NON.

FORMALFINANCIAL
INTERMEDIATION
IN THE PHILIPPINES:
and EmergentTrends
TheExperience

A Study Preparedtbrougb tbeAssistanceoftbe

Foundationfor Sustainable Society,Inc.

for tlte
Caucusof DevelopmentNGO Networks,
and tbe
Center for Community Services
Ateneo de Manila University

Decemher6, 1996
 this
exclusively with the credit Program ln the absenc€of a sophisticatedcost accountingsystem'
ratio serves as an adequate weighing factor to overhead and
-distribute
"p"i"i.""f "Inpfoy*
*"ti. The sa\anesof rhe \4 emplo)eesdkect\ in'iolred in credit operations is P 105,600'
"i-i""v.tiu" administratjve and management
Ofthe aemainingP43,185 of salary expenses,P/30,000 arc relatedto
staff . 64% of theseand all non salaryadministrationand depreciationexpensesshouldalso be allocat€d
to the credit program. Total administrativeexPensesare thw P/30.000+P/50,600+P/6'0O0=P/86'600'
64% of theseexpensesis P/55,424. Finally, all provision and charge_ofrexpenses6r€ allocatedto the
crertit program sfrce they are directly related. Total oPerationalexp€nsesthus equal to P/199,524,or
36.8%ofthe avemgePortfolio.

Institution % creditProsram
Employees
ODerational 22 64% t4

DirectSalaries 105,600 t00 % 105,600

AdministrativeSalaries 30,000 64 o/o 19,200
AdministntiveExpenses 56,600 64% 36,224
LoanPrcvisions 38,500 100% 38,500
TOTAL 199.524

Thelmpute.lcosl of capildl assocjated whh the creditprogramis calculated on ihe amountof

equityor concesiional loansthatis invested in lhe ponfolio, plus20% ofthe amount of thePortfoliothat
is nonnallyrequired for cashflow management. ln the case progtam, 120% of th€ average portfolioi!
P/650,400. Tile economic costof maintaining the real value of this amount with 15% inflationis
P97,560. The imputed ofcapital
cost is therefore P/97,560 minus the P,€7,000 ofactual costs:
financial
P/60,560, or 112% ofthe Ponfolio

TherBsults the FONDOENMPRESA

indicat€
of this analysis (housed
withina multi-purPose
NCO) g€nentesa 33.2Vo gtossfuuncial marginfiom its credit oPemlions However'operational
ar" 36.8%andthusthe net operating marginis a (3,6%)deficit The institution
is likely
"*p.nr.i the creditopemtion
tin;ncingthis deficitby cross-subsidizing from otherprogmms.
with resources
Imoutediapital costsareanadditional I1 2%,resultinga level3 of(14.8%).Theyieldontbeporlfolio
wouldhaveto increase by 37%to besustainablein thelongterm.

PROFITABILITY ANALYSIS
lncome 40 o/o
ActualFinancial
Costs 6 . 8%
Gross Margin
Financial 33.2 % Lev€l I
OperatingCosts 36.8 %
OperatingMargin (3.6 %) Level2
ImputedCapitalCosts _ _\l]_%
TOTAL 14.&r/6 Level3
SubsidyIndex 37.5o/o

88
 Arner 6

A Sample ofMeasures Used to Evaluate Macro-level Informal Market performance

Rural informal credit marketsca! be evaluatedvis-a-isthe fo owing objectivesusing the

follo*ing measules:

a. Objective: to providecieditfacilitiesfor thoseleft-ouiby theformalbaDking

Elstem
Measure: il1mea$ringtheactualdisbursenrent
offilrds to thetargeted
sectors
whicharc
categorized
asspecialcreditprograms

membership index(o/oofmeEbersbonowingto theeconomically active

population;special6€dit progtbrnslikc to rrarrh,ar (coopfype)andthe
Gmeeea-t)?es havem€dbershipitrdicesof 2.0%!o 1.8Zorespectively as
agaituttheaverage of 11.170ro 12.9%for theformalbar*s.

Fdryq(yo of fcna.lesin totalmelDb€rship/clienrele);

specialredit progfao$
have64,6yoto 84.0yoas against9.I % for theformalbanks.

b. Obje€tive: to providelow-interest
creditfacilitiesto suittheneedsofthepoor

Measure: rateGimpleaDDual
Cy€r.aee-interpqt latesfor lendingwitiout compomding);
for theformalbaDkrit is I I .4%av.ragewhilefor thespecialoe&t prograos
it is 13,2o/o

Objective: to providosustainable
operationfor ihepoorcreditors

Mealuc: recovervrate(totsllepalmeotrepa,,tlent+ loansoutshnding)

ofsbort-termt
yearloans;therecoveryrateis 5I .0%to 62.0%for thespecialcreditprogams
administer€dby developmentbanks,whilelor theinfolD1al
coop_typei it is
?3.8%andfor theclame€nban*sit is 98,00lo

M$surei over-allpedolmarceis mea3uredby Dercapitashare,/savinc

r4rjohis ameasure
ofthe a$ountofloan createdpersavingdepositgenemted.

Fortheformalruralbarkinginstitutionsthemeasure is 126,6T1(5.
ForthecooD-
gpesit js l8?.4,rdrileforrhecrameen q?esit is 653.Thefigrresindicate
a
bjgheroedit rcsouca-generation for theinforDalsectorowingmainlyto the
lo\rertransactioncost.

Source:Chowdhury,
A andM. Garcia,1993.RurallrstitutionalFinancein Banstadesh
andNepal:Review
andAeendaForReforms.AsianDevelopment Bank.Manila

89
 Anlex 7

Summary ofFindings on Cooperativ€Credit Unions(CCUS)

l. ofCCUs
T.!'o€s

Thereare3 qPes ofCCUs defined in the study: (l)the community-basedCCUr or the op€n-t?e which
close-t)?eccus
oDeratein a certainco;mudty andis openro all t ?es ofmernbe*hips;(2) ihe iisiiiution-basedor
Jrri"t is openontv to m"muers shadng a common insitutional affiliation suchasbeing o6c+members; and (3) the
,,palengke"
literaly) which is basedon conmotrtradeaffiIiation rvheremembe$areusually
-rr**_o"i"a (r"-;g
snall marketverdors irl ne€d ofdaily seedcapital money'

2. ofccus
services

nobi|izationn|je formoffxed deposits(suchasmembership

srtvingl" and time
fees),savingsdeposits,
depo;its$,ithinterestlatesofferedabovetheba$kingmatketrates

Crcditlacililiessuchaslow-interest(belowbankingmatketmtes),non-collateralforprovidential,
loansto membersor non_members
productionor ernergency

Olrer rervrcessuchasthe provisionofloan coltectionwherebycollectorsa& hiredto reachfar_flung

costsfor many
clients,Foviaiingofice h;urs b€yongthe 8 to 5 routiDe,whichlowersthetransaction
promoting
livelihoodandself-employernrfprojects(includingtaining andseed in
capital some
areas),
"ii"ns,;ap.ouiiiooof'damayan"irndsforemergensybutexclusivelyformembersonly, and sefling
asa venDe for socialization

3. oftheseccus
operation

Sincelheseareunsupervised by theBSP,lhentheyar€exenptedfromminimumcapitalrequi*menb,not
requirements
to portfolioceilings,reserved
subjecled taxesiuldmeasules'
andolherintemrediation

ThereisnoPerceivedlinkagebetweenbanksorothelfofilal6editinstifirtionsandccus,andbanksare
of surplusfunds
seenonly asrepositodes

Thereis no overlappingof clie ele.Ttheinfordal cr€dit&arketis seenasprovidinga differentsetof

products (notofferedby thefornal bankings€ctors)andthat'swhyCCUSandlocalbankb$nchescanco_
in onearea.In fact,thetearcinstaoces
ixist sidelby-side ofbanksafealsomembers
whefedepositors of
cCUs

Evaluatinqtheooerationof CCUS

Asinmostofthestudiespreseed,includingthisone,thereisemphasisplacedoothelelativesuccessof
CCUS particularlyasagainstthe fomal barking sectorin t€rmsofsurviving a generaleconomiccrisis' andthis is
al'udei ro thegeneralbdependence andnoD-reliance lo goverfiDmL 6lndsor subsidies'

provide
CCUSare perceivedto be successfulin servitg lorv_inconead high-risk clientswho camot
rates,mDch more for the
collateral for loans. However, depositorsare penalizedin i€rns of low real intetest
informalsectorswhoreqlirememberstopaya$ualdues(rangingfrom?5toP100)plusattendancetopre-
membershipseminan

S"**J"-b"tt", M andJ Balbosa,1988;Relampagos,

M 1188;Lamberte, D Dougias'1990
J ' M Larnbede,

90
 Sincetrznsactioncostsare lower in the informsl oedit ma*et tharl in the fomal credit market,thereare
othermeasuresby which th€ lower tr"nsactioncostsis compensated for. For instancein makingloans,the CCUS
alrcadydeductthe hterest, therebymaking the real effectivemte Buch higher

CCUSare also perceivedto enjoy a higher spreadand areuatrested by inflationary Pressure's.

In tenns ofgenerzting imds, CCUSmostly rely on the rnernbersfupduesand dePosilsgeneratedfrom

I'to gain accessto credit for
members. Wh€n menbers rrere askedwhy they join CCUS,one_hau answercd
consumflion"andthe oiher half said "to gainaccessto credit for production/busine$." A lot (74%) indicatedthat
theyjoin CCUSto avoid borrowing ftom moneylend€rs(with 5-6 ifierest).

The incr€ase h fix€d deposits catr be attnbuted to the following factors: (a) an expansionof
membershipspeciallyamong market-vendor-ard commmity_bssedCCUS,(b) some coops initiaied savings
mobilizationprogramsa'Id specialpromossuchasmfles andothergirnoicks to expandsharccapital subscription,
and (c) somecoopsimposeda loan rct€ntionlimit ftolr 1 to 5 percerf loan transactionto incteaseth€ borow€r's
fixed deposit(the allormt oiloan is limiied to the borrowels sharesubscription).

lnspite of increasesin Dominalassels,a largenumberof coopshavenot beenableto matehthis with an

increasein net incomes. This is due to a slrge in operatinggxpensesasthe coop'sdernbershipgew Also, the
pattem of expendituresallocatedfot su4tus funds go mainly to dividendsandpatronagepalments Fe\rr'areie_
irvestedinto the cooCsimprovesrentofopentions suchastle Pulcrhase ofcapital equipmerfsfor long-l€rmgrowih
Prospects.

Recofirmetdation:

. Thlre is needfor CCUSto expandtheL servicesnot only in tenns ofmembe$hiP but moreimponantly
in termsof the product t)?es Guchastime'deposils,etc )

. There is a recommendationfor iniet-Ccu lending particularly amongCCUSwho fofm parts of a big

conf€deration,This would put excessfrmdslo geater usealld lessenthe opPottunitycostof holding iarye
amormtsof surplusfunds.

. To sustaingrowthamongcreditcoops,th€y shouldd€pendlesson fxed depositsor increasein membershiP

asa sorrceofgrol4ih. Financialimovatior! in termsoflntroducing newproducts,mustbe lnitiated. This
requiresupdatingofmanagemefltskills andacquisitionofngw technolory' Portionsoftheb net eamugs
could be investedfor this.

. New products may be rnboducedsuch as the infoduction of "discount cards" for the acquisition of
consumeror capital goods such as hand tractorc' Tie-ups can be devleopedbetlveen smallscaie
manufactureis of hand-tsactors(which in many cases arc small-scale cottage industry"t,?e of
rnanufachrdng),or drscormton the Products^ervicesofreredby fellow cooP_members

5. ofccus
Evaluatinplhe experi€nce

. CCUSexperiencelow mte of increasein real assetsowing to the high rutesof loan defaultswhich plague
the operationofCCUs. ln this 1987study of6 rural-basedCCUS,the raio ofloans outstandingto total
loansis 30.30perceni Thismeanstlatforeverypesolentout,30centavoswlllbeheldasbaddebt and
would entail geater cost for the CCU. Also the geater portion of overdu€ loans is mor€ than 2 years
(61.03%).

. Still. CCUSaresuccessfirlin reachinglow-incomesaversandborowers ever Dpto themosl far_flmg areas

unserved€vm by rural banks

91
CCls sufn'veowr {oe)e?$ o$ii\gts Se iac!{oat l!|emtretssrs\araed{oen laniaipehot eilhet assare$
ofborowsrs, ev€n ifdany CCUSarc plagu€dwith large adouDtsofbad debls' Sti[ the oPerationof (
CCUSis srral arouS! to sustaitrlarge lossesadd th€y have never €xperiences"bark_ruas"since the
borowers arc the lendersthemselves(asmeEbers-saveNofthe CCU)

Savinssmobilizedby $'al-based ccus are sma . The real outstandingfixed depositsper nemb€r range
h.rwe; P2l to P342.basedotr a studvof6 rural-basedCCus in 1987.

cCUs .ie not w€lt-organiz€dandtherek needfor gleaterb:ainingin bookeepingand simPleaccounting'

It wss foluld that therc existsa negativerelationshiPbetweenCcu-mernbershipandmembers'sincome'

This $rggeststb€ possibitityof gra&Iatirg membelsfrom the infomal CCUSto the fomal bankjDgsysten
as they becomericher.

In somear€as,CCUSrcinaitrthe ody institution for savingmobilization' and sav€tstlay not necessarily

bealsothebofiowers.losuchinstance,somefolthedepositinsuanceiscalledforasaDincentivefor
greatersavingmobilization.

92
 Annex8

SumrnaryofFindings on Credit CooperatiYes

I. From: Ltado, G., '"Ihe Financial StructureandPerfomhnceofPhilippine CredrtCooperatives",PIDS

DiscussionPaperSedesNo. 94'04

1. Basedon sampleswvey of 104credit coopentiv€sfrom mne regionsin the colllltsy,

2. Major shrdyfindings andconclusions:

a-Basedon cdteria suchas capital adequacyandproteclion,assetquality, mte of r€trm and costs,

liquidity and solvency,the study concludesthat credit coopemtiveswere able to mobilize huge
financial resourcesand wete able to provide credit and saviflgs seffices to a large base, at a
standardcomparableto lhat of fomal fina$ial ifftihrtiots.
'Baduat€d' into becoming4
b. In the period 1990-1992,16 ofthe sample104oedii cooperatives
large credit cooperativesand 12 m€dium credit cooperativeswith more membersaDd bigger
flnancial resouces.

c. Loansto membe$ constitutedthe biggestuse(aboul780lo)of a$et use.Investnentswere a mere

4% of assets;sharesin the fedemtion,1% andcashon handand in bah.ks,7%.

d. Crcdit cooperativesas a utnle had positive net €amingson assetsof about 14 p€rcentas of end
1992.This is conparable to what the small saveror investorcould eam fion altemativefinatcial
instrumentsthat ale accessibleto him

e. Sixty percentofthe total incomeofcredit coop€mtivescametorn lendingactivities.

f. Credit cooperativesarc very liquid, judging from the compuledliquidily ratios. Cashon hand,
cashilr baJ* and shortterm investmettswere fout timesas latge as deposilsandboffowings.

g. Thereexistsa saong casefor establishingan appropriatesupervisioDsandregulatorysyslemfor

cr€dit cooperatives. Although the CDA hasthe supervisoryauthority over theseinstihrtions,it is
not appropriately gquipped. It does Dot have the Professionalard iistitutional expeftise to
supervisea raPidly gowing credit coopentive system

h. The credit cooperativesserves a particular market niche consistiDg of small savers and
borowers, both individuals ard smallbusin€ssenterprises

i. The creation of a small stabilization fund is necessaryto improve the viability of credit
cooperativesand to bolster confidencein this type of iDstitutions.A corollary conclusionis the
need to detelmiflethe apFopriatenessofa depositinswanceor gua&nteeschemeat safeguarding
membercapital and savingsaswell asimproving the liability ofdedit cooPerative.

IL FromrLtanto. G.. E. GarciaandR Callanta,"An Assessment ofthe CapacityandFinancialPefomance

of Microfinance The PhilippineCas€",Discussion
lnstihrtions: PaperSeriesNo. 96-12

1. Basedon cas€studiesol 7 Microfinatce lnstitutions(MFI), composedof 5 sedil NGOS,one

cooperativerural bank andoneGrameenbant r€plicalor.

93
The study addressesfour areasthat wiil enableMFls to be self_sustainingfinancial itstitutions
servingthe poor:
a. outreachandimPact
b. viability and $stainability

2. Major findings and concLusiolrs:

a. Re: Expsndine outr€ach

1. Outr€ach remains snall and limit€d, aithough lhe poor borrowers and savers
predominateamongMFI clientele.Tllis limited reachis attsibuiedlo:

a. weak i$titutional caPacity

b. lack of an extensiveandviable deliv€ry system
c. a relatively small finan€ialbase

2. The principal problen faced by cr€dit NGOS is the lack of iegal persoDalityand
authority to act asreai financial intermediaries.This also resultsin a very limited capacity
to developand legally offer iinovative financialproducts.

t. Tmnsform credit NGOSinto full pledgedformal financial institutions' e.g private barlk, finatce
company,non-stocksavingsandloanassociation or creditcooPerative; or creditNGOSmay invest
in formal financial institutions.

2. Promote linkage banking with private banks which are interesledin Providing micro-finance
s€rvicesfor thepoor.

3. Invest in tsainilg existing nfal bad<s,CRBs andcredit urions in ricrofinatce lechnologies.

b. MII viabiliw andsustainabililv

1. Many MFIS are not viable or sustahabledue to their inlernal ilnancial policies and
organizalionalpraclices and procedr:res lnprovements are neededin the irstallation of
sound financial reporting and monitoring syst€m,Portfolio management,assessmentand
managementof risk, product packagingand pricing, managementof loan anears and
slrategicbusiness Planiing.

2. There is a need to upgmdein itstitutionalize Performatc€standards,particularly loan

repayment,appreciationof loan defaultajld agingof delinquentaccounts

Recommendations:

1. Building up the equity baseof MFIS by infusingmore capiial ilom exrstingo}lners and

2. Diversiry loans,savingsand otherfinancial productvservicesaccordingto client demand.

andslaf of MFk.
managemeni
3. Professionalize
 ANNEX9

GO''IERNME]{TCREDITPROGRAMS

L Dulch Rnral Dd€lop 19871o

t992

2. NdtionalRecodciliation Rebelrenh*, Bo.afide NOOs

tendt-setdels, syhpatlize*,

1988-91

Developnenl (LEAD).
4. Daecay Op€Bdon fot \'l\,lYC,SiateCollegd
LivelihoodDevelopment
rBOLD). NCOs.
5. Livelihood
Skills NMYC,
srar.collesG
Dev.lopmentProerM
n-sDPl NGOs.
6. ContractRelorcnralion 1988.1992 SENRO&
R.ENRO/DENR

(DEI\'R) 1 9 8&2 DE IR
srill
0sFP)

D DENR 8. Inlegrat.dSusBinable DENR

(conrd) Raedch & Develophl

ISFAJe6 in te Phils.
L.C.US,NGOq
RegioisI to XI
Developnent PrcErm
0.IRDP) RebelRetude

NCOS& PVOS

(DrLP).

95
 ANNEX9

GO\'ERNMENT CRXDIT PROGRAMS

NGOS& PVOS

Employnent & Ente-

preneushiP
Dev.Pro-

vt,vm,D(& cAx)
16.WorkingYoudCentre
of Inpact
l?. Developnenl

18,FundforRuralgnploY-
ment& Enryd* Devl.

2l CuiilowerDevelopmenls

groeeu&GFSME

22.Equipment
Acquisihon on'going

Enreryriss(EASE)

23.Fr$.hise & Enfiepre-

ne! rship Developfent
Prosr@(IED)

Ehirepri*s(GFSME)

raciriry(RGF)

& 8 NGO'S
GFSME,CAN'LGU

Ent.rlnsesCudertee

belowP2 5 M,NationPide.

96
 ANNAX 9

GOVERNMENT CRTDII fROGRAMS (ContId

On-eoing

EnrdPris4(GFSME)

36 Balil.ta sa(.buhayo llRC

R€t6VI'I-RC

DBP,LBP,LBP
Baye Progr.n/ILRC
(rLRC)

38.SdfEhploynent O.-goine DS$/DNehrr'ork

39.hdustrial On-going

P.ogru oCLF-\,fP) Philippina(PMIP);

(CEBU'EPZCEIIo1
PCCI:IINEX.
Continuing

Plosran(MEDP)

On-going
Procld (TSI) NCOs

97
 ANNEX9
Page4
GOITERNMEI{T CREDIT PROGTIA,Dr$(LiO!I

Finacirg Progrd for

the Cooierciaiianon

Eristinglris.tion
InigationsSFternsfor

m)
16.GSISMembdAlsrsloc. GSISncrnb.rs(NGOS. On-going
for lhc Dcvdopmcntof
EnuepHcu$hiP0i.1ADE)
systm(GslS)

M. LandBdtk continuing

Fm.ls Coopqadves.

