Rural Financial Inclusion and New Microfinance Technologies in the Philippines

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Rural Financial Inclusion and New Microfinance
Technologies in the Philippines
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Jovita M. Corpuz Executive 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
Stakeholders Park Inn Pribaltiyskaya Hotel 19-21
November 2008, St. Petersburg
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Rural Financial Inclusion and New Microfinance
Technologies in the Philippines
Jovita M. Corpuz Executive 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
Stakeholders Park Inn Pribaltiyskaya Hotel 19-21
November 2008, St. Petersburg
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Outline of Presentation

• 1 Policy Background
• 2 Product Innovations
• 3 Process Innovations
• 4 Success Factors, Issues and Challenges

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1 Background

• 1970s - 1980s
• Supply-led and highly subsidized directed credit
  programs (DCPs) for small farmers and other rural
  poor
• Government provided loans either directly or
  through private rural banks at subsidized
  interest rates
• Proliferation of DCPs
• Result DCPs failed
• DCPs suffered high delinquency
• Bankruptcy of rural banks
• Subsidies went to big borrowers
• DCPs did not reach the poor

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Credit Policy Reforms

• Termination of government directed credit
  programs
• Formulation of agri credit and microfinance
  strategies anchored on the following policy
  principles

• Increased participation of the private sector
• Adoption of market-based financial and credit
  policies
• Focus on proper management and utilization of the
  loan fund
• Active participation of banks and government
  financial institutions
• Government to provide the enabling policy and
  regulatory environment and critical support
  services

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Credit Policy Reforms

• The shift from supply-led credit and subsidies --
• paved the way for financing models that are
  demand-driven and market - oriented such as
  Grameen banking

• MFIs increased in number now totaling
  
  5,308 composed of 500 NGOs, 229 rural
  and thrift
  banks and 4,579 credit cooperatives
• The number of poor with access to credit
  significantly increased from the 1990s
• MFIs have granted more than PhP74 billion
  (US1.54 billion) to over 3 million poor clients
  from 2004-2007

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Innovations New Microfinance Technologies

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

• Types of innovations
• Products (i) agri microfinance, (ii) micro
  insurance, (iii) housing microfinance, (iv)
  savings/deposits, (v) capability building
• Processes (i) Automated Teller Machine (ATM)
  Cards, (ii) Mobile phone banking

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2.1 Microfinance for Agriculture
Agri-Fishery Microfinance Program

• a cash flow-based lending approach with flexible
  repayment terms (i.e., based on households
  income cash flow and not only on the activity
  financed by the loan)
• loans are for agricultural activities and
  non-farm micro-enterprises

• Land Bank of the Philippines lends program loan
  fund to rural banks, cooperatives, irrigators
  associations and other peoples organizations
  for relending to agricultural households

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2.1 Microfinance for Agriculture

• 12 rural banks and 7 cooperatives have lent to
  nearly 6,000 agricultural households close to PhP
  70 million (US1.46 million)

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2.2 Micro Insurance

• Micro insurance refers to insurance systems
  designed for the poor which is characterized by
  simple product design, frequent and affordable
  premium payments, fast and timely payment of
  insurance claims, and uniform benefit packages
• Types of micro insurance provision
• Informal damayan system Regular small amounts
  of contributions from borrowers to be given in
  fixed amount in case a borrower or any member of
  his family dies
• Formal (i) establishing mutual benefit
  associations (MBAs) or (ii) linking with a
  commercial insurance provider

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2.2 Micro Insurance

• Center for Agriculture and Rural
• Development - Mutual Benefit
• Association (CARD-MBA)
• Offers life and disability insurance, loan
  redemption scheme and obligatory provident fund
  members
• Provides life insurance coverage to 600,000
  low-income Filipinos

• Risk Management Solutions, Inc. (RIMANSI)
• Network of professionally-managed MBAs that
  develops and offers risk management solutions to
  member-owned micro-insurers, strengthening their
  capacity in providing risk protection services to
  the poor
• Has helped established 5 MBAs and currently
  providing insurance coverage to over 50,000
  households

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2.3 Microfinance for Housing

• Involves the application of microfinance
  principles and methodologies to the provision of
  shelter finance
• Consists mainly of loans to the poor and
  low-income households for

