Microfinance is commonly associated with small, working capital loans that are invested in microenterprises or income-generating activities (Churchill and Frankiewicz, 2006). Such microenterprises are often family owned and have less than five employees, sometimes based out of the home, as for instance small retail kiosk, sewing workshops, carpentry shops and market stalls (Whole Planet Foundation, 2009). Today, however microfinance is referred to more generally as the provision of financial services to those excluded from the formal financial system (UNCDF, 2002). In the beginning the credits that were given to poor were called microcredits or micro-lending, but soon it became clear that also other financial services were used and needed by the poor which enlarged the microcredits to microfinance (Felder-Kuzu, 2005). Microfinance and microcredit are often used interchangeably, but it is important to highlight the difference between them because both terms are often confused. According to Sinha (1998), microcredit refers to small loans, whereas microfinance is appropriate to non- government organization (NGOs) and microfinance institutions (MFIs) who supplement loans with other financial services. Microcredit is a component of microfinance in that it involves providing credit to the poor, but microfinance also involves additional non-credit financial services such as savings, insurance, pension and payment services (Okiocredit, 2005).
The typical users of microfinance services are traders, street vendors, small farmers, service providers (hairdressers and rickshaw drivers), artisans and small producers, such as blacksmiths and seamstresses and belong to the economically active poor population that are living close to the poverty line and are therefore self-employed, low-income entrepreneurs in both urban and rural areas (Ledgerwood, 1999). Poor people proved to be viable customer of microfinance as shown by the Grameen bank model, which has successfully worked in Bangladesh and earned Professorr Muhammand Yunus a Nobel Prize Award in 2006. Since Yunus’ first loan issue to a group of poor rural women in Bangladesh more than 30 years ago, the microfinance market has grown with an enormous pace and has enlarged its portfolio of financial services beyond pure microcredit. Microfinance is widely known and regarded as the most humane part of the international financial system, perhaps even the only humane part (Schmidt, 2008).
The microfinance market has evolved over the past decades and has grown at a remarkable pace. It is estimated that today, there are between 7,000 and 10,000 established microfinance institutions of which only a fraction reports its data to rating agencies or microfinance platforms, such as the MIX (mixmarket.org). Figure 1 based on the Micro Credit Summit Campaign Report 2009 shows the relationship between the number of families living in absolute poverty in each continent of the world (i.e. those living on less than US$1 aday adjusted for Purchasing Power Parity) and the number of poorest families that were reached with a microloan in each region at the end of 2007. For this statistic however only 3,552 MFIs worldwide contributed their information.
1. Breakdown of access to microfinance by
Source: Micro Credit Summit Campaign Report
With such enormous numbers given, there is a great potential in this segment of global society and a disproportionately high demand for such financial services especially by the working poor. Therefore, everybody jumped on the microfinance bandwagon with its comparatively high interest rates and repayment rates of almost 100 percent that make the poor borrowers more attractive for banks and international investors than other commercial lending in the traditional retail business. The recent trend of commercialization of microfinance institutions (MFIs) even underlines a run for profits from the business with poor customers.
Overview of Microfinance in the Philippines
Rural banks and cooperatives in the Philippines started the concept and practice of servicing small loans as early as the 1960s. Agricultural workers and fisher folks benefited from this initial access to small credit. The said banks could not sustain the program, however, because of low repayment rate and some structural problems in their scheme.
During the 1970s until mid-1980s, the government mobilized rural banks, development banks and other government financial institutions to provide highly subsidized credit to the rural poor. The government, through its directed credit programs (DCPs), had hoped to bring down the cost of credit and help ease poverty. However, just like the first attempt of rural banks and cooperatives to provide small credit to the rural poor, the DCPs failed mainly due to the following: a) DCPs did not reach the target clientele; instead, subsidies were cornered by big borrowers; b) DCPs bared corruption at different levels because these involved government funds; and c) massive repayment problems resulted in huge fiscal costs for the government.
The lessons learned in the implementation of various government credit programs in the 70s and 80s contributed greatly in developing the practice and operations of microfinance – a new approach in credit methodology. In the late 80s non government organizations (NGOs) became potent partners of the government in the fight against poverty. Through microfinance, they provided the much-needed small loan for small entrepreneurial activities. Microfinance is NGOs alternative options for non-collateralized loans and savings instruments for the poor. These NGOs provided individual and group lending, but used group pressure or group accountability as collateral substitute. Although certain regulatory and prudential issues initially hounded microfinance NGOs, they ably met the needs of the entrepreneurial poor.
Philippine microfinance began as a social development initiative to alleviate poverty and has since moved from the marginal to the mainstream, toward commercialization and microbanking. Different from other development approaches, “micro credit” as it was then called, could be sustained without an endless supply of donor subsidies and resources, a feature that attracted government anti-poverty officials, who worked on new legislation and mobilized public resources to bring down barriers to the adoption of microfinance by Philippine semi-formal and formal institutions. In 1993, this led to the formation of a Presidential Task Force on Credit for the Poor and consultative meetings to draw up a Master Plan for Credit for the poor.
The Master Plan identified a three-pronged strategy to alleviate poverty through microfinance: policy reform; financial resource-mobilization; and capability building. The first thrust to raise financial resources was embodied in the organization of the People’s Credit and Finance Corporation (PCFC) in 1996. The second thrust was in the area of developing a conducive policy environment. It included lobbying for the passage of Republic Act 8425 and the establishment of a government body—the National Anti-Poverty Commission (NAPC). The third thrust involved building institutional microfinance capacity, primarily through a government fund called the People’s Development Trust Fund (PDTF) (Bangko Sentral ng Pilipinas Microfinance Handbook, 1995).
The practice and provision of microfinance has been gaining momentum in the Philippines. This momentum is driven by numerous empirical evidences and many success stories that demonstrate microfinance as an effective tool for economic development and poverty alleviation. Microfinance provides the necessary push for microenterprises to help them grow. This bears significance for the Philippines where microenterprises make up about 91% of total establishments surveyed by the National Statistics Office. Without access to financial services, these microenterprises are forced to rely on more expensive sources of credit (i.e. informal money lenders, pawnshops, etc.) which disallows them to have the additional liquidity that will help them grow their businesses. By invigorating these microenterprises, microfinance may then be a good intervention to empower the many Filipinos living in poverty; to increase their economic activity and income, generate employment and improve the over-all quality of their lives.
Reference: Genita, J. and J. Hinlo. 2015. Microfinance and Poverty in the Philippines. Unpublished Undergraduate Thesis. School of Applied Economics. University of Southeastern Philippines.