Commercial BankLand BankThe Lending lnvestor
Annex 3. Lessofls Learned from the Indonesian Experlence
Aanex 4.Ainex Table 4 l Gtameen Bank (Bangladesh) Financial Indicators'
Annex Table 4 2 Selected Pedbtmanc; lndicators for Three ACCION
lnlernatlonal Aii l iates as ofDecember 3l -laqI
A$tex 5. Financial Performance lndicators for Specialized Financral N@s and
Alnex 6.
Annex 7.Annex 8.Ar$ex 9.
for Mult ipurpose NGOS -s"".pr"'Jili".srr*t used lo Evalua(e Macrolevel lnformal Market
PerformanceS,rrmn"ary offindings on Cooperalive Credit Unions (CCUs)
Summary of Findings on Credit ( ooperattves
Covernment Credit Programs
ANNEXES
eunt eutopln , Cooperative Bank oflndonesia
Page
6 l61646566
68
'tl
12
'16
8t
84
85
86
89909395
100Annex 10.
ACROITYMS
ADB Asian Development BankAdMU Ateneo de Manila UniversityAICP Agricultural Credit Policy CouncilBCOD Bureau of Cooperative DevelopmentBAP Bankers Associatioo ofthe PhilippinesBSP Banko Sentral ry PilipiMsBTC Borrorter Tramactions CostCAR CordilleraAdmidsfativeRegionCDA CooperativeDevelopmedAuthorityCCU Credit Cooperative UdonCDA CooperativeDevelopmentAuthorityDBP Dwelopment Bank ofthe PhilippinesDTI D€padmsot ofTrade and lrdustryFAO Food and Agriculture OrganizatiorFIES Family lncome and Expenditure SurveyGO Governmental OrgarizationGSIS Govemment Service Insurarce SystemGTZ Deutche Cesellschaft fur Technishe ZusammemarbeitICM Informal Crcdit MarketIGP Income Generating ProjectsHOA Household-Operated ActivitiesLBP Land bank ofthe PhilippinesLTC Lender Transactions CostMEDP Micro-EnterpriseDevelopmentProgramMIND Miqdoro DevelopmentNBFI Non-BankFinanciallnstitutionNEDA National Economic Development AuthorityNGO Non-Govemmental OrganizationNSo Natioml Statistics OfficePDC Post-dated ChecksPBSP Philippine Business for Social ProgressPNB Philippine National BankPO People's OrganizationPVO Pdvate Volurtary OtganizationROSCAS Rotating Savings and Credit AssociationsSHG Self-Help GroupSLA Savings and Loans AssociationSSS Social Security System5W5 SOCral Weamer )tallonsIIPBRF University ofThe Pbilippines Business Research FoundationTBAC Technical Board for Agricultural CrcditTST-SELA Tulong sa Tao-Self-Employment Assistanc€ Progam
i ; as l . t ( . ' . .
Executive Summarv
In the past two decades, tlere has been a major shift in the thinking, in the approaches andin what are now considered "best practices" ofcredit delivery to the poor, Aom a traditional approachto a "new view" and "fitrancia.l systems approach" to micrcfinance programs. There has also beena major policy shift from rcgulation toward financial libelalization. It is in the context of theseparadigrn and policy shifts that we situate this study.
The objeotive of this paper is to present a brief review of literature on the Philippinefioancial mark€t, focusing on financial intermediation for the poor, padiculady by non-formalfinancial iNtitutiotrs. Informatiol was gathercd ftom secondary sources, itrcluding published andunpublished reports, iltemal reports ofinstitutions, and evaluation studies ofspecific programs.
Among the subjects covered are the following: 1) The client system, with insights from paststudies as to who the poor are, where they are located, vrhat their dedit needs are, where they borrowfrom, and their savings pattertrs; 2) Govertrment l€nding progams for the poor, including ffeditprograms for agricultural householdg ald lending to microelltrepleneurs; 3) The supplien ofcredit,particularly non-formal financial intermediaries whose clients are small farmers,microentrepreneurs, and other small boffowers; 4) NGOS aod cooperatives as flnancialintermediaries, including the sources of funds, lending operations, stengths and weaknesses; 5)lssues related to access ofthe poor to financial services, including high risk, high transactions costs,the preferences of the poor for bonowing and savings sewices; and the extent of their decisionmaking in the financial process; and 6) Trends in microfinance, including factors which havecontributed to greater effectiveness in lending to the pool and to institutional viability andsustainability. These trends have evolved not only in the Philippines, but also in other developingcountries, as a result ofmany hard lessons leamed Aom past programs.
The Client Systems
. The taditional clients targetted by intemational donors, NGOS, POs and goverument bankslike Land Bank are the "poor", defined as including groups like small farmers, small flshermen,rural wome4 and microentreprefleurs. The poor in the Philippines make up almost three-fourths ofthe population, using minimum food requirements as ar indicator. They areconcentrated in the Cordillera Administrative Region (CAR), Cagayan Valley, the Visayas, Westernand Northem Mindanao. The poorest regions still remained the poorest after the passage ofsevenyears. Hardly any change in the geographic concentration ofthe poor can be seen from 1985 to1992. Most ofthe poor are engaged in agriculture and related activities.
*This repofi was prepared by Dr. Virginia G. Abiad, with the research assistance of Edsel Beja Jr., EdgarJovero and Rommel del Mundo, all faculty of the Departrnent of Economics, Ateneo de Manila Univelsily.
Ho,sehordsborowt?":q:::j;::T::n*T,:':*:'il:'trJl':;;"fr*'"Jlilltr::;i,1":ilh"::T,T;i::H':1':f#il"i'i''iv iai'zi n' r"; "onsumption
Where do the poor borrow liom? Maitrly lrom the non-formal sector- Oftiose wno
:x"J""i;i""il,f,h,rl*t j*r* -*l':*lm::'::l;f"il1' "l'"il:#;ffiJi*';"r% ;i;'al botrowets in each seosraphic area
Due ro the rack or acc:::l:"r:*$ TTllff"",'' ::"i"#1131'i;"f:"?JTl:ff,'T#' :i::""J,::m.Iffi'X;*'":"oo;ffi:":, ij'"'i-nooE *"'oridarirvgroupsrr)r11tr',"#:l1l"i"?"i"J*"i *oori"", ql '.i1d."ilillj;'"","jr":"Xj:",tffi::l$11'ni. il,n"''*,'u' ,".,"'H:1.illil; *J'{::F"llffI{ilf *: :*i1;f iy;ugf ri ;;:;#i:11^","il;i:iinterest and required no collateral ,'
H:'i'J,. ,:t;:Tb*",H:',ifii1fr;ii:"'n gm:i';::: ;:Tlilff :lli"'?;"'The poor are able to save ' and this is substantlated-q :ev'e' r t'::d'le^s"t"$'Jl"tiin"^J"1'1tJ
ffi tJj1ffi1:?Jxilt"fifl ;H,:]llH' !:ii il ll: i:fr i]'o^"".'.' """Government Lending Programs for the Poor
*.,' .. :li1Ji',:ii5H::: l'f"H:'tilJ'"'"':'T,n*t*:[#;ff1,1H'J:Hlsilnf il:*THil*iii#**1**,-+*Hi"r'''hjl#":"':L:*povernmenr instirurions Various stuores po-'l'^:."- ..:,';;;-;;;.;id
government agencies Many'*H:fl".:,,""J,ffi'il;:""-"',iil:'[o,'"il":lx1;j'#:i''lTl'"?u';"'li'"'0n"""o""'"'""'i.onotrn""a"ntt "tpousing
market rales
Lending to Microentrepreneurs
..-,#"il,,lJiffi li',il'il'$;r',ffi i,"""ff il:&.i#i;ft F"",-'J$'il'*",.,""" sTltf?ff fi'#",;,''fl#"Til;i:*r't *i*i*'- *'i"'?'Tff ""#;Jnl, "iil ii*,o, ", -11':r:"''i:|L';*:$*qf i[:i$:itffi ]:l",n X#ffi::i:#:31#fi""; ilil il:" il;;;;I*o'king capirar Loan Pro
vl l
Association of the Philippines @AP) and the Small and Medium Enterprise Credit Program ofPhilippine Business for Social Progress (PBSP).
The Services of Non-formal Financial Intermediaries
It is not the baDking sector, but the nol-formal (iofomal and semi-formal) financialintemediaries that are able to give the poor geater access to loatrs, as well as deposit facilities. Theinfomal sector is comprised ofthose mentioned eatlier as sources ofcredit ofthe poor: Paluwagatror ROSCAs, self-help groups, friends and relatives, professional Eotreylenders, inpuVtrade creditors,farmer-lenders, and others. The semi-fomal financial sector on the otler hand, is made up ofpawnshops, lending investors, coopentives and NGOS.
lt is estimated that there are over 18,000 cooperatives, among them roughly 2,000-3,000qedit cooperatives, ard another 2,000-3,000 farmers' cooperatives which have survived the crisisin cooperatives, resulting from their use as conduits by the govemment's past credit programs. Thereare about 36,000 registered NGOS, 850/0 ofwhich are community based.
Informal markets are able to mobilize small deposits. Self-help groups, cooperative areditunions and paluwagans have been found to be effective mobilizers of small savings from poorhouseholds, Their success in mobilizing deposits is due to lower transactions costs, adoption ofsimple procedures, group and participative decision making and homogeneity ofthe members. Thelatter means the members belong to the same income range, have the same occupation or livelihood,or are geographically close to each other.
The financial market in the Philippines is highly segmented, and the contracts and termsdi$er with each. Segnentation ofmarkets results fiom the D?e of clientele catered to, the degee andtlpes of financial intermediations functions undertaken, the major source offunds, and accordingto whether they opente in linkage with other markets or not. The terms and conditions of differenttypes oflenders are detailed in the report, including their target clientele, interest rates, rcpaymentschemes, and penalties.
Various performance indicators have been used to evaluate markets as well as imtitutionsin the semi-formal and formal sectors. On the institutional level, performance indicators used instudies in the Philippines include indicators of client outreacl! as well as measures of financialperformance (see for example Llanto, 1994). The latter includes measures of capital adequacy andprotectior\ rates ofretum and costs, solvency, ald asset qualily. The results ofthese measures,and conclusions rcgarding the effectiveness ofcooperatives ard NGOs as financial intermediariesare discussed shortly.
Microfinance programs should a.iso be evaluated on other performance criteria which indicate1) the outreach ofthe dedit ard savings programs, e.9., the number of clients, the characteristics ofclients, etc.; 2) the quality ofthe services; and c) measures onthe extent ofparticipation ofclientsin decision makinq.
viii
lssues on Access irfthe Poor to Financial Services
Most small falmels, microentepreneu$ atrd other small borrowers are not able to borrow
ftomba*s,duetoa)thehightraosactionscostofhandlingsmallaccounts;b)theperceivedhigherrisk oflending to these clientele; and c) the lack of staodard collateral requiled by banks. studies
show that bororver traosactions cost is regressive itr its impact otr bo owers That is, as a
proportion ofloan amount, borower tralsactions cost is greatef for small borrowers, taxing them
as much as 270% more than medium aad large borrowers. bformal lenders are successi:lly able
to lend to small borrowels because of the extent to which they have been able to lowel borrowel, as
well as lender hansaclions cost
NGOs and Cooperatives as Financial Intermediaries
It is estimated that tiere are about two thousad NGO9 in the aourtry engaged in
developmental activities. Less than one fourth of these deyeloPment NGos are involved in financing
livelihood activities, of which 3 00 NGos are participants in vaious credit programs of government
agencies. Fourteen are engaged il the Grameen Bank replication in the country'
Less than 300 NGos are estimated to be viable or sustainable. They are sustainable because
of: a) a large resource base acqrmulated though the yea$; b) an almost continuous flow of donor
funds Aom l-ong established relationships; and c) effective cost recovery measures or earnings from
their operations, e.g., Iending, training; consulting services.
Lending by NGOS is generally small in amount' and shoft term More than 90% ofloans
disbursed are for amounts under P5,0OO, and maturity pe ods are between one-month and one year'
However, larger NGOs have had loans as large as P200,000, mainty for group lending, but these
make up less than l0% oftotal number ofloans approved
Loans of NGOs are mainly granted for income'generating projects (IGPS), with smaller
proportions gralted for providential and educational purposes. The most common types of activities
i-nnced ure mi"roenterpdse activities like food processing, vending, backyard livestock raising,
handicraft s (sub-contractiog), lepair shops, cosmetology and dressmaking'
?0olo of borrowers are women. Nominal interest rates charged by NGOS range from 12 to
3 0olo .per arulum. In additior\ NGOS usually collect service fees that may be aflat rate like P20 or
a percentage, e.g.,2/o ofthe principal amount Effective ilterest rates rarge from 20to 407o per
u,'num, du! io th" co.-on practice of "front-1oading" interest charges to the interest amount, and
the frequent repayment schedules, such as weekly or bi-monthly payments
Most NGOS have a built in savings mobilization scheme Savings schemes are of two
general types: compulsory and periodic savings by beneficiaries, which may be daily, weekiy or"monthly; ^
and "savings charges" added to the interest rate, amounting to 2 to 109'" of the loan
amoun[
ix
!
s
o,r:rd
rol rln
Efective Credit and Savings Programs for the poor
The traditional view on microfinance has been replaced by the ,,aew,, view and the financialsystems approach. This emphasizes prudential regulation, savings mobilization, developmetrt ofthefinancial infrastructure, i^titutional viability, apprcpriate Gategies and sustarnable financialservices.
. Thee interrelated systerns strategies are required for the development of a satrtrgs-driven anddemand-oriented fitrancial system: a) a policy reform strategy, wX"h .rnpt u"l"es inte.est lateliberalizatio4 exchange rate iiberarization, and a regar fiamework permitting financial infrastructuredevelopment; b) an institutuioml adjustment strategy, whicl focusei on the expansion ofcompetitive formal and nonformal finaflciar institutions and their adjustment to the differentrequireme[ts ofall segments of the population; and c) an instrumental i;ovation srrategy, whichstresses. sound banking tecbdques, including appropriate maturities, interest rues that cove.transactlons cost, and effective risk managemelt.
. Effective programs have been zuccessfi.rl in achieving three principal goals : to provideservices to the poor, to attain financial self_suficiency,-and to,.u"h lu,g. nimbers. ih" k"yfeatures in prcgams worldwide which have p^roved to .be effective for lendini, as well as for savingsmobilization, are detailed in the main text ofthis studv.
-. Recent studies on cooperatives and NGOs as Iinancial intemediaries (Cordero, 1994;Llanto, Garcia and Callanta, 1996, and othdr studies) point to the following issues andrecommendations :
1. While NGOs have characteristics which suit the requirements for lelding to the poor,they are faced with a number of constraints, the most importani of which are: weak institutuionalcapability, subsidy dependence, atd resource cotstraints.
., ?. Th". w-eak institutioral capacjty of many cooperatjves,Ncos to Deliver Credit isattributable to the following constraints; l) Outreach is smali due to a) lack oflee4l pe$onality andauthority to act as real filancial irtermediaries, thus limiting its capaciiy t6 o6iinovative 1inancialprcducts and to mobilize deposits; b) lack of an extensive and vi;ble hmncial delivery system; andc) inability to absorb cost of training ofpotential clients. 2) Viability. Many credit NGOS are notviable.and sustainable due to a) their small {inancial base; and bj the need to improve internalfinancial.policies, systems and procedures. _]lResoar ce Mobilxiion. Credit NGOS must raiseslbstantiai.deposits and deweiop.various lnitruments for small savers, to stay competltrve a.ldvtable 4) Supervisory and regulatory frameworlr. It is necessary to bring creiit NGOs under asupervisory and regulatory framework, to minimize problems iike the aisence of performancestandards; the lack ofuniformity, and dilution of standards of credit evaluation; the lack of po.tforiosupervision, leading to poor loan recovery; and deterioration of portfolio quality.
3.smallandevenmedium-sizedNGostendtobeveryleade$hip-dependent,whichcouldthreatel its long term survival.
4. Personnel tumover is relatively high, resulting from a poor remuneration levels- Despite
their srong comfiIitment , NGO personneftend to give way to family pressures and economic
realities to;eek better paying and more secure jobs elsewhere
5. lnadequate stafdevelopment StaffofNGOs are known for their strong commitment to
*o*. fforl"*r,ttpetence or eipertise for developnent work may be lacking' particularly in the
co-se oi s-ol1e.ilCfjs. This is due to lack ofresources for training, personnel and management
developmelt.
6. Credit coopentives are able to mobilize huge financial resources' a:rd to provide credit and
savings services to a large mass base, at a standard comparable to- that of formal financial
f,"rJni,i"* ihis is based o-n criteria which includes capital adequacy and protection, asset quality,
rate ofreturn, liquidity and solvency'
7. Credit cooperatives are viable financial intermediaries whose development must be
strongly suPported.
8. Credit coopentives can grow into strotrg, self-reliant and self-sustaining flnancial
institutuions, given the proper supervisory and regulatory environment' emcient managemelt
policies and practices.
Some ofthe key recommendations resulting fiom past studies are the following;
1)TransformcreditNGOsintofull-fledgedformalfinancialinstitutions,e.g.,privatebank,finance
"i."-". """-"*t savings and loan association or credit cooperative; or alternatively, credit
N;6;;;;tg.r,ir" "r
inv-est in formal flnancial institutions ; 2) Build up the equity base of MFIs
Uv inir.ine .oL capital &om existing owners and new investo$; 3) Create a financial stabilization
niJ rr,","Jiif""t '"ner
the needs of-financially distressed credit cooperatives. This canbe managed
li u zu"*tion ot u auly constituted body;14) create an exlernal supervisory and regulatory system'
;d;;; ;"dt"t"regular examinarion and review of financial policies and performance and
;roor" n.O"ntiuf t"g"lation Although the CDA is a likely candidate for this' - its institutional and
ptii.*i"""f expertiie needs to be improved for the purpos^e 5) Approach microfinance as a
sociallv responsible buslness, trot as a charity or social welfare institution;. 6) Diversifu loans'
r""*ti ""i",ift*
ntancial products/services according to client demand; 7) Maximize deposit
-oUiliutioo oppotn,nities, 8j Promote linkage banking with private banks; and 9) Increase access
oi "."dit
for th" poo., thtough programs that decrease transactrons cost - though linkages and group
lending, and adoption ofinnovative programs that have proved effective for grassroots lending' like
the Grameen Bank and othel schemes
NON-FORMAL FINANCIAL INTERMEDIATION IN TIIE PHILIPPINES :THE EXPERIENCE AND EMERGENT TRENDS*
1, Introduction
A. A Shift in Thinking and Approach to Microfinance
In the past two decades, there has been a major shift in the thinking, in the approaches andin what arc now coosidered "best practices" of credit delivery to the poor. There has also been amajor policy shift ftom regulation toward fimncisl libera.lization. It is within this context thatfinancial intermediaries in the formal and informal sectors, donor agencies, NGOs and GOs haveto make deaisions on what altemative programs to pursue ard what stratggies to use, given theobjective ofproviding furancial se.vices to the poor. It is also inthe context ofthese Paradigm andpolicy shifts that we situate this study.
In the 1 970s and early '80s, agricultural ioan programs were pushed by international agencies,as well as by govemments ofunderdeY€loped countties, with the hope aqd intention that availabilityfor credit for small farmers, at low rates ofinterest, would allow them to purchase the necessary farminputs, and thus gradually pull them out ofthe poYerty trap This was the season oftargetted qedit,
below-rnarket interest rates and use ofthe rural banks as conduits for small farmer credit. Becauseof the low rates at which banks could rediscount from the Centlal Banl, incentives to mobilizesavings died down.
Development hstitutions, donor agencies and practitiotrers have inareasingly adopted a newview of qedit and flnance programs, including a "financial systems approach" to microflnanceprograms, covering micro-credit as well as micro-savings programs for the poor' This new viewreplaces the traditional approach, in which programs channelled credit to particular economic groups(e.g., srnal farners) with the view ofincreasing itrcomes ofthe targeted group. Although borower-focus and mechanisms varied widely, the programs ofthe old approach were characterized by thefollowine;
> Credit was targeted. Clientele groups were defined, and in some instances, loaoswere targeted on selected types of activity (dce productioo).
> Credit was cheap atrd below ma.rket rates.. Lending rates were subsidized.> The govemment provided credit.> Programs were large scale and worldwide> Savings mobilization was neglected. Because ofthe wide availability of cheap donor
funds, local resource mobilization was inadequate. Resources for lending thereforewere erternal, rather than intemal.
*This repofi was prcpared by Dr. Virginia G. Abiad, with ihe research assistance of Edsel Beja Jr', Edgar
Jovero and Rommel del Mundo. all facuby of the Departrnent of Economics, Ateneo de Manila University.
The dismal experience of credit programs in many countries worldwide have resulted in an
emerging concensus' i "new" view which incorporates the loLlowlllg pnnclptes:
Provision of financial services rather thar credit as ar input Finalcia].iot-",."autionnu'tobeseenasamattelofprovidingservices,ratherthandelivery
of credit as a Production inPut'i""Jr"t"".Jrn.Offization ibrough savings Aone-sided focus on credit contributes
to unsustainable financial institutioos'i,."Jr"i", .i"**"ion costs and risk is necessary to increase access for the poor^Cr"Ji -
tft""fO not be pushed in large amounts The scale of lendi[g should be
"'ij-r*i^i" "l"t"f ", which financiJ institutiorn can maintain prudence in lending
and efiicietrcy in loan collectionAvoid subsidized interest ratesLoid targeting of credit on activities, and iuPervised qedit programs
The oeedlor accompanying macroeconomic and sectoral policy changes
In addition to the shift disoussed above' the policy environment.has been trarsformed from
o r"n"fui"i a "
gtoatatiy liUerai'ea financial system Reforms', both in policy and in institutions
;";:";";il; "il;i#er includes interest policy reform. exchange rate policy reform, reforms
i^ *o*lori iunng".ent and liberalizarion of uanr entry lnstitutional reforms' onthe other hand'
ir"i"o"'cJ"o"r s"""k reform with respect to credit allocation, bank superv-ision and regulation;
,iioit, in tft" .ta Uanking system, and in the Philippine Deposit lnsurance system
This study colstitutes the first ofa thjee-phased project' The first phase n a preparalory
otur.. th"-r""onl a policy development phase' tire third a policy recommendation phase The
fii;;;;;;;J i, tl p,","nt "
uti"f review of literature on the PhilipPine flnancial market'
;*usin;; 'f;il;;i
intermeaiation for the poor' Information and data rr'r'ere gathered from
ffi#,i" ;*;;;i;;fing published and unp;bfished reports' internal reports of institutions' and
evaluation studies of specific programs'
ln Section 2, we discuss the client system, ard provide insights ftom p"tlll*lt: ":-t: Y:
t their credit reeds are' where they borow ftom' and theirthe poor arq where tlrcy are located, wha . ih. ^^^, in.h,.tino::lil"Jffi ;T';'d;,i""r:;;;'"*"c"':ryT"idig-?i:g:T:::P::f :.::1*::i:ili:ii.fiiil:#;: ;' ;;;;;;p;'; ll I"':1.1: *; ̂T,::.: """1" *o*:ii "l^ffil:are small farlners,- ' ntermediaries whose clientspanicularly non-tormal lo-"tu'.. IlilJi#; ;;; -a ",r "'''l r borrowers rh" dg;l"lt-tlp:: ^:f-.i:i":t-'lj:*tf ::;iiliil ;*Jil;;* i" 1r'-" '..,'"1 and urbanrior andihe Y;:*:,1':::':"Ti':ifi:i111:ilJ."'f'ffi #."JtJ ltcot""i coopetfauves as financial inrermediaries.is t ::1""+::Section 5; Section 6 focuses on issues telated to accessofthe poor to financial services This
L The Client Svstems
Io underdweloped countries like the philippines, the majority ofthe rural population, as wellrr segm€tr of uban householdq have little or no access to funds from banks ani the formal sector.h such situation, traditional informal, as well as innovative sot "_",
in tf,i nnt"ia sector play acrucial role in increasing access fo, the poor. (Figure t shows the "omponeot!
ofthe formal andloo-formal sectors, rvith the latter made up ofthJsemi-for.a *a ioforioJ,""torO.
