Rural Financial Inclusion Rural Financial Inclusion and and

New Microfinance New Microfinance Technologies in the Technologies in the

PhilippinesPhilippines

Jovita M. CorpuzExecutive Director, Agricultural Credit Policy Council

Member, APRACA Executive Committee

National Conference on Microfinance in Russia: New Strategies of Success

The National Association of Microfinance Market StakeholdersPark Inn Pribaltiyskaya Hotel

19-21 November 2008, St. Petersburg

Джовита М. Корпуз Совет по сельскохозяйственной кредитной

политике

Rural Financial Inclusion Rural Financial Inclusion and and

New Microfinance New Microfinance Technologies in the Technologies in the

PhilippinesPhilippines

Jovita M. CorpuzExecutive Director, Agricultural Credit Policy Council

Member, APRACA Executive Committee

National Conference on Microfinance in Russia: New Strategies of Success

The National Association of Microfinance Market StakeholdersPark Inn Pribaltiyskaya Hotel

19-21 November 2008, St. Petersburg

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Outline of PresentationOutline of Presentation

1 Policy Background1 Policy Background

2 Product Innovations2 Product Innovations

3 Process Innovations3 Process Innovations

4 Success Factors, Issues and 4 Success Factors, Issues and ChallengesChallenges

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1970s - 1980s1970s - 1980s• Supply-led and highly subsidized directed Supply-led and highly subsidized directed

credit programs (DCPs) for small farmers and credit programs (DCPs) for small farmers and other rural poor other rural poor

• Government provided loans either directly or Government provided loans either directly or through private rural banks at subsidized through private rural banks at subsidized interest ratesinterest rates

• Proliferation of DCPsProliferation of DCPs

Result: DCPs failedResult: DCPs failed DCPs suffered high delinquency DCPs suffered high delinquency Bankruptcy of rural banksBankruptcy of rural banks Subsidies went to big borrowers Subsidies went to big borrowers DCPs did not reach the poorDCPs did not reach the poor

1 Background1 Background

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Credit Policy ReformsCredit Policy Reforms• Termination of government directed credit programsTermination of government directed credit programs• Formulation of agri credit and microfinance Formulation of agri credit and microfinance

strategies anchored on the following policy strategies anchored on the following policy principles:principles:

– Increased participation of the Increased participation of the private sectorprivate sector

– Adoption of market-based Adoption of market-based financial and credit policiesfinancial and credit policies

– Focus on proper management Focus on proper management and utilization of the loan fundand utilization of the loan fund

– Active participation of banks and Active participation of banks and government financial institutions government financial institutions

– Government to provide the Government to provide the enabling policy and regulatory enabling policy and regulatory environment and critical support environment and critical support servicesservices

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Credit Policy ReformsCredit Policy ReformsThe shift from supply-led The shift from supply-led

credit and subsidiescredit and subsidies -- --• paved the way for financing paved the way for financing

models that are demand-driven models that are demand-driven and market - oriented such as and market - oriented such as Grameen bankingGrameen banking

• MFIs increased in number – MFIs increased in number – now totaling now totaling 5,308 5,308 composed of 500 NGOs, 229 composed of 500 NGOs, 229 rural rural and thrift banks and and thrift banks and 4,579 credit cooperatives4,579 credit cooperatives

• The number of poor with The number of poor with access to credit significantly access to credit significantly increased from the 1990s increased from the 1990s – MFIs have granted more MFIs have granted more

than PhP74 billion (US$1.54 than PhP74 billion (US$1.54 billion) to over 3 million poor billion) to over 3 million poor clients from 2004-2007 clients from 2004-2007

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Innovations & New Microfinance Innovations & New Microfinance TechnologiesTechnologies

• Aim: Microfinance innovations are Aim: Microfinance innovations are aimed at wider and deeper rural aimed at wider and deeper rural financial inclusion of the poorfinancial inclusion of the poor

• Types of innovationsTypes of innovations– Products Products : (i) agri : (i) agri

microfinance, (ii) micro microfinance, (ii) micro insurance, (iii) housing insurance, (iii) housing microfinance, (iv) microfinance, (iv) savings/deposits, (v) savings/deposits, (v) capability buildingcapability building

