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Small Loans, Big Returns (tmaekawa@adb.org)
Rural banks are finding microfinance profitable; poor rural women are the winners

By Tsukasa Maekawa
Senior External Relations Officer

WEAVING SUCCESS: Justina Gondraneos used microfinance to boost her basket business; now she employs 2–6 workers.

Nongovernment organizations (NGOs) are a major provider of microfinance for the poor in Asia. But in the Philippines, rural banks are emerging as a major player in what could become a profitable business.

"The success of microfinance for the poor in the Philippines for the past decade has encouraged us to venture into a new field of banking: lending to the extreme poor," says Marilou Genuino, President of BMS Rural Bank.

BMS Rural Bank is one of 140 conduits that have been qualified to conduct microfinance for the poor in the Philippines under a government project. They are called "GBA replicators" as they employ the Grameen Bank approach of providing credit to the poor in Bangladesh. Established in 1983, the Grameen Bank has become a model for microfinance after producing significant income, employment, and other social benefits in several countries, particularly Bangladesh, Malaysia, and Philippines.

A US$65 million microfinance project—funded by the Government of the Philippines, Asian Development Bank (ADB), International Fund for Agricultural Development, GBA replicators, and beneficiaries—aims to benefit 300,000 ultrapoor families, or about 10 percent of all such families in the country. Currently, nearly half the target households are receiving loans from the GBA replicators.

The six-year project, which started in 1997, finances a portion of the start-up costs for new replicator branches, development costs of ongoing GBA operations, and training of GBA branch managers and field staff. It also provides credit to GBA replicators for relending to the poor.

Taking the Grameen Bank Approach

Out of 136 GBA replicators—with more than 300 branches throughout the Philippines—about 40 percent are NGOs and cooperatives, while the rest are financial institutions categorized as rural banks, cooperative banks, and thrift banks.

Qualified as a GBA replicator in 1999, BMS Rural Bank currently has more than 1,600 clients—all women. The need to augment family income often induces women to go into business, and microenterprises generally offer the best entrepreneurial prospects for rural women.

MORE JOBS: Microfinance can lead to new jobs by those who succeed in expanding their businesses.

Revenue from microfinance currently accounts for 10 percent of BMS Rural Bank's total revenue. "We expect lending to the poor to soon be a major source of profit—maybe 30 percent of the bank's total," says Ms. Genuino. In addition to microfinance, the bank engages in ordinary banking: lending to merchants and small enterprises, providing educational and housing loans, and accepting savings from the general public.

Traditionally, banks rarely lend to the ultrapoor, mostly because of the lack of information about individual clients and acceptable collateral, and the high transaction costs of processing small loans. The formal financial institutions, including rural banks, were thought to be reluctant and institutionally ill-equipped to service the microenterprise sector, particularly the poor.

Grameen Bank experiences have demonstrated that collateral is a myth. As Deputy General Manager of Grameen Bank Siddiqur Rahman said at an ADB conference in February, "Collateral does not guarantee the return of your money."

Discipline Leads to Success

The success of a labor-intensive and time-intensive operation, such as micro- finance using the GBA, rests largely on how effectively the discipline is maintained among the borrowers. Frequent group value formation and training activities are required to ensure program success and sustainability. "A credit program without strict discipline is nothing but a charity. It tries to maintain strict discipline. In every transaction there is discipline," said Mr. Rahman.

In the Philippines, repayment has been excellent. Carmen Apuli of the People's Credit and Finance Corporation (PCFC), a government agency through which funds are channeled to GBA replicators, says its collection rate is 98 percent.

Other features about microfinance, such as small loans that increase gradually, regular loan repayments and meetings, formation of homogeneous self-help groups by borrowers, mandatory savings, close monitoring and supervision of borrowers, and transparency of procedures, are contributing to the effective operation of micro- finance. "If you want to be successful in microfinance, you should not skip any of those features that keep members well disciplined and the staff well trained," says Ms. Genuino.

Borrowers must go through a screening test before being qualified as a GBA member. Their monthly income must not be more than peso (P)10,000 (US$200). They should have been permanent residents in the area for at least one year, and must not have regular jobs or be white-collar employees. Members must be willing to organize into groups of five members. They are also required to initially take a seven-day training course to make sure they know what group liability is, and what they must do to stay in the group. Even after they are accepted as members, they have to attend at least 24 hours of group training during regular meetings.

Up to eight groups form a center, where weekly repayments and savings are made. One of the BMS centers, located on an island in the Philippines' largest lake—Laguna de Bay—south of the capital of Manila, comprises five groups with 25 members. The center is named Samahang Binuklod Para Sa Pangkabuhayan (Association Toward Improvement of Livelihood).

The members, wearing their project t-shirt "uniforms" get together every Friday morning to repay and save. "We wear the uniform because we are proud of being a member. We have committed ourselves to improving our life," said Ms. Ruby Rosa Carmona, the chief of the center. Ruby and the rest of the members borrow between P7,000 and P12,000 (US$145 and US$250), repaying the amount over one year. They save P30 (US$0.63) a week.

Borrowers Recite Commitments

At the beginning of the meeting, they recite their commitments and resolutions. They vow to repay weekly, lead active lives, use loans for improving their lives, refrain from gambling and drinking, take care of their family, protect the environment where they live, and offer proper education to their children. They discuss problems concerning their lives and businesses. The center treasurer, who is also a borrower, collects weekly repayments and savings in front of every member.

REPAY AND SAVE: Members at their weekly meeting.

Not all members are making big profits, but their lives have improved through micro- finance. All want to continue to borrow and expand their microenter- prises. They engage in the trading of ready-made garments, rice, vegetables, fruit, processed foods, fish, and poultry feed. One of them bought a small boat to start a transportation business. Other businesses they have either expanded or started include producing bamboo baskets, furniture, and charcoal; raising fish and hogs; making peanut butter; and running a small grocery store. Another became a barbecue vendor.

Justina Gondraneos finds it easy to repay her loan: her income has more than doubled since she borrowed P12,000 (US$250). She hires two to six workers to help her with her basket-making business. Before, she had no employees and was running a much smaller family business with her relatives. "I am happy now because I am saving some money in case of emergency," she says.

Dominga Certeza, who belonged to another center on the island, has expanded her bamboo bed-making business with a loan of P15,000 (US$300). With profits from that business, she bought her husband a fish cage so that he doesn't have to go to the lake every day to catch fish, for which he would earn about P50 (US$1) a day. Now he has more time to help make beds. Their income increased by P3,000 a week.

Raising the income of the individual poor person is only one of the benefits of microfinance. The GBA encourages members to make voluntary savings in addition to the compulsory savings. Voluntary savings serve as a kind of social safety net as the savings provide emergency financial assistance for members when they are unemployed. Microfinance also leads to the employment of more poor people by those who succeed in expanding their businesses.

Says one member, who also makes bamboo baskets, "I am happy now because my husband, who is a seaman, has decided to stay at home. The family is reunited."

Know more about ADB's work in the Philippines

Read the report on microfinance institutions - MFIs - in the Philippines

Learn more about ADB's Microfinance Development Strategy

Visit ADB's Microfinance site

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