Rural as well as urban households.need funds for productive activity in farming, fishing aadsoall industdes, as well as for expemes like illness and dearr, in tr," rrour"iroro, ro the extent thatrhe fomal sector camot suficientlv Drovide this-due to collaterar rimitaffi iigt.r ri* ort"oarngto farmers and other reasons-few altemativ., *; i.d;;;;;;;;;#ffi:'-"
,., The traditional clienrs targetted by intemational donors, NGOs, pOs and goverment bankslike Land Bank are the "poor,,, defined by different programs as on" o, *a" of tfr" fo[o*inggroups:
fugs services; and the extent oftheir de( -- --r"" rvr wvrrvwl,=
. lsfn mfye tJl.1n9 financial process. In Sec,tioq 7,
dsk-all,tlansacti::s
costs as qc,tors afectiDg access, preferences ofthe poor for borrowng
s.rccesstul microfnance.programs including th"l,i"pt"*ifity, tn"ii out """n-_J*if#and the common factors behind these effective -a *"tAouti" progrur liiJnUua". u
:1:"*il_T^:lliT1;-wir!,rrrrale.co.ngiuut"a to gr"ute, "trJ"iiv?,;ilffi;;,",h:
* i:..'T1i1111 Tlblity atrd sustainabirity. rr"rJt."oa, r,uu" "uoru"j';;i'o.J; ;;;i!€q but also in other developing countdes, as a result of many hard l"r; i;;i##;:;
l. Small,/marginal farmers
a. owner-cultivatorsb. sharecroppers and telants famersc. landless laborersd. shifting cultivators or tribes
2. Small fishermen
3. Rural Women
4. lnlabitants offorest areas
5. Microent.epreleurs / small trade.s
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A FAO repo.t (1981) categorizes four broad groups ofrural people in terms ofthe abilityofthe formal rural credit system to meet their credit needs. These are: Group 1 Those who haveviable production units and are relatively better placed in the rural economy and who can profitablyuse the credit because of their access to technology and other resources in the rural system;Group2. Those who have sma.ll sized holdings and can utilize credit profitably ordy if it is associatedwith elements of subsidy to make the investment viable; Group 3. Those who cannot borrow at allliom the financial system and need financial resources, without which they cannot undertake anyproductive activity and Group 4. Sub-rnarginal and non-viable farmers and other rural poor withoutaoy sizeable resources except human labor and who cannot be gffeatively involved in any economicactivity within the existing socio-economic structue.
Group 4 would be considered the nonviable poor, to which credit institutions rMould notconsider fitending loans to. Persons inthe Group l, onthe otherhard, may not necessitate loanstrom credit institutions, as they would have thet own resources to carry out theil economic activity.The ruIal poor in Grcups 2 and 3 would be the priodty groups needing financial support.
These four groups were further classified in the FAO report into nine categories with distinct,special features (see Table l). Except for small own€r-cultivators, the other target groups listed inthe table have no sizeable resources, and only subsist Aom earnings from their labor. It is generallyperceived that small famers' incomes can inarease with access to good seed varieties and to otherproductive inputs; that rural women need widening ofemployment opportunities for income earning;that iandless agricultural workers can be made viable with additional earning oppoftunities in non-agricuitural activities; that small fishermen can expand their income through forms of storage,assistance in marketing and processing; that inhabitants offorest areas can combine selflsubsistencewith cultivation and sale offorest products. Most prcgams aim to increase access to credit for suchpurposes.
B. Who are The Poor and Where are Thev Located?
In the PhiJ.ippines, almost thee-foufths ofthe population is "poor". Il:'1992,'110A of the totalpopulation fell within the bottom 300lo income bracket (HeIIin and Racelis, 1994). This and otherrecent poverty indicators use the basic food requirements for an average-size Filipino family ofsixas a measure, taking nutiiional needs ofthe family into account.
Where are the poor located? They are concentrated in particular areas: the CordilleraAdministrative Region (CAR), Cagayan Valey, the Visayas, Westem and Northern Mindanao. Thepoorest regions stili rcmained the poorest after the passage ofsevel years. Hardly any change in thegeographic concentration ofthe poor can be seen from 1985 to 1992. In the 1985 survey, the poorwho belonged to the lowest 30o% income bracket came from basically the same regions: Bicol, theVisayas, Western and Eastern Mindanao. Using a measure ofthe evenness ofthe distribution ofpoor families throughout the various regions in the country, Marquez and Virola (1995) concludethat the Philippines showed an improvemert in the fegional distribution ofpoor families from 1985to 1988. but a slisht deterioration from 1988 to 1991.
TARGET CLIENTS OF MICROFINANCE PROGRAMS
ii1ii6v"". t *""0'"n " tn
non-viable btrt can ;e made
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:iffi,lffi Tiii{!'fr 1",,J,:fl:::I".!,*.v ."t'.t'"n"' t'"t"*"'x
3ff iln:l*iil'.'l:11:Hi:T'Need specialized programs tor marketing
ii:':::i: i":lr€r:"[ :'ru:,::",,*"#:$*ff:"'JlJEil'
No sizeable resourc€s €xcept labour
*H5""ili"'ffi,'':fi "-:ff :ffi [il"n"*iTiliii" i" n""'s""'*"'"t """'"'
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Sharo croppers and tenants
Shiltlng cultivalors' Pastoral
9.Inhabitants of lore$ afeas
As expected, most ofthe poor are located in the rural areas ofthe country. The poor madeup 71.3% ofthe total rural households in 1985, and a much lower, but still significartly large,60.7% in 1991. The proportion ofpoor and non-poor families in rural arcaswas 50.7Yo and33.6Yo,respectively, in 1985; in 1991, the ratios wete 4'7 .2 u\d 37.0yo, respectively.
Most ofthe poor (tbree out ofevery fout or 76.5yo) ue e[.gaged in agriculture and relatedaotivities. Of ttre total number of families classified as poor in 19'71,49% were farmer owners,famer part-owners, farmer tenaots, other farmers, farm laboreq and fishermen (Herrin 1986).Farmers engaged in palay made up the largest proportion ( 34%.) ofthe total.
Ofthe total number oflow income families in 1985,32yo of 3,067 vtere salary-wage eamersof wbich. 12.7yo were engaged in agriculture ar:d 79.3yo in non-agriculture. For other actMties,23.5yo of3,061 werc in crop-farming and gardening, and 10.3% in family subsistence activities.
C. Norms for Identifving rhe Poor
While natioml surveys of NSO identify the poor though the food tbreshold measureindicatod above, various credit projects target their beneflciaries using norms or measures likeincome level, land holding, asset valuatio!, activity and tumover, and consumption level (FAO,1981). These are discussed b efly below.
a) Income Level. A certain minimum level of income is used, in relation to the"subsistence needs" of the household.
b) Land Holding. Land is the main capital asset irr the rural areas. Thus, a minimumsize of iand holding is prescribed as necessary to generate an income sufficient tomaintain the family at the subsistence level. Households with less than the minimumare included in the target group.
This measure does not apply however to households tlat do not own land,including share croppers, tenant cultivators, landless laborers, and others.
Asset Valuation. Assets of the household are valued and used as a measure ofwealth.
Activilv and Tumover. The nature of the activity engaged in or to be undertaken bythe potential beneficiary. Ifthe expected returns is below a certain level, insufficientfor subsistence, the household would qua]ify for including in the target group.
Consumption Level. This is similar to the food threshold measure used by NSO. ltis based on the monthly consumption of a minimum amount of food calories.Households which do not have this minimum consumption level are included in thetarget group.
d)
It is recogized that some extatreous factors affect the measu'es above' such as the fertility
of the land, avaiiability of irrigation facilities, existing and potential cropping pattems.
D. What are the qedit needs ofthe poor?
Householdsbofowtoaugmentresoulcesforproduction,aswellastomeetconsumptionexpenses that theit own rncome cannol cover' Wlile ionsumption credit plays a marginal role in
*"i'i.-t "-"a
Uy tne for.ut financial system (3 6% 1n 1986)' the informal sector is quite
efficient in meeting the consumption requiremetrts of borrowers'
Agabin (1989) points out that the relative importance ofbonowing-for conzumption orfor
proar"ilo"n-a-id"tt o'"JJitg a the. type of borrower or their source of income For example'
io,rrowkg for prodtclion use was higir among rice-based farm.households On the other hand'
io"onuf-tl.O 6o"o*ers, fishing households and landless agricultural workers bonowed more for
"iirrp,|o, purpo""s. Market vendors acquired loans to finance their operating capital'
Dataftomvi.tuaio(1994)showsthatproductionloallsaregenera.l lyusedtobuyinputsofproau.t-ioi-ti-t"-1".a, (2? 57o of farmer-respondents)' fertilizer (58 9%) and pesticides (53 0%)
Loans for irrigation fees and equipment weie availed ofby only 6 40lo and-10 10lo ofthe farmers'
resoectively. -Consumption
loans, on the other hand are spent on food (47 8% ofrcspondents)'
"iJ.uiion ana ..ai.mi .*p"nt.t, 21 2% atrd 20 0%, resPectively
A shift in fam'household loans from predoEinantly consumption^loans in the 1950s to
pr"aomin-ity proau"tion loam in the 1970s and '80s was mainly a result of the availability ofnew
ir.i."m"f# ts*"y, Agabiq Tanchoco, 1985) The rural credit.history study by ACES (1988)
i"Ji""* i'rt"ii"irn u,jtoriing is not only production related-' but . also seasonal Farm Production
;;";;;;il;;rn;joi r.uion rot gttilos toans bv 850/o of thedce,farmers surveved and 7l% of
it "
riJe-onion farm"rs. Borrowings by tie farmers tended to rise du ng the months ofplanting'
Jrft ii" p"Jt"*ft. f" June and July, the main crop season for rice - Sub-peaks reflect the second
,"u.on fo, rice arrd the planting season for onion' This seasonal pattem ofbonowing by poor
i"r."i, *", "rr"
stro.,rn Uy an earlier study (TBAC, lgsl), reveahg that.farmer surplus and
;r;";;t ; monthly iattern. For all types of farmers in-the study' the planting and growing
.""iir'if.i.".y a epril;'w"re defl"it rno'tls while the surplus morths were the harvest months
Oi"t i" i"iyj-ri" rtg"st bono*ing occutted during February' the start of the planting season The
;;;G;;il6; ffcribed in the itudv showed that the pattern is opposite that of borrowing and
that it is centered during the harvest season'
The ACES study concluded that unlike farm households' non-farm households borrow
mainly (?0%) for ibod consumptlon Twenty one ofthe 38 non-farm.respondents repofted farm
work'as their main source of income. consumption loans were also hi-ghest during the plaoting
.""*", "" ")<p**,
f"r the start ofthe schooiyear, as well as,the need for operating capital to do
their farm jobs competed with meeting household needs for food'
Marquez and Virola (1995) indicate the expenditure behaviour ofpoor families on regularlyconsumed items. When income is low, food and other necessities comprise the majority of familyexpenditures. Poor families, as well as the non-poor have substantial expenditures for alcohoiicbeverages. Expenses on medical care and education are substantial. 80oZ ofthe families surveyedin 1985, 1988 ard 1991 reporled spending on the average P243, P243, atrd P388, respectively, formedical care; and P382,P3'15 andP642, respectively, for education.
-I Herrin and Racelis (J 994) conclude that only 12oZ oflow income families availed ofcredit
]itnt. A similar conclusion was obtained from the 1970 data. Amotrg those who did not bonow,
f Artasoos for not availing of credit \re.e ; high interest rate (49.4yo), to collatetulto offer (48.6%)r d h.qdensome requirements (46 5olo). Only 20.5% of the respondents indicated that they did not
trad to borrow.
E. Sources ofCredit ofthe Poor
Ofpoor households who borrow, where do they source their borrowings? Mainly ftom theabrmal sector. The overall importance ofthe informal sector in the country is shown in Table 2,Dd io other developing countries, Table 3. The former, fiom a survey ofthe Atetreo de Manilatirir-ersity ard Social Weather Stations h 1989, indicates Ei!o!, that otre third ofthe total popuiatioroCthe Philippines bo(owed; and Second, that ofthose who borowed, about truajbirels borrowedfrom informal lenders. Suryrisingly, borrowing from informal lenders was prevalent not only inrbe rural areas, but also in Metro Manila and other urban areas, making up more than 60% of totalborrowers in each geographic area.
Although low, middle and high income groups borow from the informal market, theproportion of the poor who borrow from the informal is higher than other income groups, ashdicated by Agabin et al. (1989) and SWS-ADMU (1987). Five economic classes were employedin classifying bonowers: d B, C, D, and E. The upper income classes were categorized as AB whilethe middle, poor, ard the poorest classes are classified as C, D and E, respectively. Among the fiveclasses, 70.52% of the total loans was undertaken by the D and E classes, or P3 1.678, of which68. 17% was ilfofmal credit or P21.5B. If each of the two classes is considered individually, the Dclass had 47% oftotal loans or P2l.l8B, ofrrhich 70% was infonnal credit or P 14.748. TheEclasshad 23% ot P 10 .49B, of which 6 5% was informal qedit or P6.8 5B .
Due to the lack of access to formal credit, poor households avail of the following forms ofnon-formal fi nancial intermediaries,
l .
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ii.
lll.
laodlordlenders
traders/input suppliers
trader/miller lenders
v farmerlendeG
vi. ProfessionalmoneYlenders
The most prevalent source of loans in the informal sector has beer\ trot the pnvate
moneylenders, as commonly expected' but reldtives and ftiends, making up 61 2% of the total
i"i"#^f f"_! (ACPC, l9ti8). Loaos from relatives made lp 25.5yo while loans from friends /
o"intrUott *u, 35.7% (see Table 4) Most ofthe loans given by friends and relatives carry no
irr"'i"n. ana colateral is seldom required. Reciprocity is offen tlle undedying chancter ofsuch
loans, with credit gnnted on the imPlied assumptiol that the lender at some later date may requfe
a loar at which time the bonower is expected to assist'
Merchant- and traderlenders also were a major source of informal sector loaos' 32 2yL
Landlords used to be ar important source ofloans in tle rural sector, particulady for small farmers
ffo**at, G "gr*i-
reform program for rice and com lands has substantially reduced the incidence
oil".ai.iJ "t"ii
1agauin, issi) IDput suPPliers were also a significant so,urce of credit in the
iiior, .bua
,ii"*"J r";gely a resit ofibe syltem ofthe gouemment farmlending program known
u, I\l"r"erou Ss (ACLS, 1988) As a result ofthis program, loans in the form offenilizer and
o"t,i.ial"tuJ""p ."re than one third oftotal loans obtained by farmers fiom 1973 to 1978 This
orooortion declined howeYer to 12-15% in the succeeding years
A more rcceot survey (NEDA 1992) showed that only 12% ofultra-poor families had access
to .r"ait. 'frar" *"t this sourced from? The NEDA study shows that 3 80lo of loars of ultra-poor
i"*"n"ra, came from friends and relatives, l8g/o from pfivate moneylenders and 13% from
;;;;;;d*t. The NGos provided only 2 9% ofcredit in urban areas and 1 970 in rural areas'
Studies on ,//ra, informal lenders (R'elampagos, et al,1990; Lamberte ard Bunda' 1988)
ioai""tJtt ui botro*ing fiom the informal market in urban areas is also common, with the major
intermediaries being :
i. the "palurvagan" or ROSCA'
ii. professionalmoneylenders,
iii. cooperative credit unions, and
iv. input/tradecreditors.
l2
LENDING PROGRAMS FOR SMAIL AND MEDIUM ENTERPRISES
Institulions
LENDING PROGRAMSBAP Cr.dit Guardnty Corpomtion&\F Crcdit Cua|anty CorporationI>Elopment Bank of the PhilippinesTb. Livclihood CoQomtionTlc Livclihood CoQorutionNdionat Aericultural and Fishery Co'incilPhilippine National Bank
Ptilippine Naitonal BonkT€chonolog/ and Livclihood Rcsource C€dlcrTcchnology snd Livclihood Resourcc CenterTcchnolog/ and Lilclihood Resource Centcr
1Z T.chnology and Liv€lihood Rcsourcc Center
TNDIREST LENDING PROCRAMl. BPI Foundation Inc.Z D€v.lopmeni Bank ofthe Philippinca3. Depanmcnt ofTrad! and Induslr/4. Dcpdrtftcn! ofTmd€ and lndustry
5. Llrd Bark of ihc Philippincs6. Ldnd Bank oflhe Philippines7. Lard Bankoflhc Ph'lippincs8. Philippinc Busincss for Social Progrcss9. Small Busincss Guaranlec and Finatcc
Corporation10. Socirl Security Syst.mll. Social Sccurity System12. Sociel Security Systcm13. Socisl Secudty Syslein14. social Sccufity systcm15. Social Sccurity Systcm
C, CREDIT GUARANTEE PROGR,AMSL Cuanntee Fund for Smail and Medium2. Philippinc Exton and Foreien Loan
Guarlntee Corporarion3. Philippinc Expon and Fofcign Loan
Cuarantee Corpamtion4. Small Business Cuarantee and Fioance
5. Small Business Gu@ntee and Finance
D. COMBINED DIRECT AND INDIRECT LENDINGPROGRAM
l. Ayala Foundation
Lending Program
Fixed Asset Loar PrograrnWorking Capital Loan ProgranOmibus Financing ProstuEquipment Acqu'snion for Small Edlerprcneu. PrcjectFrDchisc and E terpreneurs Dcvclopmenl fo. ProjectLivelihood Enhanc€mcnt forAgricultural D€velopment Progra-mOvcE€ls Contmct Wo*er's Livelihood for AgdculturalD€velopmenl ProgamPangkbuhayan ns Bayan Lending ProgranAero-indusrdal T.chnolo$/ Transfcr ProsrdnExport Industy Modemizrrion ProgmmT€chnolo$/ Ulilizario Fimncing ProgramUrban Livclihood Financing Program
Finarcing Assistancc LincIndustdal Cuarartcc and Lodn FundTulorg sa TaoNGO Micro"Crcdit Projcci llTulong sa TaonlGO Micro"Crcdit Project II CNGO toBorowe's)Agriclltural Lorn FundCounlryside Loa, FurdRegularLcrding to Famers and Fisherfolks Coop€radvessmall and Mcdiun EntspriscsSmall EntcQrisc Financing Fac'lity
Busin€ss Rchabililation Program for SMESFinancing Prograrn fof Exponc$Finarcing Prognm lor Post Hafl.sl Facilitics for SmallFarme$ and Fishdfolk CoopcmtivcsKabalikat sa Paepapaunlsrd ng Irdustriya lcndingPrcgram for Small and Mcdiun Scale IndustriesLivelihood Financing PrograrnPow$ Cercmtion Progam for SMES
Prcshipnenl Expon Financing ClaraDtee Prognm
Postshipmcnt Expon Finaocing Guarantee Program
Leae Guar&tee ProgramR€gular md Automalic Guarantee Facility
Micro Credit Program
In SaDaql Palay, where there was no forEal financial institution in operatioo' the density latio is one
rrronJyf"ia", p"i teo touseholds (Lanberte and Bunda, 1988) The total combined resources ofthe
Z0 moneliers operating was P1.05 million in 198? The 20 paluwagans in the same study had
a total nrembership of 193 out ofthe 191 stalls in the public market. This implies that all stallholders
in the market were members of the paluwagan
The total rcsources mised by the ten paluwagans surveyed reached P7 2 million in 1987 It
was also found out that 28oZ ofthe sample members ofthe Cooperative Credit Unions (CCUS) were
also members of a paluwagan. This implies that the paluwagan has poteotial in mobllizing savings
among the non-wealthy
coopentivecreditUnioDs(ccus)arealsoimportantnon-formalintermediariesintheulbanareas'Thecombinedassetsof44NAM\.EscomembersandfourcreditunionsamoultedtoP278.7 million. This was about 28 percent of the combined assets of all pawnshops in the
Philippines. CCUs were a common source of loans for low to middle income households'
particularly in offices and in public markets (Lamberte, 1988) CCUS also exist in many rural areas'
and have shown their potential for growth and for servicing small borowers
IIl terms of absolute size, the CCUs as a system is growing at a faster rate thao that of
oawnshops and the banking system CCUS also tend to expand in size during crises periods at the
"*p"nr" ofhighly t.gulated financial institutiom such as the banking system'
Afourthsourceofloa.nsinurbanareasistradecredit ' lnstudyingtheMarikinafoofweafindustry, Lamberte and Jose (1988) found that trade qedits compris€ 82 percent ofthe sales value
oi,ttl Ju.pt" foot "ar
manui'acturers and 80 percent ofthe value oftheir inputs of materials
F. What are the Savings Pattems ofthe Poor?
Shrdies in savings behaviour ofthe rural poor indicate that the majority ofthe poor do save
or are capable of savirig (Subido l98l;Lamberte et al 1992) Subido axgu€s that if the FIES of
NCSO ir,ir"a, tn" ."tufiwould show that rural households are dissavers. ln fact, during *te period
6at_Dls, tie ratio of dissaving to income is 18%. But ifthe survey ofthe Technical Board for
Agnculturj credit (TBAC) and university ofthe philippines-Business Research Foundation (UP-
n[F) is used, a savings is positive for farming households The average propensity to save rs
estimated at 9.l% anJ this varies fton alow of -4'76yo for annual ilcome of P500 and 2l% for
annual income ofPt o,O0o-P 15,000. Families who dissave dlaw down their asset holding which are
mainly in the form ofpalay and com inventories. Subido (1981) also points out that another study
ofthe 1-AeC and Up-iR1;-indicates an average rural savings ranging ftom P1,000 to P1,662 during
the period 1976-1978. Most ofthe savings, however, are in phlsical assets, while flnancial assets
(casi1 bank deposits, etc.) comprise oniy a small percentage (3 67o) ofthe avemge household's assets
Another study ryifiucio, 1994) Presents the savings behaviour ofthe poor, as represented by
the first third decile and the fourth to tenth deciles of income, using data on average real income and
expeldihres ofhouseholds. Mrbcio coocludes that the lower income goups (first third) gene.allydissavg supporting the traditional aryument tiat households with very low incomes do not or cannotsave. But the dissaving rate for this income group has been declining, as shown by the following;il 1985, household real dissaving was P433; declining in 1988 to P75 and further decreasing inl99l toP2. The second income group does save. ln 1985, real savings was P6,166, in 1988 Pl0,114and in l99l Pl1,099.