– Processes Processes : (i) Automated : (i) Automated Teller Machine (ATM) Teller Machine (ATM) Cards, (ii) Mobile phone Cards, (ii) Mobile phone bankingbanking

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2.1 2.1 Microfinance for AgricultureMicrofinance for Agriculture

• a cash flow-based lending approach with flexible a cash flow-based lending approach with flexible repayment terms (i.e., based on household’s income repayment terms (i.e., based on household’s income cash flow and not only on the activity financed by the cash flow and not only on the activity financed by the loan)loan)

• loans are for agricultural activitiesloans are for agricultural activities and non-farm and non-farm micro-enterprises micro-enterprises

Agri-Fishery Microfinance Agri-Fishery Microfinance ProgramProgram

• Land Bank of the Philippines Land Bank of the Philippines lends program loan fund to lends program loan fund to rural banks, cooperatives, rural banks, cooperatives, irrigators associations and irrigators associations and other people’s organizations other people’s organizations for relending to agricultural for relending to agricultural householdshouseholds

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2.1 2.1 Microfinance for AgricultureMicrofinance for Agriculture

12 rural banks and 7 cooperatives have lent 12 rural banks and 7 cooperatives have lent to nearly 6,000 agricultural households close to nearly 6,000 agricultural households close to PhP 70 million (US$1.46 million)to PhP 70 million (US$1.46 million)

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2.2 2.2 Micro InsuranceMicro Insurance• Micro insurance refers to insurance systems Micro insurance refers to insurance systems

designed for the poor which is characterized by designed for the poor which is characterized by simple product design, frequent and affordable simple product design, frequent and affordable premium payments, fast and timely payment of premium payments, fast and timely payment of insurance claims, and uniform benefit packagesinsurance claims, and uniform benefit packages

• Types of micro insurance provision:Types of micro insurance provision:– Informal Informal “damayan” system: Regular small “damayan” system: Regular small

amounts of contributions from borrowers to be amounts of contributions from borrowers to be given in fixed amount in case a borrower or given in fixed amount in case a borrower or any member of his family diesany member of his family dies

– FormalFormal : (i) establishing mutual benefit : (i) establishing mutual benefit associations (MBAs) or (ii) linking with a associations (MBAs) or (ii) linking with a commercial insurance provider commercial insurance provider

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2.2 Micro Insurance2.2 Micro Insurance• Center for Agriculture and Rural Center for Agriculture and Rural Development -Development - Mutual Benefit Mutual Benefit Association (CARD-MBA)Association (CARD-MBA)

– Offers life and disability insurance, loan Offers life and disability insurance, loan redemption scheme and obligatory redemption scheme and obligatory provident fund membersprovident fund members

– Provides life insurance coverage to Provides life insurance coverage to 600,000 low-income Filipinos 600,000 low-income Filipinos

• Risk Management Solutions, Inc. (RIMANSI)Risk Management Solutions, Inc. (RIMANSI)

– Network of professionally-managed MBAs that develops and Network of professionally-managed MBAs that develops and offers risk management solutions to member-owned micro-offers risk management solutions to member-owned micro-insurers, strengthening their capacity in providing risk protection insurers, strengthening their capacity in providing risk protection services to the poorservices to the poor

Has helped established 5 MBAs and currently providing Has helped established 5 MBAs and currently providing insurance coverage to over 50,000 householdsinsurance coverage to over 50,000 households

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2.3 Microfinance for Housing2.3 Microfinance for Housing- Involves the application of microfinance principles Involves the application of microfinance principles

and methodologies to the provision of shelter financeand methodologies to the provision of shelter finance- Consists mainly of loans to the poor and low-income Consists mainly of loans to the poor and low-income

households for: households for:

i. Home improvement or i. Home improvement or repairsrepairsii. Housing constructionii. Housing constructioniii. House and/or lot iii. House and/or lot acquisition, acquisition, and/orand/oriv. Access to basic iv. Access to basic infrastructure infrastructure or public servicesor public services

- Serves the housing Serves the housing finance needs of the finance needs of the working or working or entrepreneurial poorentrepreneurial poor

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2.3 Microfinance for Housing2.3 Microfinance for HousingMicrofinance for Housing Microfinance for Housing

