At 3 a.m. on a weekend morning, Ruth Asor brushes the sleep from her eyes and enters the tiny bakery attached to her home in Bayugan, a quiet town in Mindanao. Long before the heat of the day sets in, Ruth and her six helpers are mixing up batches of dough for pan de sal, for her customers to dip in their breakfast coffee.
Microentrepreneurs like Ruth make a major contribution to the economy of the region. Not long ago, Ruth would never have imagined that she could borrow money from a bank to grow her business, and few bankers would have found her a likely client.
But times have changed. Since 1997, with assistance from a program known as Microenterprises Access to Banking Services or MABS, rural banks throughout Mindanao have been helping microentrepreneurs – dressmakers, vendors, rickshaw divers, small restaurant owners – expand businesses without recourse to "five-six" loan sharks who charge 10 percent interest every month, or an annual rate of 150 percent.
"MABS saves borrowers a lot of money," Lief Doerring, MABS senior manager said.
After several years of project work, more than 19,000 borrowers with no prior access to bank credit are successfully repaying short-term loans, and 68 rural bank branches are finding they can turn a profit by lending to this new type of client. Bankers new to microlending are astonished at how quickly these programs take root and flourish.
"Profits from the program allowed us to quickly recover capital costs completely," said Nicolas Lim, president of the Rural Bank of Kapatagan Valley in Lanao del Norte. "It’s an investment that pays off in just one year."
Funded by the United States Agency for International Development (USAID), the program works by setting up microfinance units in rural banks. Once managers understand that microlending works, the MABS team trains microfinance specialists to analyze this segment of the market and design credit programs that meet the needs of small borrowers. Bank officers are taught to manage the loans and minimize porfolio risk – currently a low two percent among participating banks.
The team is also exploring ways to establish a credit reference bureau to let independently owned, geographically distant rural banks share information about borrowers. "It’s imperative that rural banks adopt an attitude of zero tolerance toward delinquency," said Doerring.
This isn’t always easy when borrowers are friends and neighbors. But setting expectations at the outset works to everyone’s advantage, he said. "If borrowers know they have to repay the loan, they’re more honest about their needs, and loans are structured so they can pay."
An important part of MBAS’ training teaches loan officers to treat clients like professionals, get to know them well, and establish long-term relationships. "Borrowers who repay often come back for repeat loans," said Doerring.
Loan terms range from three to six months, with annual interest rates of 24 to 48 percent – higher than "prime" rates, but in line with microlending norms and far lower than "five-six" rates.
Microfinance principles advanced by MABS have led to improvements in the overall banking system. "For 90 percent of our commercial portfolio we now follow the same procedures that we follow for microfinance," said Lourdes Pineda, compliance officer at the Rural Bank of Santo Tomas in Davao del Norte.
"After training in cash-flow lending, zero tolerance, and credit investigation, our staff has adopted strong credit discipline as the culture of our bank," added bank president Rosele Solis.