Overview of Microfinance and Financial Inclusion

1. Overview of Microfinance and Financial Inclusion Presentation for APRACA CENTRAB Participants 15 December 2011

2. Presentation Outline • Access to Finance Scenario • Early Attempts to Provide Credit to the Unserved • Shift in Government Credit Policy • Microfinance Policy and Regulation • What is Microfinance? • BSP Program for Microfinance • Microfinance Today • Moving Forward to Financial Inclusion

3. Philippine Banking System Philippine Banking System is three tiered, comprised of the following: Universal and Commercial Banks: largest type of bank in terms of resources and scope of banking activities, functions and services. Thrift Banks: composed of savings and mortgage banks, private development banks. Their identified market is the SME sector, consumer loans. Rural and Cooperative Rural Banks: relatively smaller banks found in the rural communities aimed to service the needs of local economies.

4. Current Scenario • 8,915 banking offices (739 head offices and 8,176 branches/other offices) • 9,847 ATMs • 103 banks with electronic banking • (Data as of June 2011)

5. Access to Finance a Major Challenge • 610 out of 1,635 municipalities do not have banking offices, a 37% non-coverage • Concentration of services in higher income urban areas, leaving low income areas significantly underserved • Archipelagic structure provides spatial obstacles/barriers to access

6. Early Attempts to Provide Credit to the Unserved Government paradigm prior to 1980s Economic growth can be spurred through government subsidized credit Financial institutions do not lend to the rural sector because of high risks and excessive costs The rural poor cannot afford to pay interest at market rates Government intervention through Directed Credit Programs (DCPs) DCPs aimed to address unequal access and exclusion of marginalized sectors from the credit market (e.g. farmers, fisherfolk)

7. Early Attempts to Provide Credit to the Unserved DCPs found to be unsustainable and inefficient Credit did not reach target markets Politicized credit process and selection of beneficiaries Market distortion: non-participation of private commercial financial institutions in credit market Financial institutions depended on cheap government and donor funds to finance loan portfolios Fiscal loss to government as it bore interest rate subsidies and administration costs DCPs promoted “dole-out” mentality in borrowers

8. Shift in Government Credit Policy Government credit and financial market policies changed from supply-led to market-oriented Government passed new lawsand directives to: Fully adopt a market based approach to development financing (e.g. market based interest rate policy) Rationalize or terminate DCPs to avoid crowding-out commercial financial institutions in the credit market (e.g. no government line agencies providing credit) Promote microfinance as tool for poverty alleviation (Social Reform and Poverty Alleviation Act of 1997, Agriculture and Fisheries Modernization Act of 1997, Executive Order 138)

9. Policy Approach to Microfinance Government recognized microfinance as a tool for poverty alleviation and emphasized the market-based approach National Strategy for Microfinance (1997): states that the role of government is to provide an enabling policy environment that facilitates greater participation of private financial service providers Regulatory Framework for MFIs (2002): defines parameters for regulating various types of MFIs in the country (e.g. banks, cooperatives, NGOs) Performance Standards for MFIs (2003): identifies a uniform set of performance standards that cuts across all types of retail MFIs to facilitate assessment and benchmarking

10. Espouses the following principles: Non-participation of government line agencies in the implementation of credit and guarantee programs and focus on policy environment and capacity building Adoption of market-oriented financial and credit policies, e.g. market-oriented interest rates Greater role of private MFIs in the provision of financial services Donors to focus on capacity building National Strategy for Microfinance

11. Regulatory Framework For MFIs Defines microfinance as provision of a broad range of financial services to low-income households engaged in entrepreneurial activities Has the following objectives: To protect the financial system from unsound practices by deposit-taking MFIs To protect small clients To promote establishment of an accurate, reliable and transparent set of financial information for MFIs

12. Principles of regulation: Deposit-taking institutions (banks and cooperatives) subject to risk-based prudential regulation and supervision NGOs that collect savings beyond “compensating balance” subject to appropriate regulations Regulatory structure: BangkoSentralngPilipinas for all banks, including those with microfinance operations Cooperative Development Authority for all cooperatives, including those with credit operations Microfinance Council of the Philippines as designated repository of information for all MFIs not under BSP or CDA Regulatory Framework For MFIs

