Micro FinanceMicro Finance

A Report byA Report by

Raymund SanchezRaymund Sanchez

AgendaAgenda

DefinitionsDefinitions HistoryHistory Purpose / GoalsPurpose / Goals CharacteristicsCharacteristics Applying for a Micro LoanApplying for a Micro Loan CriticismsCriticisms TrendsTrends

DefinitionsDefinitions

Micro Credit / Micro Loans:Micro Credit / Micro Loans: the extension of very small loans to those the extension of very small loans to those

in poverty design to spur entrepreneurshipin poverty design to spur entrepreneurship

Micro Finance:Micro Finance: is the provision of financial services to low-is the provision of financial services to low-

income clients, including consumers and income clients, including consumers and the self-employed, who traditionally lack the self-employed, who traditionally lack access to banking and related services access to banking and related services

DefinitionsDefinitions

Micro Finance :Micro Finance : As defined by Bangko Sentral ng Pilipinas, As defined by Bangko Sentral ng Pilipinas,

“is the provision of a broad range of financial “is the provision of a broad range of financial services such as deposit, loans, payment services such as deposit, loans, payment services, money transfers & insurance services, money transfers & insurance products to the poor & low income products to the poor & low income households for their micro enterprises & households for their micro enterprises & small businesses to enable them to raise small businesses to enable them to raise their income levels & improve their living their income levels & improve their living standards”standards”

History of Micro History of Micro FinanceFinance

HistoryHistory

Jonathan Swift inspired the Irish Loan Funds Jonathan Swift inspired the Irish Loan Funds of the 18th and 19th centuries of the 18th and 19th centuries

Individualist anarchist Lysander Spooner Individualist anarchist Lysander Spooner wrote about the benefits of numerous small wrote about the benefits of numerous small loans for entrepreneurial activities to the poor loans for entrepreneurial activities to the poor as a way to alleviate poverty as a way to alleviate poverty

Muhammad Yunus founded Grameen Bank Muhammad Yunus founded Grameen Bank in the 1970s in Bangladeshin the 1970s in Bangladesh

Gained popularity in the Philippines in the Gained popularity in the Philippines in the mid 70’smid 70’s

HistoryHistory

1972, Central Bank of the Philippines 1972, Central Bank of the Philippines had jurisdiction over the entire credit had jurisdiction over the entire credit systemsystem

BSP charter (R.A. 7653) was enacted, BSP charter (R.A. 7653) was enacted, lending investors were removed from lending investors were removed from regulatory powers of BSPregulatory powers of BSP

Lack of regulation resulted in various Lack of regulation resulted in various unchecked, unacceptable practicesunchecked, unacceptable practices

HistoryHistory

2001, DOJ opinion transferred authority to 2001, DOJ opinion transferred authority to SECSEC

SEC instructed financing companies to SEC instructed financing companies to conform to Financing Company Act, conform to Financing Company Act, increasing minimum capitalization to P10Mincreasing minimum capitalization to P10M

Due to high capitalization, out of 10,885 Due to high capitalization, out of 10,885 lending investors only 360 were able to lending investors only 360 were able to registerregister

Presently, micro lending institutions owe their Presently, micro lending institutions owe their existence to CA order prohibiting the existence to CA order prohibiting the implementation of the circularimplementation of the circular

Purpose / GoalsPurpose / Goals

PurposePurpose

Differences with standard banking creditDifferences with standard banking credit A tool for socio economic developmentA tool for socio economic development Emphasizes micro entrepreneurship, Emphasizes micro entrepreneurship,

employment generation, trust building & aid employment generation, trust building & aid to the SME in difficult timesto the SME in difficult times

Applicants most often lack collateral, Applicants most often lack collateral, verifiable credit history, minimal verifiable credit history, minimal qualifications for access to traditional creditqualifications for access to traditional credit

Lending companies typically use own fundsLending companies typically use own funds

CharacteristicsCharacteristics

CharacteristicsCharacteristics

Amount: P3,000 – P15,000Amount: P3,000 – P15,000 Terms of payment: 3 – 6 monthsTerms of payment: 3 – 6 months Collateral: usually noneCollateral: usually none Interest rate: 5%-10% per month or higherInterest rate: 5%-10% per month or higher Manner of payment: daily, weekly, monthlyManner of payment: daily, weekly, monthly Beneficiary: small trading, “sari-sari store”, Beneficiary: small trading, “sari-sari store”,

market stall holders, micro-businesses, etcmarket stall holders, micro-businesses, etc

Who extends Micro Who extends Micro lending?lending?