3. Government Lending Programs for the Poor
In spite of government mechanisms intended to increase bank lending to small borrowers,such as credit quotas, guarafltee schemes, subsidized rediscounting and interest rate schemes, banklending to small farmers and otier low iflcome sectors did not increase significantly. This has beenthe basis for gove.nment's justificatiol of its involvement of line and non-bank govemmentagencies in runl aredit programs, covering loans to farm and non-farm households.
Armex 9lists 53 goverDment qedit prcgams administered by 17 lines agencies and non-bankgovemment institutiotrs. They include lending the Department of Agriculture's LivelihoodEnlancement for Agriqrltural Development (LEAD) program; the Depanment ofEnvironment andNatural Resoulces (DENR)'S Contmct Reforcstation Progam atrd Itrtegrated Social ForestryProgram; the Office of the President's Equipment Acquisition for Small Enterprises (EASE)program; the Department of Social Welfare and Development (DSWD)'s SeltEmploymentAssistance Proglarl the Department ofTrade and lrdust#s Micro-Enterp se Development Program(MEDP) and Tulong Sa Tao (TST) program; the Development Bank ofthe Philippines (DBP)'sContract Farming Program; and Land Bank of the Philippine's Lending Program to FamersCooperatives. At least 14 ofthe 53 programs use NGOs, PVOs and cooperatives as conduits forrheir credit programs
Several studies done by the Tecbnical Board for Agricultural Credit (TBAC), AgdculturalCredit Policy Council (ACPC), and Phihppine Institute for Development Studies (PIDS) point outthe ineficiency, lack of comparative advantage and ineffectiveness of credit programs implementedby non-financial govemment agencies. Many govemnent programs also continue to lend atsubsidized interest rates, in spite ofgovemment pronouncements espousing market rates.
Credit prognms implemented by government finalcial institutions are the following (seeAinex 9):
L LBP wholesale lending to small famers through cooperatives and rural flnancialinstitutions (e g , rural banks, private development banks, saving and loanassociations)
2. LBP-GTZ project to link banks with self-help groups
3 PNB special programs catering mainly to cottage level ciientele;
15
5.
o.
4. DBP special lending windows to assist cooperatives, small fame$ and
and microentrePreneurs;
SSS small entrepreneur's livelihood program for SSS members;
GSIS small enfepeneur's livelihood program for GSIS members;
Farm lending, measured as a shate oftotal value-added' and oftotal loans granted by the
u-tirg ,""i.i, tasi"clined in th" past decade The sharc ofagiculture to total formal loans for
+r.- -a;nd l qqo io 1994 averased onlv 4ol0, While the average for the previous four yeals was 7o%'
ffJil;H;";;;, "" u t"it"itv
"izu"at, but more as a problem of identiflcation bv institutions
r""["a i"'""i*f*ral credit ofenough potentia] low-risk borrowers/^activities' as well as the
Droblem of devising a suitable credit delivery mecharusm ( worlo t'anK' I vvo'
Land Bank of the Philippines (LBP) is the main government-f,nancial institution ir|olved
ir maf iil.t f"iJi"g, canied out mainiy through cooperatives Due largely to the rapid formation
;;;BP il;;;;;;;*es trom 1986 to 1990,-LBP loans to small farmers and fishermen increased
by 2,622yo within the four-year Period
B. Government Lending to MicroenterDrises
Most govemment lending programs focused mainly on small farmers from the 70's until the
mid-,Ao;. - it
";as only in the late-l8os that credit programs for microentrePrises were established'
;;r;*t"[trt"r, as ienned by ttre small and Medium Enterprise Development (SMED) Council'
cover all business activities engaged n industry, agri-business and / or services' excluding trading'
*i"il* .i"gf" p.ptl"orship, cooperative' partnership or cotporation' whose total assets amount 1o
less tha p50,ooo, and which is duly registered wiLh rhe approprrate agencres
The 1988 Survey of Household'Operated Activities (HOA) gl:ve.s some indication ofthe
relative magnitude of mrcroentrepreneurii activity in the country as their sol]rces of fimncing
Thic (nrvev covered apDronmarery 52,000 sample households nationwide whose livelihood
;:fuL;#;;; riJ'ro"-r. *iiii'i"', tining and q'arrying activities emploving less than five
i*."u"-a ft"ti"ft.lds engaged in whoiesale and retail trading and manufacturing which rvas not
;"'**iav ."""r"ir"aut""." it " survey showed that 4?.2% of all households were engaged in at
r"^i "*
doe. r,i-*, in Metro Manila (13.3%) and highest in westertr Mindaoao (?0.4%) HOAs
are mostly (almost 7S%) in the agriculture, fishery and forestry sectors'
Only l0 to 20% ol households surveyed availed offinancial assrstancefrom govemment or
private ien'ding institutions or persons The majority used thier.own funds for {inancing their
businesses. ofthose who borrowed, 68 to 8070 borrowed aom private persons The survey did
not indicate whether these were commercial sources (such as moneylenders) or non-commercial
sources like friends, relatives and neighbors . "
covemmc!-teldi! AsriculturdHaN
Among the govemment leoding programs to microenterprises, the largest in scope was DTI'STulong sa Tao - Self-Employment A,ssistance Progmm (TST-SELA), launched in 1987. Thisprogram aimed to a) increase emplolmert and income opportunities for low-income groups,includiog the landless, subsistence farmelg poor women and the unemployed; b) promotion ofsavings and se)f-reliance among the beneflciaries; arrd c) increase ptoduction of goods and servicesofthe target group and thereby stimulate the local economy.
TST-SELA targetted the rural poor with household incomes below the poverty threshhold,as defined by NEDA who were engaged in microentreprises with P50,000 or less in assets, andemploying not more than 5 persons. By the first quarter of 1992, loans granted by TST-SELA andits related programs (NGO-MCP l and MEDP-CDF) amounted to P530 million, reaching 84,077beneflciaries. Lending to micrentrepreneurs under tiis plogram is carried out though accreditedNGOS .
Other govemment agencies that implement lending programs focused on microenterprises,as shown in Table 5, a.re the Equipment Acquisition for Small Enterprises, (Office ofthe President);the lndustry Development Program and the Balikatan sa Kabuhayan Refresh (Technology andLivel.ihood Resource Center); Jeepney Boundary Hulog Program (Development Bank of thePhilippines); Sma.ll Market Vendors' Loan (SMVL) Program ajld the Bangkabuhayan ng Bayan(Philippine National Bank); the Kabalikat sa Pagpapaunlad ng Irdustriya (KASAPI) aod SSSMembers Assistance for the Development of Entrepreneurship (MADE) of the Social SecuritySystem.
Most ofthese progams include terms meant to attract microentrepreneu.s who are not ableto access from the formal sector : below-market interest rates, long-term repayment periods,guara.ntees for collateral-short loans and simple processing and documentation requir€meots. Mostdo not require coliateral, but instead base the lending decision on such factors as the capacity ofthefirm to grow, to create employment, and to utilize indigenous re$ouces.
A list ofgovemment and non-government iending programs for micro-, small and mediumenterprises is shown in Table 6. Noteworthy among the private lending schemes are the Fixed AssetLoan Program and Working Capital Loan Progam ofthe Bankers' Association ofthe Philippines(BAP) and the Small and Medium Etrterp se Credit Program of Philippine Business for SocialPrc$ess (PBSP). The Iinancial assistance under these special lending programs are oftkee types:a) direct loans, with credit provided dircctly by the financial institututiofl to the boffower; b) iodirectloans, which provide loans through other institutions like banks, cooperatives, NGOs and industryassociationsl and c) credit guarantees provided to banks,a cooperatives, and/or private voluntaryorganizailons to encourage them to provide loan assistance to small enterprises.
The issues on access discussed in Section 4 apply to microenteryrise credit, as well as toagricultural and other small borrower lending. Similariy, principles found to be effective in runningcredit and saving programs for the poor and theil implications for financial schemes in thePhilippines provides many iessons which financial programs directed at mic.oenterprises in thecoLntry can benefit f 'o-n
Suggost€d Oisaggregatlon of th€ Rural Market
Possess baslc enlreprene!dalqualliies and nanagedal skills to
in lalgerscalo projecls.
st€ady in6ne sourco. CaPableofg€neraljng som€ surptus, and€n abso6 comPulsory caPltalbuild-u p and oblig alio.s.
marginal tarme6, lplanddrellerg, out-oFschool Youih,dislocated and disenlrandised
Fam-b3sed @p/ivestc6k kisingnon-fafir t€ding aclivities e,g.petty buY-and-sell, mini san-sa
shorl l.nn Prcducuon orol loan delivory, Ec.very,
slpe lsion. Reod.nhtion otlues and virlues on credn,
savings and commlnity tEnsrof-
upgrading oPaElionE of pnvab-seclor-lEd coop!, Elocusing LBPlending PoliclEl or poc.dur€s.
3c.€$ lo an "spex bank',lmol€m.ntanon of Prc16ct Sl|nRelianc€ (PSR), CoDorate ApprcachNucleus &lat€ or collecltve coitiact
viable savlngsled cooperative3.Forg 6 inancial and op€ra{ng bondbetween and among 2,000
nc€ kom an epex banK , aPrcmotLon ol prcdlcts .ndr.ach 050,000 ullr. Poor by 2000.
NGO-GBA €pllcsllonr . Pool ot200 NGos c€n betalned fo.
ol access to long term loansasslslance, lund rnanagemeht,
kag€s wlth banking Eoctor, aid
Core grcup ot Phil. Netwo.k ror'lping th6 Hard Core PoorHILNEI),
suer Phil pp{^d Ruftl cBdll shldy, vor' 1
1 8
l_l
Table 6SOURCES OF FORMAL AND INFORMAL LOANS
SELECTED SURVEYS(in Percent)
Period Covered
1982-83 1983-84 '1986-87 1988
FormalBanksNon Banks
lnformal
LandlordRelativesFriend/NeighborMerchant/TradersMil lersMoneylendersInput Dealers/Storeowners
Rich FarmersOthers
TOTAL
58.356.9
41.7
2.6
13.64.21 .7
5.0
11.2
100.0
3.3
96.4
4.69 ,1
43.2
100,0
25.5
32.2
0 ,1
2.4
4 . 1
100.0
5.42 .1
92,5
11,4
17 ,38 .0
10 .1
9.0
100.0
31 .9
100.0Sourcer AgncultuGl Credlt Policy Council
19
4.These@
within the dualistic financial system in the country, finarrcial intermediaries in the formal
sector co-exist with those in the informal. The formal sectol consists of institutions which are
supervised ard regulated by the BaDko Sental ng Pilipinas @SP), including banks, lending investors
uni inrur-"" companies. The informal sector (including a grey area which authors like Ghate( 1992) call semi-formal) has a wide variety of intermediaries, all firnctiodng outside the regulatory
L""h of SSp. These informal financial intermediaries include cooperatives, credit unions, rotating
savings and oredit associations (ROSCAs) also known in the Philippines as "paluwagan", ilnancial
self-hip groups, private monelenders ("5-6"), farmer lenders, traderJenders, tiends, neighbors and
relatives.lsee Figure t, Sectiol2). In the Philippines, cooperalive credit unions, cooperativ€s and
NGOs are consiJered as semi-formal financial intemediaries because they are registered and to a
aertain edent, regulated by the Cooperatives DeveloPment Authority (CDA), but in other countries,
these institutions are considered part ofthe informal sector'
Theformal,bankingsectorhastraditionallybeenurbanbased(exceptforruralbaoks)bothin the location of their bianch network and in the cona€ntration of their deposit atrd lendilg
activities. Because of the character of their operations, banks are generally unable to provide
adequate frnancial services to marginal sectors like small farmers, microentrepreneurs and other low
in.o^" e.oupr. Savings deposit facilities for small borrowers are also negligible in the formal
sector.
It is the non-formal (semi-formal and informal) frnancial intermediades that are able to give
greater access to loans, as well as deposit facilities for small' low.income households Their
itrengths, which diff'erentiate them markedly from the formal sector, lie in the following features:
a) flexibility of loan transactions,
b) personal dealings with borowers,
c) simple and sometimes crude system ofmaintaining accounts;
d) blending ofmoney-lending with other types ofeconomic activities;
e) informal dealings with customers; and
f) for professional moneylenders, secrecy about financiai dealings
The setni-formal financial sector in the Philippines is made up of pawnshops, lending
investors, cooperatives and NGOs It is estimated that there are over 18,000 coope'ahves' among
them roughly i,000-3,000 qedit cooperatives, and another 2,000-3,000 farmers' cooperatives which
20
have survived the "cooperative crisis", resulting from their use as cotrduits by the government's pastcredit programs. There are about 36,000 registercd NGOS, 85% ofwhich are community based.
Numerous altematives have been explored in the county, in which NGOs are involved,usually with support liom extemal NGOS. Among the foreign NGOS, the churches play a prominentrole. Siebel (1996) notes that what is rcmarkable and extraordinary for the Philippines is the easeat which NGOS and government orgarizations work together. Examples are the NGO MicrocreditProject with the Department ofTrade and Industry @TI) assisted by the Asian Developmert Bank(ADB), and the P(oject Linking Banks and Self-Help Groups with Land Bank, assisted by theGerman Technical Cooperation Ageocy (GTZ).
Ghate categorizes informal finance into four broad tlpes: a) direct but intermittelt letrdingby individuals or institutiotrs with a temporary surplus of funds; b) lending by individuals orinstitutions specializing in lending, whether on the basis of their own funds or of intermediatedfunds; c) lending by lenders who main activity lies in markets other than credit, but who tie credittransactions to traosactions in these other markets; and d) group finance. These four catego es arerelated to each other in Figure 1.
Ghate fl(st distinguishes between qedit extended by entities (whether individual orinstitutional) to otiher entities; alld credit extended gilhin entities, or group finance (box 2 and 3in Figure 2). Of those who lend to other entities, we can distinglish between "intermittent" and"regular" lenders. Intermittent lenders grant loans intermittently, although not necessarilyinfrequentiy, as Chate points out, whenever they have a temporary surpius offunds. Families ofFilipino ove$eas contract workers who receive remittances and lend periodically, is an example ofthis type oflender. Lending between relatives and friends is also arother instance ofiDtermittentlendins. Agabin (1988) points out ahat from 30 to 60% ofinformal farm indebtedness was sourcedfrom friends and relatives. As much as 7870 ofioans for the small enterp.ise buslness sector wassourced ttrough kinship and friendship ties (ISSI, 1985); likewise, 66% in the undergourd microbusiness enterprises (Gatchalian et al., 1986).
' Among regular lenders, we cal distinguish those who "tie" lending to marketing and othertransactrons, and those who extend untied credit. The tied-credit lender may be a supplier offarminputs (fertilizers, pesticides) or may be a buyer, such as a rice trader, rice-miller or sugarcaneprocessor. Those who extend untied credit are o{ten refered to as "specialist lenders" becauseextending c.edit is their major activity. Regular lenders source their funds either from their ownfunds or fiom borowed funds
ln group finance, inte.mediation takes place between members ofthe group, lvith depositsand loans being carried out collectively. Credit unions, paluwaga.ns, self-help groups, and creditcoopelatives are examples ofthis type.
21
Figure 2
MAJOR TYPES OF INFORMAL FINANCE
lnformal Finance
credit extended withinentities, or group Iinance
Credit extended bY entities(whether individualorinstitutional) to other entities
Regular lenderslntermittent lender$
Untied credit(specialist lenders)
Source ; Ghal€,1992
22
B. Segmentation of Markets
Financial markets itr the Philippines, as in other underdeveloped countries, are segnented.The broadest segments are the formal, semi-formal and info.mal sectors. Within each of thesesectors, there is still substaotial segmentation. Segments exist according to the type of clientelefinancial intermediaries cater to (commercial and industrial loa.:rs, large agricultural borrowers, orsmall borrowe$ and savers); according to the degree and t)?es of intermediation functionsundertaken, according to the major source of funds, and accordilg to whether they opefate inIinkage with other markets or not. The suppliers of qedit in the informal sector may be fulI finarcialintermediaries, fllnctioring both as mobilizers of savings as well as lenders, or limited only tolending functions. FuDds may be sourced from deposits, members equity, borowings, grant ordonations. Loans may be linked with other markets, such as is the case oftrade qedit ftom inputsuppliers, wholesalers and footwear matrufacturers in Marikina (Lamberte and Jose, 1988).
Small-scale and subsistence agriculture source their loans mostly from informal lenderswhile commercial agriculture absorbed most of the loans €xtended by the commercial bankingsystem to the agricultuml sector.
Even ifinlormal finance is directed towards the poor aqd margioalized individuals, informallenders also segregate bonowers (see Ghate 1992). The highest risk individuals or the poorest class(Class E), arc therefore less prefened by informal lenders. This does not mean that informal lendersdiscriminate or crowd-out the poorest class from credit. Rathel informal lenders have excellentinformation on creditworthiness ofindividuals that they are able to allocate loans according to riskand borrowe/s capacity to pay.
The clientele ofcredit unions, credit cooperatives, rotating savings and credit associationsare the low-income groups comprised of small farmers, marginal fishermen, factory workers andordinary employees. The traditionai moneylende$ like traders, millers, landowners and big farmerscater to petty traders, small entrepreneurs like market vendors, factory workers, employees, poorconsumers and subsistence producers (ftshermen and farmers).
C. Mobilization ofSavings bv Non-Formal Financial Intermediaries
The savings mobilization role ofthe informal sector depends on the segmeot that the ICMcaters to. While the mobilization of savings is demonstrated strongly in the case of CCUS and self-help groups, paluwagans, aod other savi-ngs and lending groups, informal money lenders on the otherhand depend on their o*n savings and eamings, and do not generally mobilize savings (Agabin etal. 1989).
ICMs which mobilize deposits are able to provide assistance to poor households, which areeither not willing or unable to deposit their small savings in a bank. The schemes adopted by ICMsvary according to the type ofintermediary, but generally members have the incentive to contributeregularly since each will be able to get a larger loan when he needs it. An outstanding feature of
23
lCMs which mobilze saviogs is that they are composed of members who belong to the same income
category or range, have the same occupation or livelihood, and are geographically close to each
other. In other words, they are homogeneous itrdividuals (Agabin et al 1989) Moreover, rcciprocity
is expected arnong the loembers. That is, membe$ cotrfibute money and save with tie expectation
that they can also borrow. If membe$ want to borow more, thetr they have to cofltribute more
Moreover, loans are given to members only. Also, because ICMs cater to particular t]?es of clients,
they are able to segregate the market more easily than the formal market (Ghate 1992). This explaitrs
the homogeneity of the clients: market vendors, tricyle drivers, teachers, etc , and the ease of
processing financial transaotions. Thus, transactions costs is minimized.
Self-help groups, CCUs and paluwagans have been found to be effective mobilizers of small
savings from poor households. Jamon (1989) mentions four features ofself-help goups that serve
as their strong points. "These strengths include: 1) the adoption of simple procedures, 2) ability to
raise and colleot small savings, 3) group decision-making, aad 4) homogeneity, which helps ensure
effective supervision and lesser ruherability to poiitical manipulation" (FDE, 1994, p 114)
CCUs and paluwagans are also able to successfully mobilize deposits among low-income
eamers, due to low transactions cost, which in turn is minimal due to : i) limited geographic area
ofoperation, e.g., within public markets and omces; ard ii) a fairly homogenous clientele, e g ,market vendors, and employees). Paluwagan and CCU members save because of the expectation
that they are able to borrow. Hence, if members want to bofow more, they tend to save more
Among the CCU members in the sample, about 50 percent do not have bad( deposits
compared to 72 percent of the sample paluwagm members. Among the members with bank
deposils, few were able to borrow from a bank
Although moneylenders generally do not mobilize savi4gs, relying on their own funds for
thef lendhg activities, Lamberte and Bunda (1988) documented a case whete a professional money
lender was able to mobilize savings by accepting time deposits for as low as P l 00 at 80% per annum
This accounts for 70 percent ofher loanable funds.
D. Participation in Financial Decision Making
The extent ofparticipation ofbonower-members in decision making in financial transactions
has been documented by.Abiad (1994) for one type ofnon-formal financial intermediary - self-help
groups (SHGs). For an NGO, the degree ofparticipation can be seen in a case study on the Credit
and -savings
Project of Mindoro lnstitute for Development (MIND) prepared by Helvetas Swiss
Association lor Development and Cnoperrtion
The Abiad study was based on a survey of240 financial SHGs in Indonesia ard verified for
the Philippines by field visits to SHGS in the country The SHCS were groups involved in Project:
Linking Banks and SelFHeip Groups in the two counties The study conchrdes that member
borrowers of SHGs have a high degree of participation in financial decision making The main
24
mechanism for participation is the regular group meeting, typical ofthe structure ofmost SHGS inthe Philippines, Indonesia and other countries.
Bouman (1979) points out that inibrmal financial groups that do not have regular meetings,and where the organize. instead collects the contributions, are likely to have more difficulty withrespect to fraud and embezzlement. In this regard, most (85%) of the SHGS surveyed collectedmember savings and distributed loans during their regular group meetings, held generally once amonth. Financia.l transactions arc therefore known and open to scrutiny by group members, and trustrvithin the SHG is enhanced.
Finarcial records, through rudimentary, are kept by most (98%) ofthe SHGs. Transactionsare transparent in 650Z ofthe groups, with records known or accessible to both group managementand individual members. The records ofthe remainiog (35%) SHGS are seen only by the group'smanagement, thus these groups lack transparency arld perception ofcontrol over their savilgs.
Other areas of particrpation include the following sanctions for lack of savings discipline,sanctions for loan default, the interest rate to be charged, and a.llocation of interest income.Regarding the latter, SHGS charge their members high interest rates for loars, lvith 90% of SHGSchatgjngz4o or l-Jgher per annurq and 300lo charging more than 48%. Since these groups pay zerointerest on thet membe$' savings deposits, thus incurring zero cost offunds, the interest income ofthese groups is therefore substantial. How is this to divided among the members ofthe group?
In general, the group decides. Interest income is calculated at the end ofeach year by 62%ofthe groups, and income is distributed in a malrner decided by the group. One third ofthese SHGS(34%) allot all of their interest income to the group firnd, while 15% distribute the funds to theindividual members. The remaining 5l% allocate a portion ofinterest income to a combination ofthe following: to the group fund, to members, to group omcers, or to payment ofSHG obligationsor activities.
