Microfinance in Philippines

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COUNTRY ANALYSIS UNIT FEDERAL RESERVE BANK OF SAN FRANCISCO JANUARY 2010 Microfinance in the Philippines uring the last few years, the volume of microfinance activity has grown considerably in the Philippines and an increasing number of financial institutions have engaged in retail microfinance operations. While this sector has been traditionally dominated by rural banks, non-governmental organizations (NGOs) and finance cooperatives, in 2009 a number of commercial banks sought entrance into the retail microfinance market. This Asia Focus report reviews the growth of the Philippines microfinance industry and discusses the implications of commercial banks entering this market. What is Microfinance? The Philippines central bank, Bangko Sentral ng Pilipinas (BSP), defines microfinance as the provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance products to the poor and low-income households and their microenterprises. The financial service most commonly provided is microcredit, which is typically issued in the form of a specific business loan for microenterprise purposes. A key defining characteristic of a microfinance loan is the ability to secure credit without collateral. In the Philippines, microfinance loans cannot exceed PhP 150,000 (US$3,218). ii Microfinance providers in the Philippines often employ a group lending approach, whereby each person within a small group is liable for any default by another group member. Other group lending-based methodologies being used in the Philippines include the ASA model, whereby each group member is responsible only for his or her own loan, and the Alliance of Philippine Partners in Enterprise Development (APPEND) Scale-Up Branch Model, which is based on the Trust Bank model. iii,iv Development of Microfinance in the Philippines The Philippines’ microfinance sector is credited as one of the oldest and most active in the world. v While the roots of microfinance activity date back to the early 1900s through cooperatives, microfinance, as D described today, surfaced in the 1980s and was codified into national law in 1997 with the signing of the Social Reform and Poverty Alleviation Act (RA 8425), and the establishment of both the National Anti-Poverty Commission and the National Strategy for Microfinance. With approximately 33% of the country’s 92 million population considered to be living below the poverty threshold, poverty alleviation is one of the government’s top priorities and microfinance is a primary tool to address this issue. i The ultimate goal of the government’s National Strategy for Microfinance is to create a sustainable private microfinance market, where the private sector drives market dynamics, such as products and pricing, and the government’s role is limited to providing an environment which enables the market to thrive. The General Banking Law of 2000, which mandated the recognition of microfinance as a legitimate banking activity, is one of the primary catalysts for accelerated growth and commercialization of microfinance over the last several years. The law empowered the BSP to create measures recognizing microfinance providers as banking institutions and to provide regulatory guidelines specific to the microfinance portfolios for institutions falling under the BSP’s purview. Furthermore, banks engaging in microfinance activities were given certain allowances and relieved of certain restrictions;

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