13. Performance Standards for MFIs • Addresses need for a uniform set of standards applicable to all types of MFIs, considering the institutional peculiarities • May be used by regulators, wholesalers/creditors, investors, donors, policy makers and even as an internal tool for assessing performance of retail MFIs • Facilitates benchmarking and comparison • May eventually set the framework for a rating system for the microfinance industry

14. Performance Standards for MFIs • Sustainability Indicators • Financial self-sufficiency • Loan portfolio profitability • Outreach Indicators • Growth of no. of active clients • Growth in microfinance loan portfolio • Depth of outreach • Portfolio Quality Indicators • Portfolio at risk • Provision for loan losses • Efficiency Indicators • Administrative efficiency • Operational self-sufficiency • Loan officer productivity

15. Cooperative Code of 2008 strengthens CDA mandate to regulate and supervise all types of cooperatives (savings and credit, transport, consumer, electric, multi-purpose, etc.) Previously, CDA focused on developmental activities (e.g. cooperative training) Department of Finance-National Credit Council (NCC) assisted CDA in establishing standard chart of accounts, performance standards and manual of rules and regulations for savings and credit cooperatives CDA is in the process of strengthening its regulatory and supervisory capacity BSP supports DOF-NCC and CDA in the above initiatives Notes on Cooperative Regulation

16. NGOs register with the Securities and Exchange Commission (SEC) and indicate engagement in microfinance provision NGOs not prudentially regulated by government but the largest ones are members of MCPI, a private network of MFIs MCPI members adopted the Performance Standards for MFIs, regularly report to the MIX Market and generally subscribe to best practices BSP collaborates with MCPI in various aspects (e.g. transparency, MOTY, other advocacies) Notes on Microfinance NGO Regulation

17. What is Microfinance? • Provision of a broad range of services: deposits, loans, payments/ money transfers, insurance • For the low-income entrepreneurial poor and their households • Based on client cash-flow, character/creditworthiness, sometimes uses collateral substitutes • Small amounts, frequent amortization, simple documentation • Use of effective microfinance methods (group or individual) with element of social responsibility • Market-based interest rates, demand-driven delivery • NOT “consumption loan” • NOT for “dole-out, for “ultra-poor” or “cure-all for poverty”

18. BSP and Microfinance The General Banking Law (2000) provides legal basis for BSP to mainstream microfinance in the banking sector In the same year, BSP declared microfinance as its flagship program for poverty alleviation The BSP program for microfinance is three-pronged: Development of a microfinance “friendly” policy and regulatory environment Capacity building within the BSP and the banking sector Promotion and advocacy efforts

19. BSP Program for Microfinance Creation of an enabling policy and regulatory environment for microfinance Mainstream microfinance in the banking sector while maintaining prudential standards Provide incentives and appropriate environment for expanded scope and scale of microfinance operations in the banking sector Set performance standards, reporting requirements to ensure sound and sustainable operations Over 20 regulations issued to achieve an enabling environment

20. Training and capacity building Building banks’ capacity for microfinance in areas of internal controls, portfolio and risk management, governance Exposure visits of top management to inform policy making Examiner trainings to strengthen supervisory capacity Institutionalization of microfinance within the BSP Microfinance Committee Micro, SME Finance Specialist Group Inclusive Finance Advocacy Staff BSP Program for Microfinance

21. Promoting and advocating for sustainable microfinance Participation in the legislative process Developing partnerships to promote sustainable microfinance (NCC-DOF , MCPI, RBAP, MABS, donors) Establishing linkages between large financial institutions with retail microfinance institutions Initiatives to promote consumer education in microfinance (e.g. Financial learning seminar for microfinance clients and the unbanked) Advocacy for consumer protection (e.g. transparency and disclosure standards) BSP Program for Microfinance