ProjectProject• ADB-assisted social housing and ADB-assisted social housing and

community development program community development program jointly executed by the Housing jointly executed by the Housing and Urban Development and Urban Development Coordinating Council (HUDCC) Coordinating Council (HUDCC) and the Development Bank of the and the Development Bank of the Philippines (DBP)Philippines (DBP)

• Loan features:Loan features:– Loan maturity: 5 years for home improvement, 10 Loan maturity: 5 years for home improvement, 10

years for house construction and house and/or lot years for house construction and house and/or lot purchase purchase

– Amortization schedule: either daily, weekly, semi-Amortization schedule: either daily, weekly, semi-monthly or monthlymonthly or monthly

– Maximum amount for home improvement is PhP Maximum amount for home improvement is PhP 150,000 (US$ 3,125) and PhP 300,000 (US$6,250) for 150,000 (US$ 3,125) and PhP 300,000 (US$6,250) for house construction and house and/or lot purchasehouse construction and house and/or lot purchase

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2.3 Microfinance for Housing2.3 Microfinance for Housing

• Enterprise Bank, Inc. is one of the earliest MFI Enterprise Bank, Inc. is one of the earliest MFI banks to implement a microfinance housing banks to implement a microfinance housing program (June 2006) in selected provinces in program (June 2006) in selected provinces in MindanaoMindanao– Loanable amount of P5,000-P25,000, Loanable amount of P5,000-P25,000,

payable within 6-12 months in weekly payable within 6-12 months in weekly installmentsinstallments

– 24% interest rate per annum24% interest rate per annum

Loans of almost P5 million (US$104,000) Loans of almost P5 million (US$104,000) granted to 1,141 clients for home repairs granted to 1,141 clients for home repairs and improvementsand improvements

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2.4 2.4 Savings and Deposit ProductsSavings and Deposit Products• Mostly a component of microlending programs/loan Mostly a component of microlending programs/loan

productsproducts• Compulsory or mandatory savings and depositsCompulsory or mandatory savings and deposits

– Integrated in loan program where small, frequent (weekly) Integrated in loan program where small, frequent (weekly) savings deposits are requiredsavings deposits are required

– Intended to enforce savings discipline among borrowers and Intended to enforce savings discipline among borrowers and boost loan portfolio of MFIboost loan portfolio of MFI

• Voluntary savings now form Voluntary savings now form part of services on top of part of services on top of compulsory savings due to compulsory savings due to capacity and willingness of the capacity and willingness of the poor to savepoor to save Microfinance borrowers in the Microfinance borrowers in the

Philippines have become net Philippines have become net savers with combined bank savers with combined bank deposits of almost P2 billion as deposits of almost P2 billion as of end-2007of end-2007

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2.5 Capability Building2.5 Capability Building•ACPC’s Institutional Capacity Building (ICB) ACPC’s Institutional Capacity Building (ICB) Program Program – Provides grant funds for ICB activities of farmers and fisherfolk Provides grant funds for ICB activities of farmers and fisherfolk

organizations to strengthen their capability in accessing and organizations to strengthen their capability in accessing and managing credit funds managing credit funds – Eligible projects for fundingEligible projects for funding

• Conduct of relevant training, seminars/workshopsConduct of relevant training, seminars/workshops• Exposure trips to success cases of finance, savings Exposure trips to success cases of finance, savings

and business development methodologiesand business development methodologies• Coaching, consultancy and technical services to Coaching, consultancy and technical services to

beneficiary organizationsbeneficiary organizations• Management information systems projectsManagement information systems projects

In 2007, ICB programs benefited 1,360 farmer In 2007, ICB programs benefited 1,360 farmer organizations with about 9,972 membersorganizations with about 9,972 members

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2.5 Capability Building2.5 Capability Building

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2.5 Capability Building2.5 Capability Building•MFI approaches to capability buildingMFI approaches to capability building

Financial literacyFinancial literacy – capability building activities focused on – capability building activities focused on increasing public’s knowledge of financial concepts, skills increasing public’s knowledge of financial concepts, skills and attitudesand attitudes