Informal financial service providersInformal financial service providers Individuals, moneylendersIndividuals, moneylenders PawnbrokersPawnbrokers Saving collectorsSaving collectors Money guardsMoney guards

Member owned organizationsMember owned organizations Credit cooperativeCredit cooperative Credit unionsCredit unions

Formal financial service providersFormal financial service providers Rural / Development banksRural / Development banks Some commercial banksSome commercial banks

NGO’sNGO’s

How to Apply Micro How to Apply Micro LoansLoans

How to Apply Micro LoansHow to Apply Micro Loans

Prospective borrowers are required to submit Prospective borrowers are required to submit basic information requirements (e.g. bio-data, basic information requirements (e.g. bio-data, business papers, financial statements, business papers, financial statements, collateral offered, usage of loan)collateral offered, usage of loan)

Credit & background checkingCredit & background checking Collaterals offered (if applicable) are Collaterals offered (if applicable) are

appraised to determine loanable valueappraised to determine loanable value Other pertinent information are gathered Other pertinent information are gathered

about the borrowerabout the borrower If eligible, credit evaluation report is made for If eligible, credit evaluation report is made for

approvalapproval

Sample Micro Loan Sample Micro Loan RequirementsRequirements

Stall holderStall holder Stall permitStall permit Promissory notePromissory note Co-maker statementCo-maker statement Application formApplication form PicturePicture Valid IDValid ID

PensionPension ATM cardATM card PassbookPassbook Promissory notePromissory note Application formApplication form PicturePicture Valid IDValid ID Co-maker statementCo-maker statement

SalarySalary Pay slipPay slip Employee authorizationEmployee authorization Personnel dept authorizationPersonnel dept authorization Application formApplication form PicturePicture Valid IDValid ID

CarCar LTO registrationLTO registration Promissory notePromissory note Chattel MortgageChattel Mortgage Application formApplication form PicturePicture Valid IDValid ID Deed of saleDeed of sale

Credit InvestigationCredit Investigation

The process of gathering data on a certain entity in The process of gathering data on a certain entity in relation to its credit standing / reputationrelation to its credit standing / reputation

Basic components:Basic components: Bank checkingsBank checkings Trade checkingsTrade checkings Verification of SEC & BDT recordsVerification of SEC & BDT records Neighborhood / Background investigationNeighborhood / Background investigation Address verificationAddress verification Court case verificationCourt case verification

Credit InvestigationCredit Investigation

Bank checkingsBank checkings Name of banks / FI’s with present or past dealings Name of banks / FI’s with present or past dealings Type of credit facility grantedType of credit facility granted Amount approvedAmount approved Outstanding balancesOutstanding balances Security / collateral offeredSecurity / collateral offered Date loan was grantedDate loan was granted Maturity / expiry dates of accommodationMaturity / expiry dates of accommodation Credit experienceCredit experience

Credit InvestigationCredit Investigation

Trade checkingsTrade checkings Past & present suppliersPast & present suppliers Products / services suppliedProducts / services supplied Volume of purchasesVolume of purchases Amount of accommodationAmount of accommodation Manner / terms of paymentsManner / terms of payments Collateral usedCollateral used Length of business Length of business

relationshiprelationship

Community based business funded by local banks in Cambodia

Credit InvestigationCredit Investigation

CapitalCapital :borrower should have more at stake than :borrower should have more at stake than the creditorthe creditor

ConditionCondition EconomicEconomic :economic condition in the area:economic condition in the area IndustryIndustry :sunrise / sunset industries:sunrise / sunset industries Political / socialPolitical / social :government / community constraints:government / community constraints Source of informationSource of information :economic reports, newspapers, TV:economic reports, newspapers, TV

CollateralCollateral :property mortgages:property mortgages

RegulationsRegulations

Organizational requirementsOrganizational requirements Citizenship requirements Citizenship requirements Amount & charges on loansAmount & charges on loans Maintenance of books & Maintenance of books &

recordsrecords Reportorial requirementsReportorial requirements Capital requirementsCapital requirements

CriticismsCriticisms

CriticismsCriticisms

Lack of data to quantitatively prove that Lack of data to quantitatively prove that micro finance can alleviate povertymicro finance can alleviate poverty

High interest rates charged to borrowers High interest rates charged to borrowers Questionable role of donorsQuestionable role of donors Micro lenders for not taking more Micro lenders for not taking more

responsibility for the working conditions of responsibility for the working conditions of poor households poor households

Loans borrowed by the poor are not used Loans borrowed by the poor are not used for the intended purposefor the intended purpose

TrendsTrends

TrendsTrends

Many traditional large finance Many traditional large finance organizations are contemplating micro organizations are contemplating micro credit projects as a source of future credit projects as a source of future growth growth

peer-to-peer platforms peer-to-peer platforms

ReferencesReferences

www.wikipedia.orgwww.wikipedia.org www.sbgfc.org.phwww.sbgfc.org.ph www.dbp.com.phwww.dbp.com.ph Mr. Edgardo Tipa, “How to organize a Mr. Edgardo Tipa, “How to organize a

micro lending business”, seminar micro lending business”, seminar handoutshandouts

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