49.SnallMek t vendoB
Loe (SMVLProgan. abiliry

93
 ANNEX '

GOITRNMENI CIiIIDIT PROCRAMS

Nq/EaGtins

Billion

ofP5M.

o. t2. Kabalika!Sa

lnduslriya(X-ASAID insiiturio$(PIh)
(37in numbe's)

99
 5
E5

F
F:
3 ,i
J
$

:- .: i x

(i)
H:€ gti

=6= E
z
E ?EY.7- tl

z
e z32z
t ><= ^
z
E
'E3'
FL ('a

s ztzl
= 6< -
;
-l
O Fl

z
>.= z
q=; u: o
c
!u, t
2
 3
96
g
F
z e
IJ
g
2
-EE_ E

;'l
U -<

|:Ei.lElrll
A3 i
zz g
a!4
z Y"l
z <-
*Ell- 3
E
a
Erx sa

z I
z ipFt

,l 3=
sz

A g .,E E
b 3 =k

i E: EE
>
<
E="3?
3I gd E 5 € EA z
dE
;!
z
;c
E.i
x !3;9 i A eeE-^
6
*
2Eaz
F!€: ! ; ;E{E
q 3 !da!
z
9 5;6C 'g E sE5g ez
n 6i E F,
; ; P€ -
E
3
? ;zEE
6
i
56 qE
-z*!i EAEEZ1 2)
<A
g, -f + P ! ? E >E r 9
4 :35;
z Bl Et E !us!:F
qE;54tsE;
ed:4Es!Z
gEi;E65q
a F.411
EE.azt
aESi:E-E9
F;:i;i?i ,89;i
E:-EE
9 !9::
ie;;$rcEa z :; EE:Tg;
E--i : E.s E 4!
o
io<=c(J<4
.o:.. h.o t E;
 -'=;gdig$Bgsg
-9"38I'sfl!'
ii ': BANKBUrcPIN
HEADOFFICC

FUB^LCFEDIT
DEPARTMENT
r3. ':sfigXtEE'S$s:
rEriE9EF.EE
]E
a:
,3:
"3Eqt!.b.4$H"c"s.
3EN"-Cee";F
<
COOPNAT]VE
GENEBAICAEDIT A!FALCNED|T CAEDiI

4
z -ets85.3?383$B
-AyBFqEEs
E

EUMLCOOFEMTIVES
UNITS
l
a ?
I ega6 Savng
-

:
" 3"iE"s-
a i E3A3e
aEf,
ME,IBEFS

s;FFFi9Fsi€gE 8e
i.:'i

:t,:i
.!1,
i;g;iifgFli
5 : i !t; l : ;ia
3
'€
q
n z
E V
E P;iE
a ;e
?B
!F
€C
: ,Fi ;EE . 3EE
i
i3
a!
EE
E ;.! i E

2
o. :i E!5;r I
sr[r2 E?E I E€E
A
;v 3
;: 6 5 E E }g h
.QE B E E,9 E

f $rfrE
;5 t
ic. i

igsE,$giig,ffiiigiF
;.H? F .H{
.H;.Ei.fI
EEF
g^Fg
E cEt$
E 6egHEg
''. ri

Y E4
E s5' r- 9; :
. E . E FE
4= : :i F
" yx 9 gE 2
Ei d ! ':z e : ] :
zEi"21
Sigfr
f 5€: c
: i$? !s
:!s+E
.. 5€=e;
i r53
E !:E N

x * $Es-;E
() *, 39 Et€ :
;Its.Ets E

ZF
gE iE ETEEE
EsifE Hi; FE
iiE!;i€; t e€;EE:
: f gi EHE
i rE3x
E3i d ?,5*Aa'.5
i

5; I ;;
EE + E -
E io .es ":
EE :
;! i
F;
;.
i
E
3: : tii 3E!

s:1

E: g Ei ; E F
E 5
: :ri
g3? e
-
i bEs
!-
1:
-"
A
*!
E:
I
! ;: 2 i s; E
iE,: FZ 4'* o x :; 5;p- 5
ESPE ; ;
i : E5 B E5; Eg * a ; t I I
z esEi Eg 8.2 Z | ;s E [;: =i J5Jq;5 5 r E :

; g i; F;:g i! E E E : - 6! - E E
E 3
- t i -,i E€! e r r
ES:r9rT ;+ F ';;;9
-F-P
sl.€si i i r
:!! 6e ( i A
EB! ; 3 F; E :5i [ARE.R: ;€bE
EEd E 3 ;a t iEE3si
:?; c+8 5 5 s ; $ i ! ;
:;:
I iFET;€ct- ::r!!j!iT
t .:n Hhq.,"=:
.o.o
: €o; : F! !; E "..tr5F;3:
;,?
 BIBLIOGRAPEY

Abiad, Virginia, Fina cidl Innovqtion in Rural Credit Markels: The PhilipPine Case, IDE
ToL:yo,SedesNo. 211,Feb.1993
Abiad, Virginia., "TransactionsCost ofBorrowers andLendersin the PhilippineLiokage
Project", Report prcparedfor ProjectLinking BanksandSeltHelp Groupsin the
Philippines, Iuly, 1994.
Abiad, Virgini4 "Linking Formal and Informal Financiallntermediariesin Underdeveloped
Countries: The Indonesian Experience",February,1994.
Agencyfor CommunityEducationalS€.vices(ACES), Inc. "The Informal Credit Market of Six
Selected Barangays in NuevaEcija, 1972-1987", August1988
Agabiq M., "A ReviewofPolicies Impingingon the Informal Credit Markets in the
Philippines", PIDS-W?88-12,Sept.1988
Agabi4 M. et al., "IntegrativeReport on the lnformal Credit Marketsin the Philippines",
PIDS-WP89-10,June1989
Berenbach,ShariandDiego Guzma4 "The SolidarityGroupExperienceWordwide",
in Otero,M. andE. Rhyne,TheNew WorldofMicroenterPiseFinance.Building Hedkhy
Financial InstitutionsJor thePoor,Ktnwian Press,1994
BoumanF.J,A,,"TheROSCA:FinancialTechmlogyof Infomal Savingsard Credit Institutions
in DevelopingCountries",Sdvingsand Development,yol. 3, No. 4, 19'79.
CAPS,Impactof Assessment of the Ndtionql Livelihood Prcgran, Marila, 1993
CorderoandAssociates,PhilippineRuralCreditStudy,June1994,Asia.nDevelopment Bank,
June,1994.
Chowdhury,A. andM. Garcia,i?arsl Institulional Finqncein Banglqdeshdnd Nepal:
ReviewandAgendaJorRefotms, ADB, 1993
Cuevas,C. andD. Graham,"Agricultural Lending Costsin Honduras"in Undermining
Raral Developmentwith CheapCredit,D. Adams,D. GrahamandJ. Von Pishke,
WestviewPress,1994
Domdom,A., V. AbiadandA. Viloria,"AccessofMicro-Enteryrises to Credit,Department
of Economics, Ateneode ManilaUniversity,March1996,uopublished mimeograph
Esgueffa,Emmanuel, "RuralCreditProgramsin thePhilippines: Lessons andPolicyIssues",
no date.
Edgecomb, ElaineL. andJamesCawley,"TheProcessoflnstitutionalDevelopment: Assisting
SmallEnterpriseInstitutions Become More Effective", in Otero, M. and E. Rhyne,Tie
New WorldofMicroenterpise Finance.Building Healthy Findncial Instilutionsfor lhe
Poor',KumarianPress,1994
FacultyofDepartmentofEconomicsGDE), An lntegratedAnalysisofPast andExisting Polices
andProgramsDirected Toward A.lleviatingPoverlyin UnderslandingPo\)ertyand
tnequ.:tlilyin the Philippire.t, P. Intal atrdM. Bantilan,NEDA 1994
Garde.R.. The PBSPInterestRateReview,n.d.
Ghate,P.,et al. , Informal liinance. SomeFindings From Asia, AsianDevelopmentBank,
t992

104
 Hashemi,SyedM., 'Building Up Capacityfor BankiqgWith the poor : the GrameenBank in
Bangladesh",PaperSubmittedto the ExpertMeetingon FinancialMechanismsin
SupportofParticipatiotr ofthe Poor, Orgadzedby the OECD DeveloDmentCentrein
conjunction wiri trAD. Paris.gtn - l0tb April. 1996
Helyetas,"A CaseStudy of Credit atrdSavingsProjectofMindoro hstitute for DeveloDment-
Itrc , (MIND), tom Profles on CreditPrograrnmes of SouthemLuzon parttrers,Helvetas
PhilippineProgrammeOffice, 1993.
Herriq A., "ChargingEcotromicEnvironmeit andthe Welfareoflow IncomeGroups"in
the Philippinesin ?ar.racto, s of theNational AcademyoJScienceand
TechnoIogt, 1986, pp. 259-286
HerrinA., andE. Racelis,"Monitoringthe Coverage ofPublicprogramson Lovr'Income
Families:Philippine,1992",Integrated Population andDevelopment planning
Projects,NEDA9Manila,1994
lLO,"IdertificationoftheRuralPoor-TheTargetGroup,'lnMqtaqlonFinancingof
DevelopmentProjects/Activitiesfor theRuralPoor, APRACA April 1985
Intal,P., "TheStateofPovertyin thePhilippines: An Overview"in underitandingpoterty
and Inequqlity in the Philwines, P.ltt'd andM. Bantilan,NEDA 199+
Intal P. andM. Bantilan, UnderslandingPovertyqnd IneEuqlityin thephilippines,NED\
t994
IPc-ProjectConsultGMBII "Analyzingtbe Eficiency ofCredit GrantingNGOs : A Technical
Guide,April, 1993.
Jamon,V.P., "SectomlStudy:StrategicAssessment ofNGOSin population,Family
Planning,Health atrd SocialWelfare"in,4 S*ategicAssessment of Non-
GovernmentalOrgcmizqtionsin the Philipprzeq A.B. Quizon andR. Reyes,
ANGOC,1989
Lamberte, M., 'rTheRoleandPerformance ofCooperative CreditUnionsin theRural
FinancialMarkets:SomePreliminary Resuits",Presented du ng theACpC-pIDS-
OSU Seminaron "FinancialIntermediation in theRuralSector:Research Results
andPolicyIssues,22-26Sept.1984
Lamberte, M., "TheUrba.nInformalCrcditMarkets:An Integrative Report,',pIDS-Wp
88-25,Dec.1988
Lamberte,M. andJ. Balbosa," bformal SavingsandCreditInstitutionsin the U6an AJeas:
The CaseofCooperativeCreditUnions",PIDS,1988
Lamberte, M, andMa. T. Bunda,"TheFinancial Marketsin Low-IncomeUrbar
Communities: The CaseofSapangPalay",PIDS-WP88-05,1988
Lamberte,M. and A. Jose," The manufacturilg Sectoraodthe lnformal Credit Markets:
The CaseofTrade Creditsi(I the FootwearIndustry',, PIDS-W?88-07,1988
Lamberte, M. andJ. Lim, "RuralFinancialMarkets:A Reviervofliterature',,PIDS Staf
PaperSeriesNo. 8702,Sept.1987
Lamberte,M., J. Lim, R. Vos, J Yap, E. Tan andMa. S. Zingapao,Philippine Externql
Finance,DomesticResourceMobilization dndDeveloptfientin the 1970sand
.1980s. PIDS-ISS.1992
Lava,A., D. Arroyo,R. De GuzmanandJ. DelosSantos,"CaseStudieson theMoritoring
oflnformal CreditMarkets,PIDS,1989

105
Lim, J. andE. Esguena,"Impact ofFinancial andMacro Policiesand Conditionson the
Rural FinancialMarkets," UPSE, 1996,unpublishedmimeograph.
Llanto,Gilberto.,"RuralCreditPolicy:Do we Needto Target?",ACPCStaffPaperSeriesNo.
87-30 Sept..1987.
Llanto, Glberto, "Agricultufal Credit andBankingin the Philippines:Efficiency andAccess
Iszues".PIDS-$? 93-02.June1993.
Llanto,Glberto, "The Finarcial StructureandPerfomanceofPhilippine Credit Cooperatives",
PIDSDiscussion PaperSeriesNo. 94-04.
Llanto, Gilberto M., Edagardo GarciaandRuth Calla.nt4"An Assessmentofthe Capacityand
Financial Performance of Micro{inalce lnstitututions: the Philippine Case", PIDS
Discussion PaperSeriesNo. 96-12.
Marquez,N. andR Virola, "Poverty Statistics:A Profile ofthe PhilippinePoor", Division
of Mathematical Scierces,IlP,Feb.1995
MicrocreditSummit,"Draft Declaration", Washington D.C.,August1996.
NEDA, "A Study on GovemmentAssistanceto Low-IncomeGrcups" ir\ TheAgricultural
Sectorwilh InadequqteAccessto Inslilutional Credit, MoJ,ila,1989
Otero,M. andE. Rhyne,TheNew Worldof MicroenterPriseFinance.Building Health!
Financial Institutionsfor lhe Poor,K]uljjlalianPress,1994
Relampagos, 1.,M. Lambertea.ndD. Gaham,"A Studyof the OpentionsandPerfomance
of Seleated CreditCooperatives PiDS, 1990
in thePhilippines,
Sacay,A., M. Agabin and C. Tarrchoco, Small Farmer Credit Dilemma, Manila, TBAC,
1985
S\ebel,H, Financiql SystemsDevelopmentandMitofnance. nqble lnstitutions
Appropriate Strqtegiesqnd &tstqinqbleFinanciql Serviceslor the.Microeconomy,
DzutscheGesellschaft fur TechdsheZusammenarbeit (GTZ) GimbH,1996
Subido,C., "RuralSavingsMobilization",UPSE-DP8l I 1, Aug. 1981
TBAC, "ResearchProject on the Rural FinancialMarketsin the Philippines",TBAC and
LPBRF. Madla- 1981
Virtucio,F., "A HouseholdSurveyof LowestIncomeGroupsin the Philippines" in
UnderstdndingPoverty and Inequality in thePhilippines,P. Intal andM. Bartilan,
NEDA, 1994
Relampagos, J., M. LamberteandD. Graham,"A Studyofthe Operations andPerformance
ofselectedCreditCooperatives PIDS, 1990
in thePhilippines,
Sacay,A., M. Agabin and C. Ta.nchoco, ,tnall F mer Credil Dilemna, Manila, TBAC,
1985
Siebel,H.,Financial SlstemsDevelopmentdnd Mi$ofnqnce. WdbleInstilutions
Appropridte Stralegiesand.SustairableFinancial Servicesfor theMiqoeco othy,
DeutscheGesellschaft flr Technishe Zusammenarbeit (GTZ) GimbH,1996
Subido,C., "RuralSavingsMobilization",fl?SE-DP8111,Aug. 1981
TBAC, "Research Projecton theRuralFinancial Marketsin thePhiiippines",TBAC ard
IIPBRF.Manila.l98l
Virtucio,F., "A HouseholdSurveyof LowestIncomeGroupsin the Philippines" in
(JnderstandiigPoverty cnd htequdlit) in lhe Philippines,P. lntai andM. Bantilan,
NEDA. :I994

106
 TABLE OF CONTENTS

Page

Tableof Contents i
List of Tables iii
List of Figures iii
Auexes
Aclonlms

ExecritiveSummary

1. Introduction

A Shiftin ThinkingaadApproaches to Microfimnce 1

A Shiftfrom Regulationto Liberalizatior 2
TheStudy: ObjectivesandMethodology 2

2. TheClientSystems

A. Targetted
CliedsofcreditPrograms 3
B. Whoarethe PooraadWhereAre TheyLocated? 5
'7
C. Normsfor Identifing thePoor
D. WhatAretheCreditNeedsofthePoor 8
E. sources
ofCreditofthePoor 9
F. Whatarethe SavingsPattemsof thePoor? l4

LendingProgramsfor thePoor
3. Government l5

A. Lendingto AgriculturalHouseholds 16
B. Lendingto Microentrepreneu$ l6

oflnformal FinancialIntermediaries
4. TheServices 20

A. Tlpes of InfonnalFinanciallntermediaries 20
B. Segmentation of Markets 23
C. Mobilizationof Savingsby Non-Formal
FinancialIntermediaries
D. Participatiooin FinancialDecisionMaking
E. Contracts andTermsofDifferentTypesoflnstitutions 26
F. InterestRates,Repayment Schemes andotherIssues 32
5. NGOsand CooperativesasFinancialIntermediaries

A. Sources ofFundsandSustaimbility
B. LendingandSavingsMobilization
: BaokBukopir
i. ,q'C"it-*"i"f g""k Ownedby Cooperatives 34
in Indonesla
35
6. Issueson Accessofthe Poorto FinancialServices
to Credit
A. RiskandTransactiolCostFactorsAffectingAccess
Jf

1. High Risk ofSmaI Bo'rowers

Costof SmallLoans
2. High Ttansactions
36
B. OtherFactorsAffectingAccess 40
C. Preferr€dSourcesofCreditandSavingsServices
Poor 41
7. EffectiveCredit and SavingsProgramsfor the
to Microfinaace 4l
A. Current/ Evolving Approaches
I TheNew View
2. TheFinancialSystems APproactr
and Thatwork
lnstitutions 45
B. Learningfrom Programs
I ieplicabilityof Successful MicrofinanceSchemes
2. OuireachandWelfareEffectsofEffectivePrograms
3. FactorsBehindSuccessful MicrofinancePrograms
h thePhi]ippines 48
C lmplications
' for Institutionsa[d Programs
A. Principles for FinancialService Deliveryto thePoor
I Features ofEffectiveCreditDelivery
2 EtrectiveSavings PrinciPles
5U
B lnstitutionalDevelopmelt
C. Evaluationofthe Performance ofNon-Formal
50
Markets andlnstitutions
I FinancialAnalYsis
2 Aftlyzing OperationalProductivity
3 Evaluating TargetGroupOrieotatton^
4 Measures ofPoor Orga$zatlonal Pertormance
a SubsidY DePendence Index
b Measureof Decapitalization
59
8. Key Issuesand Recommendations

ll
 LIST OF TABLES

P^ge

Table1 TargetClients of MictofinancePrograms 6

Table2 Distribution of Borrowers,Urban andRural Philippines,
MetuoManila,by Sourceof Credit,1986and1987 10
Table3 Shareoflnformal Creditin ShrdyCoultries 1l
Table4 LendingSchemefor Micro-,SmallandMediumEnterprises 13
Table5 Suggested Disaggegation ofthe RuralCreditMarket l8
Table6 SoulcesofFormal and InformalLoans,Selected Surveys 19
Table? Terms andConditionsof FormalandNon-FormalFinancial
Intemediaries (I) 28
Table8 TermsandConditionsof FormalandNon-FotnalFinancial
Inteimediaries(II) 29
Table9 BorrowerTransactionsCost, FormalandInformal
Financiallntermediaries 37
Table10 LenderTransactions Cost,FormalandInfomal Financial
lntermediaes 38
Tabl. I I TheFinancialSystemandIts Sub-Systems 4l
!')
Table12 AppropriateStrategiesfor lnstitutional Adjustment
Table13 lnstitutional Developmentfor EffectiveMicrofinance 49
Table14 NCO Characteristics Necessaryfor FinancialIntermediation 50
Table15 A Frameworkfor Evaluating FinancePrograms 53

LIST OF FIGURES

Figure1 The Formal andInformal Sectorsofthe Philippine

FinancialSystem 4
Figure2 Major TypesoflnformalFinance 22

l11
 ANNEXES

Page

6l
lnnovations
Anne\ I Financial in the Philippines
61
caseSludv rheGfameenBank:ProjectDungganon
fil. Replrcaling
""' " AreaProfile 64
J""* r"ul I l ProjectDungganon
Summary ofLoansGranted 6 5
en""" fuUrc 1 2 ProjectDunlganon 66
AnDexTablel 3 TypesofProjectsFinanced ^
Total SavingsGenerated
eon"* futf" f + fio;ect Dungganon' 68
andSelf-HelpGroups
cur" StuOypz ProjectLinkingBanks (SHPIs)
iine* TabteZ l Self-HelpPromolinglnstitr'rtions 'tl
in theLinkageProlecl
LinkageProlect
AnnexTable2 2 Dataon thePhilippine
Moleylender:thecase
C"r" Sttay *l ft't*tking thePrivate 12
of Calabanga Cooperative
Retailers' CreditUnion

Annex2. CaseStudiesofCreditProviders
A. lnformalSector
CooPeratives
NGO
TheGovelnment Agency
TheGuaranleeProvidel
'16
B FormalSector
The Commercial Bank
LandBank
The Lendinglnvestor 8t
LearnedfromtheIndonesian Experlence
Annex3. Lessofls
Aanex4. 84
(Bangladesh)FinancialIndicators'
Ainex Table4 l GtameenBank
Pedbtmanc;lndicators for ThreeACCION
AnnexTable4 2 Selected 3l 85
AiiliatesasofDecember
lnlernatlonal -laqI
for
lndicators Financral
Specialized N@s and
Performance
A$tex 5. Financial 86
NGOS
for Multipurpose -
Evalua(eMacrolevellnformalMarket
Alnex 6. s"".pr"'Jili".srr*t usedlo 89
Performance 90
offindingson Cooperalive CreditUnions(CCUs)
Annex7. S,rrmn"ary 93
Annex8. Summary of Findingson Credit( ooperattves
95
Ar$ex9. Covernment CreditPrograms 100
Bankoflndonesia
Annex10.eunt eutopln , Cooperative
 ACROITYMS

ADB AsianDevelopmentBank
AdMU Ateneo de Manila University
AICP Agricultural Credit Policy Council
BCOD Bureauof CooperativeDevelopment
BAP BankersAssociatioo ofthe Philippines
BSP Banko Sentralry PilipiMs
BTC Borrorter TramactionsCost
CAR CordilleraAdmidsfativeRegion
CDA CooperativeDevelopmedAuthority
CCU CreditCooperative Udon
CDA CooperativeDevelopmentAuthority
DBP Dwelopment Bank ofthe Philippines
DTI D€padmsotofTrade andlrdustry
FAO Food andAgriculture Organizatior
FIES FamilylncomeandExpenditureSurvey
GO GovernmentalOrgarization
GSIS GovemmentServiceInsurarceSystem
GTZ DeutcheCesellschaftfur TechnisheZusammemarbeit
ICM Informal Crcdit Market
IGP IncomeGeneratingProjects
HOA Household-Operated Activities
LBP Landbankofthe Philippines
LTC LenderTransactionsCost
MEDP Micro-EnterpriseDevelopmentProgram
MIND Miqdoro Development
NBFI Non-BankFinanciallnstitution
NEDA NationalEconomicDevelopmentAuthority
NGO Non-GovemmentalOrganization
NSo Natioml StatisticsOffice
PDC Post-datedChecks
PBSP PhilippineBusinessfor SocialProgress
PNB PhilippineNationalBank
PO People'sOrganization
PVO PdvateVolurtary Otganization
ROSCAS Rotating SavingsandCreditAssociations
SHG Self-HelpGroup
SLA SavingsandLoansAssociation
SSS SocialSecuritySystem
5W5 SOCral Weamer)tallons
IIPBRF UniversityofThe PbilippinesBusinessResearchFoundation
TBAC TechnicalBoard for AgriculturalCrcdit
TST-SELA Tulong saTao-Self-Employment Assistanc€Progam

i; asl.t(.'. .
 ExecutiveSummarv

In the pasttwo decades,tlere hasbeena major shift in the thinking, in the approachesand
in what arenow considered"bestpractices"ofcredit deliveryto thepoor, Aom a traditionalapproach
to a "new view" and "fitrancia.lsystemsapproach"to micrcfinanceprograms. Therehasalsobeen
a major policy shift from rcgulation toward financiallibelalization. It is in the context of these
paradigrnandpolicy shiftsthat we situatethis study.

The objeotive of this paper is to presenta brief review of literature on the Philippine
fioancial mark€t, focusing on financial intermediationfor the poor, padiculady by non-formal
financialiNtitutiotrs. Informatiol was gathercdftom secondarysources,itrcludingpublishedand
unpublishedreports,iltemal reports ofinstitutions, and evaluationstudiesofspecific programs.

