Going beyond microfinance, best practices

The Microenterprise Access to Banking Services (MABS) program in the Philippines is breaking ground by demonstrating that commercial microfinance providers can profitably serve the rural poor. Since this United States Agency for International Development (USAID)-designed program started over four years ago, MABS participating banks had disbursed approximately $37 million to more than 70,000 microentrepreneurs as of December 2002.

The MABS program has worked with 37 banks having a network of 102 rural bank branches in the Philippines to help them profitably serve the microenterprise sector not only by transferring knowledge, but by converting rural bankers into true believers in microfinance best practices and building their long-term capacity to successfully apply them. By creating systematic processes for introducing microfinance to rural banks, MABS has facilitated the easy and rapid expansion of microfinance.

The impetus for MABS since microfinance institutions (MFIs) have demonstrated the profit potential of targeting the microenterprise sector, more and more commercial financial institutions have been entering the microfinance market. At the same time, not many MFIs have been successful at reaching rural markets. The MABS program has identified a method of enticing traditional financial institutions to enter the microfinance market.

In many countries, "downscalers" often enter the microfinance market with limited information about target clients and lack of knowledge of microfinance best practices. As a result, few have profitable microfinance portfolios. In fact, many have exited the market as quickly as they entered. Often these downscalers did not understand or adhere to microfinance best practices. Given that their microfinance portfolios were small compared to their traditional lines, they rarely paid attention to develop a successful microfinance business.

Several consumer lenders in Bolivia, for example, decided to enter the microfinance market in the late 1990s. However, they applied consumer-lending models to microenterprise lending, based on the entrepreneur’s reported salary rather than a thorough assessment of the enterprise and family cashflow. As a result, over-indebtedness and defaults ensued and caused many of the consumer lenders to lose money and retract from the market.

These have been few examples of MFIs achieving success both in terms of profits and outreach. However, many of these MFI successes have targeted primarily urban areas. Few profitable MFIs have made a significant impact in rural microenterprise markets, especially in savings mobilization. While rural banks in the Philippines are also present in urban areas, they have a substantial presence in rural areas.

Rural banks in the Philippines

The Philippines has had a legal and regulatory framework suitable for the operation of small, regulated banks for some time. The Rural Banking Act of 1952 paved the way for the establishment of rural banks to serve small farmers, cooperatives and small merchants in the countryside. The law also allowed duly established cooperatives to organize rural banks and/or subscribe to the shares of stock of any rural bank.

As part of their efforts to spur agricultural production, the government of the Philippines (GOP) policies in the 1970s encouraged rural banks to expand by offering subsidies and targeted lending programs. As with many agricultural lending programs in the past, these programs distorted the market, leading to misallocated funds and high delinquencies.

By the end of 1983, 70 rural banks had ceased operations. However, rehabilitation programs and the GOP’s commitment to allowing the rural banks to compete freely in the market reversed the negative trends. By 1992, the rural banking system reported positive real growth in assets, capital and net loans, with 787 rural banks reaching 463,000 borrowers.

There are now 781 rural and cooperative rural banks in the Philippines with more than 1,900 branches. Collectively, they cover over 85 percent of the municipalities and cities of the Philippines. These banks are culturally and geographically close to the potential clients that comprise the microenterprise sector; however, until recently, most rural banks required collateral that made it difficult for microentrepreneurs to obtain credit.

Given that lack of access to financial services was identified as a constraint to economic growth in the Philippines, the USAID decided to design a project to accelerate national economic transformation by encouraging the Philippine rural banking sector to significantly expand the access of microenterprises to savings and lending services. (To be continued)