Rural Financial Inclusion and New Microfinance Technologies in

Rural Financial Inclusion and New Microfinance Technologies in the Philippines Джовита М. Корпуз Совет по сельскохозяйственной кредитной политике Jovita M. Corpuz Executive Director, Agricultural Credit Policy Council Member, APRACA Executive Committee National Conference on Microfinance in Russia: New Strategies of Success The National Association of Microfinance Market Stakeholders Park Inn Pribaltiyskaya Hotel 19 -21 November 2008, St. Petersburg

Rural Financial Inclusion and New Microfinance Technologies in the Philippines Jovita M. Corpuz Executive Director, Agricultural Credit Policy Council Member, APRACA Executive Committee National Conference on Microfinance in Russia: New Strategies of Success The National Association of Microfinance Market Stakeholders Park Inn Pribaltiyskaya Hotel 19 -21 November 2008, St. Petersburg

Outline of Presentation 1 2 3 4 Policy Background Product Innovations Process Innovations Success Factors, Issues and Challenges 3

1 Background 1970 s - 1980 s • Supply-led and highly subsidized directed credit programs (DCPs) for small farmers and other rural poor • Government provided loans either directly or through private rural banks at subsidized interest rates • Proliferation of DCPs Result: DCPs failed Ø DCPs suffered high delinquency Ø Bankruptcy of rural banks 4

Credit Policy Reforms • Termination of government directed credit programs • Formulation of agri credit and microfinance strategies anchored on the following policy principles: – Increased participation of the private sector – Adoption of market-based financial and credit policies – Focus on proper management and utilization of the loan fund – Active participation of banks and government financial institutions – Government to provide the enabling policy and regulatory environment and critical support services 5

Credit Policy Reforms The shift from supply-led credit and subsidies - • paved the way for financing models that are demand-driven and market - oriented such as Grameen • banking MFIs increased in number – now totaling 5, 308 composed of 500 NGOs, 229 rural and thrift banks and 4, 579 credit cooperatives • The number of poor with access to credit significantly increased from the 1990 s 6

Innovations & New Microfinance Technologies • Aim: Microfinance innovations are aimed at wider and deeper rural financial inclusion of the poor • Types of innovations – Products : (i) agri microfinance, (ii) micro insurance, (iii) housing microfinance, (iv) savings/deposits, (v) capability building – Processes : (i) Automated Teller Machine (ATM) Cards, (ii) Mobile phone banking 7

2. 1 Microfinance for Agriculture Agri-Fishery Microfinance Program • a cash flow-based lending approach with flexible repayment terms (i. e. , based on household’s income cash flow and not only on the activity financed by the loan) • loans are for agricultural activities and non-farm microenterprises • Land Bank of the Philippines lends program loan fund to rural banks, cooperatives, irrigators associations and other people’s organizations for relending to agricultural households 8

2. 1 Microfinance for Agriculture Ø 12 rural banks and 7 cooperatives have lent to nearly 6, 000 agricultural households close to Ph. P 70 million (US$1. 46 million) 9

2. 2 Micro Insurance • Micro insurance refers to insurance systems designed for the poor which is characterized by simple product design, frequent and affordable premium payments, fast and timely payment of insurance claims, and uniform benefit packages • Types of micro insurance provision: – Informal “damayan” system: Regular small amounts of contributions from borrowers to be given in fixed amount in case a borrower or any member of his family dies – Formal : (i) establishing mutual benefit associations (MBAs) or (ii) linking with a commercial insurance 10 provider

2. 2 Micro Insurance • Center for Agriculture and Rural Development - Mutual Benefit Association (CARD-MBA) – Offers life and disability insurance, loan redemption scheme and obligatory provident fund members – Provides life insurance coverage to 600, 000 low-income Filipinos • Risk Management Solutions, Inc. (RIMANSI) – Network of professionally-managed MBAs that develops and offers risk management solutions to member-owned micro-insurers, strengthening their capacity in providing risk protection services to the poor Ø Has helped established 5 MBAs and currently providing insurance coverage to over 50, 000 households 11

2. 3 Microfinance for Housing - Involves the application of microfinance principles and methodologies to the provision of shelter finance - Consists mainly of loans to the poor and lowincome for: i. Homehouseholds improvement or repairs ii. Housing construction iii. House and/or lot acquisition, and/or iv. Access to basic infrastructure or public services - Serves the housing finance needs of the working or entrepreneurial poor 12