22. Philippine Microfinance Today • Philippine microfinance regulatory environment consistently ranked as best among 55 countries (The Economist Intelligence Unit, Global Microscope for Microfinance, 2009-2011) • Microfinance is fully mainstreamed in the formal financial system • There is an institutionalized means for NGOs to transform into formal financial institutions • Financial institutions see microfinance as profitable and consider clients as consumers not beneficiaries • Industry is professionalized through adherence to performance standards and greater transparency

23. Philippine Microfinance Today • Technological innovation helps increase scale and efficiency of operations (e.g. mobile banking) • Wider range of products/services for microfinance clients: • Microfinance Loans (microenterprise, housing microfinance, micro-agriculture) • Microdeposits • Microinsurance • Local and international commercial institutions increasingly interested to invest in microfinance • Industry has attracted microfinance institution rating agencies • Microfinance data sharing system (MiDaS) currently being piloted by 8 MFIs • Central Credit Information Corporation currently being established as mandated in by the Credit Information System Act of 2008

24. Philippine Microfinance Today • There are now 198 banks (from only 30 in 2000) with microfinance operations reaching 964,000 clients with outstanding loans of PhP7.1 billion (USD166.3 million) and savings of PhP3.8 billion (USD87.4 million) • Some measurable results: • Increased access to formal credit: for first time borrowers, microfinance was their first formal bank loan • Impact on savings: 6 out of 10 borrowers had opportunity to save for the first time. Overall, clients increased savings balances by 13% since taking their first loan

25. Moving Toward Financial Inclusion • Building on the success of microfinance, BSP initiatives focus on bringing more people into the financial system especially the previously unbanked • What are the characteristics of a truly inclusive financial system? • wide range of financial services that serve different market segments, • financial products appropriately designed, priced and tailor-fitted to market need, • wide variety of strong, sound and duly authorized financial institutions utilizing innovative delivery channels and • effective interface of bank and non-bank products, delivery channels, technology and innovation to reach the financially excluded

26. Cohesive and Consistent Guiding Principles • Financial inclusion is a worthy policy objective that should be pursued alongside the promotion of stability and efficiency in the financial system. • Financial inclusion and financial stability are mutually reinforcing. • Financial stability and financial inclusion are not inevitable. Both demand at least the same measure of energy, imagination and serious attention from policy makers. In addressing financial access issues, market based solutions are feasible and should be encouraged. It is necessary to establish a supportive regulatory environment for the said market based solutions to work. • These solutions, of course, present real and valid risks but these are concerns that can be managed. • All financial service providers should be properly and proportionately regulated to uphold consumer protection and financial system integrity.

27. Ensuring that new participants in the financial system area adequately informed and protected Providing space for linkages and partnerships to further broaden reach Enabling technology to expand reach and lower costs – e-money/ mobile banking Further expanding the range of products- deposits, insurance Continuously allowing the expansion of the physical reach through branching regulations Recognizing a wider range of microfinance loans for housing and agriculture Microfinance fully mainstreamed in the banking system through sound, stable and sustainable programs Microfinance as Microcredit or loans for small businesses

28. Recent (2010-2011) Initiatives • Wider Range of Products • Micro-deposits • Microinsurance • Micro-agri Loans • Housing Microfinance • Expanded Physical Network • Opening of Micro-banking Offices (MBOs) • Lower Barriers to Customer Acquisition • Updated Anti-Money Laundering Rules • Expanded Virtual Reach • E-money Issuers • E-money Network Service Providers Consumer Protection and Financial Literacy

29. Contact Information • Inclusive Finance Advocacy Staff • Office of the Deputy Governor • Supervision and Examination Sector • 10th Floor, Multi-Storey Building • BANGKO SENTRAL NG PILIPINAS • Mabini Street, Manila, Philippines • (632) 708-7701 local 2896 • (632) 708-7482 • www.bsp.gov.ph • Pia Bernadette Roman Tayag • Acting Deputy Director and Head • proman@bsp.gov.ph

30. Thank you. www.bsp.gov.ph