Regarding loan superyision and collection: 88% ofthe groups responded that there was noneed for loan supervision because they know each member well; 58% replied that they spot checkoccasiom.lly, and 24olo that it was not necessary to check, for they trusted their members.
Most loan collection is done at group meetings, and is therefore transparent. This methodof collection also serves as an effective means ofpeer pressure for timely rcpayment, since lailureto pay a loan affects the magnitude ofsubsequent loans other members ofthe group can avail of.Most (91%) ofSHGs require loan instalments to be paid du ng the regular montl y group meeting,3 6olo allow members to pay through board members outside the regular meeting; and 9% involvedoorstep collection.
The Helvetas case study on MIND's Credit and Savings Project reveals similar resultsrega.ding participation by borrower-members:
25
On Loan Decisions
In the case of livelihooil loans, group / peer pressure is very much evident. The Sroupreceives th6 loan, then subdivides and priodtizes it among eligible members. The goup tlenis r timately rcsponsible for total repayment.
The mere act of allscltssing and presenting to the General Assembiy the status of a member-borrower, whether he / she is d€linquent or not, is in a lact pressule on tle borower. In thecase of KAMMI, it was the production cells and corc groups which collectively pressuredindividual bonowers.
On Default Penalty Slslc!1
This refers to default penalties assessed on bonowers failing to liquidate his/her obligations.Management takeover recernly |gftns as Sagip'Utang was enforced on a borrower who failedto pay his/h€r loan - in part or in full. The production cell tates over 50%ofhis farrnlots ofwhich the eaming is used to bail out the mortgaged land. The owner-cultivator was thentreated as hired laborer in his farm, The set up rcamins lmtil such time that the lot wasrede€med,
On Monitoring ofLoans
The production cells and/or core groups within the POs monitored the project. Collectively,they plessured individual beneficiaries to perform the tasks assigned to them and obligatedthem to settle their obligations.
These two studies give us some indication ofthe relatively high degree ofparticipation of
borrower-members in finaocial decisions ofnon-formal intermediaries like NGOs and SHGs. In the
formal sector, no such pafiicipation exists.
E. Contracts and Terms ofDifferent Tvpes oflnstitutions
L The Financial Institutions
Two studies (Domdom, et al., 1996, and Garde, 1995) provide some insights into thecontacts and terms ofinstitutions which provide financial services to the poor. Both studies provideinformation based on case studies ofthe following institutions:
1. Rural Bank
2. Credit Cooperative
3. Primary Non-Agricultural Multi-Purpose Cooperative
4. Bank-Related Fouodation for Micro-Lending Program
26
5. Thrift Bank
6. Pdvate Credit arrd Guarantee Corporation.
7. Land Bank
8. Lending Investor
9. Cooperative
10. NGO
I I Government AgeDcy
12. Guarantee Provider
Tables 7 and 8 prodde the details for each type of institution, covering: a) the type ofclient; b) the loan package/description of lending program; c) sewice delivery; d) interest rutes; e)delinquency; f) sources offunds; g) maximum loan amount; h) loan maturity; and i) collateralrequlrement.
The study ofDomdom et. al. includes case studies of3 lenders from the formal sector: a ruralbank, a thrift ban* and a private credit guarantee corporation; and of4 informal lenders, includinga multi-purpose cooperativg a credit cooperative, an NGO and a foundation set up by a commercialbank. The lendels have been io existence between 5 to 3 1 yeals. Data oll these micro-lenders isshown in Table 5.
Except for two fuiancial intermediaries, the foundation and the credit guarartee corporation,the miqo-ff€dit programs of the other institutions are targetted toward miqoentrepreneurs,including market vendors, tricycle ddvers, cottage iodustly operators, and women in relocation areas.While loans are given for livelihood and income ge[erating activities, consumption related loans arenot precluded. On the other hand, the balk-related fourdation atrd the guarantee corporatioors creditprograms are aimed toward NGOs which onJend to small enterprises.
The formal financial institutions source their funds for lending from savings and timedeposits (for the rum.l aod thrift bank), and ftom the financial resources ofmember-banks (for thecredit guarantee corporation). The funds used by the informal financial intermediaries rarge fromshare capitaJ, grants. dona(ions and interest income
The loan characteristics as well as loan processes of the different lenders (see Table 5)indicate the extert to which each type oflender is able to adjust its financial services and productsto its target clierftele. Two financial intermedia es-the foundation and the guarantee corporation--
21
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do not exteDd loans directly to miqo-enterprises, but instead lend to NGOS, cooperatives, voluntaryorganizations and small- and medium-scale enterpises. These borrowers should be engaged ilonlending to micro-enbepreneurs, and must show proof of a good qedit record. The amount thatcatr be borrowed is a maximum ofP500,000 for the initial loan. The itrte.est rate charged rangesfrom 8 to 16olo.
For financial intermediaries which directly leod to low income and small entepreneu$(credit cooperative, multi-pulpose cooperative, NGO, rural bank, tbri{t bank), the following wouldbe indicators ofthe extent to which they are able to provide access to these small borrowers:
a) loans which are small in size;
b) simplified loan procedures;
c) rapidity ofloan approval and loan release;
d) maturity and loan purpose which is flexible, and able to meet divergent needs;
e) collection systems that are ia tun€ with the earnings flow ofits clientele; and
D interest rates sumcietrt to cover thei ransactions cost, the dsk rclated to theirparticular clientel, and their cost offunds.
Wldle these indicators vary among the types of direct lenders in the sample, they are in factreflected by the data on each lender in the study. The loans are small in size, and although themaximum loan size may be as high as Pl00,000 the actual number of small loans (F2,000-P5,000)is also large. Howevet because ofthe system ofrecord keeping by these lenders, there was no wayto quantify and determine the average loan size and the most frequent loan size ganted (the modalloan size).
The collection systems, such as the daily collection system for market vendors, assures highrepayme[t rates, as collection of small payments is timed with the cash inflow of their businessactivities. The location ofthe NGO or ofthe bank closer to the clients is another factor that showsincreased accessibility by the small borowers. The NGO for example has field offices in each area,and received weekly payments from the boffowers in that area. In the two cooperatives, the omceis located within walking distance (or a tricycle ride) ofthe bonower's residence or place ofworkLoan approval and release is sho.t (within 2-3 days for some, within the sme day for others).
Since the loan decision is pushed do\an to the lowest possible level, i e. flot centralized in thehome office, screening and approval can be done in a shorter period. The borrower's track record,an interview by the branch manager or the credit committee, or a referral fiom a former borrower ofthe NGO is sumcient to get a loan approval, with or without collateral.
30
level of repayment is assured by some lenders tbough the use of mechanisms likeand joint liability (by the NGO which uses the Grameen baok approach) and by
visits to the end-user.
al insights into the cotrtracts and terms offinancial intermediades car be gleaoedshrdies of Garde (1995) of diferent credit providers in the formal and non-formal
7 to l2 h the list above). These are zummarized in the matrix (Table 6) atrd are detailedsardies presented in Annex 3. Garde draws the following conclusions fiom these case
The credit market is highly segmeoted, and different credit providers confinethemselves to a particular segmetrt. Segments like the "poor" are also highlystratified. Only Land Bank addresses the highest-dsk sector--small falmels. Mostof the credit providers surveyed focused on other segmeots of the poor, includingwage earners, market vendors, tricycle drivers, micro- and small-scale business).
Having a clearly defined market segment facilitates the developmetrt of different loanpackages aacording to the needs and capabilities ofeach segment. Loan packagesmay be differentiated by purpose, tem, intercst rate and other terms. New loanpackages have been developed, for example, by older cooperatives to counteractconstraints on interest rate by regulatory agencies like the former BCOD.
Proximity to the end-users is a key stratery of the credit providers. This isaccomp)ished by confning themselves to a paxticular atea ofoperatiol or setting up"brarches" close to the target segnent. Sqeenin& monitoring and collection are thusfacilitated.
Creative approaches to loan securities/collateral have beeq developed. Because thepoor lack sufficient collateral, other mechanisms for assuring repalment are used,such as chattel mortgages, promissory notes, co-maker, group guarantees, joint
liability by the Board, etc.
Lenders telld to ircrease the effective interest rate through other charges, like fees forapplicatior! sewice, plocessing, supewision and insurance.
Developing a cross-zubsidy scheme. Institutional viability is maintained by lendinga major portion of the lender's portfolio to lower-dsk sectors, iII ordet that ilsearnings can subsidize the lending operations for high risk groups like farmers. Anexample ofthis is Land Bank's commercial operations, which subsidizes its letrdingprograms to the risky agradal sector-
3 l
F. Interest Rates- Repa)'rnent. and Other Terms
lnteresl Rates
Contrary to tie popular belief that CCUs charge lower lending rates thao banks, CCUSaverage effective lending rate were found to approximate that of banks (Lambertg 1988 ). CCUSgenerally collect interest h advance and additional charges afe lwied to cover service fees, loanredemption insurance and collection oharges causing the effective ioterest rate to shoot up. Theseother charges account for halfofthe effective interest rate. The other halfis nominal interest rate.
Lambede and Bunda (1988) looked into the lending mtes of moneylenders. Onemoneylender had a high lendirg rate but only had a net spread of 1.5 percent. Two money lendersincurred losses while four enjoyed substantial profit margins. Lambete reasons that the twomoneylenders who suffered losses were actually new market entrants and that their losses should beconsidered as sunk costs. These sunk costs are inaulred so that they can establish their presence inthe market. Market lenders who enjoyed the largest spread had the largest number ofclients.
Based on inte.views with moneylenders, it was found out that moneylenders do not checkthe interest rate being charged by other moneylenders because t}Iey believe that there is excessdemand for credit in the community. The wide variation of lending rates across moneylenderstogether with the lack of ability of boffowers to shift from one moneylender to atrother is itrdicativeofa severely fragmenred capital market.
The effective interest rate charged in trade credit was investigated by Lamberte and Jose(1988). The effective interest rate on trade qedit is broken down into explicit a.nd implicit rates.The explicit rate is made up of the discount rate on post-dated checks (PDCS) and plain hterest rate.The implicit interest rate o ginates out of the price differential of inputs or of outputs in the case of"tie-in" credit a(angement.
Suppliers who ale solely supplying inputs charge implicit interest rates that are twice as largeas those charged by wholesaler-traders who axe also input suppliers. The latter charge lower implicitrates because by usually having marketing contacts with big exporlers or retailers, they arcguamnteed a steady supply offootwear though tie-in ar.argements. The former can exercise somedegree ofpricing power because footwear manufacturers bo.row fom them since the manufacturers'wo.king capital is tied up with trade credits extended to customers. For both however, implicitinterest rates account for more than 40 percent ofthe efective interest rate.
The effective interest rate is first determined by input zuppliers and thetr the rclative sharesof implicit and explicit interest rates are adjusted. Input suppiiers were also discovered practisingdiscrimination bet\'/een small and large firms. Small firms are charged higher rates that large firms,since PDCs issued by large firms are considered less risky, hence the lower implicit interest rate.
3Z
tend to qeate financial practices that are tailored to fit the cash flow ofexplains why paluwagans may take different forms--based on the ftequency ofdaily, weekly, bi-monthly and monthly.
CCUs where members receive their salarv everv l5th and 30th ofeachrepayments are scheduled during l-hese days. Loa.ns with longer matudties are only
who have se@rity oftenure. Market-based CCUs, on the other hand, use a daily-scheme because their members have a high cash tumover. Loan maturities normally do200 days.
paymetrt schemes are used by moneylenders: steady scheme, revoMng scheme andihe balikbayan scheme. Under the steady soheme, there is no set matudty date lor a loan butborrowers are required to pay interest otr the principal monthly. The bonower is Aee to decide howto pay the principal. ln the revolving scheme, the matudty dat€ and intercst paymetrts are set and arecollected in advance. Bonowers are Aee to select whether to pay the principal on either a daily,weekly or bi-monthly basis. Under the Balikbayan scheme, boffovr'ers effectively have a credit linewith the moneylender. The line limit is not pre-established. Availments from the line are payable,
ard pnncipal, wrtfun one day or one week. Revolvmg credit was the most popular tt?e ofhavitrg accounted for at least 33 percent and at most 83 percent ofloans granted by various
CODE-NGO estimates that there are about two thousand NGOS in the country engaged in&rdopmedal activities. Less than one fourth ofthese deyelopment NGOs are involved in financinglldihood activities. Ofthesq 300 NGOS are participants in various credit programs ofgovemment.geocies. Fourteen are engaged in the Grameen Bank rcplication iq the country.
Based on a NATCCO survey of 826 coopentives in 1992, about tbree fourths ofcooperatives are community-based, while the rest are imtitutionally based. By fulction, about half(46.9%) are multi-purpose cooperatives; 3'1.3yo are qedit cooperatives. However, many ofthemrlti-purpose aooperatives are also engaged in lending, thus it is estimated that at least three fourthsofthe cooperatives are functioning as semi-formal financial intermediaries.
A. Sou.ces offunds ard sustainability
Cordero (1994) points out that NGO sustainability is a main concern, for while they aresocially oriented, they are also fund driven. The majority ofNGOs edst through a) gants or softloanq and b) cost-free resources such as free omce space, voluoteer workers or officers. The studyfunher concludes that the existence ofmany NGOs is precarious, as cheap or cost-free fund sources
33
may dry up, and the commitment of NGO workers' with little or IIo compersation may give wayto the rcalities oftheir survival.
Less than 300 NGOS are estimated to be yiable or zustainable. Those that arc sustainableare so because of: a) large resource base accumulated through the years; b) an almost continuousflow ofdonor funds from long established relationships; and c) effective cost recovery measures orearniflgs from thek operations, including, lending, training, and consulting sewices.
B. Lending and savings mobilization
Lending by NGOs is generally small in amount, and short term. More than 900lo ofloansdisbursed are for amounts utrder P5,000, and matudty periods are between one-month and one year.(Codero, 1994). However, larger NGOs have had loans as large as P200,000, mainly for grouplending, but these make up less than 107o oftotal number ofloarN approv€d.
Loans of NGOS are mainly gra.nted for income-generating projects (lGPs), with smallproportions ganted for providential and eduoational purposes. The most common types ofactivitiesfinanced are microenterprise aotivities like food processing, vending, baclryard livestock raising,haadicraft s (sub-conractiog), rcpair shops, cosmetology and dressmaking.
709lo ofborrowers arc wome& based on the same study. Nominal interest rates charged byNGOS range Aom 12% to 300lo per annum. In addition, NGOs usually collect service fees that maybe aflat rate like P20 or apercerxage, e.C.,2yo ofthe pdncipal amount. Effective interest rates rangeftom 20 to 40yo per amum, due to the common practice of [front-loading" interest charges to theinterest amount, and due to the ftequent repayment schedules, such as weekly or bi-monthlypayments.
Most NGOs have a built in savings mobilization scheme. Savings schemes are of twogeneral types: compulsory and periodic savings by beneficiaries, which may be daily, weekly ormonthly; and "saving charyes" added to the interest ratq amounting to 2 to 10% of the loan arnount.
C. A Commercial Bank Owned by Cooperatives: Bank Bukopin in Indonesia
Bank Bukopin in Indonesia is a commercial bank owned by cooperatives. Established in1970 by 8 coopemtive organizations, itwas owned by 676 cooperative orgarizatioff in 1992.. Allover Indonesia, it has 19 branches, 40 sub-branches and 50 cash offices in the rural areas.
The organizational structure of Bank Bukopin consists of3 levels. BB Headquarters atnational level, BB branch at the provincial level, the KUDS and the kelompoks (groups) at the levelof the member households or the level of rural cooperatives. Policy matters and controls oftheongoing programs in the provinces are caried out at the Headquaxfe$; the provincial level is incharge of daily operations and expansion ofthe program to new KUDs and kelompoks; fom thislevel, field assistants provide support and control services to the participating KLiDs and kelompoks.
34
aod credit services are provided within the shucture of the village uniticipants are organized in groups, kelompoks of 50 to 100 persons who all become
KUD
have rapidly gown. The number ofkelompoks grew from 94 in 1985 to 1,254ip grew from 13,660 to 89,93 in the sarne period. This shows ao average grofih
the kelompoks ard 426% for membership per year. In temls of assets, the growthyear, while liabilities and reseryation at 182y6 per year. Duritrg that period, the
have made profit.
details on Baok Bukopin's objectives, organization struoture, procedurcs, terms andsee Annex 10.
Most small farmers, microetrtrepreneun, and other small bofowers in the Philippines, asin other underdeveloped countries, arc not able to bonow ftom banks. This is due mainlyperceived high risk of lending to these clientele, as well as to the high transactions cost
in handling the small accounts of such boFol,ers. Alother factor is lack ofthe standardrequired by bank, i.e. land and other fixed assets. As a result, small borrowers are-Faclically shut out ftom formal sector loanr, and thus rely almost exclusively on the informal credit
marKer.
1 High fusk of Small Borowers
The main risk a lender faces in granting a long is that of loan default. Two types of defaultsmay alise: ong where the boffower is not able to pay the loaq although he vr'atrts to; the other, thebonower can pay, but is unwilling to do so. An example of the first t]?e is a failed rice clop due toa typhoon.
Poor people are generally considered as high-risk clients by financial intermediaries. Theirbusiness activities are small, with limited tum-over alrd small profit margins. They are oftenundercapitalized. Small farmers ability to pay their loans depend on their harvest, which dependon many extemal factors like the wealier and the world and domestic prices ofthe commodities theygrow. Fuihermo(e, p.oductivity in agriculture is low, and production ofpoor people is oftenconcentrated on low value crops. The debt capacity oflow income households is low, their assetsare few, and they have little or no security to offer.
The exte[t to which lenders are able to reduce risk determines how successful it can be inlending to small farmers, small traders, and other sectors ofthe poor. Some successful \rays to
rcduce dsk have proved effective in widening the market for loans for small borrowers, both from
the formal and the bformal sectols. This is discussed further in Section 5.
2. High Transactions Cost of Small Loans
Transactions costs are incuned by both the lender (LTC) and by the boffower @TC). The
mode of operation of banks often lead to high BTC, which poor people may find prohibitive
Borowers often have to travel long dista.nces, probably several times, to the qedit institution
located in the poblacioD. Each visit takes lollg travelling and wailing time in the bank The time
spent could have been speDt on fatming or trading aotivity, and thus it has an oppoftunity cost. The
l;a[ applicafis have to seek assistatrce for numerous complicated forms, and to pay fees, includingpossibly, bribes. All these add up to high BTC when dealing with the formal sector'
Studies have shown that BTC is regessive in its imPaot on bono\xers (Abiad, 1988; Cuevas
and Graham, 1984). That is, as a proportion ofloan amount, BTC is greater for small bonowers,
taxing them as much as 21oyo more tha! m€dium and large borrowers. Informal lenders are
successfully able to lend to small borowers because ofthe extent to which they have been able to
lower BTC. One study indicates that BTC of bonowing fiom a bank is five time greater than
bonowing Aom a financial Self-Help Group (SHG) in the informal market (see Table 9). For distant
communities, BTC can be as much as 39 times lower for SHG loans compared to bank loans
(Abiad, 1994),
Lender transactions costs, onthe other hand, are those associated with evaluating, disbursing
and collecting loans, as well as ofmobilizing savings and other funds. Since LTC as a percentage
of loan amount ilglgasrs the smalle! the loan amount is, banks therefore prefer to lend to larger
clients rather than to smaller clients (Table 10 )
Lending pro$ams that have been successful in providing credit to the poor have been those
which have, through innovative schemes, been successful in reducing transactions costs, as well as
risk. The provision of altemative forms ofcollateral substitutes has also been a major factor in
increasing credit access ofthe poor.
B. Other Factors Affecting Access
Geographic Concentration ofBanks in Urban Areas
Sixty percent ofFilipinos live in the rural areas (NSO 1990), but banks and their branches
are clustered h Metro Manila aad other urban areas The number ofbatrks pe. total municipality and
city per region, or the density ratio, is highest in Metro Manila (99.2% in 1994) Even Central
Tagalog (R.egion 3) and Southem Tagalog (Region 4), which are contiguous to lvletro Manila' were
low in bank densify when compared to the Manla 4 3yo ar\d3.syo, respectively for the same pe od
The regions with the lowest density ratio were Region 8 (0 6%), CAR (0.9%), Region 9 (1 1%) andRegion 5 and 12 (1.4% each).
.16
Table I
BORROWER TRANSACTIONS COSTFORMAL AND INFORMAL FINANCIAL INTERMEDIARIES
Type ofFin'l lnst.
BTC
BANKSNBFIs
SHGs
(P)
159'76
"31
(P)
.044
.020
.009
Table t0
LENDER TRANSACTIONS COSTrFORMAL AND INFORMAL FINANCIAL INTERDIARIES
LTC
(P000)
LTC FOR LENDING
BANKS: '1,213,000
ITC Per Pgso LTC PerLoanorP6r Deposit Account
NBFIs 250,540.107.'164,010
4,4864423.52
219.42422.24
SHGS 28
LTC FOR DEPOSIT I\4OBILIZATION
BAN KS:NBFIsSHGs
532,00082,040
0.0820 .164
467 0.07
37
Decline in Formal Sector Lending to Agiculture
The removal of credit targeting and crcdit subsidy as a lending/loan policy, i.e. sPecialagricultural credits and the like, has resulted, in general, to a declirle in the percentage share ofagdcultural loans. Lim and Esguena (1996) show that the share ofagdcultural credit to total loansgranted by commercial baoks, savings banks, private development banks, rural banks and stocksavings and loans associations has declined. Commercial bank loans to agriculture decreased from7.36% to 6.17yo a..d to 1.37 in 1984, 1988 and 1993, respectively. Private dwelopment banklending to agriculture for the sarne tbree years also declined- l 5 29%, 14 .73/o, 70 93Yo respectlvely
While mral bank lending to farmers declined fiom 1984 to 1988 (75 91% eJ,rd' Zl73%,respectively), it increased to 27.83yo in 1993. Likewise, an increasing treod in agri loaN wasobserved for two types ofbanks : savings banks and stook savings and loan associations: fromO.48yo, O.56yo ar..d O.'tlo/o for 1984, 1988 and 1993, respectively, for savings banks, and ftom10.06%,2l13yo and 27.83Yo, respectively, for the same three years for stock SLAS Overall,however, formal seator lending to farmers declined: 8 3%, 6 65% ar,d' 2 08yo for the same thf,eeyears, for all institutions combined.
Moreover, Lim ard Esgue.ra (1996) argue that the fall in the share ofagri loans is becauseofa shift ofresources away from nual areas to urban areas whele the retum are higher, as well asa shift away from agricultu.al loans to other sectors
Guarantee Program Did Not lncrease Loans to Small Borrowers
FDE (1994) compared various guarantee and non-guarantee (regular) loan programs andconcluded thati
2.
3.
1 Guarantee programs did not effectively reduce lending cost. The Processingrequirements inqeased the manhours needed to service the loaqs, which accordingto Abilay pushed the average cost per peso loan to P 0.11.
