Microfinance made easier

For the last three years, Bangladesh-based ASA provided technical assistance to local microfinance institutions under the Microfinance Support Project of the United Nations Development Programme.

The Philippines has approximately 2,000 MFIs, counting rural banks, cooperatives and NGOs. For the UNDP-sponsored MSP, ASA partnered with 16 MFIs and assisted them in implementing the ASA model for sustainable microfinance services.

ASA is a non-government organization that provides technical assistance and microfinance consultancy in 15 countries. It currently serves over 1.6 million beneficiaries with $112 million in outstanding loans. Because of a high repayment rate of 99.94%, it has found no need to accept donor funds for the past five years, relying solely on the business of borrower-members to keep it in business.

Guarantor system

A typical microfinance service is the group loan wherein five or six persons form a group and act as co-makers or guarantors for one another. In the event one member defaults or fails to pay his or her dues, the other members chip in to pick up the remaining tab. The idea is for each group member to serve as "conscience" or guide for the others to ensure they all pay for what they borrow or risk being ostracized by the group.

Kamrul Tarafder, ASA team leader in the Philippines for the MSP, said this system fails in many ways because it punishes the bad as well as the good borrower. ‘The good borrower will ask, "Why do I have to pay for my co-member?’ They would prefer to just drop out, rather than pay for what they did not borrow. What happens is you lose four good payors because you tried to collect from them what you couldn’t get from the bad borrower," he asked.

The ASA model emphasizes the primary responsibility of the MFI to ensure faithful collections of all loans, lifting the burden of peer guarantees from the borrowers.

In addition, ASA lowers the cost of engaging in microfinance by standardizing lending policies, guidelines systems and procedures; simplifying bookkeeping, reporting and management information systems; and establishing controls and discipline in the whole microfinance transaction.

For Ruth Callanta, president of the Center for Community Transformation, the simplified process allowed the branch office to operate without the aid of accountants and computers. ‘Full disclosure and transparency in operation became possible, and potential for fraud was limited," she said.

As an ASA partner-MFI, CCT saw its repayment rate rise from 52% in 1998 to 98% in 2001, after participating in the MSP. The CCT pilot branch for the ASA lending methodology became operationally viable within 12 months, with total active clients of 754, a loan portfolio of P1.7 million and a repayment rate of 99.99%.

Counting all of ASA’s 16 partner-MFIs, the MSP ended with 33,338 borrowers, total loans outstanding of P75 million, an average loan size of P5,208 and a repayment rate of 96.16%.

Evaluation

‘Only the best practitioner can teach others," said ASA-Bangladesh managing director Shafiqual Choudhury. ‘There is a need to develop a few MFIs that can show success on a nationwide scale. MFIs also need visionary and committed leaders who have a strong determination to grow and reach out to the poor."

While the UNDP is still looking for country or institutional sponsors for a second, smaller-scale MSP, local MEIs which were not part of the first MSP are trying to learn what they can from ASA – even as they try to raise seed funds for their initial lending activities.

ABS-CBN Bayan Foundation, for example, has disbursed a total of P883 million to 33,691 borrowers since it started operations as Bayan Microfinance in June 1997. "While its repayment rate of 96.85% as of end-2001 is already much better than most informal lenders, program manager Reno Rayel says there is still room for improvement. He hopes to obtain sufficient donor funding to be able to implement the ASA model and ultimately make their livelihood lending program a sustainable enterprise. – CP Sison