Microfinance success and perils

Microfinance is growing by leaps and bounds in the country. For the longest time, the government was having a hard time coaxing credit sources to look in the direction of the poor to boost this sector’s income levels and perhaps yank it out of the isang kahig, isang tuka cycle.

According to the anti-poverty commission, of the 4.2 million poor households in the Philippines, only 2.5 million have access to microfinance services. Microcredit is believed to help the poor build viable businesses, pursue economic opportunities and reduce vulnerability to external shocks.

Back in the 70s, government had introduced subsidized lending money largely to rural banks and cooperatives, hoping that “cheap credit” coursed through these financial channels would reach micro-entrepreneurs – mostly rural poor, and largely women.

The money, sadly, did the reach the intended beneficiaries. Worse, there was large-scale corruption in the way the funds were handled, with subsidized credit going to large borrowers instead. Finally, the program had to be declared a failure after succumbing to huge repayment problems.

Government changed its tack, choosing instead to create the environment that would encourage private financing institutions to broaden their services and reach out to a wider number of poor households that employ microcredit to generate income. This seems to be working now.

Growing success

Of late, more financial institutions are expressing interest in pursuing micro-financing. The central bank estimates that the amount of money moving to the poor sector is growing at a robust level, and this is just what it is able to monitor.

Recently, CARD Inc., one of the leading microfinance institutions in the country, successfully issued P500 million worth of corporate notes that is intended to finance a medium-term expansion plan that includes putting up branches in the Visayas and the full computerization of its operations.

Already, CARD boasts of a loan portfolio totaling P1.8 billion, with a client base reaching about half a million borrowers, all women, and a loan default rate of less than two percent.

The issue had been oversubscribed, indicating the growing credibility of micro-financing in the country. In fact, more non-government organizations and cooperatives are also thinking of doing similar fund-raising activities purportedly to take advantage of this new market.

Celebration and caution

There are several reasons why we should celebrate this development, but at the same time, recognize there are corresponding issues that warn us to be more prudent in anticipating its future boom.

Microfinance is good for the economy. It brings a better source of credit to an estimated 92 percent of registered enterprises that are characterized by micro capitalization and assets ranging from a few hundred pesos to less than a million pesos.

It also provides loans to women of urban and rural poor households who generally take on from one to two micro-businesses; the income derived from these directly brings food to the table and money to pay for electricity and water services.

While interest rates are often higher (ranging from 30 percent to 70 percent on a reducing balance basis) than those given by banks to big businesses, these are definitely lower than those available from usurious interest-wielding informal lenders, or even pawnshops.

By the way, part of the success of microfinance institutions today is the admission that they are in the business to make money, a precious learning from the success of the internationally renowned Grameen Bank that lends money to the village poor without collateral.

The income of MFIs is needed to cover for the true – and higher – cost of lending, which includes running after payments of more borrowers that are often less accessible to the centers of commerce.

Growing uncertainties

With more banks now interested in boosting their micro-finance lending units, capitalization in the industry in the next three years is seen increasing three-fold, which explains the recent move by CARD to issue corporate notes, and the expressed intention of other similar financial institutions to follow.

This, however, could dry out credit sources of NGOs and cooperatives that operate in the more remote parts of the country, and are often the only conduits of credit for agriculture-based communities that most need help.

Already, the banking sector has edged out NGOs and cooperatives in drawing funds from the People’s Credit and Finance Corp., which functions as the apex microfinance institution in the country and boasted of a P3.1-billion loan portfolio as of June this year.

With giant companies like Citigroup and Deutsche Bank are preparing to move into micro-financing, many new players could put up micro-lending units without the right training and more importantly, the right frame of mind. Microfinance is serious business, and the biggest pitfall would be to operate without the original intention: helping the poor.

Microfinance is not the elixir for the poor

Lastly, with more organizations and institutions jumping into the microfinance bandwagon, the quintessential angst of many development experts once again surfaces: Does microfinance really benefit the poorest of the poor?

It has been widely studied that the bottom poor cannot help themselves, and that the solution is more encompassing, calling for specific solutions to address societal problems such as illiteracy, lack of skills, inaccessible markets, the lack of political will and leadership, lack of transparency, high graft and corruption, lopsided developmental policies, and so many more.

The greatest folly would be to celebrate the success of microfinance, but to wake up one day realizing that the gap between the poorest and those with better control over their own lives has grown even wider.

2009 Philippine Collegiate Championship update

The Mindanao Regional Championship games to determine the team that will represent the region in the next phase of the 2009 Philippine Collegiate Championship will be hosted by Davao City. Regino “Boy” Cua is the coordinator of the local organizing group.

Fifty one teams of seven “mother leagues” from Cagayan de Oro, General Santos, Davao, Zamboanga City, Sibugay and Dipolog are participating in the process of selecting the respective leagues’ representatives in the regional games.

The champion teams of these leagues will play at the Gaisano Gym, Davao City on Oct. 15, 16 and 17 to dispute the regional championship and the right to represent Mindanao in the zonal qualifying games to be held at Cebu City. Visit www.CollegiateChampionsLeague.net for more details about the 2009 Philippine Collegiate Championship games.

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.