Presentation by:

Maria Kristina S. GalvezProject Manager – Social Enterprise UnitPunla sa Tao Foundation

Where Did It All Began: The Grameen BankThe Philippine Financial SystemPhilippine Microfinance ProfileProcess and Procedure: How Does Microfinance Work?Impact Assessment: Does Microfinance Really Work?Microfinance and the Financial Crisis

Why the poor cannot borrow from other formal financial institutions?

Can the poor really pay or save?

Dr. Mohammad YunusFounder, Grameen BankNoble Peace Prize Winner, 2006

Grameen means “village” – thus, Village BankingEnvisioned as the “biggest development wonder”Extended banking facilities to poor men and womenAimed to create opportunities for self-employment in rural Bangladesh

From “low income, low saving & low investment“ into "low income, injection of

credit, investment, more income, more savings, more investment, more income".

Defined as provision of financial services, savings and credit to the poor on a sustainable basis.

CreditSavings

Other Financial Services (ex. Insurance)

Serve the poor or reduce poverty

while at the same time

Pursue the business to maximize return on investments

NGOs – 500Rural Banks – 195Savings and Credit Cooperatives – 4,579

Source: GTZ-PhilHealth Orientation for Microfinance

Near Poor

E-Poor

Laboring

Ultra-

Poor

Entrepreneurial Poor or “e-poor”

17 million people still do not have access to financing services

Source: National Anti-Poverty Commission, 2005

Process, Approach and Methodologies

Group Lending

• Around 5-30 members per group• Members guarantee each other’s loan

Example: Grameen methodology

Individual Lending

• Loans are given based on the capacity to pay (Household or Business Cash Flow)

• With collateral or co-maker• Clients are screened for credit checks or

character references• Loan size are tailored to business needs.

CreditSavings

Compulsory SavingsVoluntary Savings

InsuranceDeath InsuranceHealth Insurance

Payment ServicesAgricultural Microfinance

Client Orientation Credit/Background Investigation 1

Loan Documentation

Loan Review and Approval

Processing DisbursementCollection

Small loans granted to borrowers based on cash flowGiven to increase income levels, for small enterprises

Amount starts from Php 2,000 to Php 5,000 and maximum principal amount pegged at Php150,000

Equivalent to the maximum capitalization of a microenterprise (under RA 8425)

Source: Bangko Sentral ng Pilipinas

Direct Costs1. Costs of Funds for lending2. Cost of Risk (Loan Loss)3. Administrative Costs4. Expand Capital Base

Indirect Costs1. Staff Salaries2. Other Operating

expenses

Old Approach – subsidized interest ratesNew Approach – market-based interest rates

The new approach permits the microfinance institution to cover the costs in lending a loan,

thus making it sustainable.

Interests at MFIs are currently at 2% - 3% per month

Commercial banks deal with large loans therefore their transaction costs are lower.Government-owned MFIs are also lower because of political considerations.Some MFIs charge very low rates (ex. 20% per annum), but incur losses. Losses are recovered through subsidies.

A “win-win” proposition: more microcredit lent and gross returns to lenders.

Government should continually seek consultation with MFIs to understand better the

infrastructure bottlenecks they face.

The government should not lend, rather make an enabling environment for lending.

Studies and Evidences

Majority of existing clients and new clients are not poor according to the official definition.No significant impact on household assets and human capital investments.For microfinance to be an effective poverty-alleviation tool, beneficiaries must be identified correctly.

Source: Kondo, Toshio (2007) Impact of Microfinance on Rural Household in the Philippines, ADB

Asian Financial Crisis : Banking and currency crises had little relevance to subsistence-based economies in closed ecosystem marketsMoney will become more scarce, more conservative, and more costly.Financial pressures on families may lead to less savings and more withdrawals.

Risk Management, Good Governance and Shift to

More Enterprising Environment for Clients!

Maybe necessary, but not sufficient as a poverty-alleviation tool.Microfinance should pay for itself to reach more poor people.The role of the government is to enable financial services, not to provide them.