Cuamntee schemes did not significantly improve the amount ofcredit to agriculture.Io fact the proportion of agricultural loans to total loans fell from nine percent in1981 to 7.9 percent in 1986.
The guarantee program did not increase access to small bol.owers, as iltendedBanks conthues to prefer large-size loans. A total of7l.3 percent ofthe guaranteedtunds in 1986 were in the Pl.0-5.0 million range" (FDE, 1994, p. 114).
Linkages with the Fomal Credit Markets
The new view ofrural finance includes the utilization ofnonbank institutions such as NGOSas credit channels. Starting trom the administration offormer President Aquino, NGOs, PVOs have
i 8
as channels of credit in the rural areas.
semi-formal lenders access bank credit, wfuch are in tum relent to small ruralFor example, the Land Bark ofthe Philippines (LBP) utilizes cooperatives and NGOs
channels. LBP wholesales the loaos to these channels which retail the loans to memberborrowers. Moneylenders likewise bonow part of their loanable funds from rural flnancialinstitutioN for retail credit to small farmer bollowers. NGOs, PVOs and credit cooperativesexhibited.capability as credit cotrduits. Llanto (1993) attributes this to (i) grassroots rctworks; and(ii) peer pressure within the organizatior4 resulting in decreased transactions costs, more emcientbonower screening and higher loan repayments. The link with the formal credit market allows theseinstitutions to utrdertake credit and savings activities for its membe$ at the same tim€.
Llanto concludes that these informal lenders' greater flexibility and comparative advantagecan b€ hamessed by having a wider and deeper linkage with the formal credit market. Accordingto the ADB (1990) study which reviewed agricultuml credit in the Philippines, the following factorsmay help realize a wider and deeper linkage between the informal and formal sectors:
> breakrng down baffi'ers to entry m tie rural fnancial markets> weakening the monopoly powers of some informal lenders by iocreasing outlets> extending variegated loar terms,> and incleasine the amount of{inancial resources available to the informal sector
C. Preferred Sources ofCredit and Savings Services
Most studieg done from 1954 to 1982 indicate that farmer-creditors bonowed mainly frominformal sources, except duriry the pe od ofthe Masagana 99 program in the mid 1970s. This canbe interpreted as either a preference for non-formal boffowing, or as a reflection of their lack ofaccess to formal sources.
In the TBAC Small Farm Indebtedness Survey (1986), tronborowels fiom the fomalfinancial system said that not bonowing was their preference. The survey results show that thispreference was not due to lack of access to any credit system. This zurprising revelation wascorroborated by a NEDA study in 1986, which indicated that 52.5 percent of rural families do notwishto borrow. A key reason to nonborrowing is the fact that 94.2 percent ofthose who have neverborrowed preferred interest rates below the existing fomal credit programs and ofmost informallenders.
Another study (Abiad, 1994) indicates that the prefered source ofloans ofself-help group(SHG) menbers (55% ) is the SHG rather than the bank. The main reasons given for this preferencewere: a) the interest income which accrues to the group; and b) the ease ofavailment Aom thesrouD.
3 9
The same study shows that the SHG is also the preferred depository ofmember's savings,indicated by two thirds oftotal respondents. The reasons for this preference include : a) a sense ofduty towards their goup; b) tbe acceptance of small savings amouds by the SHG; and c) the savingsin time and transportatiotr cost.
7. Effective Credit and Savings Programs for the Poor
A. Current/Evolving ApproaehgslqMierollalee
The "new" view was presented in Section I vis a vis the traditional view on microfinance.Another approacb which has been gaining wider acceptance in utrderdeveloped countries, is knownas the "financial systems" approach (Siebel, 1996). This is not differcnt from the "new" view, butis a refinement of that approach. It emphasizes prudential regulation, savings mobilization,developmert of the financial infrastructure, institutional viability, appropriate strategies andsustainable dnancial services. Under this approach, three intenelated systems strategies are requiredfor the development ofa savings-driven and demand-oriented financial system (see Table 1l):
a) a policy reform strategy. Emphasizes intelest rate liberalization to allow for profitablelending and .eal retums on savings; exchange rate liberalization permittitrg marketprices; and a legal framework permitting financial infrastructure development; withall these coordinated with real sector policy reforms;
b) an institutional adiustment strategv. Focuses on the expansion ofcompetitive formaland nonformal financial institutions and their adjustmeflt to the differentrequirements of all segments of the population;
c) an instrumental irulovation strateg],. Stresses sound banking techniques, includingappropriate maturities, ioterest rates that cover transaction costs, and effective riskmanagement
Depending on the situation in the are4 there are four alternative strategies ofinstitutionaladjustment that can effectively cor$ribute to financial viability and sustainability and contribute toincreased access by small borrowers and savers. These are presented in column l ofTable 12.Eachstategy requires a prerequisite condition for lhe strategy to be effective (column 2). Examples offinancial institutions that have zuccessfully adapted each stmtegy, {iom diferent underdevelopedcountries including in the Philippines are listed irl column 3.
Depending on rvhether the conditions in column 2 are met, the four major institutionaladjustment strategies listed in Tablel0 offer strategic entrypoints fo. intervention (Siebel, 1996):
L lnstitutiond adaptatiol (or d.rrngrdding) ofbanks to the local environment. Barks canbe assisted in adapting to the microfinance market in terms oftheir financial service structure, their
THE FINANCIAL
Siebel, 1996
Table 1l
SYSTEM AND ITS SUB-SYTEMS
Policy envircnment (l) The totalsystem(ii) The policy framework(iii) The legal framework
The suoervisorv framework
(vl Theinstitutionalinfrastructure:- The formal financial sector- The semiformal tinancial sector- The informal financial sector
lnstitutional environment
lnstrumental €nvironment (vi) Financial products(vii) Procedures and services
Tefms and conditions of contracts
Ilrarket environment ix) CLrstomers vs. beneficiades
lntervention entrypoints (x) Financialsystemstrategies
corporate culturg their intemal busiress and product policy, their bank procedures, their terms andconditions, risk management, and manpower and training system.
2. Institutional Enharcement (or upgrqding) of nonformal (informal and semiformal)financial institutions. There are two pdncipal approaches to achieve this One is organizationaldevelopment within the framework of their customary legal forq the other is promoting thetransition of an institutioo to a higher-order legal form. The two approaches may be directed atprimary or secondary organizations.
3. Institutional linkages between formal and nonformal financial ircIinjl,ior[s qinkagebanking). Ljtr](.agebar*Jng is a strategy that aims to combine the best offormal and informal financethrough a) institutioDal linkage betweer self-help gloups (SHGS) and banks; and b) financiallinkages between saviogs artd credit. Institutional lirkages between banks ad SHGS may movethough an evolutionary sequence ofthree stages: a) indilect linkage to b) direct linkages with theultimate step ofmakiDg the small bonower bankable and gMng him c) direct access to bankingservices, if so needed. Based on pilot project expedence, initially in lndolesia, then in thePhilippines, Thailand, Nigeria, Zimbabwe, and eventually, in Vietmm and other countries. ln thePhilippines, the linkage project is jointly carded out by Land Bank and the German TechnicalCooperation Agency (GTZ).
Table l2ADDroDriate Stratesies of Institutiona Adiustment
Strategy Conditions Examples
Adapting ibrmalfinancial institutions
Effective formal institutionsexist
BN, BDB, BAAC, NMDBPlanters Dev't Bank
Enhancing nonformalfinancial iNtitutions-Enhancing informalfiflancial institutions
--Enhancing semi-fo.malfinancial institutions
Effective nonformalinstitutions existEff'ective informalinstitutions existEffective semiformalinstitutions exist
Bank MBMNumerous NGOsCoop or NGO banks
Linking forma] andnonformal financialinstitutions
Both effective formal andnonformal institutions exist
Various Lirkage projects inAsian (including thePhilippines) and Africa
Creating new institulions Absence of effective formalor nonformal institutions
Grameel Bark\BA in VietnamCBs in NigeriaLand Bank in thePhilippines
Note :BAAC Bar i for A8ricultur€ and Agricult ral Cooperaiives, Thailand (r govemment ouned agrjc ltLrral b,nk)
42
NMDBVBAPDB
Bek MaIa Boeha Mrrga, Bali (the ftrst NGO baDk in Indonesa)B3!k Dagang Bali (a aprivately owned cornm€rcial bank in ldonesia)
BaDk Rakyat Indonesia (the largesl rurat-agricultural Bank in Indonesi4 goverflient owned, operating6 a cornmercial be)tcommrnity ban16, ovrcd by seif-help groups and individuals, Nigeria
&aneen Bank, Bsngladesh (a self-help gouP-based ber*, mixed oBnership); rcplicadon of GmneenBatrk has been done lnnun€rous count-ies, including the Philippin€s. Project Dungganon h Neg.os Occidenlal is a,1
Northem Mindanao D€velopment Bank (a p.ivate thrift b * h the Philippines)Vietnem Bad( for Agricultu€ (a goverrmefi-owned agricultural bstik in ViehalnPlsnteF Development Bank (s private development, rccently transformed into a oommercial bank).
4. Institutional innov^tior. (or inJrastuctval innovation), arcalirLg new institutions. Thisstrategy is apprcpdate wherever no suitable institutions exist or when existing institutions cannotbe adjusted to suit local requirements.
The strategies mentioned above are not universally applicable, ard the appropriateness ofeach would depend on loca.l circumstanees and condition, which need to be carefully assessed. Themain conditions are listed in column 2 ofthe above table.
B. Lea.ning from Programs and Institutions That Work
Wh.ile there are programs and institutions that have failed h providing financial services forthe targetted poor sectors, therc are also mary success stories which others, particularly NGOS andcooperatives, can leam fom. Even more imponad is the fact that many microfinarce models haveexhibited a high level of replicqbility.
l. Replicability of Successful Microfinance Schemes
It has been found that in spite of ethdc and cultural differences, effective microflnanceschemes such as those developed in Bangladesh (Grameen Bank), Latin America (ACCIONprogram) and other underdeveloped regions have been successfully replicated in other countries,with appropriate adjustments for cultural and social differences. This replicability ofmicrocreditschemes has been documeoted by the Microcredit Summer Draft Declaration (1996), and isevidenced by the following replication of efi'ective programs :
L Grameen Trust has funded project start-ups in 19 countries in Asi4 Africa,ard Latifl America
2.Opportunity International has developed 52 microlending paxtne$ in 26 countries.
3.The village balking movement has grown to over 68 programs in 32 counties
4. The ACCION network now reaches 277,000 clients in 13 Latin American countries
and in the U.S.
5.The Women's World Banking Network has 45 affiliates in 37 countries arcund the
world.
6.The credit union movement in Burkina Faso has created 325 wometr's associations
that in 3 years have made 26,000 loans.
7.The Canadian qedit union rao'rement Development Intemationql Desiardin
microcredit partners in 14 developing coufltries with a total loan Portfolio of US
million.
8. Project Linking Banks and Self-Help Groups aqd other linkage banking programs
have been spriad to several countries in Asia and are being considered in several
counrries in Africa.
2. Outreach and Welfare Effects ofEffective Programs
It has also been documented by this same study that successful microfinance programs are
able to reach large numbers ofvery poor people :
L Bangladesh Rural Credit Advancement Committee (BRAC) services one million
families with credit;
2. FINCA cur€ntly has 15 aftiliate programs in 14 countries, reaching 64,000
borrowers;
3. Freedom from Hunger's "Credit with Education program is now delivered by 14
NGOs and community-based financial institutions to 20,000 clients in 8 countries'
There is also evidence that microfinance programs are able to improYe the income / welfale
of poor people' For example, Catholic Relief Service (CRS) showed increases in incomes of 3 80
village bank borrowers in El Salvador, with weekly income increases averagitrg 14570'
Various micro studies, as well as sample surveys, have also confirmed the positive impact
ofGrameen Bank in increasing incomes and asset owtrelship. Hashemi, for example, reportsa 1988
shrdy that crrameen had codributed to nraking member household incomes 430lo higher than contlol
group incomes. This credit prograrn also helped irrease assets, savings and net worth ofhouseholds
Ey iromoting a shift from land-based activities to nol_traditional economic activities, the world
Sani (tSgSi"on"ludes that the Grarneen Bank strategy promotes productivity increases and
employment generation in the rural ecolomy
has161
Hashemi's study further concludes that Grameen is a program a) that has been extremelysuccessful in reaching tle poor; b) in ensuring that the poor do actually repay; c) in increasingincome and economic wdfare ofthe poor; and d) in proving that progams for the poor can actuallybe financially viable, and in the long run, even economically sustainable
3. Factors Behind Successful Microcredit Programs
Approaches to microfinanc€ vary from prcgnm to prograr! but many ofthose that have beensuccessful share the following characteristics (Microcredit Summer Draft Declaration ,1996) :
L they demonstrate partioipatory qualities characteristic of peoples organizations;
2. fiaditional forms ofsecudty such as collateral are replaced by a system ofcollectiveresponsibility within a group ofpeers:
3. interest rates high elough to cover cost ofoperations.
4. encouraging savings in addition to their lending programs
5. ownership ofthe financial institution;
6. targeti[g the very poor; targeting women;
7. simple procedures for reviewing and approving loan applications;
8. quick disbursement of small, short-term loans (3 mos. to one year);
9, incentive ofaccess to larger loans immediately following successful repayment ofborrower's first loan;
10. coDmitment to, and training for democratic participation in decision making byall those involved as borrowers
11. accurate management and information systems, actively used to make decisions;providing for accountability ofmanagement perfomance and use offunds.
12. a culture, structure, capacity and operating system that can support sustainecdelivery to a significalt and growing number of poor clients
Credit alone is not suffcient for pove.ly alleviatio[ Many programs axe aware that, inorder for the very poor to build income, assets and livelihood in a sustainable way, they need accessto: market information and commercial linkages; appropriate technology and methodoiogies toimprove productivity; know how and bargaining power for equipment and supplies; health andsocial security systemsl appropriate management expertise for individual and collective enterpises.
Two of the successful microfinance programs are the Grarneen Bank, which originated inBanglades\ and the Bank Bukopin or cooperative baok of Indonesia These two case studies arcnow briefly discussed below.
C. Imolications for Institutions and Programs in the Philippines
Based on the "new" view and the "financial systerns" approach, microcredit and mic.osavingsprograms have been set up afld implemetrted in various count es by various agencies and financialinstitutions. The move to these new approaches has been motivated by the negative rcsults thatplagued earlier credit programs. lvhat are the principles based on this approach that have workedin the "success" stories that have been documented in Latin America, Asia ard A.ftica?
l. Prinoiples ofFinancial Service Deliverv to the Poor
a. Features ofEff'eotive Credit Delivery
Effeative programs have been zuccessful in acheiving three principal goals: to provide
services to the poor, to attain finalcial self sufficiency, and to reach large numbers. However, notall microlinance programs have successfully attained these objectives of equity and sustainabilityWhat are the key features in the programs worldwide that have proved to be effective? Berenbachand Guznan (1994) cite the following, with specific referenca to group lending schemes, but whichhave general applicability to most micro-credit programs.
Client population, Group members must have an ongoing productive activity (faming, smalltrading, microenterprise) a.nd must have demonstrated an ability to conduct their proposed business.
Grcup setf-formation, Groups are responsible for selecting thet own members and leaders,and may receive 6eld orientation from the fleld extension workers. What is vital is the self-selectionfeature, since group members share collective responsibility. Groups are small (3-10 members
Only one member ofa farnily participates h the same group
Decentrqlized operations. Progam staff operate within the community, marketplace or shop,reaching the borrowers a1 thek place ofwork. This strategy reduces borrowers tansactions cost and
overcomes cultural barriers that inhibit microentrepreneu$ from approaching fomal banks Bybeing where the bonowers are, the extension agents become familiar with group members, knowlocal business conditiorN atrd other events that may influence borrower's loan performance.
Appropriate loan sizes and terms. Group members decide how much each member oeeds,then sum is approved by the institution and lent to the group as a whole. Loan amounts begin small,and payback periods are short. Loan terms are adjusted to fit the economic activities and timidg ofeaming ofthe borrowers. Payments for market vendors are scheduled daily, for farmers, accordingto harvest time.
Interest Rates and Service Fees.. The real charge to borrowels should itrclude ir1terest rates,service fees and implicit costs of compulsory savings. Revenue ofpeer group lenders should besufficient to cover their operating costs and to prevetrt decapitalization oftheir loan funds.
Sinple l@n applicotion and r.tpid review. Simplg well-designed forms, visits to workplacesand qualified staf contribute to effective application and review process. When groups are largelyilliterate, loan decisions are based ol oral assessmetrts among members. The grcup approves theloar requests. The experience shows that the pedod can be not longer than 7 days for first timeloans, and one day for tepeat loa.rN.
On-time pat tent requirements. Grol'l,p develops incentives and sanctions to facilitate timerepayment. Groups members are responsible for collecting loans. No member is eligible foradditional credit until the whole group has repaid its loan. Subsequent loans are made immediatelyand in larger amouDts for grcups that rcPay on time.
Linking credit to srvings qnd other rtnancial servlces. Group provides not only loans butalso a safe and accessible savings facility for its members,
Trqining qnd orgqnizqtion building. Provision of training as well as on-site technicalassistalce improves the groups existing management and administuative tecbniques.
b. Effective Savings Principles
The financial systems approach to microfinance recognizes that savings are as important aservice for the poor as uedit, and that savings mobilization is crucial in building self-sufrcientfinancial institutions. Just as there are proven principles for lending to the poor (as listed above),there are also principles for savings that have emerged ftom experi€nces in various countries. Theseare the following (Otero ard Rhyne, 1994):
l. The most widely desired savings instruments offer: safety, convenience, readyaccess to money and a positive retum
2. More people want a good place to save, than want loans. Thus, savings semces canreach deeper in a community thar can lending progmms.
3. The opportunity to save should not be limited to those who bonow.
4. Lending to micro-borrowers can be financed to a signiicant extent by savings ftomthe same communities, provided savings sewices are designed according to customerneeds.
5. A voluntary savilgs instrument (such as a passbook savings) with Aee access todeposits better meets saver's requirements than forms of compulsory savings, and hasthe potential to raise much larger amounts offunds
2. Institutional Development
Institutioml development has emerged as a key factor influencing the performatrce ofNGOsand POs that implement micro-qedit and miqo-savings programs. Using a synthesis of 25organizational cases in developing countries, Edgcomb and Cawley (1994) suggested some corceptsthat can serve as a guide to effective NGO / PO programs. These are summarized in Table 13 anddiscussed briefly below.
Institutional development is a complex cotrcept because the life ofan organization is also aoomplex process. The matrix in Table I I above was created as an organizing tool to analyze anorganization, and embodies two notiotrs
a\ Components, Institutional development implies a process ofachieviog effectivenessio at least four distinct, but relat€d ideas: vision, capacity, resource capability andIinkage.
b) Stages, Adapting to change in as the organizatiotr goes from the development sage,to the susainability stage, to the €xpansion stage
There are stumbling blocks at each stage. In the organizational stage, these inolude a cdsisin leadership, methodological problems, resource scarcity. ln the sustaimbility stage, on the otherhand, a drop in repayment rates, donor-ddven temptations, staf costs, orgaoizational blockages andcomputerization. The stumbling blocks in the expansion stage include a crisis in vision, new tolesversus oid roles, and inappropriate resource mobilization.
Table 14 lays out seven characteristics that NGOS require for effective financialintermedition.
3. Evaluation ofPerformance ofNon-Formal Ma.kets and Institutions
Various performance indicators have been used to evaluate markets as well as institutionsin the semi-formal and formal sectors. Some are measures of macro-level informal marketperformance (see Annex 6 for some examples) which may include a membership index, a sex index,the average interest rates charged, recovery rate and per capita share to savings ratio (Chorvdhury,1993).
On the institutiooal Level, periormance indicators used io studies rn the Euhppines rncludeindicators of client outreacl; as well as measures of financial performance (see for example Llanto,1994). The latter include the measures listed below:
48
NAL DEVELOPMENT
Table 13
FoRTHE EFFEcTIVE MICROFINANGE SECTOR; A FRAMEWORK
tdganlzlion'5 abilily toi ro develo! qsreN and 10
eclir and tr.ln slatt K€y l5clo6 aEdgaf izalional 3tructure, inlomallonsysrem3, p€rson.el pollcles. sl.ff
Source: Edg@mb, E.L, and James cawloy in oteoand Rhymo,1994
EXPANSION S€reup, hsljtu-
ihgeashg clrents anruor ged
IOPMENT Start{p, d6
tution .dv.nces toMrd efil-ciency and tinancial viabiriiy.
r€souRcEs An o€anlzatlon's abillty toise, flanase, and account lor suttici€nl
lo cover expens.3. Key faclorsllnd{ais ng pollcies and p€ctlc.s,
budgeiing and tin..cal Projecl-
T,IKAGES The ability to develop end
ntaln productiv. rejatLon3hips wllhev3nt organlzatlom, Key tactoB are
enl relatlons peer nefworks, in.ationa PDo and donor PanneB.
49
Table 14
NGO CHARACTERISTICS NECESSARY FORFINANCIAL INTERMEDIATION
S trtrc( Otcro, 199+.
characteristics Expansion-Led Approach
Covernance and board The impofiance ofan active, well-informed board with fnancial expertisebecomes more of a PriorityPrivate-sector individuals play a decisive role in obtaining resources andsetting the vision for the organization.Boards assume additional risks by h€lping gain access to comrnercialmoney and investing in the organization.
Client population Main emphasis is on scaling up the size oflhe ProgramFocus is on reaching tens ofthousands or more microentelpreneursBorrowers are defined as "cli€nts "
Sources ofcapital Funding fiom grants, so{l loans, and bank loans h bl€nded, movingtoward bonowing only from banks
Methodology for delivering Use nethods thai have been fine-tunedfinancial services Specialize in financial s€rv;ces only
Do not exPerim€nl.Operale many thousands oftransactions a month.Developing savings instruments becomes very important,
Self-sufficiency/ Attaining operational and financial self_sufficiency becomes afinancialslandlng rcqujrement.
Transaction cosls decrease due to incr€ased ellciency and scaleThis is a key issue for NGOS that want to conlinue expansion
Financial nanagement Effective finmcial analysis and more complete MIS become a priority.Financial projeclions ar€ more sophisticatedFinancial analysis is int€grated into program implementation.