Amongthe subjectscoveredarethe following: 1) The client system,with insightsfrom past

studiesasto who the poor are,wheretheyarelocated,vrhattheirdedit needsare,wherethey borrow
from, and their savingspattertrs; 2) Govertrmentl€ndingprogams for the poor, includingffedit
programsfor agriculturalhouseholdgald lendingto microelltrepleneurs;3) The supplien ofcredit,
particularly non-formal financial intermediaries whose clients are small farmers,
microentrepreneurs,and other small boffowers; 4) NGOS aod cooperatives as flnancial
intermediaries,includingthe sourcesof funds,lendingoperations, stengthsandweaknesses; 5)
lssuesrelatedto accessofthe poorto financial includinghighrisk,high transactions
services, costs,
the preferences of the poor for bonowingand savingssewices;andthe extentof their decision
makingin the financialprocess;and 6) Trendsin microfinance, includingfactors which have
contributedto greater effectiveness
in lendingto the pool and to institutionalviability and
sustainability.Thesetrendshaveevolvednot onlyin the Philippines, but alsoin otherdeveloping
countries,asa resultofmany hardlessons leamedAom pastprograms.

The ClientSystems

. Thetaditional clientstargettedby intemationaldonors,NGOS,POsandgoverumentbanks

like Land Bank are the "poor", definedas including groupslike smallfarmers,small flshermen,
ruralwome4 andmicroentreprefleurs.The poor in the Philippinesmakeup almostthree-fourthsof
thepopulation, usingminimumfood requirements asar indicator. Theyare
concentratedin the CordilleraAdministrativeRegion(CAR), CagayanValley, the Visayas,Western
andNorthemMindanao.The poorestregionsstill remained thepoorestafterthe passage ofseven
years. Hardly anychangein the geographic concentrationofthe poor canbe seenfrom 1985to
1992.Most ofthe poor areengaged in agricultureandrelatedactivities.

*This repofi was preparedby Dr. Virginia G. Abiad, with the researchassistance
of EdselBeja Jr., Edgar
Joveroand Rommeldel Mundo, all faculty of the Departrnentof Economics,Ateneode Manila Univelsily.
 Ho,sehordsborowt?":q:::j;::T::n*T,:':*:'il:'trJl':;;"fr
iai'zin'r"; "onsumption
i,1":ilh"::T,T;i::H':1':f#il"i'i''iv
-*l':*lm::'::l;f"il1' Oftiose wno sector-
liom? Maitrlylrom the non-formal
j*r*
Where do the poor borrow
"l'"il:#;
:x"J""i;i""il,f,h,rl*t
ffiJi*';"r%
area
in eachseosraphic
;i;'al botrowets

Duerothe oracc:::l:"r:*$
rack :i
::"i"#1131'i;"f:"?JTl:ff,'T#
TTllff"",''
*"'oridarirvgroupsrr)r11tr',"
ij'"'i-nooE
::""J,::m.Iffi'X;*'":"oo;ffi:":,
ql'.i1d."ilillj;'"","jr":"Xj:",tffi::l$11'ni.
"i"?"i"J*"i*oori"", ,".,"'
il,n"''*,'u'
*J'{::F"llffI{ilf
H:1.illil; iy;ugf ri ;;:;#i:11^","
*: :*i1;fgm:i';:::
,'
interestandrequiredno collateral

,:t;:Tb*",H:',ifii1fr;ii:"'n ;:Tlilff :lli"'?;"'

H:'i'J,. r t'::d'le^s"t"$'Jl"tiin"^J"1'1tJ
' andthisissubstantlated-q
Thepoorareableto save :ev'e'

ffi tJj1ffi1:?Jxilt"fifl ;H,:]llH' !:ii illl:i:fr i]'o^"".'.'

"""
LendingProgramsfor thePoor
Government

l'f"H:'tilJ'"'"':'T,n*t*:[#;ff1,1
*.,'..:li1Ji',:ii5H:::
silnfil:*THil*iii#**1**,-+*Hi" po-'l'^:."- ..:,';;;-;;;.;id
'*H:fl".:,,""J,ffi'il;:""-"',iil:'[o,'"il":lx1;j'#:i''lT
instirurionsVariousstuores
povernmenr agencies Many
government

rales
i.onotrn""a"ntt "tpousingmarket

Lendingto Microentrepreneurs

i,"""ff
il:&.i#i;ftF"",-'J$'il'*
li',il'il'$;r',ffi
..-,#"il,,lJiffi
sTltf?ff
,.,""" *'i"'?'Tff
fi'#",;,''fl#"Til;i:*r't
*i*i*'- ""#;
Jnl, ",-11':r:"''i:|L';*:$*qf
"iilii*,o, il:" il;;;;I*o'kingi[:i$:itffi
Loan
capirar X#ffi
Pro]:l",n
ilil
::i:#:31#fi"";
vll
Associationof the Philippines@AP) and the Small and Medium EnterpriseCredit Program of
PhilippineBusinessfor SocialProgress(PBSP).

The Servicesof Non-formal FinancialIntermediaries

It is not the baDking sector, but the nol-formal (iofomal and semi-formal)financial
intemediariesthat areableto give the poor geater accessto loatrs,aswell asdepositfacilities.The
infomal sectoris comprisedofthose mentionedeatlier assourcesofcredit ofthe poor: Paluwagatr
or ROSCAs,self-helpgroups,friendsandrelatives,professionalEotreylenders,inpuVtradecreditors,
farmer-lenders,and others. The semi-fomal financial sector on the otler hand, is madeup of
pawnshops, lendinginvestors,coopentivesand NGOS.

lt is estimatedthat thereare over 18,000cooperatives,

amongthemroughly2,000-3,000
qedit cooperatives,ard another2,000-3,000farmers'cooperativeswhich havesurvivedthe crisis
resultingfrom theiruseasconduitsby the govemment'spastcredit programs. There
in cooperatives,
areabout36,000registered NGOS,850/0 ofwhich arecommunity based.

Informalmarketsareableto mobilizesmalldeposits.Self-help groups,cooperativearedit

unionsand paluwagans have beenfound to be effectivemobilizers
of smallsavings from poor
households,Their success in mobilizingdepositsis dueto lowertransactions
costs, adoptionof
simpleprocedures,group andparticipativedecisionmakingandhomogeneityofthe members.The
lattermeansthe membersbelongto the sameincomerange,havethe sameoccupationor livelihood,
or aregeographicallycloseto eachother.

The financial market in the Philippinesis highly segmented,and the contractsand terms
di$erwith each.Segnentationofmarketsresultsfiom theD?e of clientelecateredto, the degee and
tlpes of financialintermediationsfunctionsundertaken,the major sourceoffunds, and according
to whethertheyopentein linkagewith other marketsor not. The termsandconditionsof different
typesoflendersaredetailedin the report, includingtheir targetclientele, interestrates, rcpayment
schemes, andpenalties.

Variousperformance indicatorshavebeenusedto evaluatemarketsaswell asimtitutions

in the semi-formaland formal sectors. On the institutionallevel, performanceindicatorsused in
studies in the Philippinesinclude indicators of client outreacl! as well as measuresof financial
performance (seefor exampleLlanto, 1994). The latter includesmeasuresof capitaladequacyand
protectior\ ratesofretum andcosts, solvency,ald assetqualily. The resultsofthese measures,
and conclusionsrcgardingthe effectivenessofcooperativesard NGOs asfinancialintermediaries
are discussedshortly.

Microfinanceprogramsshoulda.isobe evaluatedon otherperformancecriteriawhich indicate

1) the outreachofthe dedit ard savingsprograms,e.9.,the numberof clients,the characteristicsof
clients,etc.; 2) thequalityofthe services;andc) measuresonthe extentofparticipationofclients
in decisionmakinq.

viii
lssueson Accessirfthe Poorto FinancialServices

Most smallfalmels, microentepreneu$atrdother smallborrowersare not ableto borrow

ftomba*s,duetoa)thehightraosactionscostofhandlingsmallaccounts;b)theperceivedhigh
risk oflending to theseclientele;and c) the lack of staodardcollateralrequiled by banks. studies
show that bororver traosactionscost is regressiveitr its impact otr bo owers That is, as a
proportion ofloan amount,borower tralsactionscost is greateffor smallborrowers,taxing them
as much as 270% more than mediumaadlarge borrowers. bformal lendersare successi:llyable
to lendto smallborrowelsbecause of the extentto which theyhavebeenableto lowel borrowel, as
well aslenderhansaclions cost

asFinancialIntermediaries
NGOsandCooperatives

It is estimatedthat tiere are about two thousad NGO9 in the aourtry engagedin
developmental activities.Lessthanonefourth of thesedeyeloPmentNGos are involvedin financing
government
livelihoodactivities,of which 300 NGos areparticipantsin vaious credit programsof
agencies. Fourteenareengagedil the Grameen Bankreplicationin the country'

Lessthan300NGos areestimatedto be viableor sustainable.They are sustainablebecause

of: a) a largeresourcebaseacqrmulatedthough the yea$; b) an almostcontinuousflow of donor
fundsAoml-ongestablishedrelationships;andc) effectivecost recoverymeasuresor earningsfrom
theiroperations, services.
e.g.,Iending,training;consulting

Lendingby NGOSis generallysmallin amount'andshoftterm More than90% ofloans

andmaturity pe odsare betweenone-monthand oneyear'
disbursedarefor amountsunderP5,0OO,
However,largerNGOs havehadloansaslargeasP200,000, maintyfor grouplending,but these
makeup lessthanl0% oftotal numberofloansapproved

Loansof NGOs are mainlygrantedfor income'generating projects(IGPS),with smaller

proportionsgralted for providentialandeducational purposes.The most commontypesof activities
i-nnced ure mi"roenterpdse vending,backyardlivestockraising,
activitieslike food processing,
handicrafts (sub-contractiog),lepair shops,cosmetologyanddressmaking'

?0oloof borrowersarewomen. Nominalinterestrateschargedby NGOSrangefrom 12to

30olo.perarulum.In additior\NGOSusuallycollectservicefeesthatmaybe aflat ratelike P20or
a percentage,e.g.,2/o ofthe principalamount Effectiveilterestratesrargefrom 20to 407oper
u,'num,du! io th" co.-on practiceof "front-1oading"interestchargesto the interestamount,and
thefrequentrepayment suchasweeklyor bi-monthlypayments
schedules,

Most NGOShave a built in savingsmobilizationscheme Savingsschemesare of two

general
types:
^
"monthly; compulsoryand periodic savingsby beneficiaries,which may be daily, weekiy or
and "savingscharges"addedto the interestrate,amounting to 2 to 109'"of the loan
amoun[

ix
 Efective Credit and SavingsProgramsfor the poor

The traditionalview on microfinancehasbeenreplacedby the ,,aew,,view and

the financial
systemsapproach.This emphasizes prudentialregulation,savingsmobilization,developmetrtofthe
financial infrastructure, i^titutional viability, apprcpriate Gategies and sustarnable
financial
services.

Thee interrelatedsysternsstrategiesarerequiredfor the developmentof a satrtrgs-drivenand

.
demand-orientedfitrancial system: a) a policy reform strategy,wX"h .rnpt u"l"es
inte.est late
liberalizatio4exchangerate iiberarization,anda regarfiameworkpermittingfinancial
infrastructure
development; b) an institutuiomladjustmentstrategy,whicl focusei on the
expansionof
competitive formal and nonformal finaflciar institutions and their adjustmentto
the different
requireme[ts ofall segmentsof the population;and c) an instrumentali;ovation
srrategy,which
stresses.sound banking tecbdques, including appropriatematurities, interest rues
that cove.
transactlonscost, and effectiverisk managemelt.

Effective programshavebeenzuccessfi.rl in achievingthreeprincipalgoals: to provide

.
servicesto the poor, to attainfinancialself_suficiency,-andto,.u"h lu,g. nimbers. ih" k"y
featuresin prcgams worldwidewhichhavep^rovedto effectivefor lendini, as
.be well asfor savings
mobilization, aredetailedin themaintext ofthis studv.

Recentstudieson cooperatives and NGOs as Iinancialintemediaries(Cordero,1994;

-.
Llanto, Garcia and Callanta,1996, and othdr studies) point to the following
issuesand
recommendations :

1. WhileNGOs havecharacteristics which suitthe requirements for lelding to the poor,

! they are facedwith a numberof constraints,the most importaniof which are: weak institutuional
s capability,subsidydependence,atd resourcecotstraints.

Th". w-eakinstitutioralcapacjtyof many cooperatjves,Ncosto Deliver

., ?. Credit is
attributableto the following constraints;l) Outreachis smalidueto a) lack oflee4l pe$onality
and
o authorityto act asrealfilancial irtermediaries,thuslimiting its capaciiyt6 o6iinovative
1inancial
,r prcductsand to mobilizedeposits; b) lack of an extensiveandvi;ble hmncial
deliverysystem;and
:r c) inabilityto absorbcostof trainingofpotentialclients.2) Viability. Many credit
NGOSarenot
d viable.andsustainable dueto a) theirsmall{inancialbase; and bj the needto improveinternal
financial.policies, systemsandprocedures. _]lResoarce Mobilxiion. CreditNGOSmustraise
slbstantiai.deposits and deweiop.various lnitrumentsfor smallsavers,to staycompetltrvea.ld
ro vtable 4) Supervisoryand regulatoryframeworlr. It is necessaryto bring
creiit NGOs under a
lr supervisoryand regulatoryframework,to minimizeproblemsiike the aisence
of performance
ln standards;the lack ofuniformity, anddilution of standardsof credit evaluation; the lack po.tforio
of
supervision, leadingto poor loanrecovery;anddeterioration of portfolioquality.
 3.smallandevenmedium-sizedNGostendtobeveryleade$hip-dependent,whichcou
threatel its long term survival.

4. Personneltumover is relativelyhigh, resultingfrom a poor remunerationlevels- Despite

give way to family pressuresand economic
their srong comfiIitment, NGO personneftendto
jobs elsewhere
realitiesto;eek better payingandmore secure
to
5. lnadequatestafdevelopment StaffofNGOs areknown for their strong commitment
or eipertisefor developnentwork maybe lacking' particularlyin the
*o*. fforl"*r,ttpetence
co-seoi s-ol1e.ilCfjs. This is due to lack ofresourcesfor training,personnelandmanagement
developmelt.
provide credit and
6. Creditcoopentivesareableto mobilizehugefinancialresources'a:rdto
to- that of formal financial
savings servicesto a large mass base, at a standardcomparable
protection, assetquality,
f,"rJni,i"* ihis is basedo-ncriteria which includes capitaladequacyand
rateofreturn, liquidityandsolvency'
whose developmentmust be
7. Credit cooperativesare viablefinancialintermediaries
stronglysuPported.
flnancial
8. Credit coopentives can grow into strotrg, self-reliant and self-sustaining
emcient managemelt
institutuions, given the proper supervisoryand regulatory environment'
policiesandpractices.

resultingfiom paststudiesarethe following;

Someofthe key recommendations

1)TransformcreditNGOsintofull-fledgedformalfinancialinstitutions,e.g.,privatebank,finance
savingsand loan association or creditcooperative;or alternatively, credit
"i."-". """-"*t inv-estin formal flnancialinstitutions; 2) Build up the equity base of MFIs
N;6;;;;tg.r,ir"
"r 3) Create a financialstabilization
Uvinir.ine .oL capital '"ner&om existingownersandnew investo$;
niJ rr,","Jiif""t theneedsof-financiallydistressedcredit cooperatives.This canbe managed
body;14)createan exlernalsupervisory andregulatorysystem'
li u zu"*tion ot u aulyconstituted
and
;d;;; ;"dt"t"regular examinarionand review of financialpolicies and performance
for this'- its institutionaland
;roor" n.O"ntiuf t"g"lation Althoughthe CDA is a likelycandidate
microfinance as a
ptii.*i"""f expertiieneedsto be improved for thepurpos^e5) Approach
sociallvresponsible buslness, trot as a charityor socialwelfareinstitution;.6) Diversifuloans'
r""*ti ntancial products/servicesaccordingto client demand; 7) Maximize deposit
access
-oUiliutioo oppotn,nities,8j Promotelinkagebankingwith privatebanks; and 9) Increase
""i",ift*
oi for th" poo., thtoughprogramsthatdecrease transactronscost though linkagesandgroup
-
"."dit andadoptionofinnovative programsthat haveprovedeffectivefor grassrootslending' like
lending,
the GrameenBankandothel schemes
 NON-FORMAL FINANCIAL INTERMEDIATION IN TIIE PHILIPPINES :
THE EXPERIENCE AND EMERGENT TRENDS*

1, Introduction

A. A Shiftin ThinkingandApproachto Microfinance

In thepasttwo decades, therehasbeena majorshiftin thethinking,in theapproaches and

in whatarcnow coosidered "bestpractices"of creditdeliveryto thepoor. Therehasalsobeena
major policy shift ftom regulationtowardfimncisl libera.lization.It is within this contextthat
financialintermediariesin theformalandinformalsectors,donoragencies, NGOsandGOs have
to makedeaisions on what altemativeprogramsto pursueard whatstratggies to use,giventhe
objectiveofprovidingfurancial se.vicesto thepoor.It is alsointhecontextoftheseParadigm and
policyshiftsthatwe situatethis study.

In the1970sandearly'80s,agricultural ioanprograms werepushedby international agencies,

aswellasbygovemments ofunderdeY€loped countties,with thehopeaqd intention that availability
for creditfor smallfarmers,at low ofinterest,
rates would allow them to purchase the necessaryfarm
inputs,andthusgradually pullthemoutofthepoYertytrap Thiswasthe season oftargetted qedit,
below-rnarket interestratesanduseofthe ruralbanksas conduits for small farmer credit. Because
of the low ratesat whichbankscouldrediscount fromthe CentlalBanl, incentives to mobilize
savings dieddown.

Development hstitutions,donoragencies andpractitiotrers

haveinareasingly adopteda new
view of qedit and flnance programs, includinga systems
"financial approach" to microflnance
programs, covering micro-credit aswellasmicro-savings programs for thepoor' Thisnewview
replacesthetraditional
approach, in whichprograms channelledcreditto particulareconomicgroups
(e.g.,srnalfarners)with theviewofincreasingitrcomesofthe targetedgroup. Althoughborower-
focusandmechanisms variedwidely,theprograms ofthe oldapproach werecharacterized bythe
followine;

> Credit wastargeted.Clientelegroups were defined,andin someinstances, loaos

were targetedon selectedtypesof activity (dce productioo).
> Creditwascheapatrdbelowma.rketrates..Lendingratesweresubsidized.
> The govemment providedcredit.
> Programswere largescaleandworldwide
> Savingsmobilizationwasneglected.Becauseofthe wide availabilityof cheapdonor
funds,localresource mobilizationwasinadequate. Resources for lendingtherefore
were erternal, ratherthanintemal.
*This repofi was prcparedby Dr. Virginia G. Abiad, with ihe researchassistanceof EdselBeja Jr', Edgar
Joveroand Rommeldel Mundo. all facubyof the Departrnentof Economics,Ateneode Manila University.
 in an
of creditprogramsin manycountriesworldwidehaveresulted
Thedismalexperience
the loLlowlllgpnnclptes:
i "new"view which incorporates
emergingconcensus'
input Finalcia]
of financial services rather thar credit as ar
.iot-",."autionnu'tobeseenasamattelofprovidingservices,ratherthandelivery
Provision

of credit as a ProductioninPut'
i""Jr"t"".Jrn.Offization ibroughsavings Aone-sidedfocuson credit contributes
to unsustainablefinancialinstitutioos'
^Cr"Ji - .i"**"ion
i,."Jr"i", costsandrisk is necessary to increaseaccessfor the poor
of lendi[g should be
tft""fO not be pushedin large amounts The scale
which financiJ institutiorn can maintainprudencein lending
"'ij-r*i^i" "l"t"f ",
and efiicietrcyin loan collection
Avoid subsidized interestrates
qedit programs
Loid targeting of credit on activities,andiuPervised
policy changes
The oeedlor accompanyingmacroeconomicandsectoral

above'thepolicyenvironment.has beentrarsformed from

In addition to the shiftdisoussed
bothin policy andin institutions
Reforms',
o r"n"fui"i a gtoatatiyliUerai'eafinancialsystem ratepolicyreform,reforms
;";:";";il;
" "il;i#er includesinterestpolicyreform.exchange
reforms'
of uanrentry lnstitutional ontheotherhand'
i^ *o*lori iunng".ent andliberalizarion banksuperv-isionandregulation;
ir"i"o"'cJ"o"r s"""k reformwith respectto creditallocation, system
system, andin thePhilippine Depositlnsurance
,iioit, in tft" .ta Uanking

project' Thefirst phasen a preparalory

This studycolstitutes thefirst ofa thjee-phased phase The
otur.. th"-r""onl a policydevelopment phase'tirethirda policyrecommendation
flnancialmarket'
fii;;;;;;;J 'f;il;;i i, tl p,","nt uti"f reviewof literatureon thePhilipPine
" for the poor' Informationanddatarr'r'eregatheredfrom
intermeaiation
;*usin;;
ffi#,i" ;*;;;i;;fing publishedandunp;bfished reports'internalreportsof institutions'and
evaluation studies of specificprograms'
ftom p"tlll*lt:
ln Section2,we discusstheclientsystem,ard provideinsights ":-t: Y:
reedsare' where they borow ftom' andtheir
thepoorarq wheretlrcyarelocated,what their credit
. ih. ^^^, in.h,.tino
;T';'d;,i""r:;;;'"*"c"':ryT"idig-?i:g:T:::P::f
::lil"Jffi *; *o*:ii:.::1*::i:
;' ;;;;;;p;';
ili:ii.fiiil:#;: -' "l^ffil: """1"small
ll I"':1.1:^T,::.:
ntermediarieswhose clients are farlners,
panicularly non-tormal lo-"tu'.. I
lilJi#; ;;; -a ",r"'''l r borrowers rh" dg;l"lt-tlp:: ^:f-.i:i":t-'lj:*tf ::
;iiliil ;*Jil;;* i" '..,'"1 and
1r'-" andihe
urbanrior Y;:*:,1':::':"Ti':ifi:i111
#."JtJ ltcot""i coopetfauves inrermediaries.is
asfinancial
:ilJ."'f'ffi t ::1""+::
ofthe poor to financialservicesThis
access
Section5; Section6 focuseson issuestelatedto
 dsk costsasqc,torsafectiDgaccess,
preferences
ofthe
-- --r""poorfor
-all,tlansacti::s rvr borrown
wvrrvwl,=
g
fugs services;and the extentoftheir de( mfye tJl.1n9
financial
. lsfn process. In Sec,tioq
7,
s.rccesstul
microfnance.programs
including
th"l,i"pt"*ifity, tn"ii out
andthe commonfactorsbehindtheseeffective-a *"tAouti" progrur """n-_J*if#
liiJnUua". u
togr"ute,
:1:"*il_T^:lliT1;-wir!,rrrrale.co.ngiuut"a
*i!€q i:..'T1i1111 rr"rJt."oa,"trJ"iiv?,;ilffi;;,",h:
atrdsustainabirity. r,uu" ;;;
butalsoin otherTlblity
developing
countdes,
asa result of manyhardl"r;"uoru"j';;i'o.J;
i;;i##;:;

L TheClientSvstems

Io underdweloped countrieslikethephilippines,themajorityofthe ruralpopulation,aswell

rr segm€trof ubanhouseholdq havelittleor no accessto fundsfrombanksani theformalsector.
h suchsituation,traditionalinformal,aswell asinnovativesot in tf,i nnt"ia sectorplay a
crucialrole in increasing
accessfo, thepoor. (Figure t shows"_",
the ofthe formaland
loo-formalsectors,rviththelatter madeup ofthJsemi-for.a *a ioforioJ,""torO.
"omponeot!

