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Microfinance in the Philippines: Report Card
ADB helped the Philippines expand its use of microfinance and learned some valuable lessons along the way.
Poverty rates in the Philippines have generally declined in the last 20 years, but it remains a persistent, widespread problem in the country. The Philippine government has made poverty reduction a high priority.
Microfinance, or the provision of financial services such as loans to poor families, is recognized as a potent method of directly improving the lives of those most in need. When managed correctly, these small loans can be used to build small businesses and develop other income-generating activities that have a long-lasting impact.
The Philippine government has recognized the efficacy of microfinance and has made progress in promoting the development practice. It has also prioritized the need to accelerate the use of microfinance and expand its reach across the country. In 2005, more than two-thirds of poor families, or 17 million people, did not have access to microfinance.
To help the Philippines expand its use of microfinance to assist poor families, ADB in November 2005 began the Microfinance Development Program. The program, supported by a $150 million loan from ADB, sought to help the Philippines achieve the Millennium Development Goals, including the eradication of extreme hunger and poverty, and the empowerment of women, through the use of microfinance.
Specifically, the program sought to increase the number of users of microfinance and expand financial literacy and consumer protection for the poor. It also sought to build viable institutions that could provide efficient and cost-effective microfinance services and improve the policy and regulatory oversight of the industry.
The program assisted the Philippines in more than doubling the number of active microfinance clients in the country, from 2.4 million in 2006 to 5.5 million in 2008. During the same period, about 2.6 million jobs were created, according to the program completion report produced by ADB.
In addition, the program took a wider view of microfinance than simply lending. This included helping to increase the number of microfinance institutions that offered microsavings and microinsurance services. In December 2007, at the conclusion of the program, there were six mutual benefit associations offering microinsurance to 518,307 policy holders.
The program helped make microfinance institutions in the Philippines more sustainable by assisting in the adoption of performance standards by government regulatory agencies and those doing business related to microfinance. These standards promoted legal and ethical practices within the microfinance industry, whose clients can be vulnerable to exploitation.
Working in coordination with the Philippine government, the program promoted the use of electronic banking, particularly with mobile phone technology. This lowers costs and saves time for microfinance clients, who often make multiple small loan payments a month. Rather than physically visiting a microfinance office, or relying on a go-between, the client can pay quickly and cheaply using their mobile phone.
The program also helped create new legislation, bolster a government regulatory agency and produced a consumer protection guidebook that helped improve the oversight of the industry and while increasing the financial understanding of clients.
The program faced significant challenges. For instance, it sought to level the playing field in terms of taxation on microfinance institutions. Some microfinance institutions are considered non-government organizations and enjoy tax-exempt status while others do not. Tax-exempt non-government organizations vigorously opposed these efforts and at the end of the program, the status quo remained.
An attempt to increase the efficiency of a government agency involved in microfinance through privatization failed. More progress could have been made toward privatization had the program taken more concrete steps toward achieving the goal.
In addition, a website created with the support of the program could not effectively receive complaints from the public due to lack of awareness and technology limitations. The lesson learned in this instance was that the program could have more fully investigated the capacity of the website operator to sustain its new, enhanced functions.
After the completion of the program in December 2007, efforts continued to align the new laws, manuals, and government agencies associated with microfinance. There were also efforts to maintain market-based principles in the conduct of microfinance, particularly in dealing with micro, small, and medium-sized enterprises.
As the number of microfinance clients increased under the program, the need for an efficient microfinance credit system became clear and was identified as a priority for future work. A need was also recognized for an expansion of microinsurance in the Philippines and for an increase in support for the financing of microenterprises.