Personneystaffdevelopment Technicaiexpertiseinfinancialareasincreas€sSlaffgrows rapidly;more emphasis is placed on training the staflAreai ofemphasis are client relationship, portfolio managemeni,planning, and insijlutional development
50
a. To measure capita adequacy aod protection;
l. Capital rutio
2. Reserves to loalls Ratio
3. Debt to equity ratio
4. Loan loss allowance to loans outstanding ratio
b. To measure rates ofrctum and costs
L ,Rate of teturn on assets
2. Rate ofretum on loans
3. Net earnilgs on assets
4. Interest income llom loajN to operating incom€ mtio
5. lnterest income fiom investments to total income ratio
6. Other income to total income ratio
7. Net Operating results afrer reseffes to total sharc capital
8. Total opemting expenses to total income ratio
c. To measure liquidity:
1. Liquid reserve ratio
2. Loans to assets ratio
3- Loans to savings and share capital mtio
4. CBI to total deposits and borrowings ratio
5 l
d. To measure solvency
l. Bo.rowings to deposit ratio
2. Solvency ratio
e. To measure asset quality
l. Asset quality
Microfnance programs should be evaluated on both financial perfomance, usiog haditiooalfina.ncial ratios, and on other performanas criteria such as :- a) the outreach of the qedit and savingsprograr4 e.g., the number ofclients, the aharactedstics ofclients, etc; b) the quality ofthe services;and c) measures on the extent ofparticipation ofclients in decision making. These are summarizedin Table 15, a framework for evaluating finatce programs. Tested evaluation methods, principlesand measures are dosumented in various sources, including IADB (1993), IPC (no date), and Rhyne(1994), and are presented below:
a. Financial Analysis
The primary indicator of overall efticiency, viability and sustainability for deliveringfinancial services is the frnancial strengh ofthe institution. Ar insdtution is financially sound andsustainable when it generates sumcient income to cover operations and flnancial costs, atrd tomainrain the real value ofits equity base.
Indicators Will Varv According To The Tvpe ofFinancial Institution
The performance of a financial institution is generally measured as a series of ratios ofincome and expenses to income-generating assets. But depending otr th€ type ofinstitution, theallocation and calculation ofincome and expenses, as well as the definition of "performing assetswill vary (IADB, 1993). A summary ofthe fwo approaches to calculatitrg financial performanceindicato$ according to whether the institution is a) a specialized flnatrcial institution; or b) a multi-purpose institution with a credit program is shown in the table below;
The IADB papers points out that the viability of a financial institution depends on the abilityto generate enough income from performing assets to cover all the operations and financial costs ofthe organization. The financial ratios thus measure the institution's perfomance in those terms.
The client-service relationship
1. Outreacha. Number ofclients; rnarket penetration indicatorsb. Characteristics ofclients: gende( loqation, income status, sector ofenterprise
2. Qualjty of seruice, alternatjvesa. Market tesl willingness to payb. Client transactions costs: convenience and timeunessc. Service termsr p ce, loan sizes, malu ty, collateral, access to deposits,
eligibility requirements
3. Enlarging client's decision-making options; how the service fits into the client'sfinancial managementprocess-liquidity, consumption smoothing investment
hE!!!!!e!3l!13!i!iq
1. Financial self-sufficienry of service2. Financial condition of institution
a. Profitability or abiliiy to break evenb. Portfolio qualityc. Liquidityd. Capiialadequacy
3. Institutional strength and context
Source: Otero and Rhyne, 1994.
Table 15
A FRAMEWORK FOR EVALUATING FINANCE PROGRAMS
Different Institutions
Type of Itrstitution Base lncome OperatingCost
FinancialCost
ImputedCapitalCost
Deposilt!.ldng FI
Non-deposit-iaking FI
Performhg lncone derivedftom perfo.ndng
A[ administrative,
and loan loss
Total cost offimds
Irdlation*(equiry + soflloans) tess
fillancial costless imputed
Mdti-purposeInstitutionwith Credit Progam
LoanPordolio
Ircome derivedftom lendingactivities.
Dir€ct persornel,% oiadmin costsand loan lossprollslon
Total cost offhds
Inllation*@orfolio"l2) lessfnancial
Source : IADB (1993)
Finarcial Indicators for Diferent of
Many NGOs, however, are involved in various activities generating income and incurringcosts u(elated to its qedit operations. Thus, the measures of financial performance for such multi-purpose NGOS has to be adjusted to take this into consideration. The table above and an examplein Annex 5 show how this can be caffied out.
Standard financial ratios used for assessing the financial performance ofnon-formal financialintermediaries are those listed in Section 3,F These are generally known and used by credit-grantingNGOS, and will not be discussed here.
b. Aralyzing Operational Productivitv
The operational productivity is measured by ratios which compare the number of loansgralted to the number of staff dedicated to the letrding operation. Some productivity indicato$ thatcan be used to measure the efticiency ofprogram operations are:
L Input data:
a. Weighted Average Number ofCredit Oficers
b. Weighted Average Number ofcredit Ope.ations Staff'
55
2.Output data;
a. Number ofl-oatN Disbursed in Fiscal Year
b. Number ofLoans Disbursed to First-Time Borrowers in year
c. Amount Disbursed in Fiscal Year
d. Average Loan Amount Disbursed in Fiscal Year
e. Weighted Average Outstarding Loan Portfolio
f. Weighted Average Number ofActive Loans
g. Weighted Average Number of Outstanding Loal Balance
3. Productivity Indicators:
a . Loans Disbursed Per Credit Officerf/ear
b. Amount Disbursed Per Credit Officer/Year
c. Active Loans Per Credit Officer
d. Gross Oursranding Principal Per Credit Officer
e. Active Loans Per Credit Ofiicer
f. Gross Outstanding Principal Per Credit Officer
c Target Group Orientarion
The concept of "target group oientation" is useful as a means of characterizing the programservices from the perspective ofthe client group (IADB,1993, Myne, 1994). This can be measuredby some indicators that portray different charactedstics ofthe loan products from the perspective ofthe target group. These are the foliowing;
A. General Indicators for Target Group Orientation:
i. Type and range ofproducts correspond to client demand
a. lending inethod
b. type ofloan instrument56
F
c. loan conditions
2. Services are easily accessible over the loog term
a. minimal borolver transactions cost
b. availability offollow-up loans
3. A{fordability of financial services
B. Distribution ofPortfolio, by Economic Activity
C. Analysis ofthe Financial Product / s
l. Description ofthe lending method
a. individual lending or group lending
b. minimalist lending (credit only) or integated lending (credit + non-credit services like training or technical assistance
2. Type ofcredit instrument (for fixed asset or working caPital)
D. Loan Conditions:
L Loan size : minimum, maximum, average
2. Loan term : minimum, maximum, avetage
3. Average outstanding loan
4. Average monthly /daily PaYnent
E. Cost of Credit
1. lnterest rates : nominal, effective and real
2. Fees
3. Forced Savings
4. Guarantee Requitements
51
d. Measures ofPoor Performance
The paper on "Analyzing the Effciency ofCredit Granting NGOs : A Technical Guide" (PC,no date) iodicates that sinc-e there are consequences ofpoor performance, some indicators should beused to measure this. There are two measurc ofpoor performance:
i. The subsidy dependence index (SDI) developed by Yaron (1992)
ii. A measure oldecapitalization.
An institution that is trot able to cover its costs will under decapitalization, and will eitherfold up or will have to rely on subsidies. Therefore, another way to determining the efficiency of aninstitution -aside from determining its capacity to cover its costs from income-- is to calculated thedegree to which they are dependent on subsidies.
Yaron points out that, ifone wishes to measure an NGO'S dependence on subsidies, we mustknow how much it would have to increase the return it realizes on its portfolio in order to replaceall ofthe subsidies it received with income from its own operations (Yaron, 1992). The SDI iscomputed as follows:
Required SubsidiesSDI =
Income from Lending Business
Tbe resulting ratio shows the percentage by which the institution would have to increase itsincome fiom credit operations in order to offset the necessary portion of the subsidies it has received.It can do this in two ways: a) by increase income from lending (through an increase in jnterest ratesor through an increase in the s;e ofits portfolio); and b) by reducing the level ofnecessary subsidies(i.e., by achieving a higher level ofproductivity).
The sustainability of the Grameen Bank scheme has been measured using the SDI asindicator. Hashemi et. al. point out that the financial sustainability ofGrameen has been impressive.It has been on the whole financially viable, as reflected by Grameen's profit levels through the yearsHowever, Yaron (1992) suggests that in addition to financial sustainability, credit programs ofNGOs should be assessed according to the actual self-sustaimbility ofthe irlstitution, as well as thelevel of outreach that they achieve. This economic self-sustainability is measured by Yaron'sSubsidy Dependence Index discussed above.
The calculations of SDI for Grameen Bank (Hashemi et. al.) indicate a decrease inGrameen's subsidy dependence over the years, fia'J' l'70o4 and 180% in 1986 and 1987, to adrastica$ lower level of36To in less than a decade (1986 and i98?). This figure means that ifthe
58
Bank werc to pay ma*et rates for the credit funds they are receiving, they would have to charge anadditional 36% interest rate to cove! all expenses-
As Grameen borrows more and morc Aom the money market at coomercial rates ofinterestand depen& less and less on foreign funding (as indicated by the declining SDI), it would seem toindicate a decline in dependence on donor funds. Hashemi further concludes that since donor flrndsare only being used for some head office activities like trainilg, monitodng and evaluation, it isfeasible that tie treld ir deoliniq subsidies would continue and make Grameen free of subsidiesand economically viable, in addition to being financially viable.
There are two conclusions that call be drawn ftom these SDI figures of Grameen. First, isthat Grameen is still being subsidized. Seoond, is that the subsidy level has greatly decreased.
8. Key Issues and Recommendations
Recent studies on cooperativ€s and NGOS as financial intermediades (Cordero, 1994;Llanto, Garcia and Callanta, 1996, and other studies) point to the following issues andrecomrnendations :
1. While NGOS have characteristics which suit the requiremellts for lending to the poor,they are faced with a number of contraints, the most important ofwhich are: weak institutuionalcapability, subsidy dependence, alld resource constraints.
2. The weak institutional capacity of many cooperativ€s^,lGOs to Deliver Credit isattributable to the following constraijrts: l) Outreach is sfiall due to a) lack of legal personality andauthodty to act as real fnancial intermediaries, thus limitiry its capacity to o$er innovative financialproducts and to mobilize deposits; b) lack of afl exteNive and viable financial delivery systeq andc) inability to absorb cost oftraining ofpotential clients. 2)Viabiliry. Many cr€dit NGOs are notviable and sustainable due to a) their small financial base; and b) the lleed to improve intemalfinancial policies, systems and procedures. 3) Resource Mobilizqtion. Credit NGOs must raisesubstantial deposits and develop various instruments for small savers, to stay competitive and\iable. 4) Superl/isory and regulalory franetlort. It is necessary to bring credit NGOs under asupervisory and regulatory flamework, to minimize problems like the absence of performancestardards:the lack ofuniformity, and dilutior ofstandards of credit evaluation; the lack ofportfoliosupervision, leading to poor loan recovery; and deterioration of portfolio quality.
3. Small and even medium-sized NGOS tend to be very leadership-dependent, which couldthreaten its long term survival.
4. Personnel tumover is relatively high, resulting from a poor remuneration levels. Despitethet strong commitment , NGO personnel tend to give way to family pressures and economicrealities to seek better paying and more securejobs elsewhere.
59
i
5. lnadequate staffdevelopment. StaffofNGOs are known for thei. strong cofirnitment towork. Howevet competence or expedtise for development work may be lacking, pa.ticularly in thecase of smaller NGOS. This is due to lack ofresources for trairin& personnei and managementdevelopment.
6. Crcdit cooperatives are able to mobilize huge financial resowceq and to provide dedit andsavi-ogs services to a large mass basg at a statrdard comparable to that of formal financialinstitutions. This is based on criteria which includ€s capital adequacy and protection, asset quality,rate ofreturn, liquidity and solvenoy.
7. Credit cooperatives arc viable financial intermediaries whose development must bestrongly supported.
8. Credit cooperatives oan grow into strong, self-reliaot and self-sustainting financialinstitutuions, given the proper supervisory and rcgulatory eDvironment, efficieDt managementpolicies and practices.
Some ofthe key recommendations resulting from past studies are the following:
1) Trusfom credit NcOs into full-fledged formal financial institutions , e.g., private bank, financecompany, non-stock savings and loan association or qedit cooperative; or alternatively, creditNGOs may organize or ilvest io formal fioaflcial institutiotrs ; 2) Build up the equity base ofMFIs by ini.rsing more capital from edsting owneff and new iovestors; 3) Create a finatrcialstabilization fund that will look afler the needs offinancially distressed credit cooperatives. Thiscan be managed by a federation or a duly constituted body; 4) Create an extemal supervisory andregulatory syst€m, which would conduct regular examination and review offinancial policies andperformance and impose prudential regulation. Although the CDA is a likely candidate for this, itsinstitutional and professional expertise needs to be improved for the pulpose. 5) Approachmicrofina.nce as a socially responsible business, not as a charity or social welfare institution; 6)Diversify loans, savings and other financial prcducts/services according to clieot demand; 7)Marimize deposit mobilization opportunities; 8) Promote linkage banking with private banks; and9) Increase access ofcredit for the poot thrcugh progams that deuease transactions cost -- throughlinkages and group lending, and adoption of innovative programs that have proved effective forgrassroots lending, like the Grameen Bank and other schemes.
60
Annex 1
FINANCIAL INNOVATION IN THE PHILIPPINES
Case Study # 1 | Replicatinq the Grameen Bank : Proiect Dunqoanon
lnnovation:Project Dungganon in Negros Occidental is a aeplication of the Grameen Bank", asuccessful poverty{ocused prcgram in Bangladesh. While Dungganon closely repljcatesthe Grameen Bank process, other pilot projects on Glameen in the Philippines haveadded some innovative elements to the scheme, such as a guarantee support fund.However, these other prog€ms are still at an earlier stage of implementation and havenol been documented as fully as Dungganon.
Target clientele:The "poorest of the poor'' , mostly marginalized women in seven economically depressedtowns in the province. See Table 1 for the area profile.
Start ing Date of Ptoject lmplementation : August, l989
Rationale:There is a need to deliver financial services to mafginalized groups like women in therural afeas who generally have no access to the formal credit syslem.
ObjectivesiTo uplift the quality ol life of the "poorest of the poo/' by providing better access to creditfacilities, and greater opporiunities for self-employrnent, savings and investment, usingthe Grameen Bank strategy.
lnsti tut ion lnvolved:Negros Women for Tomorrow Foundation(NWTF), an NGO based in Negros occidental,an island in central Phil jppines.
Brief Description:Closely following the pfocess developed by the Grameen Bank of Bangladesh, PfojectDungganon incorporates Grameen's main ieaturcs which include the following principles:
a) only the poof can borrow;b) no collate|al is requjred;c) business transactions are conducted in the field with a minimum of
papelworK;d) loan rcpayments are done on a weekly basis and spread over one year
or less:e) a savings p an is enforced:0 women play an active fole;g) technical and socialassistance is provided especial ly with respect to
nutri t ion, educaiion and value formation.
Source: Abiad, 1991
,"di""t":Tf fl515J;3?tl;""td'ffi:,:t"l[iffiT;', serected bv the staff usins pre-determ'ned
small sroups of five with similar.eoconoml""",:?;"i'3"""ti"?" ?l',"tt",X"^3:XL::-1:5il;]u3*h:".';',"n;;iff :"t"i"""'f$ffi :.li,,ilhi;"::"'":lu":lrrectionorweek'v
o,"u,'3;T.0"'ll'"":1fl "*J""#;l::fl fif ft qT*'#ilfr:1il"?:":#:ffiT:'."ffi t!:f,l9-#l"':lH:l'i{Jil1*:"{"^:":J,ngltT:*"m,"1,i"",*'l"tll*":5ilT3.;iliXi:il'""Tf^iii*/ffi":ft ::mifi**w1*i1""*':m"":J:"i":l:iLii:bon6w.
Forced sroup s","s: "1-:l:-,ryT,:i!il:"Ii"iJ,[ilffJJ:,i"?'31'3tri,"t"'i1i'Y; iJ,Jli:j:T"':J:[i:#!,1:]ii1,",,i!!iili,iii;;.,!member
c,uciarro rhe process i:.1F,:l::f'l;,::t1""i1",J::illi""*Tlrl?:HlT$ilf,:1 ?lli:",r"i*,3J""',:Xt"'f!:i;" '*? i'liXJ""I"'ll'1""'i'ii"i"iiii ii'"-p"iJ"t " ueins impremented
Summarv of Results:
In its first years of implemenialron a tolal of 1429 participants fiom-3l yt'"iBt'iL:i::'j]
g,:t"*i;i t"ri:ji""mfr :[ii$:ffi:15iiiffi::"r#:f ll'"rl i:"'";,ll*ry;*3111"i["?,til* i,'"",;,ii .$1'?13^1"H'a 6o7oio-' tn" s"uen irole"t sites
rhe p,ojects r,narced by ?ylrs-",,l"JJ:Hj,fi#"::$:hXTl:lHl1[llij"'lfll?iil,ll','.il;:?iflJ:i|!lXffit::Iili-",H?:il"''"ilJiiv" "'"i" " ":"'oi""to;
or asricurturar and non-aoricultural projects (see I aDles r i
*r,r".,t"x,ill".l?l?]i.f^i5'1t:l"tJrtli""t'.:tf["nde' its rorced savinss pran came to armost
Cumulative personal savlngs was P22 4 thousand' while ihe emergency fund totaled P15
thousand (Table 4 )'
A random sample of Dungganon's beneUciaries (ACPC' 1990) showed the followlng
aesults:
iq**ilil.3,f,iJ.:j":T,,,:..:ifiTf,:,:,i:."',::t"T,3{"Srx"J,?iiT"Jn:i:"1:'":B:[iil'J,'& ff lffi iJfr''51 sf 1,'l3l t'o'illr,rv, na"' *'" p'ot""'2)sevenorthe?9-,::f :1":F",hi1"A#XiT.flff ::i.lY"SilE:i,F!"f1ii ji|i
*:i1'*:: ,il'1'i-;.[iii:t, i;ii :#fi:l#m'"i Li" " *t "it'*' k-' basr et'r a / n g
and p ig Ia 's lng as a lesul i o f t l le l r paf t l r
3) In addition to individual and group savings generated by the forced savin-gs program, asionificani proportron of the sample respondents also reported savings in non-financial form'tiese included land and housinq improvements like the addition of garden soil, putting up of afence. or replacement of housing material to one of greater durability ln addition' the purchase ofconsumer durables ||ke radios, clocks, flat irons and others also indicate improvements inbeneficiary welfae. The average value of the non_financialized forms of savings ranged fromP100 to P2.000.
4) Perceptions on the project on the whole, beneficiaries expressed their satisfactjonover the ;rogramls performance. the availability of financial assistance made possible productiveoroiects. AIao the provision of technical assistance, kaining, education and value formation wereperceived positively by respondents One observed that gambling and olher vices decreased inihe area and that the vatue ofwise spending and hard work had been taught
63
€eT O - A! A E : FE . 9 E E i
t -{d # >
€
aE33
9 . !E 3 ,8
nG8-X f
i - s
. - - i 3 " - .8t +n : {$:F aaq E:!?g F d 6 d ; d i i
o . " ;'= .H;
I
E
- €;9p . :"F.:s .sEdEq : f: i € F h ' F 6 F U -
i t€, $!!is"i?I ?r;aE'3ig $==i:3F3 5tiF
*d i ^:. E E J :
f ia ;.9E
: ! Et g i
-E! Fr
;;g;sg r 6ssi si;sgR-s _ E
: .9 E q. ii..i ' + ='..
{ , 9
: :E }5 + " 9 " !
, . , ! ;EFE.UL - 9 . 6 ; , a F v u A ig 3 . ! ' + 2o i?PEr- !E;F ;?g.ei3
a
i e l g H s o oEi E EiE
6 ; i e g
EE
.s$": gs€s €$ ggg ,;ip :;"= * is$s t;:srg ! 6i$ IF;! e iEFE E -
- i . l l € $ Y ; =* i ; . q E = l ?= t . ! p ! n n :
.9
=
. 9=
.9.z^ g i z - Egi: : ! E! e : E ; ii i ; i 6 E !
. F . 9 I Ez i z < ; J
9 Z
i z
<3
o
PROJECT DTNGGANON SUMMARY OF LOANS GRANTEDSINCE PROGRAM START'D * TOf,l\'D Sf,PTEMBERI99O
AMOTNT IN PESOS
Project SiteNo. oi
Borow€rs
Loan
Granted
Weekly
Due (Princjpal)
Weekly Loan
Oustandins
Repayment
Rate %
l. Manapala
2. Hinamaylan
3. S'palay
4. Calarava
5. La Castellana
6. Old Escalante
7. Cauayan
Total
191
194
t'79
16',1
166
18
1,038
t95,700.00
192,100.00
176,900.00
166,300.00
165,500.00
51,000.00
78,000.00
1,025,500.00
95,',720.00
88,312.00
76,940.00
81,294.00
23,040.00
9,000.00
5,840.00
380,146.00
94,751.20
85,004.00
14,621.80
82,525.20
23,100.00
8,880.00
5,800.00
314,688.20
r00,942.80
107,096.00
102,278.20
83,114.80
142,400.00
42,t20.00
12,200.00
650 ,811 .80
99.0
96.2
9',7.0
100.0
100.0
98.7
99.3
9 8 . 6
Note: * August, 1989.
