Microfinance Policyin the Philippines

A DOF-NCC Presentation to the Microfinance Development Forum

Sponsored by PACAP-AusAID January 29, 2009

Crowne Plaza Galleria Manila

Ortigas, Pasig City

2

PRESENTATION OUTLINE • Situation before

-- Old policy regime• What we have

done(Government’s Response)

• Microfinance Industry Today• What we have learned• The challenges ahead

3

OLD REGIME Attempts to address the problem:• 1970s-mid 1990s -- Creation of

government directed credit programs (DCPs)

Features:• Funding from budgetary allocation,

special funds, foreign borrowings• Funds given at highly concessional

rates• Funds provided through specialized

banks• Government line agencies also

implementing DCPs

4

OLD REGIME WHAT HAPPENED THEN

• Very low outreach implemented by GNFAs compared to those implemented by GFIs

• Low repayment rates in DCPs(Undisciplined borrowers with “dole-out mentality”)

• Large scale borrowers captured the subsidies

• Huge fiscal costs • Private financial institutions dependent on

cheap government funds, leaving out savings mobilization

5

WHAT WE HAVE DONE

• Initiatives to rationalize and optimize the use of government credit programs through Social Pact on Credit

• The Pact became part of the Social Reform Agenda

• Institutional champion—the National Credit Council – created to lead the reform process.

6

WHAT WE HAVE DONE

THE NATIONAL CREDIT COUNCIL

• created in 1993 through Administrative Order No. 86 to meet the need to rationalize credit policy

• Chaired by the Department of Finance (DOF), with Landbank of the Philippines as Vice-Chair

• Member agencies:Bangko Sentral ng PilipinasCooperative Development AuthorityAgricultural Credit Policy CouncilPhilippine Deposit Insurance CorporationPeople’s Credit and Finance CorporationBureau of Rural Workers-DOLESocial Security SystemSmall Business and Guarantee Finance CorporationDevelopment Bank of the Philippines

7

WHAT WE HAVE DONE

THE NATIONAL STRATEGY FOR MICROFINANCE (1997)

• A new paradigm to develop the country’s microfinance market

• VISION is to (1) achieve a viable, sustainable, strong private microfinance market and (2) provide poor households and microentrepreneurs greater access to microfinance services

8

WHAT WE HAVE DONE THE NATIONAL STRATEGY FOR MICROFINANCE

Four policy principles:– Provision of an enabling policy

environment to facilitate increased participation of the private sector

– Adoption of market-oriented financial and credit policies

– Non-participation of government line agencies in the implementation of credit and guarantee programs

– Greater role of the private sector in the delivery of financial services to the poor

9

WHAT WE HAVE DONE

THE NATIONAL STRATEGY FOR MICROFINANCE

• National Strategy for Microfinance embodies new paradigm

• From government-led to private sector-driven. Government to only provide the enabling policy and regulatory environment

• From directed, subsidized credit to market-based approach (market-oriented interest rates)

• Donors primarily as providers of technical assistance e.g. capacity building

10

WHAT WE HAVE DONE

ENABLING LAWS

• Social Reform and Poverty Alleviation Act (December 11,1997)– Adopt a market based interest rate policy for

microfinance– Government funds used only for capacity building

purposes– Emphasis on savings mobilization– Established the People’s Credit and Finance Corporation,

the forerunner of microfinance services through wholesale lending

• Agriculture and Fisheries Modernization Act (AFMA) –December 22, 1997– Phase out of DCPs in the agriculture sector – Adoption of market-based interest rates– Non-provision of credit subsidies– Government financial institutions (GFIs) acting as

wholesalers of funds

11

WHAT WE HAVE DONEENABLING LAWS

Issuance of Executive Order No. 138 on August 10, 1999- directs government agencies implementing credit programs to adopt the NCC Credit Policy Guidelines. What are these guidelines?

non-participation of government non-financial agencies in the implementation of credit programs

government financial institutions to be the main vehicle in the implementation of government credit programs

adoption of market-based financial and credit policies

12

WHAT WE HAVE DONE

ENABLING LAWS• General Banking Law (GBL) and BSP Circulars

– Recognition of peculiarities of microfinance e.g. allows cash-flow based lending and collateral-free loans

– Makes banking rules and regulations more “microfinance-friendly” i.e., lifting of moratorium on branching by microfinance banks

• Barangay Microbusiness Enterprise Act (BMBE) – Requires market-based interest rates for loans to

barangay or village-based microenterprises– GFIs acting as wholesalers of funds– Setting up of a special credit window, within a GFI,

that will provide credit to barangay microenterprise business at market-based interest rates