Ruralaswell asurbanhouseholds.need fundsfor productiveactivityin farming,fishingaad

soall industdes,aswell asfor expemes
like illnessanddearr,in tr," rrour"iroro,ro theextentthat
rhefomal sectorcamotsuficientlvDrovidethis-dueto collaterar rimitaffi iigt.r ri* ort"oarng
to farmersandotherreasons-fewaltemativ.,*; i.d;;;;;;;;;#ffi:'-"

Thetraditional
clienrstargetted
byintemational
donors,NGOs,pOsandgovermentbanks
,.,
like LandBankarethe "poor,,, definedby differentprogramsason"
o, *a" of tfr" fo[o*ing
groups:

l. Small,/marginal
farmers

a. owner-cultivators
b. sharecroppers andtelants famers
c. landlesslaborers
d. shiftingcultivatorsor tribes

2. Smallfishermen

3. RuralWomen

4. lnlabitantsofforestareas

5. Microent.epreleurs
/ smalltrade.s
 _9
.9
2 I
.9
.9 o 3
g E
E .9 :t
uJ -> >,i- Y= !
F !
E
@ =-aEt g
'E o F
ll

J 6 =tQ'

o
z
z
tt b
UJ
z z ,?t E
.zv.z E
c E5 E
e: E
()

o- tD_q; ooo
ul

u-

d'd
--F

IL IIJ
o
a
E
IL
z .9
ci
I O
z E I t
:E
o
z Itl
z o
E E = ; E
!

IL i; o
IJJ
F

d) I!
FY t
.o t O
3
g g
E .q
E G
o F E (.)
 A FAO repo.t (1981)categorizes four broadgroupsofrural peoplein termsofthe ability
ofthe formalrural credit systemto meettheir credit needs. Theseare: Group 1 Thosewho have
viableproductionunits andare relativelybetter placedin the rural economyandwho canprofitably
use the credit becauseof their accessto technologyandotherresources in theruralsystem;
Group2.Thosewho havesma.ll sizedholdingsand can utilize credit profitably ordyif it is associated
with elementsof subsidyto makethe investmentviable; Group 3. Thosewho cannotborrow at all
liom the financial systemand needfinancialresources,without which they cannotundertakeany
productiveactivity andGroup4. Sub-rnarginalandnon-viablefarmersandother rural poor without
aoysizeableresourcesexcepthumanlabor andwho cannotbe gffeativelyinvolvedin anyeconomic
activity within the existingsocio-economicstructue.

Group 4 would be considered the nonviablepoor, to which creditinstitutionsrMouldnot

considerfitendingloansto. Persons inthe Groupl, onthe otherhard,maynot necessitate loans
trom creditinstitutions,astheywould have thet own resources to carry out theil economicactivity.
TheruIal poor in Grcups2 and3 wouldbethe priodtygroupsneedingfinancialsupport.

Thesefour groupswerefurtherclassifiedin theFAO report into ninecategorieswith distinct,

specialfeatures(seeTablel). Exceptfor smallown€r-cultivators, the othertargetgroupslisted in
the tablehaveno sizeableresources,and only subsist Aom earningsfrom their labor. It is generally
perceived that smallfamers'incomescaninarease with accessto goodseedvarietiesandto other
productiveinputs;that rural womenneedwideningofemploymentopportunitiesfor incomeearning;
that iandlessagriculturalworkerscanbe madeviablewith additionalearningoppoftunities in non-
agricuituralactivities;that smallfishermencan expandtheir incomethroughforms of storage,
assistancein marketing andprocessing;thatinhabitants offorestareascancombineselflsubsistence
andsaleofforestproducts.Mostprcgamsaimto increaseaccess
with cultivation to credit for such
purposes.

B. Who areThePoor andWhereareThevLocated?

almostthee-foufths
In thePhiJ.ippines, ofthepopulation
is "poor". Il:'1992,'110Aof the total
populationfell withinthe bottom300loincomebracket(HeIIinandRacelis,1994). Thisandother
poverty
recent indicatorsusethebasicfood requirements
for an average-size Filipinofamilyofsix
asa measure,takingnutiiional needsofthe familyinto account.

Where are the poor located?They are concentrated in particularareas:the Cordillera

AdministrativeRegion(CAR), Cagayan Valey, the Visayas,WestemandNorthernMindanao. The
poorestregionsstilircmained
thepoorestafterthepassage ofsevel years.Hardlyanychangein the
geographicconcentrationofthe poorcanbe seenfrom 1985to 1992. In the 1985survey,thepoor
who belongedto the lowest30o% incomebracketcamefrom basicallythe sameregions:Bicol,the
Visayas,WesternandEastern Mindanao. Usinga measure ofthe evenness ofthe distributionof
poor familiesthroughoutthe variousregionsin the country,MarquezandVirola (1995)conclude
thatthePhilippines showedanimprovemert in thefegionaldistributionofpoor familiesfrom 1985
to 1988.buta slishtdeterioration
from1988to 1991.
 PROGRAMS
OF MICROFINANCE
TARGETCLIENTS
ii1ii6v"". t *""0'"n" tn

ii:':::i: :'ru:,::",,*"
i":lr€r:"[ non-viablebtrt can
;e made

#:$*ff:"'JlJEil' !ir:iil,'l',*m*ru::r
*'
',i:f;:.T*'J:,ff1'!iJ:l#'
€xceptlabour
Nosizeableresourc€s
Sharocroppersandtenants *'
"-:ff
:ffi[il"n"* ;'::;:'i":1*:""
;'J'"11,"#i::
*H5""ili"'ffi,'':fi
iTiliii" i"n""'s""'*"'"t
"""'"' '" "
b"",eejffid,XjX,iJe*f
Shiltlngcultivalors'Pastoral ):"1;:ii,iJi:i,i'ff"".:i*JiJ"l'"i;
l]*" ;f[?lii':f"if;f Tiii{!'fr
" :iffi,lffi 1",,J,:fl::
t'"t"*"'x
?i,f,li,i"1,:[lf I".!,*.v ."t'.t'"n"'

:'g:ll'
::::il'l;:ii":l#fl
3ffiln:l*iil'.'l:11:Hi:T
lilHlB'Ji"ii"i'!li,?i;'"
l?i.:ifi
tor marketing
programs
Needspecialized
of lore$ afeas
9.Inhabitants
:#i';iHl*
3ffifs [?i:Jiil1]:i::f
 As expected,most ofthe poor are locatedin the rural areasofthe country. The poor made
up 71.3% ofthe total rural householdsin 1985,anda muchlower,but still significartlylarge,
60.7%in 1991.Theproportionofpoor and non-poorfamiliesin rural arcaswas50.7Yoand33.6Yo,
in 1985;in 1991,the ratioswete4'7.2 u\d 37.0yo,respectively.
respectively,

Most ofthe poor (tbree out ofevery fout or 76.5yo)ue e[.gagedin agricultureandrelated
aotivities. Of ttre total numberof families classifiedas poor in 19'71,49% were farmer owners,
famer part-owners,farmer tenaots,other farmers,farm laboreq and fishermen(Herrin 1986).
Farmersengaged in palaymadeup thelargestproportion( 34%.)ofthe total.

Ofthetotalnumberoflow incomefamiliesin 1985,32yoof 3,067vteresalary-wage eamers

of wbich. 12.7yowere engagedin agriculturear:d 79.3yoin non-agriculture.For other actMties,
23.5yoof3,061 wercin crop-farmingandgardening,and 10.3%in family subsistenceactivities.

C. Normsfor IdentifvingrhePoor

While natioml surveys of NSO identify the poor though the food tbreshold measure
indicatod above, various credit projects target their beneflciariesusing norms or measureslike
income level, land holding, assetvaluatio!, activity and tumover, and consumptionlevel (FAO,
1981).Thesearediscussed b eflybelow.

a) Income Level. A certainminimumlevel of incomeis used,in relationto the

needs"of thehousehold.
"subsistence

b) Land Holding. Land is the maincapitalassetirr the rural areas. Thus, a minimum
sizeof iandholdingis prescribed asnecessaryto generatean incomesufficientto
level.Householdswith lessthanthe minimum
maintainthe family at the subsistence
areincludedin the target group.

This measuredoesnot applyhoweverto households tlat do not own land,

including sharecroppers,
tenantcultivators,landless
laborers,andothers.

Asset Valuation. Assetsof the householdare valuedand usedas a measureof

wealth.

d) ActivilvandTumover.The natureof theactivityengaged in or to be undertaken by

the potentialbeneficiary.Ifthe expectedreturnsis below a certainlevel, insufficient
for subsistence,thehousehold wouldqua]ifyfor includingin the targetgroup.

Consumption Level. Thisis similarto thefoodthresholdmeasureusedby NSO. lt

is based on the monthlyconsumption of a minimumamountof food calories.
Households whichdo not havethisminimumconsumption levelareincludedin the
targetgroup.
 above'suchasthe fertility
It is recogized that someextatreousfactors affectthe measu'es
potentialcroppingpattems.
of the land, avaiiabilityof irrigation facilities, existingand

D. Whatarethe qedit needsofthe poor?

Householdsbofowtoaugmentresoulcesforproduction,aswellastomeetconsumptio
credit playsa marginalrole in
expensesthat theit own rncomecannol cover' Wlile ionsumption sector is quite
*"i'i.-t Uy tne for.ut financial system(3 6% 1n 1986)' the informal
efficientin meeting
"-"a the consumptionrequiremetrtsof borrowers'

Agabin(1989)pointsout that therelativeimportance ofbonowing-forconzumptionorfor

of income For example'
proar"ilo"n-a-id"tt o'"JJitg a the.type of borrower or their source
farm.householdsOn the otherhand'
io,rrowkg forprodtclion usewas higir amongrice-based
andlandlessagricultural workersbonowedmorefor
io"onuf-tl.O 6o"o*ers, fishinghouseholds
capital'
purpo""s. Market vendorsacquiredloansto financetheir operating
"iirrp,|o,
Dataftomvi.tuaio(1994)showsthatproductionloallsaregenera.llyusedtobuyinputs (53 0%)
proau.t-ioi-ti-t"-1".a,(2? 57oof farmer-respondents)'fertilizer(58 9%) andpesticides
Loansfor irrigation feesandequipment
-Consumption weie availedofby only 6 40loand-1010loofthe farmers'
resoectively. loans,on the otherhandare spenton food (47 8% ofrcspondents)'
ana..ai.mi .*p"nt.t, 212%atrd200%,resPectively
"iJ.uiion
consumption^loans in the 1950sto
A shift in fam'householdloansfrom predoEinantly
'80s ofnew
wasmainlya resultof theavailability
pr"aomin-ity proau"tionloam in the 1970sand
1985) Theruralcredit.history studybyACES(1988)
ir.i."m"f# ts*"y, AgabiqTanchoco,
i"Ji""* i'rt"ii"irn u,jtoriing is not onlyproductionrelated-' but .alsoseasonalFarmProduction
r.uionrot gttilostoansbv 850/o of thedce,farmers survevedand7l% of
;;";;;;il;;rn;joi
it riJe-onion farm"rs. Borrowings by tie farmers tendedto risedu ng themonthsofplanting'
" ii" p"Jt"*ft. f" JuneandJuly,themaincropseason
Jrft for rice- Sub-peaksreflectthe second
for onion' Thisseasonal pattemofbonowingby poor
,"u.on fo, ricearrdtheplantingseason surplusand
i"r."i, *", Uy an earlierstudy(TBAC,lgsl), reveahgthat.farmer
stro.,rn
"rr" in-thestudy'theplanting andgrowing
;r;";;t ; monthlyiattern. For all typesof farmers
theharvestmonths
.""iir'if.i.".y a epril;'w"re defl"it rno'tls whilethesurplusmorthswere
February' thestartof theplantingseasonThe
Oi"t i" i"iyj-ri" rtg"st bono*ingoccuttedduring and
;;;G;;il6; ffcribed in theitudv showedthatthepatternis oppositethat of borrowing
thatit is centered duringtheharvest season'

The ACESstudyconcluded that unlikefarmhouseholds' non-farmhouseholdsborrow

repofted farm
mainly(?0%)for ibodconsumptlonTwentyoneofthe 38 non-farm.respondents plaoting
duringthe
loanswerealsohi-ghest
work'astheirmainsourceof income.consumption
aswellas,the
f"r thestartofthe schooiyear, capitalto do
needfor operating
.""*",
""jobs
theirfarm ")<p**,
competed with meetinghousehold needsfor food'
 MarquezandVirola(1995)indicatethe expenditure behaviourofpoor familieson regularly
consumeditems.Whenincomeis low, food andothernecessities comprisethe majorityof family
expenditures.Poor families,
aswell as the non-poorhavesubstantial expendituresfor alcohoiic
beverages.Expenses on medicalcareandeducationaresubstantial.80oZofthe familiessurveyed
in 1985,1988ard 1991reporledspending on the averageP243,P243,atrdP388,respectively, for
medicalcare;andP382,P3'15andP642,respectively, for education.
-
I HerrinandRacelis(J994)concludethat only 12oZoflow incomefamiliesavailedofcredit
]itnt. A similarconclusion wasobtainedfrom the 1970data. Amotrgthosewho did not bonow,
fr Artasoos for not availingof credit\re.e ; high interestrate (49.4yo),to collatetulto offer (48.6%)
d h.qdensome requirements (46 5olo).Only20.5%of the respondents indicatedthattheydid not
trad to borrow.

E. SourcesofCredit ofthe Poor

Ofpoorhouseholds who borrow,wheredo theysourcetheirborrowings?Mainlyftom the

abrmal sector. The overallimportance ofthe informalsectorin the countryis shownin Table2,
Dd io otherdevelopingcountries,Table3. The former,fiom a surveyofthe Atetreode Manila
tirir-ersity ard SocialWeatherStationsh 1989,indicatesEi!o!, that otrethird ofthe total popuiatior
oCthePhilippines bo(owed; andSecond,thatofthosewho borowed, abouttruajbirelsborrowed
from informallenders. Suryrisingly, borrowingfrom informallenderswasprevalentnot only in
rberuralareas,but alsoin Metro Manila andotherurbanareas,makingup morethan60%of total
borrowersin eachgeographic area.

Although low, middle and high incomegroupsborow from the informalmarket,the

proportionof the poor who borrowfrom the informal is higherthan otherincomegroups,as
hdicatedby Agabinet al. (1989)andSWS-ADMU(1987). Fiveeconomicclasses wereemployed
in classifyingbonowers:d B, C, D, andE. The upperincomeclasseswere categorizedasAB while
themiddle,poor,ard the poorestclasses areclassifiedasC, D andE, respectively.
Amongthe five
classes,70.52%of the total loanswasundertaken by the D andE classes,or P31.678,of which
68.17%wasilfofmal creditor P21.5B.If eachof the two classes is considered
individually,
the D
classhad 47%oftotalloansor P2l.l8B, ofrrhich70%wasinfonnalcreditor P14.748. TheEclass
had23% ot P10.49B,of which65% wasinformalqedit or P6.85B.

to formalcredit, poor households

Dueto the lack of access availof the followingformsof
non-formalfinancialintermediaries,

l. the Paluwagan
or ROSCAS

lt. friends/ relatives

lll. cooperatives
/ cooperative
creditunions

self-helpgroups/ solidadtygroups
9
 I

It

ta

zu
<d
za)
<u-
oo

N stg
.s gx
F.
EEi F
F =s)
=
E< e e L!2
uz o
u.<
OE z
zo ?,t
ox, F
ra) ci ai c.i c 49
6=
I .9
;z o-
th< B_
6n = ?
z 5 .',9;
6E6
:AF
= l6
l6

:=
sE ; = t; :9? P
[i : = i,! -r P t< on vb=o .-s?
E9*
e:H
e;l ?3*
3:5
EEE
gE3 |i!> Ei6e
:*:
d ts.s
o!-:
a E.!
tg 6
 zl c!
<lE
+

-E E
llt
2
-tt,
lll
e. "Eg
z RE. !9 i

o
*c I
o 9a E5 4
I!
;5
N ( ro. ) E E
s g
E
ul
o
t 3 pr$ss= 6A E
o
UJ
o z e, 89b93v iq 3
z I
e: b
5; F
O !JF
3$n$
-L.'5

e ega
z F i ai
lurl
= rg E 5 6e
-t e gE
ut ol!(
;dg
(.t zl ;S: E
<l
ol
!5!P
E E:: ?
;! F:tst
IL
z o: 5<g 6
;t:
g E!.9
=E! E"s ; E 8e-rq; ;E C I
IJJ 6:€ 6- 5 toc;:o
;!t i- ! oholHo);
!Q: oE o) Pi.E6.E.6
o 5- c^ 'E: +!;98
-r9E ::E r *@:*:{, €!q: b
E b9 b;0€ b;, et b q.ei; E ;.3 ;!E: iiE
i!xn 0j x,^no :x on xi<*i:< +.
:5 6.E 6 b 6 E;;J Ei
is l;;i 9; ^ 9i;; :oi hr *o . : o ^ * = ' r * . . . 9 a i i i
a5=il o€?a;o a; i 6
i
s . , - Ei ! F c E F i s F E s.i'Fp F:, 4R.€ "-!
."E;F':€!;-eE€f;
-;.:r.= L;.rs (9
:r.-; o iE 3Ei i: h e -: F !
4>I += I *i;P;*i5
ii5 dH d tr-do-to-i: €€E:Ig
,i,i:39e
 ii. laodlordlenders

lll. traders/inputsuppliers

trader/millerlenders

v farmerlendeG

vi. ProfessionalmoneYlenders
pnvate
The most prevalent source of loans in the informal sector has beer\ trot the
61 2% of the total
moneylenders,as commonly expected'but reldtives and ftiends, making up
loansfrom friends/
i"i"#^f f"_! (ACPC, l9ti8). Loaosfrom relativesmadelp 25.5yowhile
carryno
o"intrUott*u, 35.7%(seeTable4) Most ofthe loansgivenby friendsandrelatives
chancter ofsuch
irr"'i"n. ana colateral is seldomrequired. Reciprocityis offen tlle undedying
loans, with creditgnnted on the imPliedassumptiolthat the lenderat some later datemay requfe
a loar at whichtimethe bonoweris expected to assist'

32 2yL
Merchant- and traderlendersalsowere a major sourceof informal sector loaos'
particuladyfor smallfarmers
Landlordsusedto be ar important sourceofloans in tle rural sector,
ffo**at, G reformprogramfor riceandcom landshassubstantiallyreducedthe incidence
werealsoa significantso,urce of creditin the
.bua "gr*i-1agauin,issi) IDputsuPPliers
oil".ai.iJ
"t"ii r";gelya resit ofibe syltemofthegouemment farmlending program known
iiior, ,ii"*"J
u, I\l"r"erouSs (ACLS,1988) As a resultofthis program, loansin theformoffenilizerand
byfarmers fiom 1973to 1978 This
o"t,i.ial"tuJ""p ."re thanonethirdoftotalloansobtained
orooortion declinedhoweYerto 12-15%in thesucceedingyears

A morercceotsurvey(NEDA 1992)showed thatonly12%ofultra-poorfamilieshadaccess

from?TheNEDAstudyshowsthat380lo of loarsof ultra-poor
to .r"ait. 'frar" *"t thissourced
and 13% from
i"*"n"ra, camefrom friendsand relatives,l8g/ofrom pfivate moneylenders
TheNGosprovided only2 9%ofcreditin urbanareasand1 970 in ruralareas'
;;;;;;d*t.
(R'elampagos,
on ,//ra, informallenders ard Bunda'1988)
et al,1990;Lamberte
Studies
with the major
ioai""tJtt ui botro*ing fiom the informalmarketin urbanareasis alsocommon,
intermediaries being:

i. or ROSCA'
the "palurvagan"

ii. professionalmoneylenders,

iii. creditunions,and
cooperative

iv. input/tradecreditors.

l2
 LENDING PROGRAMS FOR SMAIL AND MEDIUM ENTERPRISES

Institulions Lending Program

LENDING PROGRAMS
BAP Cr.dit GuardntyCorpomtion
&\F Crcdit Cua|anty Corporation
I>Elopment Bank of the Philippines
Tb. LivclihoodCoQomtion
Tlc Livclihood CoQorution
Ndionat Aericultural and FisheryCo'incil
PhilippineNationalBank
PtilippineNaitonalBonk
T€chonolog/andLivclihoodRcsourceC€dlcr
TcchnologysndLivclihood Resourcc
Center
Tcchnolog/andLilclihood Resource
Centcr
1Z T.chnologyandLiv€lihoodRcsourccCenter
FixedAssetLoarPrograrn
WorkingCapitalLoanProgran
Omibus Financing Prostu
Equipment Acqu'snionfor SmallEdlerprcneu. Prcject
FrDchiscandE terpreneurs Dcvclopmenl fo. Project
LivelihoodEnhanc€mcnt forAgriculturalD€velopment Progra-m
OvcE€lsContmctWo*er's Livelihoodfor Agdcultural
D€velopmenl Progam
Pangkbuhayan ns BayanLendingProgran
Aero-indusrdal
T.chnolo$/TransfcrProsrdn
ExportIndustyModemizrrionProgmm
T€chnolo$/UlilizarioFimncingProgram
UrbanLivclihoodFinancingProgram

TNDIREST LENDINGPROCRAM
l. BPIFoundation Inc. Finarcing Assistancc
Linc
Z D€v.lopmeni BankofthePhilippinca IndustdalCuarartccandLodnFund
3. Depanmcnt ofTrad! andInduslr/ TulorgsaTaoNGOMicro"CrcditProjcci ll
4. Dcpdrtftcn!ofTmd€andlndustry TulongsaTaonlGO Micro"Crcdit
Project
II CNGO
to
Borowe's)
5. Llrd Barkof ihcPhilippincs AgricllturalLorn Fund
6. LdndBankoflhePhilippines Counlryside Loa,Furd
7. LardBankoflhcPh'lippincs RegularLcrding to FamersandFisherfolksCoop€radves
8. Philippinc
Busincss for Social
Progrcss smallandMcdiunEntspriscs
9. SmallBusincssGuaranlec andFinatcc SmallEntcQriscFinancingFac'lity
Corporation
10. SocirlSecuritySyst.m Busin€ssRchabililation
Programfor SMES
ll. SocialSccuritySystem FinancingPrograrn
fof Exponc$
12. SocielSecuritySystcm FinarcingPrognmlor PostHafl.sl Faciliticsfor Small
13. SocislSecudty Syslein Farme$andFishdfolkCoopcmtivcs
14. socialSccufitysystcm saPaepapaunlsrd
Kabalikat ngIrdustriya lcnding
15. SocialSccuritySystcm Prcgramfor SmallandMcdiun ScaleIndustries
LivelihoodFinancing
Prograrn
C, CREDITGUARANTEEPROGR,AMS Pow$CercmtionProgamfor SMES
L CuannteeFundfor SmailandMedium
Exton andForeien
2. Philippinc Loan
GuarlnteeCorporarion
ExponandFofcignLoan
3. Philippinc Prcshipnenl Prognm
ExponFinancingClaraDtee
CuaranteeCorpamtion
4. SmallBusiness andFioance
Cuarantee Postshipmcnt
Expon FinaocingGuarantee
Program

5. SmallBusiness andFinance
Gu@ntee

Leae Guar&teeProgram
D. COMBINED LENDING
DIRECTAND INDIRECT R€gularmd Automalic GuaranteeFacility
PROGRAM
l. AyalaFoundation

MicroCreditProgram
 is
In SaDaqlPalay,wheretherewasno forEal financialinstitution in operatioo'the densitylatio one
rrronJyf"ia",p"i teo touseholds (LanberteandBunda,1988) Thetotal combinedresources ofthe
paluwagans in the same study had
Z0 moneliers operatingwas P1.05million in 198? The 20
a total nrembershipof 193out ofthe 191stallsin the public market. This impliesthat all stallholders
in the marketwere membersof the paluwagan

The total rcsourcesmisedby the ten paluwaganssurveyedreachedP7 2 million in 1987 It

wasalsofound out that 28oZofthe samplemembersofthe CooperativeCredit Unions(CCUS)were
alsomembersof a paluwagan. This impliesthat the paluwaganhaspoteotialin mobllizing savings
amongthe non-wealthy

coopentivecreditUnioDs(ccus)arealsoimportantnon-formalintermediariesintheulban
areas'Thecombinedassetsof44NAM\.Escomembersandfourcreditunionsamoultedto
pawnshopsin the
P278.7 million. This was about28 percentof the combinedassetsof all
Philippines. CCUs were a commonsourceof loansfor low to middle incomehouseholds'
particularlyin officesand in public markets (Lamberte,1988) CCUSalso existin manyrural areas'
andhaveshowntheir potentialfor growth andfor servicingsmallborowers

IIl terms of absolutesize,the CCUsas a systemis growingat a fasterrate thaothat of

periodsat the
oawnshopsand the bankingsystem CCUSalsotend to expandin sizeduring crises
ofhighly t.gulatedfinancialinstitutiomsuchasthebankingsystem'
"*p"nr"
Afourthsourceofloa.nsinurbanareasistradecredit'lnstudyingtheMarikinafoofweaf
qedits compris€82 percentofthe salesvalue
industry,LamberteandJose(1988)foundthattrade
oi,ttl Ju.pt" foot manui'acturersand80 percentofthe valueoftheir inputsof materials
"ar
F. What arethe SavingsPattemsofthe Poor?

