By Christine Villlaruel
The Field of Banking
What does it take to qualify for a loan in the Philippines? If the findings from the Senior Bank Loan Officers’ Survey of the Bangko Sentral ng Pilipinas (BSP) are to be believed, it is passing stringent collateral requirements for household loans. However, banks are implementing a relaxation of loan policies for enterprises.
The BSP study, which aims to enhance public understanding of credit trends and policies, uses both a survey and a Diffusion Index that show substantial growth in both demand and supply for both household and entrepreneur loans in the first financial quartile. The survey concludes that, “respondent banks cited the improved profitability of asset portfolios and increased tolerance for risk as key reasons for easing their credit standards. In particular, banks’ responses indicated increased credit line sizes, longer loan maturities, and reduced use of interest rate floors.” (2014)
At a cursory glance, the Diffusion Index seems to imply that the growing number of enterprises applying for loans is more likely to receive these loans as compared to the previous financial quartile. Conversely, the bank managers themselves foresee a steady tightening of policies for medium to small enterprises for the third consecutive financial quartile. However, the nature of microenterprises and entrepreneurs depending on microfinance loans may be facing a vastly different set of challenges in financial stability.
State of the Philippine Microfinance Industry
Granted, the characteristics of the targeted clients of finance vary greatly compared to any normal entrepreneur loan candidate’s. At its essence, microfinance is a range of financial services offered to the economically active poor. The poor are often unable to meet even the simplest of requirements to legally operate their businesses, such as official identity documents and minimum collateral. The core principle of microfinance is that sustained access to financial services and product may capacitate the poor to not only repay their loans but also uplift their lives. Microcredit loans are small and come with lowered interest rates to microenterprises.
In a country with a 19.1 percent rate of poverty incidence within households and 97.1 percent of small businesses being made up microenterprises, microfinance banking institutions and NGOs are a permanent fixture in the industry. In a report Dr. Raymund Harbaradas and Mar Umali of De La Salle University, it was seen that, in 2011, there was an increase of roughly 25 percent of active borrowers and microfinance clients from the 28.67 million of the previous year (2013). In all key indicators of outreach, loans and savings, the Philippine microfinance industry has shown significant growth within the last decade.
One noticeable trend that could possibly affect the growth of the microfinance in the Philippines is the change of players within the industry itself.
According to a microfinance study funded by the Asian Development Bank, there has been a significant decrease in both the number of microfinance-engaged rural banks and the number of microfinance-oriented rural banks that subsequently pulls [down] the number of microfinance institutions (MFIs) in the Philippines (2012). While the reach of microfinance itself continues grow nationally, more rural banks previously engaging in the industry are being discouraged to do so.
Financial Policies and Regulatory Environment Impact
It is likely that these smaller rural banks are responding to the competitive position that other MFIs exclusively enjoy. Non-government organizations and cooperatives have more leeway in terms of tax reduction privileges and disclosure of lending practices. In particular, microfinance-engaging non-government organizations are not regulated by any larger entity, while all other institutions including cooperatives must report all their actions to their respective authoritative bodies. Even with the efforts by the Bureau of Internal Revenue and BSP to regulate the microfinance environment, many rural banks are discouraged by the “eighteen month preparation time, new set of capable staff, and the 5 million outstanding loans with 1000-1500 clients” rule. Ultimately, microfinance may be fiscally sustainable but it is not necessarily as profitable as traditional banking models would be. Small bank institutions must therefore be capacitated to handle the rigors of transitioning into the microfinance industry.
With the loans playing field greatly skewed towards non-banking institutions, the foreseen tightening of collateral requirements on small and medium enterprises may result in a renewed interest from both the consumers and suppliers in the microfinance industry. Another important trend posed to greatly change the landscape of microfinance is the increased privatization of microcredit institutions. Collaboration within the traditional financial sector and between private corporations and non-government organizations translates to a increased funds for future microloans and a widening of expertise in the field.
Future Innovations and Challenges for the Industry
Microfinance is now regarded as one of the most efficient economic tools for the reduction of poverty. By being founded on the idea that the poor may work towards their own life improvement, microfinance offers an alternative perspective on sustainable development. It reaches a larger number of people with more financial need.
However, the industry itself may be in need of assistance. Valeria Arnold of the consulting development agency PriceWaterhouseCooper writes, “there is a lot of money but very few organizations capable of absorbing it … One line of credit from an investment fund will finance a great many micro-loans, but these demand costly management structures that many microfinance companies cannot afford. If they accept these flows of money, they take greater risks or may lose sight of the primary goal in their sector, which is to support entrepreneurship and not to extend consumer credit.”
If the microfinance industry is to evolve further as a means of reducing poverty, it must adapt to the changing fiscal and regulatory environment while retaining its primary goal of advocating support for micro entrepreneurship to those who may benefit from it.
“Philippines: Microfinance Development Program Completion Report.” Asian Development Bank, 1 Dec. 2012. Web. 5 Aug. 2014.
Habaradas, Raymund and Umali. The Microfinance Industry in the Philippines: Striving for Financial Inclusion in the Midst of Growth. De La Salle University, September 2013. “Senior’s Bank Loans Survey.” BSP Publications. Bangko Sentral Ng Pilipinas, 28 May 2014. Web. 5 Aug. 2014.
Arnold, Valerie. “What Is the Main Problem with Microfinance? “There Is a Lot of Money but Very Few Organizations Capable of Absorbing It.” Ideas for Development. Agence Francaise De Developpement, 27 Sept. 2012. Web. 5 Aug. 2014.