2. 3 Microfinance for Housing Project • ADB-assisted social housing and community development program jointly executed by the Housing and Urban Development Coordinating Council (HUDCC) and the Development Bank of the Philippines (DBP) • Loan features: – Loan maturity: 5 years for home improvement, 10 years for house construction and house and/or lot purchase – Amortization schedule: either daily, weekly, semi-monthly or monthly – Maximum amount for home improvement is Ph. P 150, 000 (US$ 3, 125) and Ph. P 300, 000 (US$6, 250) for house construction and house and/or lot purchase 13

2. 3 Microfinance for Housing • Enterprise Bank, Inc. is one of the earliest MFI banks to implement a microfinance housing program (June 2006) in selected provinces in Mindanao – Loanable amount of P 5, 000 -P 25, 000, payable within 6 -12 months in weekly installments – 24% interest rate per annum Ø Loans of almost P 5 million (US$104, 000) granted to 1, 141 clients for home repairs and improvements 14

2. 4 Savings and Deposit Products • Mostly a component of microlending programs/loan products • Compulsory or mandatory savings and deposits – Integrated in loan program where small, frequent (weekly) savings deposits are required – Intended to enforce savings discipline among borrowers and boost loan portfolio of • MFI Voluntary savings now form part of services on top of compulsory savings due to capacity and willingness of the poor to save Ø Microfinance borrowers in the Philippines have become net savers with combined bank deposits of almost P 2 billion as of end-2007 15

2. 5 Capability Building • ACPC’s Institutional Capacity Building (ICB) Program – Provides grant funds for ICB activities of farmers and fisherfolk organizations to strengthen their capability in accessing and managing credit funds – Eligible projects for funding • Conduct of relevant training, seminars/workshops • Exposure trips to success cases of finance, savings and business development methodologies • Coaching, consultancy and technical services to beneficiary organizations • Management information systems projects Ø In 2007, ICB programs benefited 1, 360 farmer organizations with about 9, 972 members 16

2. 5 Capability Building 17

2. 5 Capability Building • MFI approaches to capability building § Financial literacy – capability building activities focused on increasing public’s knowledge of financial concepts, skills and attitudes § Business development services – entail (i) establishment of business development centers that facilitate market linkages; and/or (ii) conduct of training and mentoring activities on livelihood and income-generating activities, marketing, management, quality control, product development, etc. § Community development – involves (i) community organization thru the formation of action groups, (ii) community capability building employing hands-on training and exposure, etc. and (iii) community-owned projects such as livelihood, health, environment, infrastructure, and others 18

3 Process Innovations • use of new technology by MFIs – increasing the convenience of clients and improving MFI efficiency, lowering cost of operations – expand MFI outreach including the poor • innovations used by banks/MFIs – automated teller machine (ATM) – phone and internet banking 19

3. 1 Automated Teller Machine (ATM) Cards for the Poor • Implemented by MFIs (such as TSPI and CARD Bank) in partnership with big commercial banks (LBP and BPI) since 2001 • ATM system allows clients to withdraw loan funds and savings at any machine nearest to the borrower, doing away with the check encashment process at the MFI. Ø Reduces transactions costs of both borrowers and MFIs 20

3. 2 Mobile Phone Banking “Text-A-Payment” (TAP) Scheme • Pioneered by microfinance-oriented Rural Banks in partnership with the country’s major communications network (Globe Telecom) • Uses short message service (SMS) technology through the G-cash product to make microfinance repayments • G-cash product “turns a cell phone into an electronic wallet, allowing the sending and receiving of cash and make payments” through SMS Ø More convenient and less costly to clients Ø Lowers banks’ transaction costs and increases productivity of account officers 21

3. 2 Process Innovations How does TAP work? 22

4 Success Factors/Lessons • No “one size fits all” program for microfinance; loan products should be specific and tailor-fit to the needs of the clientele/poor • Features of effective microfinance products ü Cash flow based lending: loan amount and repayment scheme based on household cash flow ü Simple and minimal documentation requirements ü Fast processing, timely releases of loans and insurance claims payment ü Supported by capability building ü Effective M&E ØAgri microfinance product has the most potential for 23

4 Issues and Challenges Some issues that have constrained the potential of microfinance to extend wider outreach of its services to more poor and lowincome households: • Microfinance services, particularly microfinance for agriculture, remains limited • Stiff competition among MFIs • Low preference of MFIs to cater to new micro entrepreneurs • Weak capacity of micro insurance providers • Lack of appropriate and comprehensive microfinance database and indicator 24