Shrdiesin savingsbehaviourofthe ruralpoorindicatethatthe majorityofthe poor do save

FIES of
or are capableof savirig(Subidol98l;Lamberteet al 1992) Subidoaxgu€sthat if the
NCSOir,ir"a, tn" ."tufiwould showthatruralhouseholds ln fact,during*te period
aredissavers.
6at_Dls, tie ratio of dissavingto incomeis 18%. But ifthe surveyofthe TechnicalBoardfor
philippines-BusinessResearchFoundation(UP-
Agnculturj credit (TBAC) and university ofthe
propensityto savers
n[F) is used,a savingsis positivefor farminghouseholdsThe average
-4'76yofor annualilcome of P500and2l% for
estimatedat 9.l% anJthis variesfton alow of
annualincomeofPt o,O0o-P who dissave
15,000.Families dlaw downtheir assetholdingwhichare
mainlyin the form ofpalay andcom inventories.Subido(1981)alsopointsout that anotherstudy
ofthe1-AeCandUp-iR1;-indicates an average ruralsavings rangingftom P1,000to P1,662during
the period1976-1978.Most ofthe savings, however,arein phlsicalassets, while flnancialassets
(casi1bankdeposits,etc.) compriseoniya smallpercentage(3 67o)ofthe avemgehousehold'sassets

Anotherstudyryifiucio, 1994)Presents thesavings behaviourofthe poor,asrepresentedby

incomeand
thefirst third decileandthe fourth to tenth decilesof income,usingdataon averagereal
expeldihresofhouseholds. Mrbcio coocludes that thelowerincomegoups (first third)gene.ally
dissavgsupportingthetraditionalaryumenttiat households with verylow incomesdo not or cannot
save.But the dissavingratefor this incomegrouphasbeendeclining,asshownby thefollowing;
il 1985,household realdissaving wasP433;declining in 1988to P75andfurtherdecreasing in
l99l toP2. Thesecond income group doessave.ln 1985,realsavingswas P6,166,
in 1988Pl0,114
andin l99l Pl1,099.

LendingProgramsfor thePoor
3. Government

In spiteof government mechanisms intendedto increasebanklendingto smallborrowers,

suchascreditquotas,guarafltee schemes,subsidized rediscounting
andinterestrateschemes, bank
lendingto smallfarmersandotier low iflcomesectorsdid notincrease significantly. Thishas been
the basis for gove.nment's justificatiol of its involvement
of line andnon-bankgovemment
agencies in runl aredit programs,coveringloansto farm andnon-farmhouseholds.

Armex9lists53goverDment qedit prcgamsadministered

by 17linesagencies
andnon-bank
govemmentinstitutiotrs. They includelendingthe Departmentof Agriculture'sLivelihood
Enlancement for AgriqrlturalDevelopment (LEAD)program;theDepanment ofEnvironmentand
Natural Resoulces(DENR)'SContmctReforcstation Progam atrdItrtegratedSocialForestry
Program;the Officeof the President's Equipment
Acquisition (EASE)
for SmallEnterprises
program;the Department of SocialWelfareand Development (DSWD)'s SeltEmployment
Proglarl theDepartment
Assistance ofTradeandlrdust#s Micro-EnterpseDevelopment Program
(MEDP)andTulongSaTao(TST)program;theDevelopment (DBP)'s
Bankofthe Philippines
ContractFarmingProgram;and Land Bank of the Philippine's LendingProgramto Famers
Cooperatives. At least14ofthe 53programs useNGOs,PVOsandcooperatives asconduitsfor
rheircreditprograms

Severalstudiesdoneby theTecbnical Boardfor AgriculturalCredit(TBAC),Agdcultural

CreditPolicyCouncil(ACPC),andPhihppine Institute
for DevelopmentStudies (PIDS)pointout
theineficiency,lackof comparative advantage of creditprogramsimplemented
andineffectiveness
by non-financial govemment agencies. Many govemnent programs also continueto lendat
subsidizedinterestrates,in spiteofgovemmentpronouncements espousing marketrates.

by government
Credit prognmsimplemented finalcialinstitutionsarethe following(see
Ainex 9):
L LBP wholesalelendingto smallfamers throughcooperativesandrural flnancial
institutions(e g , ruralbanks,privatedevelopment
banks,savingandloan
associations)

groups
2. LBP-GTZ projectto link bankswith self-help

3 PNB specialprogramscateringmainlyto cottagelevel ciientele;

15
 smallfame$ and
4. DBP speciallendingwindowsto assistcooperatives,
and microentrePreneurs;

livelihoodprogramfor SSSmembers;
5 . SSS smallentrepreneur's

o. GSISsmallenfepeneur'slivelihoodprogramfor GSISmembers;

covemmc!-teldi! AsriculturdHaN

Farmlending,measured andoftotal loansgranted

asa shateoftotalvalue-added' by the
ofagicultureto totalformalloansfor
u-tirg ,""i.i, tasi"clinedin th" pastdecadeThesharc yealswas 7o%'
+r.--a;nd l qqo io 1994 averasedonlv 4ol0,Whilethe averagefor the previousfour
ut"it"itv butmoreasaproblem bvinstitutions
of identiflcation
ffJil;H;";;;, "" "izu"at, aswellas the
r""["a i"'""i*f*ral creditofenoughpotentia] low-riskborrowers/^activities'
mecharusm
creditdelivery
a suitable ( worlot'anK'I vvo'
Droblem of devising
(LBP)is themaingovernment-f,nancialinstitutionir|olved
LandBankof thePhilippines formation
Due to
largely therapid
ir maf iil.t f"iJi"g, caniedoutmainiythroughcooperatives increased
trom1986to 1990,-LBP loansto smallfarmersandfishermen
;;;BP il;;;;;;;*es
by 2,622yowithinthefour-year Period
to MicroenterDrises
Lending
B. Government
until the
- govemment
Most lendingprogramsfocusedmainlyon smallfarmersfrom the70's
";as thatcreditprogramsfor microentrePriseswereestablished'
mid-,Ao;.it onlyin thelate-l8os
Development (SMED)Council'
;;r;*t"[trt"r, asiennedby ttresmall andMediumEnterprise
engaged agri-business
n industry, excluding
and/ or services' trading'
coverallbusiness activities
whose
or cotporation'
partnership total amount
assets 1o
*i"il* .i"gf"p.ptl"orship,cooperative'
wiLhrheapproprrateagencres
lessthap50,ooo, andwhichis dulyregistered
Activities(HOA)gl:ve.s someindication ofthe
The 1988Surveyof Household'Operated
relativemagnitudeof mrcroentrepreneurii activityin the countryastheir sol]rcesof fimncing
52,000samplehouseholds nationwide whoselivelihood
Thic (nrvevcoveredapDronmarery
lessthanfive
;:fuL;#;;; riJ'ro"-r. *iiii'i"', tining andq'arryingactivitiesemploving
in whoiesale andretailtradingandmanufacturing whichrvasnot
i*."u"-a ft"ti"ft.lds engaged in at
;"'**iav ."""r"ir"aut""." it surveyshowed that4?.2%of all households wereengaged
" in westertrMindaoao (?0.4%)HOAs
r"^i doe. r,i-*, in MetroManila(13.3%)andhighest
"*
aremostly (almost 7S%)in theagriculture, fisheryandforestrysectors'

availed
surveyed offinancial govemment
assrstancefrom or
Onlyl0 to 20%ol households their
or persons The majorityusedthier.ownfundsfor {inancing
privateien'dinginstitutions
businesses. ofthosewhoborrowed, 68to 8070borrowed aomprivatepersons Thesurveydid
sources(suchasmoneylenders) or non-commercial
not indicatewhetherthesewerecommercial
sources likefriends, andneighbors
relatives
.
"
 Amongthe govemmentleodingprogramsto microenterprises, the largestin scopewas DTI'S
Tulongsa Tao - Self-Employment A,ssistanceProgmm(TST-SELA),launchedin 1987. This
program aimedto a) increaseemplolmert and incomeopportunitiesfor low-incomegroups,
includiog the landless,subsistencefarmelg poor womenandthe unemployed;b) promotionof
amongthe beneflciaries;arrd c) increaseptoductionof goodsandservices
savingsandse)f-reliance
ofthe targetgroup andtherebystimulatethe localeconomy.

TST-SELAtargettedthe ruralpoor with household incomesbelowthepovertythreshhold,

as definedby NEDA who were engagedin microentreprises with P50,000or lessin assets,and
employingnot more than 5 persons.By the first quarterof 1992,loansgrantedby TST-SELA and
its relatedprograms(NGO-MCPl andMEDP-CDF)amounted to P530million,reaching84,077
beneflciaries.Lending to micrentrepreneursunder tiis plogram is carriedout though accredited
NGOS.

Othergovemmentagencies thatimplementlendingprogramsfocusedon microenterprises,

asshownin Table5, a.retheEquipmentAcquisitionfor SmallEnterprises,(Officeofthe President);
the lndustry DevelopmentProgram and the Balikatan sa KabuhayanRefresh(Technologyand
Livel.ihoodResourceCenter); JeepneyBoundaryHulog Program(Development Bank of the
Philippines);Sma.llMarketVendors'Loan (SMVL) Programajldthe Bangkabuhayan ng Bayan
(PhilippineNationalBank); the Kabalikatsa Pagpapaunlad ng Irdustriya (KASAPI) aod SSS
MembersAssistance for the Developmentof Entrepreneurship(MADE) of the SocialSecurity
System.

Mostoftheseprogamsincludetermsmeantto attractmicroentrepreneu.s who arenot able

to accessfrom the formal sector: below-marketinterest rates,long-term repaymentperiods,
guara.ntees loansandsimpleprocessing
for collateral-short anddocumentation requir€meots.Most
do notrequirecoliateral,but insteadbasethelendingdecisionon suchfactorsasthe capacityofthe
firm to grow,to createemployment, andto utilizeindigenous
re$ouces.

A list ofgovemmentandnon-government iendingprograms for micro-,smalland medium

enterprises 6.
is shownin Table Noteworthy among the privatelending schemes aretheFixedAsset
Loan ProgramandWorkingCapitalLoanProgam ofthe Bankers'Association ofthe Philippines
(BAP) andthe Smalland MediumEtrterp se CreditProgramof Philippine Business for Social
Prc$ess(PBSP).TheIinancialassistance underthesespeciallendingprogramsareoftkee types:
a) directloans,with creditprovideddircctlyby the financialinstitututiofl to the boffower; b) iodirect
loans,whichprovideloansthroughotherinstitutionslike banks,cooperatives, NGOsandindustry
associationslandc) creditguarantees providedto banks,acooperatives, and/orprivatevoluntary
organizailons to encourage themto provideloanassistance to smallenterprises.

The issueson accessdiscussed in Section4 applyto microenteryrise credit,aswell asto

agriculturalandothersmallborrowerlending. Similariy, principlesfound to be effectivein running
credit and savingprograms for the poor and theil implications for financialschemesin the
Philippinesprovidesmany iessonswhich financialprogramsdirectedat mic.oenterprises in the
coLntrycanbenefit f'o-n
 of th€ RuralMarket
Suggost€dOisaggregatlon

marginaltarme6,lpland st€adyin6ne sourco.CaPable

drellerg, out-oFschoolYouih, ofg€neraljng som€surptus, and
dislocatedand disenlrandised €n abso6 comPulsory caPltal
build-up andobligalio.s.

Fam-b3sed@p/ivestc6k kising Possess baslcenlreprene!dal

non-fafir t€ding aclivitiese,g. qualliiesandnanagedal skillsto
pettybuY-and-sell,minisan-sa projecls.
in lalgerscalo

Ec.very,
ol loandelivory, shorll.nn Prcducuonor

ot
slpe lsion.Reod.nhtion upgradingoPaElionEof pnvab-
oncredn,
luesandvirlues seclor-lEdcoop!, ElocusingLBP
savingsandcommlnitytEnsrof- lendingPoliclElor poc.dur€s.
3c.€$ lo an"spexbank',
lmol€m.ntanonof Prc16ct Sl|n
Relianc€(PSR),CoDorate Apprcach
Nucleus&lat€ or collecltvecoitiact

nc€kom an epexbanK, a
ullr.Poorby2000. viablesavlngsled
r.ach050,000 cooperative3. ol prcdlcts .nd
PrcmotLon
NGO-GBA . Poolot Forg6 inancialandop€ra{ngbond
€pllcsllonr
200NGosc€nbetalnedfo. betweenandamong2,000

CoregrcupotPhil.Netwo.k
ror ol accessto longtermloans
'lpingth6HardCorePoor asslslance,
lundrnanagemeht,
HILNEI), kag€swlthbankingEoctor,aid

suer Phil pp{^dRuftl cBdll shldy, vor' 1

18
 Table6
SOURCESOF FORMALAND INFORMALLOANS
SELECTEDSURVEYS
(in Percent)

PeriodCovered

1982-83 1983-84 '1986-87 1988

Formal 58.3
Banks 56.9 5.4
NonBanks 3.3 2.1

lnformal 41.7 96.4 100,0 92,5

Landlord 2.6 4.6 11,4

Relatives 9,1 25.5
Friend/Neighbor
Merchant/Traders 13.6 43.2 32.2
Millers 4.2 17,3
Moneylenders 1.7 0,1 8.0
InputDealers/
Storeowners 5.0 31.9 2.4 10.1
RichFarmers
Others 11.2 4.1 9.0

l TOTAL
Credlt
AgncultuGl
Sourcer
100.0
Policy
100.0
Council
100.0 100.0

_l

19
4.These@

within the dualistic financial systemin the country, finarrcialintermediariesin the formal
sector co-exist with those in the informal. The formal sectol consistsof institutions which are
supervised ard regulatedby the BaDkoSental ng Pilipinas@SP), includingbanks,lendinginvestors
uni inrur-"" companies. The informal sector (including a grey areawhich authorslike Ghate
( 1992) callsemi-formal)hasa wide variety of intermediaries,all firnctiodng outsidethe regulatory
L""h of SSp. Theseinformal financialintermediariesincludecooperatives,credit unions,rotating
savingsandoreditassociations (ROSCAs)alsoknownin thePhilippines as"paluwagan", ilnancial
self-hip groups,privatemonelenders ("5-6"), farmerlenders,
traderJenders, tiends, neighborsand
relatives.lsee Figuret, Sectiol2). In thePhilippines, cooperalive creditunions,cooperativ€s and
NGOs are consiJered as semi-formalfinancialintemediariesbecause they are registeredand to a
aertainedent,regulatedby the CooperativesDeveloPmentAuthority (CDA), but in other countries,
theseinstitutions areconsidered part ofthe informalsector'

Theformal,bankingsectorhastraditionallybeenurbanbased(exceptforruralbaoks
in the locationof their bianch network and in the cona€ntration of their depositatrd lendilg
activities. Becauseof the characterof their operations,banksare generallyunableto provide
adequate services
frnancial andotherlow
to marginalsectorslike smallfarmers,microentrepreneurs
in.o^" e.oupr. Savingsdepositfacilitiesfor smallborrowersare alsonegligiblein the formal
sector.
give
It is the non-formal(semi-formaland informal) frnancialintermediadesthat are ableto
greateraccessto loans,as well as depositfacilitiesfor small'low.incomehouseholds Their
itrengths,whichdiff'erentiatethemmarkedlyfrom the formalsector,lie in the followingfeatures:

a) flexibilityof loantransactions,

with borowers,
b) personaldealings

accounts;
crudesystemofmaintaining
c) simpleandsometimes

with othertypesofeconomicactivities;
d) blendingofmoney-lending

and
with customers;
e) informaldealings

secrecyaboutfinanciaidealings
moneylenders,
f) for professional

The setni-formalfinancialsectorin the Philippinesis madeup of pawnshops,lending

and NGOs It is estimated
cooperatives
investors, thatthereareover18,000coope'ahves'among
themroughlyi,000-3,000qedit cooperatives,
andanother2,000-3,000 farmers' which
cooperatives

20
havesurvivedthe "cooperativecrisis", resultingfrom their useascotrduitsby the government'spast
creditprograms.Thereareabout36,000registercd NGOS,85%ofwhicharecommunitybased.

Numerous altemativeshave beenexploredin the county, in which NGOs are involved,

usuallywith supportliom extemalNGOS.Amongthe foreignNGOS,the churchesplay a prominent
role. Siebel(1996)notesthatwhat is rcmarkableandextraordinaryfor the Philippines
is the ease
atwhichNGOSandgovernmentorgarizationswork together. Examplesarethe NGO Microcredit
Projectwith the DepartmentofTrade andIndustry@TI) assistedby the AsianDevelopmertBank
(ADB), and the P(oject Linking Banks and Self-HelpGroupswith Land Bank, assistedby the
GermanTechnicalCooperationAgeocy(GTZ).

Ghatecategorizesinformalfinanceinto four broadtlpes: a) direct but intermittelt letrding

by individualsor institutiotrswith a temporarysurplusof funds;b) lendingby individualsor
institutionsspecializingin lending,whetheron the basisof theirown fundsor of intermediated
funds; c) lendingby lenderswho mainactivityliesin marketsotherthancredit,but who tie credit
transactions in theseothermarkets;andd) groupfinance.Thesefour catego esare
to traosactions
relatedto eachotherin Figure1.

Ghate fl(st distinguishes betweenqedit extendedby entities(whetherindividualor

institutional)to otiherentities; alld credit extendedgilhin entities,or group finance(box 2 and3
in Figure2). Of thosewho lendto otherentities,we candistinglishbetween"intermittent"and
"regular" lenders. Intermittentlendersgrant loans intermittently,althoughnot necessarily
infrequentiy, asChatepointsout, whenevertheyhavea temporarysurpiusoffunds. Familiesof
Filipinoove$eascontractworkerswho receiveremittances andlendperiodically,is anexampleof
this type oflender. Lendingbetweenrelativesandfriendsis alsoarotherinstanceofiDtermittent
lendins.Agabin(1988)pointsout ahatfrom 30 to 60%ofinformalfarmindebtedness wassourced
from friendsandrelatives. As much as 7870ofioans for the smallenterp.ise buslnesssectorwas
sourced ttroughkinshipandfriendship ties(ISSI, 1985);likewise,66%in the undergourdmicro
business enterprises (Gatchalian et al., 1986).
'
Amongregularlenders,we cal distinguish thosewho "tie"lendingto marketingandother
transactrons,andthosewho extend untied credit.
The lendermaybe a supplieroffarm
tied-credit
or may be a buyer,suchas a ricetrader,rice-milleror sugarcane
inputs(fertilizers,pesticides)
processor. Thosewho extenduntiedcreditare o{tenrefered to as "specialist lenders"because
extendingc.editis their majoractivity.Regularlenderssourcetheirfundseitherfrom their own
fundsor fiom borowed funds

ln groupfinance,inte.mediation takesplacebetweenmembers ofthe group,lvith deposits

andloansbeingcarriedout collectively. Creditunions, self-helpgroups,andcredit
paluwaga.ns,
coopelativesareexamples ofthis type.

21
 Figure2

MAJORTYPESOF INFORMALFINANCE

lnformalFinance

CreditextendedbYentities creditextendedwithin
(whetherindividualor entities,or group Iinance
to otherentities
institutional)

lender$
lntermittent Regularlenders

Untiedcredit
(specialistlenders)

Source; Ghal€,1992

22
 B. Segmentation
of Markets

Financial marketsitr the Philippines,asin other underdevelopedcountries,are segnented.