65
PRo\f.cr Srrt.'. C!*u{Y a.NNo. of
Borowers CrantedL Agicultual-Related Project
FishingSwine Raisins
4,000.00
3I
3,000.001.000.00
2. Non-Agricultural Project
Sari-sad StoreFood vendingBuy and sell ofagicuhuralcrops and
other productsFood vending & rice retailingFood vending & egg vendingFood vending & sari'sari storeFood & fish vendingFish vendingFish vending & buy and sellFish vending & rice husk tradingFish and shrimp vendingRice retailing & shrimp vendingBuy and sell& sari-sarisloreBread vendingcoffee shop & sad-sari store
38 38,000.00
l 365
1IIII2I
2II
13,000.006,000.005,000.00
1,000.001,000.001,000,001,000,001,000.002,000.001,000.002,000.001,000.001,000.001,000.001,000.00
3.combinaton ol Agicu\tua\ andNon-Agricultural projecrs
Swine/poultry raising & flsh veDdingSwine/poulFy raising & coffe€ shoPSwine/poultly raking & lobacco vendingswine raising & rice retailiDgSwine raising & sari-sari storeSwine raising & flsblobacco vendingSwine raising & bag makingSwine mising & manicureSwine raising & food vendingSw;ne raising & vegelable vendingPoultry raising & fish,/food vendingPoultry raising & sari-sari sloreFisbing & fisb/food vendingFishing & vegetable vendingDuck .aisins & shrimD vending
36,000.00
12II25IIt
I2I
2il
12,000.001,000.001,000.002,000.005,000.001,000.001,000.001,000.004,000.001,000.002,000.001,000.002,000.001,000.001.000.00
Grand Total 7 8 78,000.00
Annex Table 1.3
TYPES oF PRoJDcrs FINANCEDSrNcE PRoGRAM STARTED To END SEPTEMBER 1990
z
zF
99R8833o i < i + - : . i - i . i
r ; d i o i . i
! ;
=€8!383
3338qEc3 s . i " i R
q . g
( : -
O i
G e" if . i>e#- n o " . r - v r . : e 6
38333c3s*eenEKe - + " < l d ) + . " . l
qsaSn I
" o F i j ! . d r r t e- i E l+: = 2i 2 f i ; a j o ( J
aF
6 36s z :^- 7 '_2- . Y e t li Za p
q Y l ;
o
I
a
Annex l
Case Study#2: Project : Linkine Banks and Self-HelD GrouDs : A Pilot Proiect ofCTZ-LBP-
PCRSF
lnnovation :;;-."J*, i" link banks with gasspon oreanizations in rual areas for the purpose of deposit
senetation and loan disbursement among faimers and small enterpreneurs The amount of loan is
ieoendent on the amount of savings dePosited by each giouP'
Target Clientele: Farm€rs and small enterpreneurs'
Starting Date ofProject Inplem€ntatioD: 1991
Rational€:ii ti"-ir,irippin.r, *,r"u a5 in Indonesia and Thailand where rhe Linking project was pilot tested,
*i".-"nt,#,.n"u., und ,malI farmers have very limited access to banking services' Few of them
ia"e "uer
aepositea in an intercst bearing accounl, nol have rec€ived a bank loarl - | wo reasons
i"iri rirt "i""
trt. r"r"*al status of lh+otenrial cus(omers' which prevents lhem fton tulfilling
lhe formal requirements of the bank. and the high cos! of small scale banlong servlces
These srouDs therefore have in the past relied largely on ffaditional forms of savings and on
;i;;i;;;;.;;;i;; us noscei una sett ' tr"rl "groups
However' one ofthe.shoncomins
i.li" utum"iun"v ottte intemally generated funds offie small Sroup to satisty lhe merno€$'
financial needs
Objectives:ii'imorove access to banking sewices lor self - help _ groupg of microentrepreneurs and small
farmeri by linking formal and infonnal irstitutions'
Institutions Involv€d:ii"rir"t
" 6".Jf."ft"n n" Tecblhche zusanunenarbeh (oTz)' the technical agency of the Federal
i"o"!fi" "f-6"*""vt
l--d Bank ofthe Philippines (LBP)' a gover nent bank; People's council
on Rural Savings and Finance, lnc'
B rief DescriPtion:nuna_"a it dfz, ,ft" pif"t project which is to run for a two _ year period' involves several key
parilclpants:
The Bank LBP, which has braDches and extension ofiices in all provinces in the country;
The Self _ Help Promoing Institution (SHPI): PCRSF' which has the experience of
promoting savings mobilization among self- help groups; and
The Self - Help Groups, which are exisiing SHGS with regular savings (and credit
act;vities
Linkaee ModchAt least two possrble lmKage moq€$ are possible Under the direct linkage mode! sHGs will
f'*" a;.4 *""ttto tl"f.ing service;. The SHPI will provide technical assistance^as well as extens'on and
;:;;G;;;;;,;;u-na in"o."-g"n"'uting u"ti;;ties rhe sHPI mav also fi$ction as an advisorto
68
the bank with respect to credit decisions Under the indirect linkage model' SHGS will d€posit group
*uinn. air*f, in ,ft" Uunf' but loans will be channeled tkough the SHPI The SHPI therefo'e acis as a
i.-iiiJ,""ir"ar"ry. The indirecr linkage nodel has been the one used in ihe pilot project in Indon€sia'
;:dTil;;il; ;; one usea in the rhitippine pilot Project which is scheduled to besin within the
q**:ffi *tue the participafis in the linkage project' several principles have been formula@d
and are central to the scheme:
Workine tkough existing institutions;n"*""iTnn ttt.-uu,ono*i of Setf - HelP GrouPs and panicipating instiru(ions;
i-""igniti;g sHct *a NGos as semi ' and infomal fhancial instirurions:
Promoting savings mobilizationlLinking savings and crediSubstituting collaleral with group IlaDIllty;Using savings as partial collaleral;Financial incentives for timely rePayment;Ensuring fast services $rough simple proced$esi
AoDlvinq market interesl ratesl ande.'.iieuiig nnanclatuiauitity $,rough cost coverage from Lh€ intercsl
margin.
E@Tif,*:dii.. wirh sHGs should be regarded as a process with several dimensions: financial.
i,,*i*,i""':jiljiiEffip"il, rr,".n1X;ri1.'o;"1.;..gi.d#j";'""j'i|i.HTffilx?lTfii,il,i""1f i;a matching of intemal resources 0t Sllu wltn
l*rui-ffiortun"" in tn" Linking project ln addition to the €ducational eflect on financjal habits' savings
are also a svmbol of strength and autonomy or the SHG' and a& an essential feature ofself- help and self
reliance.
The institutional dimension comprise the linkage of the- formal and informal institutions A
I"^rnitr" ori""*-"iii n""e to take place, with adjustnent &om all sides with tespect-to Procedures ano
ff#:". " ;;;G;';i;-for this ii communication betw€en the two groups - bankers and sHPvsHG
members.
The DarticiDative dim€nsion represents th€ need for the instilutions involved to lvork out ther owr
,".to;cat unlip.tationuf aerails. with the guidelines and principles as the;r staning Pornt
Details have to be adjusted to tnek specific conditions and needsThe degree of active
participa;on will feflect th€ commimenl ofthe padners involved'
The pilot project initiates dialogue amons the SHGS' SHPI and the banlc through information'
rnouti-tion .jna motiuatioD of these instrtutions imong the tasks are the develoPment of a manag€ment
inl-*"rion ""u".,
training system' and evaluation ofthe project'
lmplemenlrt ion TareetsTh€ linking project rn tne rnuppmes will be implemented for a period of 24 months and will
i'*f"" *tl r"rr"*i"gL iarticipants in additionto GTZ' LBP and PCRSF:
- 325 self- helP groups nationwide;- 27 self- heip pronot;ng institutionsNcos-- +s iunt" op.-ting in the rural areas (mainlv Land Bank fi€ld offices and Rural Banks)
69
An sHc qualifies only;fit tulfills the following requirements:
a)
c)
e)
0
has existing savings and credit activities;is a voluntary association bas€d on membershipmembers are small farmerc/€nfepreneurspermanent sotusgood organizationbasic and frrnctioning bookkeeping
An SHPI qualifies only ifit tulfills $e following requirements:
a)
c)o)e)
has established working relationships with SHGShas experienc€ with savings and credit schemeshas competence in ff aininyguidance./consukanc.thas financial management skilsgood organization and sufficient field staff
Credit for m€dium4erm livelihood projects shall be provided by banks a y€ar afier pro$amimplementation. How€ver, this may be sooner depending on the success of the savings mobilizationprogram and the readiness ofthe goup. Group savings ofSHCS will be acc€ptable as coUateral for a loan.
LBP will extend loans to coopenlives on a wholesale basis. In areas where there is no LBPextension omc€, an accredited rural bank shall link up with the SHGS through a rediscounting program withLBP.
The program shallbe implemented nalionwide.
l 0
Allnex Table 2.1
SELF HELP PROMOTING INSTITUTIONS IN THE LINKAGE PROJECT *
LUZON
VISAYAS
MINDANAO
lnfanta Cortunun;ty Development Administration, lnc.' (ICDAI)
Bulacan Social Action Center (BUSAC)Kalipunan ng mga Samahan ng Mamamavan (KASAMA)
Cen;r for Aerarian Reform and Transformation /CROSS (CARET/CROSS)
Visayas Cent€r for Cooperative Development (VICTO)
Philippine Pannership for the Development ofHutnan Resouces in the
Rural Ar€as - VGayas (PHILDHRRA-VISAYAS)Federation ofFre€ Farmers Cooperative' lnc., (FFFCI)
Bantayan lntegated Multi-Purpose Coop€rative, Inc., (BIMCI)
BarFhanong PanaS-hiusa sa Katilingban (BAPAKA)
Canlaon City Multi-Purpose Development Cooperative, IDc , (CCMPDCI)
Siliman University Extension Progam (SUEP)
Oitkdly'412:P4?4reCaary,e/t't'4.//7.'(.D/'r'r'?t729C93 r-i\elihatv! qa'$rddia( (EqRBLF ILeyte-Samar Rural Dev€lopment Workers Association (LABRADOR)
Kauswagan Resources Foundalion Inc., (KARFI)
Panabo Asro - industrial Corporation (PAICOR)
MindanaJAssocialion of Self-Help Societies-Southem Ph jlipPines
Educational Cooperative C€nter (MASS-SPECC)
Bukidnon United l.ion-Goverinrent Agencies Foundation (BUNGA)
PhiliDDine Parlnefship for the DeveloPment oflluman Resources in
nrimi Areas - Mindanao Development Cenler (PHILDHRRA'MDc)
Mawab Multi-PurPose Cooperative, Inc., (MMPCI)
Nabunturan Iniegrated CooPerative, lnc., (NIcl)
Davao Federation ofFfee Farmers, Inc , (DFFCI)
calinan Muhi_Purpose cooperative, inc., (cMci)
l t
Annex I
Case Study #3: Mimickins the Private Monevlend€r : The Case ofCalabaneaR€tailers' CooDerativeCreditUnion
Innovation:A cooperative credit union compos€d of market vendors mimics th€ strateg/ of privat€
mont€nders in lending to its members. The money for loans to memb€rs is sourced
ftom the capital buildup and savings mobilizalion oiits memb€rs. At the end ofthe y€ar,
all association firnds are paid out to membe$ &s dividends and capital shares This leaves
a ?.e$ ba\arce for the stait o{ each.Jear. Collectio$ (ate io( loo$s have bee(r 100%Funds fiom extemal agencies have been oflered to the credit union, but has been refusedby the credit unioD, *hich prefers to rely on it5 own funds.
Target Clieotele:Ma*et vendors in Calabanga, a small town in Bicol, southeastem part Luzon
Starting Date ofProject lmplementation : 1986
Rational€:To provide members at lhe marketPiace wirh a ready source of credit other tha! theprivate moneYlenders.
lnsfilution Involved:calabanga Retail€.s' coopemtive credit Union
Under the lead€rship ofone market vendors, a credit union was shned which went tfuough two phasesl
l ) Startup: Fr€sh fish section ofmarkel only;Saving nobilization: Pl/day for minimum ofsixty daysi
Loans: Eligible for Pl00 loan after 60 days ofregularpayne .
Expansioni due to success in the first year, a sihilar set-up was establhhed in other s€ction of themarket. In 1989, th€ existing goups were integaled into one association, now kno\.m as theCalabansa Retailers' CooDerative Credit Union.
credit Buildup Proeram: P20 per day per member until P500 subscribed share has been
Savines Mobil ization Prosram: Pl0/day'slal..
Loan: Long Term: maturity - 27 daysinterest - I 0% upon payment loanIoan ceiling - according to assessed paying capacitypurpose - any
daily; one collector for every 15 memberst funds not dhbursed are deposjled in the rural bankbefore noon of each day.
72
Short Term : maturitY -7daysinrcrest - 8% uPon PaYment of loantoan ceiling - according lo assessed paying capacirypurpose _ any
Loans are amortized daily. l0% oftotal collections is set aside to remunerate the Manager and Treasurer
who together received 20, and the Colleclors who receive 80%'
Credit Union starts out with zero balance at ihe besintine ofthe 4l!9ld!!9.+41 At lhe end oieach
yeat; dt'vt and memben capital shatet ale ?aid out, )ea'ng a zero bdatce for the shn Df the DEn
)Ear.
Summary ofResults:
I . Collection rate is I 00% The following factors hav€ contributed to this high rale:
I . disciPline of lhe membersi2. geographic proximity; collection ofcapital contribution, savings and loan
repalT nent is easy because all are vendoru in th€ same markgtplace
3, prissure to pay is stronger because ofawareness that money bofiowed is
made up ofmoney eamed by other nembers;4. any outstanding loan is d€ducled from the member's succeeding loan'
2.Lowttansact ioncosts.Transact ionscosts(Tc)forborrowersaswel lasforthelender(thecreditunion) are low.
Low Borrower TC: Due to sirnple procedures and papet work A borrow€r can hav€ a loan soon
after filling up the simple application form and giving this to the^heasurer' AveEge dme fiom loan
uppiiJionlo'fo* t"f"uie is not more than 30 minutes As long as funds are available and the borro\'ver
have no loan outstandhg, the feasurer can approve and give a loan ofless than P100'000 Loans above
this amount hav€ to be approved by the Manager'
Low Lender TC I Due toa) g€ographical proximily ofcollectors and creditors;
b) near pirfect information, since vendors have kno\\'n each other for many
years;c) simPle forns and transactlons;d) the manager and treasuer's services arc rendered for only tow hours per
day on the average.
3. The capital buiidup paoqram resulted in a sizable amount ofP85,600 by February, 1990 Because
orilfl" uotu,ni or intemal fun& generated' loans ar€ now made conpulsory for members
4. Dividends payable every Pl00 ofshares in October 1990 was P238 98'
5. Number ofmembers gr€w from lJ in one market section to 243 tom all sections ofthe Calabanga
public market. At present, ther€ are 16 groups with av€rage membenhip of 15 each'
6. No extemal funds Although extemal funds have been offered to the credit union by an NGO
(CARE Philippines) and a govemlnent agency (Departmeni of Trade and lndustry), lhes€ offers
trau" b"en r"i-riea The reason: it will be hard to collect loans fiom such tunds because this is not
money ftom its members, and therefore pressure to repay $ less-
7. There are no problems wilh the capital buildup progran ofthe group because there js a high level
of discipline and responsibilirv amoog members
'73
Annex 2
CASE STUDIES OF CREDIT PROVIDERS
A. The Informel Sector
COOPERATIVES
c)
o
a) Cli€nts. Cooperativ€ ABC cat€rs to a single market oi hotel and restaumnt workers whileCooperative DEF targets a community composed of several markets (e.9. wage-eamers, tricycledrivers, pensioners, etc.). Inter€stingly, coop DEF allows only those with a visible source ofincome to becom€ memb€rs.
Loan Packages. Cooperatives ABC and DEF both provide regular (or providenlial) loans, petrycash loans and sss-MADE loans. As additional services, coop ABC provides a credjt line for itsrestaurant and retail business while Coop DEF prcvides emergency loans during occudenc€ ofuntoward incidents and working capital to sari-sad stor€ owners and market vendors,
Service D€livery. For both cooperatives, attracting morc employees or resid€nts to join theircoopemtives and to borrow is not a problem, the more pressing concem is determining who canqualiry for a loan. For both cooperatives, a member may borow based on capacity to pay. Thismeans that a member can prove he/she has a stable source ofincome and that such level of incomematches the loan package sought after.
Rec€ntly, securing loans has becone a major concem among coopemtives. In the past,they only require promissory notes, co-nakers and authorization for salary deduction andrcmittances. Today, they are slowly adopting the ways oftheir counterpans in the fornal sector.They now require posi-daled checks, collateml's and ofier documents especially for business orlivelihood loans.
Inter€st Rates. Both coop€ratives chalge 13% interest for providential loans. This is a carry-over fom the previous linit set by BCOD. For other loan packages, howevsr, the inlerest isinfluenced by the rates charged by its competitors for €ach sub-sector s€gment. In the case ofcooperative DEF, each loan package has a different interest mte, Its "Pa-ulang sa Tindera"package is priced at 5%per 40 days since it competes with the mtes of moneyienders in the area-In the case of cooperative ABC, it charges 2.5% per month for its pelty cash loan since oihercooperatives based in hotels charg€ the same rate, cooperatives do not also float interest ratessince rhey do not have the administrative capabiliti€s and floating mighl cause confusion to its
Additional charges of2% are imposed as service fees on all types ofloans.
Delinquency. For Coop DEF, delinquent borrowers are given a maximum of three notices ordemand lelters befor€ a complaint is filed before the barangay captain or co-maker guarantees arecalled in. In cas€s of unforeseen or reasonable circumstances, re-structuring is undertak€n, andpenalties and intercst are waived-
d)
Source: Garde, Enrico O., 1995
14
N G O
For CooD ABC. accounts become delinqu€nt occasionally when there is work stopPage, rcducbon
ofworking hours, or permanent closue of comPanies Before rc_structuring is r€sorled to, other
measures are undertalcn such as calling in the co_maker Suarantee, deduction fiom sepamtionpays, etc.
Clients. Like Cooperatives ABC and DEF, NCO ABC also caters to the Poorer sectoru in the
urban arcas. Specifically, the NGO lists the following as its clientele; smali entepr€neus (who
employ people); intermediaries (other lenden); tricycle &ivers; urban poor womeq and: market
Lostr Psckrges. Each sub-s€ctor is matched with a different loan Package. Having a very defned
market 6nd a package apFopriate lo each market is one iactor why the NGO has manag€d to lower
its past due rates or bad debts.
Service Delivery. Providing very clear loan packages has contributed in expanding the number of
beneficiades. Giv€n its relative success, it has established branches in nearby Provinces and
resetilement areas.
In terms of secu.ring the loans, the NCO has employed sEicter measures than the above
coopentives. Except for its Kabuhayan Project, it requires ail beneliciaries to issu€ Post'datedcheoks. Cuarantee mechanisms such as JSS-Board have been adopted
Interest Rates. lnterest rate is as diverue as its loan packages. Like the lending investor and the
cooperatives, NGO ABC computes its interest mte based on Soing market rate (i.e the infomal
market rate) for each sub-sector, lt also does not float its inter€st rates
Delinquency. Re-sfitcturing is limited to borowers who have acted in good faith and/or became
delinquent because offoftuhous evelts Otherwise, litigation is resorted to.
a)
b)
c)
a)
o)
c)
d)
e)
THE GOVERNMENT AGENCY
o.J
Clients. The target borow€rs are intermediary inslitutions which will telend the funds to the poor.
Intemediades include NGOS, Pos and other fnancial institutions with a track record of operations
or with relevant capabilities r0 implemenling micro_credit programs for the €conomically
disadvantaged.
Loan Packag€s. The government agency provides a credit line facility to the qualified
intermediary. This credit lin€ can be availed ofin the form ofa rcvolving fund loan, or a term loan
whose matuity may exceed the expiration ofthe credit line
S€rvice Delivery. The government agency tries to secur€ the loans by passing the risks lo the
conduit who acts as guarantors ofthe end-users Qualifications of intermediari€s are enumerated'
The scheme of having post-dated chebks is also applied.
lnterest Rates. Loans are provided at a fix€d mte of 10%o per annum Based on the interview,
this is l% below the net gain of I t% from th€ Prevailing T-Bill rates (the opporiunity cost) Mrile
it may incr€ase its interest rale in tbe future based on the tend of the future T-Bill yieids, it does
not intend to lloat interest tates. Moreover, it allorYs its conduits to d€termine its own interest rales
based on the market rates in the arca.
75
e) Delinquency. (No infonnation was obtained).
THE GUARANTEE PROVIDER (GFSME)
a) Clients. As a guarantor, CFSME serves to encourage institulions to provide credit to small and
medium scale enterPrises. Small enterPrises are defin€d to have ao assel level of4_10 million
pesos, On the other hand, medfum scale enterprises are those with an ass€t size of about 10-40
million Pesos.
b) Assistance Psckages. The GFSME provides b{o q?es ofassistance. The first is the guarantee
mecbanism under which thele are two sub-class classifications. The credit risk guarantee
which covers 85% of the loan, and the collat€fal-short guarantee which cove$ 90% of th€
unsecured portion of the loan. The second package is the ljquidity mechanism whereby GFSMEpurchases the loans ofthe l€nding conduits in ord€r to improve the liquidity ponion ofthe lender'
c) Service Delivery. CFSME has accreditation Procedures which sefie to scre€n prospective
conduits. Moreover, GFSME has the power io decide upon the loans it waDts to extended
Suarantees or Purchase
d) lnt€rest Rates. As a general rule, CFSME extends serYices to loans with a maximum interest rateof 30% per annum. th€re is no interest mte policy for the guarantee mechanism since it coversont) rhe limcipa\,li eEfl\s {ees for $e g\aRrtees (\.8Vo of the lod\ ba\$\ce), }lowe\er, {or ilsliquidity mechanism, the policy is as follows; fi$t GFSME puchase loans with a fixed interest rateonly (it does not buy loans with a floating interest rate); second, it varies (not float) the range ofilterest rates ofloans it wants to purcbase. This range is established quarterly
e) Delinquency. In cas€s of delinqu€ncy, CFSME relies on the lending conduit for lhe re-structurinS, collection and/or foreclosure of assets
B. !!.e.-EarE8!!e!&r
The Commercial Bank
a) Clients. Commercial banks are risk-averse. Their primary clients belong to th€ top 1000corporations, There is, however, a segment which deals with consumer loans but these are limitedto individual borro\rers with monthly incomes of at least P 35,000. However, there are lawsmandating a proportionate share for agicultural loans (25olo) or smallscale enterprises. But thereare loopholes that allow banks to circumvent this requirement.
b) Loan Packages. The banks provide a variety ofloan packages to different market segment ofrbehigh-end market. There is a movement, however, towards penetnting the "middle-class" marketvia "consumer loans" such as car orhousing loans.
C) Service Delivery. To attract borro\yers, banls resort to various meaDs. These include: specialinter€st rates for "prime" bonowers ad derived by computing the total business generated by aparticularcli€ntadvedisements; fie,ding of market representatives; designing attractive financingpackages such as low dotrnpayments, and; putting up morebranches.
l6
d)
Securing loans is strictly observ€d Banks require numerous documentations and employ
a variety of secu ty measrres such as promissory notes, collatemls' insurances, guarantees'
mortgag;s. deed ofassignment, etc These measures compel borowers to pay diligenrly resulling
ro verv low Dail due mtes and a bad debt provision of2_3% only
Interest Rrt€s. In pricing their loans, the commercial banks consider several factors. Essentially'
while each bank may have different formulate to anive at the interest rates for the day, they all
consider cos! ofmoney, adminisFation cost, sFeads for risk, Profiq and budget targeB. These ar€
then comparcal to the risk-ftee investrnent oPtion (the T-bill ratO and the higher ofthe two shall
Drevail. Because of the fluctuation of the opportunity cost (the T_Bill rate), banks may choose to
hx lnt€rest for only a shon period of time (e.g one year for consumer loans), and float subs€quent
interest rat€s on a quarte Y basis.
Application or processing fees are charged in addition to the intercst ln many instances,
this is at leasl500 pesos perapPlication
Delinquency. The entte unpaid portion ofa loan becomes due and demaddable if a bor'ower
defaulis on any installment when il becomes due. Restructuring is often reson€d to since
foreclosure on collateEls is a long process. The rcstructured loans mean higher inlerest rates,
shorter amortization periods, penalli€s, stricter secuity measures and difficulty in accessing future
loans, ID addition, resFucrured loans are treated as new loans
e)
Lsnd Ba[k
Nore: Land Bank operations can be divided into 2 sectors: ttie commercial sector and th€ agarian sector' Theiornrnercial sector is iimilar ro $e jllusralion sbove. Thus th€ subsequent discussions relate mainly !o the agrdrian
sector)
a) Clients. Land Bank has shifted away from direct lending to famers to providing loans tfuoughconduits. Specifically, it targets cooPeftltives, cooperative rural bank (CRBS), and ruml banks(RBs) which, in tum, are expecledto rel€nd to small fisherfolk, famers, and liv€stock ftisers'
b)
c)
Loan Packages. There arc two general packages beiry ofrered by Land Bank Th€.fust is the
productior,/oieration/opemting capital loan. The second is the fixed ass€Vmedium_and long_t€rm
ioans. The former is payable after each crop cycle or one year at the most. The latter has malurity
p€riods oftwo years ormore depending on the t)?e ofasset acquired.