• i. Home improvement or repairs
• ii. Housing construction
• iii. House and/or lot acquisition,
• and/or
• iv. Access to basic infrastructure
• or public services
• Serves the housing finance needs of the working
  or entrepreneurial poor

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2.3 Microfinance for Housing

• Microfinance for Housing Project
• ADB-assisted social housing and community
  development program jointly executed by the
  Housing and Urban Development Coordinating
  Council (HUDCC) and the Development Bank of the
  Philippines (DBP)

• Loan features
• Loan maturity 5 years for home improvement, 10
  years for house construction and house and/or lot
  purchase
• Amortization schedule either daily, weekly,
  semi-monthly or monthly
• Maximum amount for home improvement is PhP
  150,000 (US 3,125) and PhP 300,000 (US6,250)
  for house construction and house and/or lot
  purchase

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2.3 Microfinance for Housing

• Enterprise Bank, Inc. is one of the earliest MFI
  banks to implement a microfinance housing program
  (June 2006) in selected provinces in Mindanao
• Loanable amount of P5,000-P25,000, payable
  within 6-12 months in weekly installments
• 24 interest rate per annum
• Loans of almost P5 million (US104,000) granted
  to 1,141 clients for home repairs and improvements

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2.4 Savings and Deposit Products

• Mostly a component of microlending programs/loan
  products
• Compulsory or mandatory savings and deposits
• Integrated in loan program where small, frequent
  (weekly) savings deposits are required
• Intended to enforce savings discipline among
  borrowers and boost loan portfolio of MFI

• Voluntary savings now form part of services on
  top of compulsory savings due to capacity and
  willingness of the poor to save
• Microfinance borrowers in the Philippines have
  become net savers with combined bank deposits of
  almost P2 billion as of end-2007

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2.5 Capability Building

• ACPCs Institutional Capacity Building (ICB)
  Program
• Provides grant funds for ICB activities of
  farmers and fisherfolk organizations to
  strengthen their capability in accessing and
  managing credit funds

• Eligible projects for funding
• Conduct of relevant training, seminars/workshops
• Exposure trips to success cases of finance,
  savings and business development methodologies
• Coaching, consultancy and technical services to
  beneficiary organizations
• Management information systems projects

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

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2.5 Capability Building
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2.5 Capability Building

• MFI approaches to capability building
• Financial literacy capability building
  activities focused on increasing publics
  knowledge of financial concepts, skills and
  attitudes

• Business development services entail (i)
  establishment of business development centers
  that facilitate market linkages and/or (ii)
  conduct of training and mentoring activities on
  livelihood and income-generating activities,
  marketing, management, quality control, product
  development, etc.

• Community development involves (i) community
  organization thru the formation of action groups,
  (ii) community capability building employing
  hands-on training and exposure, etc. and (iii)
  community-owned projects such as livelihood,
  health, environment, infrastructure, and others

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3 Process Innovations

• use of new technology by MFIs
• increasing the convenience of clients and
  improving MFI efficiency, lowering cost of
  operations
• expand MFI outreach including the poor
• innovations used by banks/MFIs
• automated teller machine (ATM)
• phone and internet banking

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3.1 Automated Teller Machine (ATM) Cards for the
Poor

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

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

• Reduces transactions costs of both borrowers and
  MFIs

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3.2 Mobile Phone Banking

• Text-A-Payment (TAP) Scheme
• Pioneered by microfinance-oriented Rural Banks in
  partnership with the countrys major
  communications network (Globe Telecom)
• Uses short message service (SMS) technology
  through the G-cash product to make microfinance
  repayments
• G-cash product turns a cell phone into an
  electronic wallet, allowing the sending and
  receiving of cash and make payments through SMS
• More convenient and less costly to clients
• Lowers banks transaction costs and increases
  productivity of account officers

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3.2 Process Innovations

• How does TAP work?

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4 Success Factors/Lessons

• No one size fits all program for microfinance
  loan products should be specific and tailor-fit
  to the needs of the clientele/poor
• Features of effective microfinance products
• Cash flow based lending loan amount and
  repayment scheme based on household cash flow
• Simple and minimal documentation requirements
• Fast processing, timely releases of loans
  
  and insurance claims payment
• Supported by capability building
• Effective ME
• Agri microfinance product has the most potential
  for reaching the unserved and underserved
  rural poor

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4 Issues and Challenges
Some 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