The broadestsegmentsare the formal, semi-formaland info.mal sectors.Within each of these
sectors,there is still substaotialsegmentation.Segmentsexist accordingto the type of clientele
financialintermediariescaterto (commercialand industrialloa.:rs,large agriculturalborrowers,or
small borrowe$ and savers); accordingto the degreeand t)?es of intermediationfunctions
undertaken,accordingto the majorsourceof funds,andaccordilgto whetherthey opefatein
Iinkagewith othermarketsor not. Thesuppliersof qedit in the informal sectormay be fulI finarcial
intermediaries, fllnctioringboth as mobilizersof savingsaswell as lenders, or limitedonly to
lendingfunctions. FuDdsmay be sourcedfrom deposits,membersequity,borowings, grantor
donations.Loansmaybe linkedwith othermarkets,suchasis the caseoftrade qedit ftom input
suppliers,wholesalersand footwearmatrufacturers in Marikina (LamberteandJose,1988).

Small-scaleand subsistence
agriculturesourcetheir loansmostly from informallenders
while commercialagricultureabsorbedmost of the loans€xtendedby the commercialbanking
systemto the agricultumlsector.

Evenifinlormalfinanceis directedtowardsthepooraqdmargioalized individuals,informal

lendersalsosegregatebonowers(seeGhate1992). The highestrisk individualsor the poorestclass
(ClassE), arcthereforelessprefenedby informallenders.
Thisdoesnot meanthatinformallenders
discriminateor crowd-outthe poorestclassfrom credit.Rathel informallendershaveexcellent
informationon creditworthiness thattheyareableto allocateloansaccordingto risk
ofindividuals
and borrowe/scapacityto pay.

The clienteleofcredit unions,creditcooperatives,rotatingsavingsandcreditassociations

are the low-incomegroupscomprised of smallfarmers,marginalfishermen, factoryworkersand
ordinaryemployees.The traditionai moneylende$like traders,millers, landownersandbig farmers
caterto pettytraders,smallentrepreneurs like marketvendors,factoryworkers,employees, poor
consumers andsubsistenceproducers (ftshermen andfarmers).

C. MobilizationofSavingsbv Non-Formal
Financial
Intermediaries

The savingsmobilizationrole ofthe informalsectordepends on the segmeotthat the ICM

of
catersto. Whilethemobilization savings is demonstratedstrongly
in the caseof CCUS andself-
helpgroups,paluwagans,aodothersavi-ngsandlendinggroups,informal moneylenderson the other
hand dependon their o*n savingsandeamings,anddo not generallymobilize savings(Agabin et
al.1989).

ICMswhichmobilizedepositsareableto provideassistance to poor households,whichare

eithernotwillingor unableto deposittheirsmallsavings in a bank. The schemes adoptedby ICMs
varyaccordingto the type ofintermediary, but generally
members havethe incentiveto contribute
regularlysince eachwill be ableto get a larger loanwhen he needsit. An outstanding
featureof

23
 lCMs whichmobilze saviogsis that theyarecomposedof memberswho belongto the sameincome
category or range,have the sameoccupationor livelihood, and are geographicallycloseto each
other. In otherwords,theyarehomogeneous itrdividuals(Agabinet al 1989) Moreover, rcciprocity
is expectedarnongthe loembers.That is, membe$cotrfibute moneyand savewith tie expectation
that they canalsoborrow. If membe$want to borow more, thetrthey haveto cofltributemore
Moreover,loansaregivento membersonly. Also, becauseICMs caterto particulart]?es of clients,
theyareableto segregate the marketmoreeasilythanthe formal market(Ghate1992).This explaitrs
the homogeneity of the clients:marketvendors,tricyledrivers,teachers,etc, and the easeof
processingfinancialtransaotions. Thus, transactions costsis minimized.

Self-helpgroups,CCUsandpaluwaganshavebeenfound to be effectivemobilizersof small

savingsfrom poor households.Jamon(1989)mentionsfour featuresofself-helpgoups that serve
astheirstrongpoints."Thesestrengthsinclude:1) the adoptionof simpleprocedures,2) abilityto
raiseandcolleotsmallsavings,3) groupdecision-making, whichhelpsensure
aad4) homogeneity,
effectivesupervisionandlesserruherabilityto poiitical (FDE,
manipulation" 1994, p 114)

CCUs andpaluwagans arealsoableto successfully mobilizedepositsamonglow-income

eamers,dueto low transactions cost,which in turn is dueto : i) limitedgeographic
minimal area
ofoperation,e.g., within publicmarketsandomces;ard ii) a fairlyhomogenous clientele,e g ,
marketvendors,andemployees).Paluwagan andCCU members savebecause of the expectation
thattheyareableto borrow. Hence,if members wantto bofow more,theytendto savemore

Among the CCU membersin the sample,about50 percentdo not havebad( deposits
comparedto 72 percentof the samplepaluwagmmembers.Among the memberswith bank
deposils,few wereableto borrowfrom a bank

Althoughmoneylenders generallydo not mobilizesavi4gs, relyingon theirown fundsfor

LamberteandBunda(1988)documented
thef lendhgactivities, a casewhetea professionalmoney
lenderwasableto mobilizesavingsby acceptingtimedepositsfor aslow asPl 00 at 80% per annum
Thisaccounts for 70 percentofher loanablefunds.

in FinancialDecisionMaking
D. Participation

ofbonower-members
Theextentofparticipation in decisionmakingin financialtransactions
by.Abiad(1994)for onetypeofnon-formalfinancialintermediary - self-help
hasbeendocumented
groups(SHGs).For anNGO, the degreeofparticipationcanbe seenin a casestudyon the Credit
-savings
and Projectof Mindoro lnstitutefor Development(MIND) preparedby HelvetasSwiss
lor Development
Association andCnoperrtion

TheAbiadstudywasbasedon a surveyof240 financialSHGsin Indonesiaard verifiedfor

by fieldvisitsto SHGSin the country The SHCSweregroupsinvolvedin Project:
thePhilippines
Linking Banksand SelFHeipGroupsin the two counties The studyconchrdes that member
borrowersof SHGshavea highdegreeof participation in financialdecisionmaking The main

24
mechanismfor participationis the regulargroup meeting,typical ofthe structureofmost SHGSin
thePhilippines,
Indonesiaandothercountries.

Bouman(1979)pointsout thatinibrmalfinancialgroupsthat do not haveregularmeetings,

andwhere the organize.insteadcollectsthe contributions,arelikelyto havemoredifficultywith
respectto fraud and embezzlement. In this regard,most(85%)of the SHGSsurveyedcollected
membersavingsand distributedloansduringtheir regulargroupmeetings,heldgenerallyoncea
month. Financia.l
transactions
arcthereforeknownandopento scrutinyby group members,andtrust
rvithinthe SHG is enhanced.

Finarcialrecords,throughrudimentary,
arekeptby most(98%)ofthe SHGs.Transactions
in 650Zofthe groups,with recordsknownor accessible
aretransparent to bothgroupmanagement
andindividualmembers. Therecordsofthe remainiog (35%)SHGSareseenonly by thegroup's
management, thusthesegroupslacktransparency arldperception
ofcontrol overtheirsavilgs.

Otherareasof particrpationincludethe following sanctionsfor lack of savingsdiscipline,

sanctionsfor loan default,the interestrate to be charged,and a.llocation of interestincome.
Regarding the latter,SHGSchargetheirmembers highinterestratesfor loars,lvith 90% of SHGS
chatgjngz4o or l-Jgherper annurqand300lochargingmorethan48%. Sincethesegroupspayzero
interest
onthet membe$'savingsdeposits, thusincurringzerocostoffunds,the interestincomeof
thesegroupsis thereforesubstantial.How is this to dividedamongthe membersofthe group?

In general,the groupdecides.Interestincomeis calculated at the endofeachyearby 62%

ofthe groups,andincomeis distributed in a malrnerdecidedby thegroup. Onethird oftheseSHGS
(34%) allot all of their interestincometo the groupfirnd,while 15% distributethe fundsto the
individualmembers.The remaining5l% allocatea portionofinterestincometo a combination of
thefollowing:to the groupfund,to members, to groupomcers,or to paymentofSHG obligations
or activities.

Regardingloansuperyision andcollection:88%ofthe groupsresponded thattherewasno

needfor loansupervision
because theyknoweachmember well; 58%repliedthat theyspotcheck
occasiom.lly,
and24olothat it wasnot necessary
to check,for theytrustedtheirmembers.

Most loan collectionis doneat groupmeetings,andis thereforetransparent.Thismethod

of collectionalsoservesasan effectivemeansofpeerpressure for timelyrcpayment,sincelailure
to pay a loanaffectsthe magnitude ofsubsequentloansothermembersofthe groupcanavailof.
Most(91%)ofSHGsrequireloaninstalments to bepaiddu ng the regularmontl y groupmeeting,
36oloallow membersto paythroughboardmembers outsidethe regularmeeting;and9% involve
doorstepcollection.

The Helvetascasestudyon MIND's Creditand SavingsProjectrevealssimilarresults

rega.dingparticipation
by borrower-members:

25
On Loan Decisions

In the caseof livelihooil loans, group / peer pressureis very much evident. The Sroup
receivesth6 loan, thensubdividesandpriodtizesit amongeligiblemembers.Thegoup tlen
is r timatelyrcsponsiblefor total repayment.

The mere act of allscltssingandpresentingto the GeneralAssembiythe statusof a member-

borrower, whetherhe/ sheis d€linquentor not, is in a lact pressuleon tle borower. In the
caseof KAMMI, it was the productioncells and corc groupswhich collectivelypressured
individualbonowers.

On Default Penalty Slslc!1

This refersto defaultpenaltiesassessed on bonowersfailing to liquidatehis/herobligations.

Managementtakeoverrecernly|gftnsasSagip'Utangwasenforcedon a borrowerwho failed
to pay his/h€rloan - in part or in full. Theproductioncell tates over50%ofhis farrnlotsof
which the eamingis usedto bail out the mortgagedland. The owner-cultivatorwas then
treated as hired laborer in his farm, The set up rcaminslmtil suchtime that the lot was
rede€med,

On Monitoring ofLoans

The productioncells and/orcoregroupswithin the POsmonitoredthe project.Collectively,

they plessuredindividual beneficiariesto perform the tasksassignedto them and obligated
themto settletheirobligations.

Thesetwo studiesgive us someindicationofthe relativelyhigh degreeofparticipation of

borrower-members in finaocialdecisionsofnon-formal intermediarieslike NGOs and SHGs. In the
formal sector,no suchpafiicipation exists.

E. Contractsand Terms ofDifferent Tvpesoflnstitutions

L TheFinancialInstitutions

Two studies(Domdom,et al., 1996,and Garde,1995) providesomeinsightsinto the

whichprovidefinancialservices
contactsandtermsofinstitutions to the poor. Both studiesprovide
informationbasedon casestudiesofthe followinginstitutions:

1. RuralBank

2. CreditCooperative

3. PrimaryNon-Agricultural Cooperative
Multi-Purpose

Fouodation
4. Bank-Related for Micro-Lending
Program

26
 5. Thrift Bank

6. PdvateCredit arrdGuaranteeCorporation.

7. LandBank

8. LendingInvestor

9. Cooperative

10.NGO

AgeDcy
I I Government

Provider
12.Guarantee

Tables 7 and 8 prodde the detailsfor eachtype of institution, covering: a) the type of
client; b) the loan package/descriptionof lendingprogram;c) sewicedelivery;d) interestrutes;e)
delinquency; f) sourcesoffunds; g) maximumloan amount; h) loan maturity; and i) collateral
requlrement.

The studyofDomdom et. al.includescasestudiesof3 lendersfrom the formal sector:a rural

bank,a thrift ban* and a private credit guaranteecorporation;andof4 informal lenders,including
a multi-purposecooperativga creditcooperative,anNGO anda foundationsetup by a commercial
bank. The lendelshave beenio existencebetween5 to 3 1 yeals. Data oll thesemicro-lendersis
shownin Table5.

the foundationandthe credit guararteecorporation,

Exceptfor two fuiancialintermediaries,
the miqo-ff€dit programs of the other institutions are targetted toward miqoentrepreneurs,
includingmarketvendors,tricycleddvers,cottageiodustlyoperators,andwomenin relocationareas.
Whileloansaregivenfor livelihood andincomege[eratingactivities,consumptionrelatedloansare
not precluded.Onthe otherhand,thebalk-relatedfourdationatrdthe guaranteecorporatioorscredit
programsare aimedtoward NGOs which onJendto smallenterprises.

The formal financial institutions sourcetheir funds for lending from savings and time
deposits(for the rum.laod thrift bank),andftom the financialresourcesofmember-banks(for the
credit guaranteecorporation). The fundsusedby the informal financialintermediariesrarge from
share grants.
capitaJ, dona(ions andinterestincome

The loan characteristics as well as loan processesof the differentlenders(seeTable5)

indicatethe extert to which eachtype oflender is ableto adjustits financialservicesandproducts
to its targetclierftele. Two financialintermedia es-the foundationandthe guaranteecorporation--

21
 F
,b
i 93t
F:EZ
3093
E T€HE
E n9+9
:E1s+
$:-EE* E 3:E;
;E;o8 E dE:AE EE;

EE {E

iaiiEiq'
at-
:E
93 EE
iE
3;:
F IR
E?E 3E
:

9; 9
d
: 9g ls-
3 E *6 gE
E
a g g
€ :e 'H
6
pll
ri L a
ll
8
gE €HEE,9d

e ! ;5 Hs
d
F E
Ij iF ti.d! li Ef i
B
gEE$I
:
f;€
E g;!
;Eli {T lllE n=
il g :
! tc*8
'I
i E E
:
E
= E' 8EEE 1I
lB ;e 3 _g gE$E
I
&
I iE *'*i- *ri*-*i---
t4
i,,---,.1!-
i .i I 62

g
a<
I P" 1
EE
L6
lILl : rE{a E Eedo
E i 5aI I l: !! tE

; i1 I e ]I EE :
2 .s€3
c 3EC
EE;
E
F
+ET.E
eEqg

E r--j--'- i -+_--'-

,$i
3b'

iIl -.,l
t9 I I EE
tE i
IL F I I E; Ei 3
l3 t ll ! U r Esa
E. rE ill ha ilL i e;
];E : EP
Ir€Ei i i :

.--=]:::l rl-.1
EIL
--:-='-
I
rl
E
g
a ilss t
I E E
i$
lq
-o
lfi
La
ti EE
ll ia ;E;
i
,i .i 1.- .l
li E
=a
E [?i ;
!3
ra
L
,a8
:e
I- I I c
li F
 9 EE ! !.8 E":;
f
Ed:9
iti: i;
: a - e! r E
!s i! 9f ? ! i t
i,9; r ! ;
iE
E :: r; i!iEi9 !9 gEFEi}: 3ti

H' E' :;E;;E E!!,!€;i

i Ei*
t!:Ei!
lEtii:
EE
;;:E9iEs
SEeef;!t
a;5

rlE; i 4E 5
it z s; EI }!i i
5;E E !
. i? s ii
::i EJ i E! e
::;;T E
q;
! E.?!
i EF
x'! i ;
,E: ! F!

z 1"
.!-
i
rEc
ii t
I tE;!
E!
rt:9t
E: *
$E.i j iii:"
E ?E f,i!
i:E;r
: t t+ 6 BI
i;*! ! H
! !
ic
$!I
E?E9t
J i } EF i Ei! Ed SrirE
E"e" ; E:n I
E
!!E*=
i $ .#
:Hif " i:iii: cr:ii;E€$
fi!;F;

{ieiE*
isiigg, iE{iiiEE
6
s
;slii
ii d t E
,iqtIa i!i ;ii ?E;F!{{ii
!:giIiEFgE _i
!
i !
,B- .-= {
: t! ii!?! j !,! j:1 a
ci ?i E

firftEarf :ie*saiF
e!iEi{i
E ia T
t f .
ti.elia
9
:s; !: s;E:
:tgEa: Frii!3E: c
i

;El'tEii* !
a5
;'E 3:
t< !.E 3 g! iE5
E E!
t:;
3E ,EEi; rEi * g
:E
E;I Bi gE!i ;rg
."4

+i
;::-;;
.E4 6 !* 3!; H
;::i
ssiFiiii:
c;ie
r 3
t :
!3 I 5
j
j 5 E
.E
g
c
do not exteDdloansdirectlyto miqo-enterprises,but insteadlend to NGOS,cooperatives,voluntary
organizationsand small- and medium-scaleenterpises.Theseborrowers should be engagedil
onlendingto micro-enbepreneurs, andmust showproof of a good qedit record. The amountthat
catrbe borrowed is a maximumofP500,000 for the initial loan. The itrte.estrate chargedranges
from 8 to 16olo.

For financial intermediarieswhich directly leod to low income and small entepreneu$
(creditcooperative,multi-pulposecooperative,NGO, rural bank,tbri{t bank),the following would
be indicatorsofthe extentto whichtheyareableto provideaccess to thesesmallborrowers:

a) loanswhich are smallin size;

b) simplifiedloanprocedures;

c) rapidityofloan approvalandloanrelease;

d) maturityand loanpurposewhichis flexible,andableto meetdivergentneeds;

that areia tun€with theearnings

e) collectionsystems flow ofits clientele;and

D interestratessumcietrtto coverthei ransactions

cost,thedsk rclatedto their
particularclientel,andtheircostoffunds.

Wldletheseindicatorsvaryamongthetypesof directlendersin the sample,theyarein fact

reflectedby the dataon eachlenderin the study. The loansare smallin size,andalthoughthe
maximumloansizemaybe ashighasPl00,000theactualnumberof smallloans(F2,000-P5,000)
is alsolarge.Howevetbecause ofthe systemofrecordkeepingby theselenders,therewasno way
to quantifyand determinethe averageloan sizeandthe most frequentloan sizeganted (the modal
loansize).

Thecollectionsystems, suchasthe dailycollectionsystemfor marketvendors,assures high

repayme[trates,as collection of small payments is timed with the cashinflow of their business
activities.Thelocationofthe NGO or ofthe bankcloserto the clientsis anotherfactorthatshows
increasedaccessibilityby the smallborowers. The NGO for examplehasfield officesin eacharea,
andreceivedweekly paymentsfrom the boffowersin that area. In the two cooperatives,the omce
is locatedwithin walking distance(or a tricycle ride) ofthe bonower's residenceor placeofwork
Loan approvaland releaseis sho.t (within 2-3 daysfor some,within the smeday for others).

Sincetheloandecisionis pusheddo\anto thelowestpossiblelevel,i e. flot centralizedin the

homeoffice,screening andapprovalcanbe done in a period.
shorter The track
borrower's record,
aninterviewby the branchmanageror the credit committee,or a referral fiom a former borrower of
theNGO is sumcientto get a loanapproval, with or withoutcollateral.

30
 level of repaymentis assuredby somelenderstbough the useof mechanisms
like
and joint liability (by the NGO which usesthe Grameenbaok approach)and by
visitsto the end-user.

al insightsinto the cotrtractsandtermsoffinancial intermediadescar be gleaoed

shrdiesof Garde(1995) of diferent credit providersin the formal and non-formal
7 to l2 h the list above).Theseare zummarizedin the matrix (Table 6) atrdare detailed
sardiespresentedin Annex 3. Garde drawsthe following conclusionsfiom thesecase

The credit market is highly segmeoted,and different credit providers confine

themselvesto a particular segmetrt. Segmentslike the "poor" are also highly
the highest-dsksector--smallfalmels. Most
stratified. Only Land Bank addresses
of the credit providerssurveyedfocusedon other segmeotsof the poor, including
wageearners,marketvendors,tricycle drivers,micro- andsmall-scalebusiness).

Havinga clearlydefinedmarketsegmentfacilitatesthe developmetrtof differentloan

packages aacording to the needsandcapabilitiesofeach segment. Loanpackages
may be differentiatedby purpose,tem, intercst rate and other terms.New loan
packages havebeendeveloped, for example,by older cooperativesto counteract
like
constraintson interestrate by regulatoryagencies the former BCOD.

Proximityto the end-usersis a key stratery of the credit providers. This is

accomp)ished by confning themselvesto a paxticularateaofoperatiol or settingup
"brarches"closeto thetargetsegnent. Sqeenin&monitoring and collectionarethus
facilitated.

Creativeapproaches havebeeqdeveloped.Because
to loansecurities/collateral the
poor lack sufficientcollateral, other mechanisms
for assuringrepalment areused,
such as chattelmortgages, promissorynotes,co-maker,group guarantees, joint
liabilityby theBoard,etc.

Lenderstelld to ircreasethe effectiveinterestrate through other charges,like feesfor

applicatior! sewice,plocessing,supewisionandinsurance.

Developinga cross-zubsidy scheme.Institutionalviabilityis maintained by lending

a major portion portfolio
of the lender's to lower-dsk sectors,iII ordet that ils
earningscansubsidizethe lendingoperationsfor high risk groupslike farmers. An
exampleofthis is Land Bank'scommercialoperations,which subsidizesits letrding
programsto theriskyagradalsector-

3l
 F. InterestRates-Repa)'rnent.and Other Terms

Rates
lnteresl

Contraryto tie popularbeliefthat CCUs chargelower lendingratesthaobanks,CCUS

averageeffectivelendingrate were foundto approximatethat of banks (Lambertg 1988). CCUS
generally collect interesth advanceand additionalchargesafe lwied to cover servicefees,loan
redemptioninsuranceand collectionohargescausingthe effectiveioterestrate to shootup. These
other chargesaccountfor halfofthe effectiveinterestrate. The other halfis nominalinterestrate.

Lambede and Bunda (1988) looked into the lending mtes of moneylenders. One
moneylender hada highlendirgratebut onlyhada net spreadof 1.5percent.Two moneylenders
incurred losseswhile four enjoyed substantialprofit margins. Lambete reasonsthat the two
moneylenders who sufferedlosseswere actuallynew marketentrantsandthat their lossesshouldbe
considered assunk costs. Thesesunkcostsare inaulred so that they canestablishtheir presencein
themarket.Marketlenderswho enjoyedthe largestspreadhadthe largestnumberofclients.

Basedon inte.viewswith moneylenders, it was found out that moneylendersdo not check
the interestrate being charged by other moneylenders becauset}Iey that
believe there is excess
demandfor creditin the community.The wide variationof lendingratesacrossmoneylenders
togetherwith the lack of ability of boffowersto shift from onemoneylenderto atrotheris itrdicative
ofa severely fragmenred capitalmarket.

The effectiveinterestratechargedin tradecreditwasinvestigated by LamberteandJose

(1988). The effectiveinterestrateon trade qedit is brokendown into explicita.ndimplicitrates.
The explicitrateis madeup of the discountrateon post-dated checks(PDCS)andplain hterest rate.
Theimplicitinterestrate o ginatesout of the price differentialof inputs or of outputsin the caseof
"tie-in"credita(angement.