Business development services Business development services – – entail (i) establishment of business entail (i) establishment of business development centers that facilitate development centers that facilitate market linkages; and/or (ii) conduct market linkages; and/or (ii) conduct of training and mentoring activities of training and mentoring activities on livelihood and income-generating on livelihood and income-generating activities, marketing, management, activities, marketing, management, quality control, product quality control, product development, etc.development, etc. Community developmentCommunity development – involves (i) community – involves (i) community organization thru the formation of action groups, (ii) organization thru the formation of action groups, (ii) community capability building employing hands-on training community capability building employing hands-on training and exposure, etc. and (iii) community-owned projects such and exposure, etc. and (iii) community-owned projects such as livelihood, health, environment, infrastructure, and as livelihood, health, environment, infrastructure, and othersothers

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3 Process Innovations3 Process Innovations• use of new technology by MFIs use of new technology by MFIs

– increasing the convenience of clients and increasing the convenience of clients and improving MFI efficiency, lowering cost of improving MFI efficiency, lowering cost of operations operations

– expand MFI outreach including the poor expand MFI outreach including the poor

• innovations used by banks/MFIsinnovations used by banks/MFIs– automated teller machine (ATM) automated teller machine (ATM) – phone and internet banking phone and internet banking

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3.1 3.1 Automated Teller Machine Automated Teller Machine (ATM) Cards for the Poor(ATM) Cards for the Poor

• Implemented by MFIs (such as TSPI and CARD Implemented by MFIs (such as TSPI and CARD Bank) in partnership with big commercial banks Bank) in partnership with big commercial banks (LBP and BPI) since 2001(LBP and BPI) since 2001

• ATM system allows clients to ATM system allows clients to withdraw loan funds and withdraw loan funds and savings at any machine savings at any machine nearest to the borrower, doing nearest to the borrower, doing away with the check away with the check encashment process at the encashment process at the MFI.MFI. Reduces Reduces transactions transactions

costs of both borrowers costs of both borrowers and MFIsand MFIs

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3.2 Mobile Phone Banking3.2 Mobile Phone Banking ““Text-A-Payment” (TAP) SchemeText-A-Payment” (TAP) Scheme • Pioneered by microfinance-oriented Rural Banks Pioneered by microfinance-oriented Rural Banks

in partnership with the country’s major in partnership with the country’s major communications network (Globe Telecom) communications network (Globe Telecom)

• Uses short message service (SMS) technology Uses short message service (SMS) technology through the G-cash product to make through the G-cash product to make microfinance repaymentsmicrofinance repayments

• G-cash product “turns a cell phone into an G-cash product “turns a cell phone into an electronic wallet, allowing the sending and electronic wallet, allowing the sending and receiving of cash and make payments” through receiving of cash and make payments” through SMSSMS More convenient and less costly to clientsMore convenient and less costly to clients Lowers banks’ transaction costs and increases Lowers banks’ transaction costs and increases

productivity of account officersproductivity of account officers

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3.2 Process Innovations3.2 Process Innovations

How does TAP work?How does TAP work?

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4 4 Success Factors/LessonsSuccess Factors/Lessons•No “one size fits all” program for microfinance; No “one size fits all” program for microfinance;

loan products should be specific and tailor-fit to loan products should be specific and tailor-fit to the needs of the clientele/poor the needs of the clientele/poor

•Features of effective microfinance products Features of effective microfinance products Cash flow based lending: loan amount and repayment Cash flow based lending: loan amount and repayment

scheme based on household cash flowscheme based on household cash flow

Simple and minimal documentation requirementsSimple and minimal documentation requirements

Fast processing, timely releases of loans Fast processing, timely releases of loans and insurance claims payment and insurance claims payment

Supported by capability building Supported by capability building

Effective M&EEffective M&E

Agri microfinanceAgri microfinance product has the most product has the most potential for reaching the “unserved and potential for reaching the “unserved and underserved rural poor”underserved rural poor”

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4 Issues and Challenges4 Issues and ChallengesSome issues that have constrained the potential of microfinance to extend wider outreach of its services to more poor and low-income households:

•Microfinance services, particularly microfinance for agriculture, remains limited

•Stiff competition among MFIs •Low preference of MFIs to cater to new micro entrepreneurs

•Weak capacity of micro insurance providers

•Lack of appropriate and comprehensive microfinance database and indicator system