13

WHAT WE HAVE DONEREGULATORY FRAMEWORK FOR MICROFINANCE

• A regulatory framework to develop a viable and sustainable microfinance market

• Deposit-taking institutions are subject to prudential regulation and supervision

• Banks engaged in microfinance are regulated and supervised by the Bangko Sentral ng Pilipinas (BSP)

• Cooperative Development Authority (CDA) as designated regulatory authority for credit cooperatives

• Deposit-taking microfinance NGOs encouraged to transform into banks or cooperatives and be regulated

• Microinsurance is under jurisdiction of the Insurance Commission (IC)

14

WHAT WE HAVE DONEREGULATORY FRAMEWORK FOR MICROFINANCE

• Development of a core set of performance standards for all types of institutions involved in microfinance

• Indicators to assess MFI financial performance

15

WHAT WE HAVE DONELEGAL AND REGULATORY FRAMEWORK FOR

CREDIT/FINANCIAL COOPERATIVES

• Standardized the Chart of Accounts for Savings and Credit Coops (SCCs)

• Formulated the Performance Standards for SCCs (COOP-PESOS)

• Developed the Manual of Rules and Regulations for SCCs

• Building the capacity of CDA to regulate and supervise SCCs

• Establishing the Coop Information Infrastructure System

• Drafting the Manual of Supervision and Examination for SCCs

16

WHAT WE HAVE DONEAT A GLANCE…• Consolidation of agricultural DCPs into one

fund (AMCFP)• Transfer of management of AMCFP and

non-agricultural DCP funds to government financial institutions (GFIs)

• GFIs provide wholesale credit funds to MFIs to avoid competition and crowding-out

• Government focus on capacity building assistance to MFIs and clients

• Capacity building assistance excludes seed funding, equity infusion and partnership

17

WHAT WE HAVE DONE

AT A GLANCE…• Agreement among key stakeholders to adopt the

Performance Standards for MFIs• Emphasis on savings mobilization• Emphasis on operational and financial self-

sufficiency• Use of sustainable community-based private

MFIs in the delivery of microfinance services • Use of the household’s cash flow as basis in the

design of microfinance products• Strengthening of the credit cooperative sector• Published Microfinance Consumer Protection

Guidebook• Issued Guide for MFIs on Business Development

Services

18

MICROFINANCE TODAY STATUS OF THE INDUSTRY

• The Philippines is recognized worldwide as one of the leaders in the development of the microfinance industry.

• First in Asia-Pacific to adopt microfinance in its central banking system

• Declared by CGAP as the best in implementing microfinance programs to reduce poverty – International Year of Microcredit 2005 New York City

• In 1997, there were only a few large MFIs with an outreach of less than half a million clients.

• Latest figures show that after ten (10) years, the number of MFIs have reached over 1400. Including branches, this has swelled to over 2,000.

• From a few hundreds of thousands in 1997, outreach has reached 5.2 million as of September 2008.

• Large commercial banks have entered the market by providing wholesale funds to retail MFIs

19

MICROFINANCE TODAY

Policy and Regulation

Wholesalers Retailers Social preparation/capacity

building

BSPCDAICSECDOF-NCC

GFIsPrivate commercial canks

Thrift BanksRural BanksCooperative banksSCCsMicrofinance NGOs

DonorsGovernment agencies (.g. developmentof MSMEs)GOCCs,GFIsAcademeLGUsNGOsPrivate sector (business organizations)

KEY STAKEHOLDERS

20

WHAT WE HAVE LEARNED

• Strong private sector collaboration from the onset is imperative to push for critical reforms

• Capacity building assistance is more important for MFIs than government subsidized credit funds

• Less direct government intervention in credit delivery enhances competition, lowers interest rates and promotes greater access of the poor to microfinance services

• Setting standards builds and develops strong, viable and sustainable MFIs

21

THE PHILIPPINES’ PERVASIVE POLICY STRATEGY

• To provide the poor greater access to financial services, government should provide the appropriate and enabling policy environment to strengthen the private sector in the delivery of microfinance services to the poor.

22

THE CHALLENGES AHEAD

• Institutionalization of microinsurance coverage for microfinance clients

• Development of creative and innovative loan products and assessment techniques for microfinance clients graduating to small enterprises

• Development of credit information system (note:recently passed)

23

Contact Information

Mr. Joselito S. Almario, Deputy Executive Director, NCC

Mr. Napoleon P. Micu, Sr. Project Specialist, NCC

4th Floor, Fiscal Policy and Planning OfficeDepartment of FinanceDOF Building, BSP ComplexRoxas Boulevard, Manila, Philippines

Emails: itoy@dof.gov.ph ; NMicu@dof.gov.phTelefax: 632-523-3825 http://www.dof.gov.ph http://ncc.dof.gov.ph

Maraming salamat po