Supplierswho ale solelysupplyinginputschargeimplicit interestratesthat aretwice aslarge

asthosechargedby wholesaler-traders who axealsoinput suppliers.The latter chargelower implicit
rates becauseby usually having marketing contacts with big exporlers or retailers, they arc
guamnteed a steadysupplyoffootwearthough tie-in ar.argements.The former canexercisesome
degreeofpricing powerbecause footwearmanufacturers bo.row fom themsincethe manufacturers'
wo.king capitalis tied up with tradecreditsextended to customers.For both however,implicit
interestratesaccountfor more than40 percentofthe efective interestrate.

The effectiveinterestrate is first determinedby input zuppliersandthetrthe rclative shares

of implicitandexplicitinterestratesareadjusted.Input suppiiers werealsodiscovered practising
bet\'/eensmallandlargefirms. Smallfirms arechargedhigherratesthat largefirms,
discrimination
sincePDCsissuedby largefirmsareconsidered lessrisky,hencethe lowerimplicitinterestrate.

3Z
 tend to qeate financial practicesthat are tailored to fit the cash flow of
explainswhy paluwagansmay take differentforms--basedon the ftequencyof
daily, weekly, bi-monthlyandmonthly.

CCUswheremembersreceivetheir salarveverv l5th and30th ofeach

repaymentsare scheduledduring l-hesedays. Loa.nswith longer matudtiesare only
who havese@rityoftenure. Market-basedCCUs,on the other hand,usea daily-
schemebecausetheir membershavea high cashtumover. Loan maturitiesnormallydo
200 days.

paymetrtschemesare usedby moneylenders:steadyscheme,revoMng schemeand

ihe balikbayan scheme. Under the steadysoheme,there is no set matudty date lor a loan but
borrowers arerequiredto payinterestotrtheprincipalmonthly.Thebonoweris Aeeto decidehow
to paytheprincipal.
ln therevolvingscheme, thematudtydat€andintercstpaymetrts aresetandare
collectedin advance. BonowersareAeeto select whetherto paytheprincipal on eithera daily,
weeklyor bi-monthlybasis.UndertheBalikbayan scheme,boffovr'ers
effectivelyhavea creditline
withthemoneylender. Thelinelimitis notpre-established.Availments fromthelinearepayable,
ard pnncipal,wrtfunonedayor oneweek. Revolvmgcreditwasthemostpopulartt?e of
havitrgaccounted for at least33 percentandat most83percentofloansgrantedby various

CODE-NGO estimatesthat there are abouttwo thousandNGOSin the country engagedin

&rdopmedal activities.Lessthanonefourth ofthese deyelopmentNGOs are involvedin financing
lldihood activities.Ofthesq 300NGOSareparticipantsin variouscredit programsofgovemment
.geocies. Fourteenare engagedin the GrameenBank rcplicationiq the country.

Based on a NATCCO surveyof 826 coopentivesin 1992, about tbree fourthsof

cooperativesare community-based, while the rest areimtitutionally based. By fulction, abouthalf
(46.9%)aremulti-purpose cooperatives; 3'1.3yoareqedit cooperatives.However,manyofthe
mrlti-purposeaooperativesarealsoengaged in lending,thusit is estimatedthat at leastthreefourths
ofthe cooperativesare functioningassemi-formalfinancialintermediaries.

A. Sou.cesoffunds ard sustainability

Cordero(1994)pointsout that NGO sustainability is a mainconcern,for whiletheyare

socially oriented,they are also fund driven. The majority ofNGOs edst through a) gants or soft
loanq andb) cost-freeresourcessuchasfree omce space,voluoteerworkers or officers. The study
funherconcludesthat the existenceofmanyNGOsis precarious, ascheapor cost-freefund sources

33
may dry up, andthe commitmentof NGO workers'with little or IIo compersationmay give way
to thercalitiesoftheir survival.

Lessthan 300 NGOSareestimated to be yiableor zustainable.Thosethat arcsustainable

areso becauseof: a) large resourcebaseaccumulatedthroughthe years; b) an almostcontinuous
flow ofdonor fundsfrom long establishedrelationships;andc) effectivecostrecoverymeasuresor
earniflgsfrom thek operations,including,lending,training, andconsultingsewices.

B. Lendingandsavingsmobilization

Lending by NGOs is generallysmallin amount,and short term. More than 900loofloans

disbursedarefor amountsutrderP5,000,andmatudty periodsarebetweenone-monthandoneyear.
(Codero, 1994). However,largerNGOshavehadloansaslargeasP200,000, mainlyfor group
lending,but thesemakeup lessthan107ooftotal numberofloarNapprov€d.

Loans of NGOSare mainlygra.nted for income-generatingprojects(lGPs),with small

proportionsganted for providentialandeduoationalpurposes.The most commontypesofactivities
financedare microenterpriseaotivitieslike food processing,vending,baclryardlivestock raising,
s (sub-conractiog),
haadicraft rcpairshops,cosmetology anddressmaking.

709loofborrowersarcwome& basedon the samestudy. Nominalinterestrateschargedby

NGOSrangeAom 12%to 300loper annum.In addition,NGOsusuallycollectservicefeesthatmay
ofthepdncipalamount.Effectiveinterestratesrange
e.C.,2yo
beaflatratelikeP20or apercerxage,
ftom 20 to 40yoper amum,dueto the commonpracticeof [front-loading"
interestcharges to the
interestamount,and due to the ftequentrepaymentschedules,suchas weekly or bi-monthly
payments.

Most NGOs havea built in savingsmobilizationscheme.Savingsschemes are of two

generaltypes: compulsoryandperiodicsavingsby beneficiaries, whichmay be daily,weeklyor
monthly; and"savingcharyes"addedto the interestratq amountingto 2 to 10% of the loan arnount.

BankBukopinin Indonesia
BankOwnedby Cooperatives:
C. A Commercial

Bank Bukopinin Indonesia is a commercial

bankownedby cooperatives.Established in
1970by 8 coopemtiveorganizations,itwas ownedby 676cooperativeorgarizatioffin 1992..All
it has19branches,
overIndonesia, 40 sub-branchesand50 cashofficesin theruralareas.

The organizational structureof Bank Bukopinconsistsof3 levels. BB Headquarters at

nationallevel,BB branchat the provinciallevel, the KUDS andthe kelompoks (groups)at the level
of the memberhouseholds or the levelof rural cooperatives.Policymattersandcontrolsofthe
ongoingprogramsin the provincesarecaried out at the Headquaxfe$;the provinciallevelis in
chargeof dailyoperations andexpansion ofthe programto newKUDs andkelompoks;fom this
providesupportandcontrol servicesto the participatingKLiDs andkelompoks.
level,field assistants

34
 aod credit servicesare provided within the shucture of the village unit
icipantsareorganizedin groups,kelompoksof 50 to 100personswho all become
KUD

haverapidlygown. Thenumberofkelompoksgrew from 94 in 1985to 1,254

ip grew from 13,660to 89,93 in the sarneperiod. This showsao averagegrofih
thekelompoksard 426% for membershipper year. In temls of assets,the growth
year, while liabilities and reseryationat 182y6per year. Duritrg that period, the
havemadeprofit.

detailson Baok Bukopin'sobjectives,organizationstruoture,procedurcs,termsand

seeAnnex 10.

Most smallfarmers,microetrtrepreneun, andothersmallbofowers in the Philippines, as

in otherunderdeveloped countries,arcnot ableto bonow ftom banks. Thisis due mainly
perceivedhighrisk of lendingto theseclientele,aswell as to the hightransactions cost
in handlingthe smallaccounts of suchboFol,ers. Alother factoris lack ofthe standard
requiredby
-Faclically bank,i.e. land and otherfixed assets.As a result,smallborrowersare
shutoutftomformalsectorloanr,andthusrelyalmostexclusively ontheinformalcredit
marKer.

1 High fusk of SmallBorowers

Themainrisk a lenderfacesin grantinga long is that of loan default. Two typesof defaults
mayalise:ong wherethe boffower is not ableto paythe loaq althoughhe vr'atrtsto; the other,the
bonowercanpay,but is unwilling to do so. An exampleof the first t]?e is a failed rice clop dueto
a typhoon.

Poor peopleare generallyconsideredashigh-riskclientsby financialintermediaries.Their

businessactivities are small, with limited tum-over alrd small profit margins.They are often
undercapitalized. Small farmersability to pay their loansdependon their harvest,which depend
on manyextemalfactorslike thewealier andtheworld anddomesticpricesofthe commoditiesthey
grow. Fuihermo(e, p.oductivity in agricultureis low, and production ofpoor people is often
concentratedon low value crops. The debtcapacityoflow incomehouseholdsis low, their assets
arefew, andthey havelittle or no securityto offer.

The exte[t to which lendersare ableto reducerisk determineshow successfulit canbe in

lendingto small farmers,smalltraders,andothersectorsofthe poor. Somesuccessful \raysto
rcducedsk haveproved effectivein wideningthe marketfor loansfor smallborrowers,both from
the formal andthe bformal sectols. This is discussedfurther in Section5.

Costof SmallLoans
2. High Transactions

Transactions costsare incuned by both the lender(LTC) andby the boffower @TC). The
mode of operation of banks often lead to high BTC, which poor people may find prohibitive
Borowers often have to travel long dista.nces,probablyseveraltimes, to the qedit institution
located in the poblacioD. Eachvisit takeslollg travelling andwailing time in the bank The time
spentcouldhavebeenspeDton fatming or trading aotivity, andthusit hasan oppoftunity cost. The
l;a[ applicafis haveto seekassistatrcefor numerouscomplicatedforms, andto pay fees,including
possibly,bribes.All theseaddup to highBTC whendealingwith theformalsector'

StudieshaveshownthatBTC is regessivein its imPaoton bono\xers (Abiad, 1988;Cuevas

andGraham,1984). Thatis, asa proportionofloan amount,BTC is greaterfor smallbonowers,
taxing them as much as 21oyo more tha! m€dium and large borrowers. Informal lendersare
ableto lendto smallborowersbecause
successfully ofthe extentto whichtheyhavebeenableto
lower BTC. One studyindicatesthat BTC of bonowing fiom a bankis five time greaterthan
bonowingAom a financialSelf-HelpGroup(SHG) in the informalmarket(seeTable 9). For distant
communities, BTC can be as much as 39 timeslower for SHG loanscomparedto bank loans
(Abiad,1994),

Lendertransactionscosts,ontheotherhand,arethoseassociated with evaluating,disbursing

andcollectingloans,aswell asofmobilizingsavingsandotherfunds. SinceLTC asa percentage
of loan amountilglgasrs the smalle!the loan amountis, banksthereforeprefer to lend to larger
clientsratherthanto smallerclients(Table10)

Lendingpro$amsthathavebeensuccessful in providingcreditto the poor havebeenthose

whichhave,throughinnovativeschemes, beensuccessfulin reducingtransactions costs,aswell as
hasalsobeena majorfactorin
risk. The provisionof altemativeformsofcollateralsubstitutes
creditaccessofthe poor.
increasing

B. OtherFactorsAffectingAccess

ofBanksin UrbanAreas
Concentration
Geographic

Sixty percentofFilipinoslive in the rural areas(NSO 1990),but banksandtheirbranches

areclusteredh Metro Manilaaadotherurbanareas The numberofbatrks pe. total municipalityand
city per region,or the densityratio,is highestin Metro Manila(99.2%in 1994) EvenCentral
Tagalog(R.egion 3) andSouthem Tagalog(Region4), whicharecontiguous to lvletroManila'were
low in bankdensifywhencomparedto theManla 4 3yoar\d3.syo,respectivelyfor the samepe od
Theregions with thelowestdensityratiowereRegion8 (0 6%),CAR (0.9%),Region9 (1 1%)and
Region5 and12 (1.4% each).

.16
 TableI

BORROWER TRANSACTIONSCOST
FORMALAND INFORMALFINANCIAL
INTERMEDIARIES

Type of BTC
Fin'llnst.
(P) (P)

BANKS 159 .044

NBFIs '76 .020

SHGs "31 .009

Tablet0

LENDER COSTr
TRANSACTIONS
AND
FORMAL INFORMAL INTERDIARIES
FINANCIAL

LTC ITC PerPgso LTCPerLoanor

P6r DepositAccount
(P000)

LTCFORLENDING

BANKS: '1,213,000 .107 4,486

NBFIs 250,540 .'164 442
SHGS 28 ,010 3.52

LTC FORDEPOSITI\4OBILIZATION

BANKS: 532,000 0.082 219.42

NBFIs 82,040 0.164 422.24
SHGs 467 0.07

37
 Declinein FormalSectorLendingto Agiculture

The removalof credit targetingand crcdit subsidyas a lending/loan policy,i.e. sPecial

agricultural credits and the like, has resulted,in general,to a declirlein the percentageshareof
agdculturalloans.Lim and Esguena(1996) showthat the shareofagdcultural credit to total loans
granted by commercialbaoks, savingsbanks,private developmentbanks,rural banks and stock
savingsandloansassociations hasdeclined.Commercial bankloansto agriculturedecreased from
7.36% to 6.17yoa..dto 1.37in 1984,1988and 1993,respectively. Privatedwelopment bank
lendingto agriculturefor the sarnetbreeyearsalso declined-l 5 29%, 14.73/o, 70 93Yorespectlvely

While mral bank lendingto farmersdeclinedfiom 1984to 1988(75 91% eJ,rd' Zl73%,
respectively),it increasedto 27.83yoin 1993. Likewise,an increasing treod in agri loaN was
observedfor two typesofbanks : savings banks and stooksavingsand loan associations: from
O.48yo,O.56yoar..dO.'tlo/ofor 1984,1988and 1993,respectively, for savingsbanks,andftom
10.06%,2l13yo and27.83Yo,respectively, for the samethree yearsfor stock SLAS Overall,
however, formalseatorlendingto farmersdeclined:8 3%, 6 65% ar,d'2 08yofor the samethf,ee
years,for all institutionscombined.

Moreover,Lim ard Esgue.ra(1996)arguethatthefall in the shareofagri loansis because

ofa shiftofresourcesawayfrom nual areasto urbanareaswheletheretumarehigher,aswell as
a shiftawayfrom agricultu.alloansto othersectors

ProgramDid Not lncreaseLoansto SmallBorrowers

Guarantee

FDE (1994)comparedvariousguarantee (regular)loanprogramsand

and non-guarantee
thati
concluded

1 Guaranteeprogramsdid not effectivelyreducelendingcost. The Processing

inqeasedthe manhours
requirements neededto servicethe loaqs,which according
to Abilaypushedthe averagecostper pesoloanto P 0.11.

2. Cuamntee schemesdidnot significantly improvethe amountofcredit to agriculture.

Io fact the proportionof agriculturalloansto total loansfell from ninepercentin
1981to 7.9percent in 1986.

3. The guaranteeprogramdid not increaseaccessto smallbol.owers,as iltended

loans.A total of7l.3 percentofthe guaranteed
Banksconthuesto preferlarge-size
tundsin 1986werein thePl.0-5.0millionrange"(FDE, 1994,p. 114).

Linkageswith the Fomal CreditMarkets

Thenewviewofrural financeincludestheutilizationofnonbankinstitutionssuchasNGOS
Startingtromthe administration
ascreditchannels. Aquino,NGOs,PVOshave
offormerPresident

i8
 aschannelsof credit in the rural areas.

semi-formallenders accessbank credit, wfuch are in tum relent to small rural

For example,the Land Bark ofthe Philippines(LBP) utilizes cooperativesandNGOs
channels.LBP wholesalesthe loaosto thesechannelswhich retail the loansto member
borrowers. Moneylenderslikewisebonow part of their loanablefunds from rural flnancial
institutioN for retail creditto smallfarmerbollowers. NGOs,PVOs and credit cooperatives
ascreditcotrduits.Llanto(1993)attributesthisto (i) grassroots
exhibited.capability rctworks;and
(ii) peerpressure within the organizatior4
resultingin decreased transactions
costs,moreemcient
bonowerscreening and higherloan The
repayments. link with the formal creditmarketallowsthese
institutionsto utrdertakecreditandsavingsactivitiesfor its membe$at thesametim€.

Llantoconcludesthat theseinformallenders'greaterflexibilityandcomparativeadvantage
canb€ hamessed by havinga wideranddeeperlinkagewith theformalcreditmarket.According
to theADB (1990)studywhichreviewed agricultumlcreditin thePhilippines,thefollowingfactors
mayhelprealizea wider anddeeperlinkagebetweentheinformalandformalsectors:

> breakrngdownbaffi'ersto entrym tie ruralfnancialmarkets

> weakeningthemonopolypowersof someinformallendersby iocreasing outlets
> extending loar
variegated terms,
> andincleasinetheamount resources
of{inancial available
to theinformalsector

C. PreferredSourcesofCredit andSavingsServices

donefrom 1954to 1982indicatethatfarmer-creditors

Most studieg bonowedmainly from
informalsources,exceptduriry the pe od ofthe Masagana 99 programin the mid 1970s.Thiscan
be interpretedas eithera preferencefor non-formalboffowing,or as a reflectionof their lack of
access to formalsources.

In the TBAC SmallFarm Indebtedness Survey(1986),tronborowelsfiom the fomal

financial systemsaid that not bonowing was their preference.The surveyresults show that this
preferencewas not due to lack of accessto any credit system.This zurprisingrevelationwas
corroborated by a NEDA studyin 1986,whichindicated that 52.5percentof ruralfamiliesdo not
wishto borrow. A key reasonto nonborrowingis thefactthat 94.2percentofthose who havenever
borrowed preferredinterestratesbelow the existingfomal credit programs and ofmost informal
lenders.

Anotherstudy(Abiad,1994)indicatesthatthepreferedsourceofloansofself-helpgroup
(SHG)menbers(55%) is the SHGratherthanthebank. The mainreasonsgiven for this preference
to the group; andb) the easeofavailmentAom the
were: a) the interestincomewhichaccrues
srouD.
39
 The samestudy showsthat the SHG is alsothe preferreddepositoryofmember'ssavings,
indicatedby two thirds oftotal respondents.The reasonsfor this preferenceinclude : a) a senseof
dutytowardstheir goup; b) tbe acceptanceof smallsavingsamoudsby the SHG; andc) the savings
in time and transportatiotr cost.

7. EffectiveCredit and SavingsProgramsfor the Poor

A. Current/EvolvingApproaehgslqMierollalee

The "new" view was presentedin SectionI vis a vis the traditionalview on microfinance.
Anotherapproacbwhichhasbeengainingwider acceptance in utrderdeveloped countries, is known
systems"
asthe "financial approach (Siebel,1996). This is not differcntfrom the "new"view,but
is a refinementof that approach. It emphasizes prudential regulation, savingsmobilization,
developmert of the financial infrastructure, institutional viability, appropriate strategiesand
sustainablednancialservices.Underthis approach,threeintenelatedsystemsstrategiesarerequired
for the development ofa savings-driven anddemand-oriented financialsystem(seeTable1l):

a) a policy reformstrategy.Emphasizes intelestrate liberalizationto allow for profitable

lending and .eal retums on savings;exchangerate liberalizationpermittitrgmarket
prices;and a legal frameworkpermittingfinancialinfrastructuredevelopment;with
all thesecoordinated with realsectorpolicyreforms;

b) adiustment
aninstitutional strategv.Focuseson the expansionofcompetitiveformal
and nonformal financial institutionsand their adjustmeflt
to the different
requirements of the population;
of all segments

c) irulovationstrateg],.Stresses
an instrumental soundbankingtechniques, including
appropriatematurities,ioterestratesthat cover transactioncosts,andeffectiverisk
management

Dependingon the situationin the are4 therearefour alternative strategies

ofinstitutional
adjustmentthat can effectively cor$ributeto financial viability and sustainability
and contributeto
access
increased by smallborrowersandsavers.Thesearepresented in columnl ofTable 12.Each
stategyrequiresa prerequisite conditionfor lhe strategyto be effective(column2). Examples of
financialinstitutionsthat havezuccessfully adaptedeachstmtegy, {iom diferentunderdeveloped
countriesincluding in the Philippines
are listedirl column 3.

Dependingon rvhetherthe conditionsin column2 are met, the four majorinstitutional

adjustment listedin Tablel0 offerstrategicentrypoints
strategies (Siebel,1996):
fo. intervention

L lnstitutiond adaptatiol (or d.rrngrdding)ofbanksto thelocalenvironment. Barks can

beassistedin adaptingto the microfinancemarketin termsoftheir financialservicestructure,their
 Table 1l

THE FINANCIALSYSTEMAND ITSSUB-SYTEMS

Policyenvircnment (l) Thetotalsystem

(ii) Thepolicyframework
(iii) Thelegalframework
Thesuoervisorv
framework
environment
lnstitutional (vl Theinstitutionalinfrastructure:
- Theformalfinancial sector
- Thesemiformal tinancial
sector
- Theinformal financialsector
lnstrumental
€nvironment (vi) Financial
products
(vii) Procedures
andservices
Tefmsandconditions
of contracts
Ilrarket
environment ix) CLrstomers
vs. beneficiades

lntervention
entrypoints (x) Financialsystemstrategies

Siebel,1996
corporateculturg their intemal busiressandproductpolicy, their bankprocedures,their termsand
conditions,risk management,andmanpowerandtraining system.

2. Institutional Enharcement (or upgrqding) of nonformal (informal and semiformal)

financial institutions. There are two pdncipal approachesto achievethis One is organizational
development within the framework of their customarylegal forq the other is promoting the
transition of an institutioo to a higher-orderlegal form. The two approachesmay be directedat
primary or secondaryorganizations.

3. Institutional linkages betweenformal and nonformal financial ircIinjl,ior[s qinkage

banking). Ljtr](.agebar*Jngis a strategythat aimsto combinethe bestofformal andinformalfinance
through a) institutioDal linkage betweer self-help gloups (SHGS) and banks; and b) financial
linkages betweensaviogsartdcredit. Institutionallirkages betweenbanksad SHGSmay move
though an evolutionarysequenceofthree stages:a) indilect linkage to b) direct linkageswith the
ultimatestepofmakiDgthe smallbonowerbankableandgMng him c) directaccess to banking
services,if so needed. Basedon pilot project expedence, initially in lndolesia,then in the
Philippines,Thailand,Nigeria, Zimbabwe,and eventually,in Vietmm and other countries. ln the
Philippines,the linkageprojectis jointly cardedout by Land Bank and the GermanTechnical
Cooperation Agency(GTZ).