Servics Delivery. The previous Land BanI leadership had embarked on an aggressive-lending
stratery to the ioint that the bank engaged in orgarizing cooperatives to create outlets for their
fundsi'This apiroach, however, has been discarded by the present management The b:tnk is now
setting up standards/minirnum requirements that cooperatives have to meet before qualiting for
Int€r€si Rates. For cooperatives, Land Bank charges a 12% inter€st rate for productior/operating
capital loans and l4% for fixed asset loans. Both are charged an additional2% as supervision cost'
On the other hand, lending to CRBS and RBs is in the form of purchases of p'omissory
notes (rediscounting). For CRBS, the re-discount rates are 6% for cooperative PNs, 'nd
12% for individual PNs. For RBs, the cooperative PNs are also at 6% while individual Panr
have a l5% rediscount rate.
1 1
lntercst rates are determined by getting the weighted aYerage interest rate of ten leading
banks and comparing it with the t2% rate for ils lending program The lower of the two nies
shall prevail.' Land Bank floats its interest rate in the conrmercial sector but follows a
fixed interest rate policy for its agrarian operations
e) Delinquency. Loan re'sfuchuing is undertaken in cases of conduits are unable to pay lnterest
ratesrernainthesameforeacht)?eof loanandborrower'Atpr€sent,however ' therestructungpolicy is undergoing a review in ihe light ofthe high past due rales it is faced with'
Tbe Lending Investor
a) Clients. Th€ inErviewed ledin8 investor targets employees of rnultinational corPorations or of
siable FiliDi[o companies. Eaming betw€en P3,500 to P15,000 per month, these €mPloyees
usually have secured ;obs.
b) Lotn Pacl(ages. the lending investor provid€s two loan q1t$j-s' namelyi ̂ salary loan and
business loans, On the avemge, more borrowers apply for a P10,000 to P15,000 cr€dit for salary
loanwhile a f€w applyfor abusiness loan wonh P100,000'
c) Service D€livery. The lending investor puts uP branches where business establishmenb are-'
"on""nt "t"d. T;bles that cleart show how much one can bonow and how much is to be paid
every amortization perioa is provided in readily available brochurcs Processing tirne is faster ihan
bank assuming all docum€nts hav€ been properly acconplished and submitted
In terms securing loans, the l€nding investor is as strict as the cortunercial banks lt
relies heavily on post-dated checks As a r€suh, while the l€nding operalions €xperience an
average tOTo past due rates, the lending inve$or is abie io collect in due time' V€ry few cases
hav€ ever been brought to and resoiv€d in the coults'
d) lnierest Rates. The lending investo. does not go through computations to anlv^e a ceftarn nieresl- ;; In reality, there had been only one change in the rate over a decade of operations (ftom
S%olmo. to 4o/"j. The lending investot simply monitors the going rate ofother lending investors in
the urea ofoperation and adjusts only when there is a potential loss of clients And unlike banks'
the lending investor does not floa! its inLerest rates'
Aoan ftom the lnterest rate, the lendhg investor also charges other fees' these
include a piocessing fee of10 pesos per thousand and an insurance fee of 6 pesos Per thousand
el Delinquencv. All checks that bounce are charged a flal rate of50 pesos plus 5 Pesos p€r day until
t t ' e a m o r r n t d u e i s s e t t l e d ' t f a b o n o w e r f a i l s t o p a y l o r 3 c o n s e c u t i v e P a y d a y s ' t h € e n h r e l o a nbecomesdueandl i t igat ionorre-stnrci j r ingispuisued'Thelendinginvestorprovidesincent lvesto$e borrower in case of restructuring. The penaliies are waived ifth€ bonower can pay30% ofthe
balance and issues new post-dated checks to repay the remaining balance over a s-monlh period
18
ArnexTable 2,2
DATA ON TIIE PHILIPPINE LINKAGE PROJECT
Table2.2A
tion ofCroup Members
f G with Financial Institutions, 1992
{unber ofsrouDs with transaction oflhis t?e..Ratio of n;*r of sroups *ilh transaction ro totalnumbe' olgoupsreponrng
(cooDerativ€s=24; non-cooperative SHCS=147; all groupFtTl)'
Bssic Information on Pa
Type of selfHelD Group
No, ofCroupsReDortine
Average No.ofMembeB
Average No. ofWomen Members
No. of GroupsRegistered
CooDerative 24 2t (380/.\ 24 (100o/oJ
Informal SHG t41 23 13 (s6o/o) 49 (33Yr)
All sHGs t7r 28 14 (50o/o\ 13 (43%\
Table 2,2.8
Type ofOccupation Coop€rative Infomal SHG All Self-Help Groups
Fanning l5 8 l 96 (56%\
Micro-€nterprise 4 20 24 (l4o/o)
Salaried 2 17 t9 (t t"/.)
Services I I 3 l 9 ( 1 1 % )
Fishing 2 'l 9 (5"/o)
Others 9 9 (s%)
TOTAL t41 1710007" )
Trble 2.2Cac ons o
Type of SHG Bank Deposits SHPVCoop Deposit
Amount (P) No.' (%)** P/qroup Amount (P) No.* io/o)44 P/goup
loopemtive 4',79,233 l 8 15% 26,624 49s.79 3 t 3% r6s,263
lnformal SHO 2,288,354 75 5t% 30 ,511 4,625,136 29% 107,561
All SHGS 2,16't,s81 93 54% 29,'t59 5,t20,926 46 21% 1\,324
19
f G with Financial Inst i tut ions' 1992
.Number ofgroups with tmsaction oflhis tvp€**Ratio ofnumb€r ofgoups with fdsaction to toialnrmber ofgrouPs repott'ng
(coop€mlives =24i non cooPerative SHGS=147i all groups=l7l).
T^ble 2.2DCredit Transactiors
Tlp€ of SHC Bank Loans SHPVCoop Loans
Nor e/o\, * P/Group No.* (o/o)r + P/Group
cooperatiY€ 2,398,680 5 2l%o 419,',t36 168.381 ,7 29% 24.054
lnformal SHC 1,t 19,343 2 \ 14% 53.102 5,291,t28 3',7 250/0 1 4 3 , 1 6 6
T^blez.2ELoans lo Deposit Rat io
TYDe ofS€lf-Help Group Bank SHPICooDemtive 5.0 0.3Informal SHG 0.5 l : lAl l SHGs 1 .3 1 . 1
80
Annex 3
LESSON LEARNED FROM TIIE INDONESIAN EXPERIENCE
A. Chatrees in the Policv Environment
The experience of Indonesia with deregulation, fmancial systems develoPment and
microfmance h; been litemlly experimental. Since 1983 the financial system of Indon€sia has
been sadually and prud€ntialty deregulated Banks ill Indonesia are ftee to set their own interest
*"li"p""Jlg *'*t", risk and profit expectations sound !g*s.ma{ -1t^eaff in.fol€'gn
"*"hunnJ ut nou-ti"e tut"". Since the deregulation act PAKTO 27 ofoctober 1988' it is relatively
i"* r"'i"i ro """"1"*
aod baDk bmn;hes, also in ruml areas As of February 1990' most
sutsiaized "rralt
p.ogru*s wilh their higb default rates were dismanlled
Derequlation in Indonesia wss neither haPhazard nor an over'night event lt Proceededin several staies, ALeady before 1983, private bank were given autonomy ln deterrnmrng lnerr
;;;,;4.4". This had imrnediarc ;fects on the mobilization ofresouces from the private
rJoi-a "r"ngtftan"a
tft" position ofprivate bantG in the fbancial system lt also demonstrated
coiuincing$ trti't aot".tic iesource mobilization is Possible a5 a result ofpolicy measures'
B. tr3titutional Adiustments end Fin.ncial Innovations
Since the onset of deregulation, fnancial institutions in Indonesia have excelled m
financiai innovations rangiag from novel products to doorstep services The private banking
;;;;;;-;; i""" paniculailv-irurovative *et, when exposed ro fierce comled on governmenl
Lants quicttv liamed to cope with market forces and reacled to the daily challenge wilh
li"""tj,r* Jr ii"it own tn'rural and microfinance, there have been num€rous institutional
iniovations as a resutt offinancial deregulation that are ofrelevance to microfinance'
l. The legal framework der€gulation which has resulted:
i) in the establishment of large numbers of new rural baDks (BPR)'
iii the conversion ofsemifomal financial institutions, particulatly the so-called
secondary banks, into full'fledged rural banb' andiii) $le estabiishment ofruralbanks by SHGS andNCOS seibel 1989; 19-24)' among
them Bank MahaBhoga Ma€a in Denpasar in 1990 as the fi$t such venture
2. A wave of innovations among private banks such as daily deposit coliection' doorstep
services. product reciprocity, municking, lilkage banking, etc Aprominent exampl€ N
Bank Dagang Baliwhich has adopted vinually allof these
3. The linkage banking project (PHBK) of Bank Indonesia supported by ̂ GTZ in which-
pil""t" -_a gou".;"nt-o*n"a banks, NGos, privat€ cooperatives and SHGS establish
iutono.nousi rsin"ss relations at mark€t terms' tying together formal and nonformal
finance (seibel l99lc; Seibel & Parhusip 1992; Foundation for Development Cooperatjon
1993: I l7-128)
8 l
Source: Seibel, 1996
4. P4K, a credit program ofthe Deparin€nt ofAgicultwe with BRI supporied by IFAD and
UN6P. Frorr 1989 to 1994 it has leached about 300'000 families below the poverty line'
organizing them in some 30'000 grouPs of 8-16 members Th€ tepaydenl mte of 99 %
sea ttris prograrn apart tom similar programs in oth€r countries where repayment mtes
below 50'% -are
noiuncommon There are three major factors which explain its success in
Indonesiai
commercial rates of interest to the groups (though not from goups to members)
which convey a message ofserious banking lo bank staff;
ii) BRI'S insistence on repayment (based on efective monitoring), .barring whol€
villages and disficts from fufther qedit ifarears exceed l0 %; and
iii) tie quality of guidance and suPervision ftom Department of Agricultur€ field
extension stafl, which is in tom sub.l"ctto eff€ctive trainin& supervision and
incentive systems. In cooperation with Bank Indonesia's PHBK, the groups arenovr 1994)95)-m *IB Process ol e\o\'mg ]fio se${c\$sf' $rgtsivdrs\s'
5, The spectacular cas€ of reorienting and restructwing a goverffnent-owned ag cult 'al
bank. In only seven years, staning in 1984, Bank Racyat Indonesia (BRl) changed from
an agency channeling govemmeDt funds at a gigantic loss to a profitable commercial
Uanf. fVnite its ruml lending sch€me, KUPEDES, €xpanded at a phenomenal rate, its
savings mobilization tlLrough village units ge\v faster' proving beyond doubt $at rural
savinis exist! l$ Dece$bcr \989, \i\tage uni! sa'tir\gls passed ths 100 % malk o{ fund
mobiiization for rural crediq by December 1990 they stood at 1243 percent of loans
granted through village units. ln D€cember l99O (end ofyear! savings in viffage umis
i.ountea to i 7z tri ;on Rupiah: double |he amount of December 1989 (Rp 850 bn)'
of th€se t.Ol billion RuPiah w€re mobilized $rough the famed lottery savingp scheme
iMpeofs h p"""rnUir 1990 the number of savers at village units was 5 28 million'
i.it mittion oe tnern snaPEDES savers The suest way to ensure a continuing flow of
funds is to make it in the interest ofthe credlt Provid€r to generate lhe funds from wilhin'
(with) a large positive sPread between the loan rate ofinter€st and the cost ot tundsl
ithis ' also;- riquked the villag€ Ll,1its lo lransform themselves fiom subordjnate
ioi"uu"."iia unitt ,o p.ont_maxi.irizing businesses, concludes one of the architects of the
program (Snodglass & Patten 1991;361)
Outstandings in December 1990 amounted to 1 38 triliion Rupiah; 38 7 percent above the
Decembei 1989 outitandings ofRp. 843 bn. ln December 1990, 1 89 million bonowers had loans
"t"r""itt" n" 731,000, c;mpared to 1.64 miilioD borowers in Dec€mber 1989 Portfolio
,".foi.u',)* fr* U.* .*"elleni. In December i990 the long term loss ratio (including repaynents'anei
*re wrte-off oatel was 2 64 percent BRl has also Ploten lhat cledit al hdket rates rs more
effective than subsidized lending. Unde! the subsidized BIMAS credit program, Rp 2 55 trillion
(in 1989 pri€es) wer€ tent ov€r a 14 year period Rp. 182 billion per Jear)[cumulative-figures]ijnder BRI's nonsubsidized KUPEDES schemes, Rp 3 ?5 trillion wer€ lent in 6 years (625 biilion
Der vear) until D€cember 1989 (in 1989 prices) Icumulative fiSuresl By D€cember' lg90
cumulative KUPEDES l€nding during lhe seven-year period stood at 528 trillion Rupiah,
averaging 753.9 billion Rupiah p€r year' BRI has now stafted to move into urban micro-finance,
mobi)izing savings and extendlng credir \o urban informa\ sEctor enleDrisEs (Sdrbe\ \989'31-4q,
tss26)
8 l
There arc seveml lesson ro be leamed ftom the BRI experience which are of relevancEbeyond the Indonesian context,
i) that the use oicommercial rerms will provide wider access to institutional crediriii) that it is possible to persuade a bar* to deal with small-scale borrowers (and to
mobilize savings;iii) that lending to individual business men and *om€n is feasible; and thativ) politicaUy, reforning rulal credit in Indonesia proved less difrcult tban expected.
(Snodgrass & Patlen l99l;cf Patren & Rosengard 199t. 1992)
83
Amex Table 4 l
GRAMEEN BANK : T.INANCIAL PERFORMANCf,
'Expr€ssed a! a percentage of average assets.Souce : Rbne, Elizabeth, Aom OteroM.,1994.
1987U.S. $15.23 million
1985U.S, $?.4 nillion
1986U.S. $10.9 milion
35.O%4.20/o0.o%0.9%
27.6%
14.tot0 .1%
27.5%9.5%13,4%4.6%
3s%
18.0%
-14.5%0.ta/o
95.O%3.6%0.o%r.0%
25.8%
t2.3%0.1%
25.',I%'t.t%
134%5.2o/o
5.7%
18.6%
-12.9%0.10/o
39.0%5.9o/o0 .1%t.4%
3\,0%
14.20,40.0%
30.8%t4.0%t2,2%4.00/o
2.6%
17.0%
-t4.0%0,2%
% pordolio grolvthCapital-to-asset IatioRetunr on assetsRehlm on capilal
-mtqcst:mcme
Inv€sfo edf rnleresf ncotheOther income
Total costs'Flnancial costsPersoDnel costsOther costs
Loan porlfolio interestincome less interest expense
Total inlerest incomeless interesl expense
Loan portfolio interestincome less total costs
Total income less tolal costs
84
Annex Table 4 2
SELECTED PERFORMANCE INDICATORS FOR THREE ACCION
INIERNAfiONAT AIFILIATES AS OF DECEMBER 3I, 1991.
' Dala ar€ derived fom AccloN ( l99l )biu-over is aen'ea as tolal loan frmds disbu$ed ov€r the averase loe ponfolio'
AveEse lom ponfolio is @lculat€d as I Oeai-beg$nng-)eat-erd Pordolio)2'
Souce: Rlrre, Elizabetb, from ol*o M. l99a
Performance Indicator Bolivia Colombia Guatemala
Client Characteristics
commerce /seftrceManufaciudng
Loan FeaturesAverage beginning loan sizeInterest rate (annual)
Borrowels ReachedTotaL active membersAnnual membership gouth rate
Loan FundsActive Porfolio
Growth rale ofportfolio 1991'91
Repayment Performance% arrears 30 days
% default
TlYo66%3 4 %
s8748%
i9,90152%
54,561,'1754.2
87%
0.2%0.0002%
$17642%
33,81r62%
53,979,5152.9
31%
4.00/o0 . 1 8 %
49%650/0
35%
40%
5t,426,',7t45.0
55%
8.00/"0,680/0
35Yo63%3',7%
$20545%
Annex 5
FINANCIAL PERFORMANCE INDICATORS FORSPECIALIZED FINANCIAL NGOS AND FOR MLT_TIprrttpOSE NGOS
Th€.most comprehensive approach to anaryzing the financial soundness of an instiruuon ,, rocompare atl income deriv€d from income-g€nerating O;Jfonnine) ass; ;;rr "p*"t""i'*a ""pi "rcosts exprcssed dt a percentaged of perJorming assets. Tle calciiation meas.re, ir" in.rlriion" utilryto efficiently mturage its assers.
This approach is applied to FoNDoEMpREsA and the results are presented in the tabre berow:
PERI'ORMINGASSETS
FINANCIALEX?ENSES
231,7 50
T::.,:::^t:!"":*:::.Lliiil,^l:lh:_:^" p.og"m for the rast nscar year were p/6r2,000./,1^":3_"^1"jil1IT,h"se assets rotars*p/23i,750. "p,"i"ri"i "
yi"rj-" ;.;t;;i;#;i:,:fiff:X.":._l1:T:_1": inuestmentsrFnaniiat Lpin",, ;ap%i&;,"p;:;;,: ffi;:il:,
".:;:li! lL: lt::"j:,r. ?:**ins assets. rhe sross fina"it"r .*ei" "r ir,. ""ri p,"-era^i. ii'.lrii. ,r.r* -6.lo/0 = 31,8%. It is imponant to note rihat ur;s culculattoriaoes n; i;:1fie"ft;'irncome derived fromgrants.
- .- . - - -9perutional .xperser include all admmistrative and loan loss provision cosrs, The totat ofP243,885 represents an operarionar cost ratio ofJg l"u. orperrorming assJts. ir.,i airi*"*" il"*."" ,1"goss financial marsin and th€ oDeratine costs ratto^yi"ta tl" net fre.attni ,"re_;ilili;/,"- :s.sx =!8:1"19,, yhigh cor€sponds ro the secJnd lever ol cosr coverag€. This calcularion indjcates tharFONDOEMPRISA is not covedng acrual cosls with incorne deried from if,"l""alrg
"p"*1"r. ff,"severity.of the 8. t% deficir is nor imned.arety appur.nt;n *,e in*irution;, iru;;;;j r;.";;;"
"..""..ofthe addirionalP/50.000, or 8.2d6. received;s glants.
In order ro calculared the third and firal ievel ofcost coverage, it is necessary to impurc me netecoiomic cost capitar treating it as a real cost associared with the manigeme"f "i
ir,-" ii""""i"ii"orari"".This€nalysis consisrs ofa catculated ofrhe imputed costs ofcapita ana'itre imprr"Ji"r"?n'i"r*O U",propefiy assets, The table below demonslrates the calculation for the case orosmm
Economic(cosT)tsENEFIT
CapitalConcessional loansEquity
Property
300,000i64,535
(45,000)
sou Le: lnrdroF/ in, ,nue p,o ec ' cons, ;a i l le lcr nod e' r . ranro lc t r \en hf l . tue only lo . Cosl Suu,r_rr Anxr \ .1
The imputed cost ofcapital is included in the financial analysis to compensate for the economiccosts of mainlaining the real value of equity and quasi-equity sourc€s of capital. Siuce the critical bsuesis that the institution maintain the ecorcmic puchasing power of its capital, the inflarion raie should beused as the measue of economic value. ln tbe case FONDOEMPRESA, the 15% inflarion rat€ isappli€d to the institutions avemge equity and concessional loans for the last fiscal year. The institutionactually paid P/17,000 in intercst on the concessional loans and the diff€rence between that and theeconomic cost ofthat con€essional loan is impuied (P45,000-P/17,000=P,28,000). AII ecoDomic costs ofmaintaining the real value ofthe equity base are imputed. It is important to note that th€re is no cost ofmaintairing the real value of savings deposits, since the depositors accepted the savings rate lls adequarecompensaLion for the effect ofinflation on lheir savrngs.
Just as there are €conomic costs associated with the liabilities and capital ofan institution, tberemay also be economic benefits associated with the institution's assets that are not captured in the profitand Loss Statement. For example, the institution has inv€sted P/175,000 ofits capital in property. It isrealistic to assume that the prop€rty asset is increasing in value at tbe same rate as inflation and thus an
@eeffi".xfr.tr"-?4{-2€4.t-4aa'6v'iijE422-' 4.-+-" e* -
benefit of prop€rty must therefore also be included in the calculation. In the example of the case
program, net economic costs equal to P/56,430,
IncomeActual Financial Costs
Gross Financjal MarginOperating Costs
PROFITABILITY
31,8o/o Level I39.9 %
Net Operating Margin (8 1 7") Level 2ImDuted Caoital costs 92%
TOTAL (11.3o/o) Level 3
ANALYSIS3't .9 %
6.10/o
Subsidv Ind€x 45.7%
2. Multi-puroose Institutlons with a Credit Prosram
ITEM PORTFOLIO INCOME FINANC]ALEXPENSES
OPEMTIONALEXPENSES
IMPUTEDcAP COSTS
CALCULATION 542,000 215,750 3?,000 t99.524 60.560
PERCENTACE 40% 6 . 8 % 36.8 % 11.2 %
In th€ case of a multlpurpose inslitution, the only performing asset relevant io the lending
oDeration is the portfolio itself. In this example, the al,enge oulslanding pot{oli, for tbe last fiscal year
was P/542,000. Likewise, only income derived from lhe podfolio should be included in the income
calculation. The P2 I 6,750 is comprised of interest income Gross yield on the ponfolio is 40 %
Wter allocating the fiiancial costs ofthe instihrtion, it is easi€st to assume that any borrow€d
funds are invested in tbe loan ponfolio. As long as liabilities are l€ss than or equal to 120% of the
average outstanding portfotio, all ofthe institutions financial costs can be allocated to the credit program.
Ge;it is assumed that the institution must mobilize enough capitat to maintain at least 20% of the
amount of the portfolio in cash reserves.) Under these assumptions, FONDOEMPRESA'S average
liabilities wer€ P490,?33,90% of the average outstanding Portfolio of P542,000 Therefore all oflhe
actualfinancial cosls ofP17,000, 6.8% ofthe portfolio, can be allocaled to the credit program. The gross
frnancial margin for th€ credit program ;s thus 40% ' 6 8oA=33.2%.
ope tiond $penses can b€ calculated by allocating all direct expenses plus a percentage ot
ov€rhead expenses. In this example, 14 ofthe institution's 22 operational enployees (64%) are involved