Tablel2
ADDroDriateStratesiesof Institutiona Adiustment
Strategy Conditions Examples

Adapting ibrmal Effectiveformalinstitutions BN, BDB,BAAC,NMDB

financialinstitutions exist Planters
Dev'tBank
Enhancingnonformal Effectivenonformal
financialiNtitutions institutionsexist
-Enhancing informal Eff'ectiveinformal BankMBM
fiflancialinstitutions institutionsexist NumerousNGOs
--Enhancing semi-fo.mal Effectivesemiformal Coopor NGObanks
financialinstitutions institutionsexist

Linking forma]and Both effectiveformal and VariousLirkageprojectsin

nonformalfinancial nonformalinstitutions exist Asian(includingthe
institutions Philippines)
andAfrica

Creatingnewinstitulions Absenceof effectiveformal GrameelBark

or nonformalinstitutions \BA in Vietnam
CBsin Nigeria
LandBankin the
Philippines
Note:
BAAC Bar i for A8ricultur€andAgricult ral Cooperaiives,Thailand(r govemmentouned agrjc ltLrralb,nk)

42
 Bek MaIa BoehaMrrga, Bali (theftrst NGO baDkin Indonesa)
B3!k DagangBali (a aprivatelyownedcornm€rcialbankin ldonesia)
BaDkRakyatIndonesia(thelargeslrurat-agriculturalBankin Indonesi4goverflient owned,operating
6 a cornmercialbe)t
commrnity ban16,ovrcd by seif-helpgroupsandindividuals,Nigeria
&aneen Bank,Bsngladesh(a self-helpgouP-basedber*, mixedoBnership); rcplicadonof Gmneen
Batrkhasbeendoneln
nun€rouscount-ies,includingthePhilippin€s.ProjectDungganonh Neg.os Occidenlalis a,1

NMDB NorthemMindanaoD€velopmentBank (ap.ivate thrift b * h the Philippines)

VBA VietnemBad( for Agricultu€ (a goverrmefi-ownedagriculturalbstik in Viehaln
PDB PlsnteF DevelopmentBank(s privatedevelopment,rccentlytransformedinto a oommercialbank).

4. Institutionalinnov^tior.(or inJrastuctval innovation),arcalirLg

newinstitutions.This
is
strategy apprcpdate wherever no suitable exist
institutions or when existinginstitutionscannot
beadjusted to suitlocalrequirements.

Thestrategies mentionedabovearenot universally ard the appropriateness

applicable, of
woulddepend
each andcondition,
on loca.lcircumstanees whichneedto becarefully assessed.The
are
mainconditions listedin column
2 oftheabovetable.

from Programs
B. Lea.ning ThatWork
andInstitutions

Wh.ilethereareprogramsandinstitutionsthathavefailedh providingfinancialservices
for
poor
thetargetted sectors, thercare alsomarysuccess which
stories others,particularlyNGOS and
canleamfom. Evenmoreimponadis thefactthat manymicrofinarcemodelshave
cooperatives,
exhibiteda highlevelof replicqbility.

Microfinance
of Successful
l. Replicability Schemes

It hasbeenfound that in spiteof ethdc andculturaldifferences,effectivemicroflnance

schemes suchas thosedeveloped in Bangladesh (Grameen Bank), Latin America(ACCION
program)andotherunderdeveloped regions havebeen replicatedin othercountries,
successfully
with appropriate adjustmentsfor culturalandsocialdifferences.Thisreplicabilityofmicrocredit
schemes hasbeendocumeoted by the MicrocreditSummer Draft Declaration(1996), andis
evidenced by thefollowingreplication programs
of efi'ective :

L Grameen Trust hasfundedprojectstart-ups

in 19countriesin Asi4 Africa,
ard Latifl America

hasdeveloped
International
2.Opportunity paxtne$in 26 countries.
52 microlending

hasgrownto over68 programsin 32 counties

3.Thevillagebalking movement
 4. The ACCION network now reaches277,000 clients in 13 Latin American countries
and in the U.S.

5.The Women's World Banking Network has 45 affiliates in 37 countries arcund the
world.

6.The credit union movementin Burkina Faso has created 325 wometr's associations
that in 3 yearshavemade26,000loans.

7.The Canadian qedit union rao'rementDevelopment Intemationql Desiardin has

microcredit partnersin 14 developingcoufltrieswith a total loan Portfolio of US 1 6 1
million.

8. Project Linking Banksand Self-HelpGroupsaqdother linkagebankingprograms

havebeenspriad to severalcountriesin Asia andare being consideredin several
counrriesin Africa.

2. OutreachandWelfareEffectsofEffectivePrograms

It hasalsobeendocumentedby this samestudythat successfulmicrofinanceprogramsare

ableto reachlargenumbersofvery poorpeople:

L BangladeshRural Credit AdvancementCommittee(BRAC) servicesone million

familieswith credit;

2. FINCA cur€ntly has 15 aftiliateprogramsin 14 countries,reaching64,000

borrowers;

3. Freedomfrom Hunger's"Creditwith Educationprogramis now deliveredby 14

NGOsandcommunity-based to 20,000clientsin 8 countries'
financialinstitutions

Thereis also evidencethat microfinanceprogramsare ableto improYethe income/ welfale

of poor people' For example,CatholicReliefService(CRS)showedincreases in incomesof 380
villagebankborrowersin El Salvador, with weeklyincomeincreases 14570'
averagitrg

Variousmicro studies,aswell assamplesurveys,havealsoconfirmedthe positiveimpact

ofGrameenBankin increasing incomesandassetowtrelship. Hashemi,for example,reportsa 1988
hadcodributedto nrakingmemberhouseholdincomes430lohigherthan contlol
shrdy that crrameen
groupincomes.This creditprograrnalsohelpedirrease assets,savingsandnet worth ofhouseholds
Ey iromoting a shift from land-basedactivitiesto nol_traditionaleconomicactivities,the world
Sani (tSgSi"on"ludes that the GrarneenBank strategypromotesproductivityincreasesand
employment generationin the ruralecolomy
 Hashemi'sstudy further concludesthat Grameenis a program a) that hasbeenextremely
successfulin reachingtle poor; b) in ensuringthat the poor do actuallyrepay; c) in increasing
incomeandeconomicwdfare ofthe poor; andd) in proving that progams for the poor canactually
be financiallyviable, andin the long run, eveneconomicallysustainable

MicrocreditPrograms
3. FactorsBehind Successful

Approachesto microfinanc€varyfrom prcgnm to prograr! but manyofthose that havebeen

successful (MicrocreditSummerDraft Declaration
sharethe following characteristics ,1996):

L they demonstratepartioipatoryqualitiescharacteristicof peoplesorganizations;

2. fiaditionalformsofsecudtysuchascollateralarereplacedby a systemofcollective
responsibilitywithina groupofpeers:

3. interestrateshigheloughto covercostofoperations.

savingsin additionto theirlendingprograms

4. encouraging

5. ownershipofthe financialinstitution;

6. targeti[gthe very poor;targetingwomen;

for reviewingandapprovingloanapplications;
7. simpleprocedures

8. quickdisbursement loans(3 mos.to oneyear);

of small,short-term

followingsuccessful
9, incentiveofaccessto largerloansimmediately repayment
of
borrower'sfirst loan;

participation
10.coDmitmentto, andtrainingfor democratic in decisionmakingby
all thoseinvolvedasborrowers

11. accuratemanagement and informationsystems,activelyused to make decisions;

providingfor accountability
ofmanagementperfomanceanduseoffunds.

12.a culture,structure,capacityandoperatingsystemthatcansupportsustainec
deliveryto a significalt andgrowingnumberof poor clients

Credit aloneis not suffcientfor pove.lyalleviatio[ Many programsaxeawarethat,in

orderfor theverypoorto buildincome,assets andlivelihoodin a sustainable
way,theyneedaccess
to: marketinformationand commercial linkages;appropriate technologyand methodoiogies to
improveproductivity; know how andbargaining powerfor equipmentandsupplies;healthand
socialsecuritysystemslappropriatemanagement expertisefor individualandcollectiveenterpises.
 Two of the successfulmicrofinanceprogramsare the GrarneenBank, which originatedin
Banglades\and the Bank Bukopin or cooperativebaok of Indonesia Thesetwo casestudiesarc
below.
now brieflydiscussed

for InstitutionsandProgramsin thePhilippines

C. Imolications

Basedon the "new"view andthe "financialsysterns"approach,microcreditandmic.osavings

programshavebeensetup afld implemetrtedin variouscount es by variousagenciesandfinancial
institutions. The move to thesenew approacheshasbeenmotivatedby the negativercsults that
plaguedearliercredit programs. lvhat are the principlesbasedon this approachthat have worked
in the "success"storiesthat havebeendocumentedin Latin America,Asia ard A.ftica?

ofFinancialServiceDelivervto thePoor
l. Prinoiples

a. FeaturesofEff'eotiveCreditDelivery

Effeativeprogramshave beenzuccessful in acheivingthree principalgoals:to provide

servicesto the poor, to attain finalcial self sufficiency,andto reachlargenumbers.However,not
all microlinanceprogramshavesuccessfully attainedtheseobjectivesof equityandsustainability
What arethe key featuresin the programsworldwide that haveprovedto be effective? Berenbach
andGuznan(1994)citethe following,with specificreferenca to grouplendingschemes, but which
have general applicabilityto most micro-credit programs.

Clientpopulation,Groupmembersmusthaveanongoingproductiveactivity (faming, small

anabilityto conducttheirproposedbusiness.
a.ndmusthavedemonstrated
trading,microenterprise)

Grcupsetf-formation,Groupsareresponsiblefor selectingthet own membersandleaders,

andmayreceive6eld orientationfrom the fleld extensionworkers. What is vital is the self-selection
feature,sincegroupmemberssharecollectiveresponsibility.Groupsare small(3-10 members
Onlyonememberofa farnilyparticipates h the samegroup

Decentrqlizedoperations.Progam staffoperatewithin the community,marketplaceor shop,

reachingtheborrowersa1thek placeofwork. This strategyreducesborrowerstansactions cost and
overcomescultural barriers that inhibit microentrepreneu$from approachingfomal banks By
being where the bonowers are, the extensionagentsbecomefamiliar with group members,know
local businessconditiorNatrdother eventsthat may influenceborrower'sloan performance.

Appropriate loan sizesand terms. Group membersdecidehow much eachmemberoeeds,

thensumis approvedby the institutionandlent to the group asa whole. Loan amountsbegin small,
andpaybackperiodsare short. Loan terms are adjustedto fit the economicactivitiesandtimidg of
eamingofthe borrowers.Paymentsfor marketvendorsare scheduleddaily, for farmers, according
to harvesttime.
 InterestRatesand ServiceFees..Thereal chargeto borrowels shoulditrcludeir1terestrates,
service fees andimplicit costsof compulsorysavings. Revenueofpeer group lendersshouldbe
sufficientto cover their operatingcostsandto prevetrtdecapitalizationoftheir loan funds.

Sinple l@n applicotionandr.tpid review. Simplgwell-designedforms, visits to workplaces

andqualifiedstaf contributeto effectiveapplicationandreview process.When groupsare largely
amongmembers. The grcup approvesthe
illiterate, loan decisionsare basedol oral assessmetrts
loar requests. The experienceshowsthat the pedod canbe not longer than 7 daysfor first time
loans,and one dayfor tepeatloa.rN.

On-timepat tent requirements.Grol'l,pdevelopsincentivesand sanctionsto facilitatetime

repayment. Groups membersare responsiblefor collecting loans. No memberis eligible for
additionalcredit until the whole group hasrepaidits loan. Subsequentloansaremadeimmediately
andin larger amouDtsfor grcupsthat rcPayon time.

Linking credit to srvings qnd otherrtnancial servlces. Group providesnot only loansbut
also a safeandaccessiblesavingsfacility for its members,

Trqining qnd orgqnizqtion building. Provision of training as well as on-site technical

assistalceimprovesthe groupsexistingmanagement andadministuative tecbniques.

b. EffectiveSavingsPrinciples

The financialsystems approach to microfinancerecognizes that savingsareasimportanta

service for the poor as uedit, and that savingsmobilization is crucial in buildingself-sufrcient
financialinstitutions.Justasthereareprovenprinciples for lendingto the poor (aslistedabove),
therearealso principles
for savingsthat have emerged ftom experi€ncesin variouscountries. These
are the following(Oteroard Rhyne,1994):

l. The most widelydesiredsavingsinstruments

offer: safety, convenience,
ready
to moneyanda positiveretum
access

2. More peoplewanta goodplaceto save,thanwant loans. Thus, savingssemcescan

thar canlendingprogmms.
reach deeperin a community

3. The opportunityto saveshouldnot be limitedto thosewho bonow.

4. Lendingto micro-borrowerscanbe financedto a signiicant extentby savingsftom

providedsavingssewicesare designedaccordingto customer
the samecommunities,
needs.

5. A voluntarysavilgsinstrument(suchas a passbooksavings)with Aee accessto

thanforms of compulsorysavings,andhas
depositsbettermeetssaver'srequirements
the potentialto raisemuchlargeramountsoffunds
 2. InstitutionalDevelopment

Institutiomldevelopment hasemergedasa key factor influencingthe performatrceofNGOs

and POs that implementmicro-qedit and miqo-savings programs. Using a synthesisof 25
organizationalcasesin developingcountries,EdgcombandCawley(1994) suggestedsomecorcepts
that canserveasa guide to effectiveNGO / PO programs. Theseare summarizedin Table 13 and
discussedbrieflybelow.

Institutionaldevelopmentis a complexcotrceptbecausethe life ofan organizationis alsoa

oomplex process.The matrix in Table I I abovewas createdas an organizingtool to analyzean
organization,and embodiestwo notiotrs

a\ Components,Institutionaldevelopmentimpliesa processofachieviog effectiveness

io at least four distinct, but relat€dideas: vision, capacity,resourcecapabilityand
Iinkage.

b) Stages,Adaptingto changein asthe organizatiotrgoesfrom the developmentsage,

to the susainabilitystage,to the €xpansionstage

Therearestumblingblocksat eachstage.In the organizational stage,theseinoludea cdsis

methodological
in leadership, problems,resourcescarcity.ln the sustaimbilitystage,on theother
hand, a dropin repaymentrates,donor-ddventemptations,staf costs,orgaoizationalblockagesand
computerization. The stumblingblocksin the expansionstageincludea crisisin vision,newtoles
versusoid roles,andinappropriateresourcemobilization.

Table 14 lays out seven characteristicsthat NGOS require for effective financial
intermedition.

ofNon-FormalMa.ketsandInstitutions
3. EvaluationofPerformance

Variousperformance indicatorshavebeenusedto evaluatemarketsaswell asinstitutions

in the semi-formaland formal sectors. Some are measuresof macro-level informal market
performance (seeAnnex6 for someexamples)which may includea membershipindex,a sexindex,
the averageinterestratescharged,recoveryrate andper capitashareto savingsratio (Chorvdhury,
1993).

On the institutiooalLevel,periormanceindicatorsusedio studiesrn the Euhppines rnclude

indicatorsof client outreacl; aswell asmeasuresof financialperformance(seefor exampleLlanto,
1994).The latterincludethe measureslistedbelow:

48
 Table 13

SECTOR;A FRAMEWORK
NAL DEVELOPMENTFoRTHE EFFEcTIVEMICROFINANGE

IOPMENT Start{p, d6 EXPANSION

S€reup,hsljtu-

tution.dv.nces toMrd efil- ihgeashg clrentsanruorged

ciencyandtinancialviabiriiy.

tdganlzlion'5 abililyto
i ro develo! qsreN and 10
eclir andtr.ln slatt K€yl5clo6 aE
dgafizalional 3tructure,inlomallon
sysrem3,p€rson.el pollcles.
sl.ff

abillty
r€souRcEsAno€anlzatlon's to
ise,flanase,andaccountlor suttici€nl
lo coverexpens.3.Keyfaclors
llnd{ais ng pollciesand p€ctlc.s,
budgeiingand tin..cal Projecl-

The abilityto developend

T,IKAGES
ntalnproductiv. wllh
rejatLon3hips
ev3ntorganlzatlom,Key tactoBare
enlrelatlonspeernefworks,in.
ationaPDo and donorPanneB.

E.L,andJamescawloyin oteoand Rhymo,1994

Source:Edg@mb,

49
 Table 14

NGO CHARACTERISTICSNECESSARYFORFINANCIAL INTERMEDIATION

characteristics Expansion-LedApproach

andboard
Covernance Theimpofiance ofan active,well-informedboardwith fnancialexpertise
becomes moreof a Priority
Private-sectorindividualsplaya decisiverole in obtainingresources
and
settingthe visionfor the organization.
Boardsassume additionalrisksby h€lpinggainaccess to comrnercial
moneyandinvestingin theorganization.

Clientpopulation Main emphasis is on scalingup the sizeoflhe Program

Focusis on reachingtensofthousands or moremicroentelpreneurs
Borrowersaredefinedas"cli€nts"

Sourcesofcapital Fundingfiom grants,so{l loans,andbankloansh bl€nded,moving

towardbonowingonly from banks

Methodology for delivering Usenethodsthaihavebeenfine-tuned

financialservices
Specialize only
in financials€rv;ces
Do not exPerim€nl.
Operalemanythousands a month.
oftransactions
Developingsavingsinstruments becomes very important,

Self-sufficiency/ Attainingoperational andfinancialself_sufficiency a

financialslandlng
becomes
rcqujrement.
Transaction coslsdecrease dueto incr€ased
ellciencyandscale
This is a key issuefor NGOSthatwantto conlinueexpansion

Financialnanagement EffectivefinmcialanalysisandmorecompleteMIS becomea priority.

Financialprojeclions ar€moresophisticated
intoprogramimplementation.
Financialanalysisis int€grated

Personneystaffdevelopment Technicaiexpertiseinfinancialareasincreas€s
Slaffgrowsrapidly;moreemphasis is placedon trainingthestafl
Areai ofemphasis areclientrelationship,portfoliomanagemeni,
planning,andinsijlutionaldevelopment

S trtrc( Otcro,199+.

50
a. To measurecapitaadequacyaodprotection;

l. Capital rutio

2. Reservesto loalls Ratio

3. Debt to equity ratio

4. Loan loss allowanceto loansoutstandingratio

b. To measureratesofrctum andcosts

L ,Rateof teturnon assets

2. Rateofretumonloans

3. Net earnilgson assets

4. Interestincomellom loajNto operatingincom€mtio

5. lnterestincome
fiom investments
to totalincomeratio

ratio
6. Otherincometo totalincome

7. Net Operatingresultsafrer reseffesto totalsharccapital

8. Totalopemting
expenses
to totalincomeratio

c. To measure
liquidity:

1.Liquidreserve
ratio

2. Loansto assets
ratio

3-Loansto savings
andshare
capitalmtio

4. CBI to totaldeposits
andborrowings
ratio

5l
 d. To measure
solvency

l. Bo.rowingsto depositratio

2. Solvencyratio

e. To measureassetquality

l. Assetquality

Microfnanceprogramsshouldbe evaluatedon both financialperfomance,usioghaditiooal

ratios, andon otherperformanascriteria suchas :-a) the outreachof the qedit andsavings
fina.ncial
prograr4e.g.,the numberofclients, the aharactedsticsofclients, etc; b) the quality ofthe services;
andc) measures on the extentofparticipation ofclients in decisionmaking. Theseare summarized
in Table 15, a framework for evaluatingfinatce programs. Testedevaluationmethods,principles
andmeasures aredosumented in varioussources,includingIADB (1993), IPC (no date), andRhyne
(1994), andarepresented below:

a. FinancialAnalysis

The primary indicator of overall efticiency,viability and sustainability

for delivering
financialservicesis the strengh
frnancial ofthe institution.
Ar insdtution
is financially
soundand
sustainablewhen it generatessumcientincometo cover operationsandflnancialcosts,atrdto
mainrainthe realvalueofits equitybase.

IndicatorsWill Varv AccordingTo TheTvpeofFinancialInstitution

The performanceof a financial institution is generallymeasuredas a seriesof ratios of

incomeandexpenses to income-generating assets. But depending otr th€ type ofinstitution,the
allocationandcalculation ofincome and expenses, as well as the definitionof "performingassets
will vary (IADB, 1993). A summaryofthe fwo approachesto calculatitrgfinancialperformance
indicato$ accordingto whetherthe institution is a) a specializedflnatrcialinstitution;or b) a multi-
purposeinstitutionwith a credit programis shownin the tablebelow;

The IADB paperspointsout that the viability of a financialinstitution dependson the ability
to generateenoughincomefrom performingassetsto cover all the operationsandfinancialcostsof
The financialratiosthusmeasure
the organization. the institution'sperfomancein thoseterms.
 Table 15

A FRAMEWORK
FOREVALUATING
FINANCEPROGRAMS

relationship
Theclient-service
1. Outreach
a. Numberofclients; penetration
rnarket indicators
b. Characteristics gende(loqation,
ofclients: income status,
sectorofenterprise
2. Qualjty of seruice,
alternatjves
to pay
a. Markettesl willingness
b. Clienttransactionscosts:convenienceandtimeuness
c. Service termsrp ce,loansizes,malu ty,collateral,
accessto deposits,
eligibility
requirements
3. Enlarging
client's options;
decision-making howtheservice
fitsintotheclient's
financial consumption
managementprocess-liquidity, smoothing investment

hE!!!!!e!3l!13!i!iq
1. Financial of service
self-sufficienry
2. Financialconditionof institution
or abiliiyto breakeven
a. Profitability
quality
b. Portfolio
c. Liquidity
d. Capiialadequacy
strength
3. Institutional andcontext

Source:OteroandRhyne,1994.
 Different Finarcial Indicatorsfor Diferent of Institutions
Type of Itrstitution Base lncome Operating Financial Imputed
Cost Cost Capital
Cost
Deposilt!.ldngFI Performhg lncone derived A[ administrative, Total costof Irdlation*
ftom perfo.ndng fimds (equiry+ sofl
Non-deposit-iakingFI andloanloss loans)tess

fillancialcost
lessimputed

Mdti-purpose Loan Ircomederived Dir€ct persornel, Total costof Inllation*

Institution Pordolio ftomlending % oiadmin costs fhds @orfolio"l
with CreditProgam activities. andloanloss 2)less
prollslon fnancial

: IADB (1993)
Source

ManyNGOs,however,areinvolvedin variousactivitiesgenerating incomeandincurring

costsu(elatedto its qedit operations.Thus, themeasures of performance
financial for suchmulti-
purposeNGOShasto be adjusted to takethisinto consideration.
Thetableaboveandanexample
in Annex5 showhowthis canbecaffiedout.

Standard thefinancialperformance
ratiosusedfor assessing
financial ofnon-formalfinancial
3,F Thesearegenerally
arethoselistedin Section
intermediaries knownandusedby credit-granting
NGOS,andwill notbediscussed here.

Productivitv
b. AralyzingOperational

The operationalproductivityis measured by ratioswhichcomparethe numberof loans

to theletrdingoperation.Someproductivityindicato$that
graltedto thenumberof staffdedicated
canbeusedto measure theefticiencyofprogram operationsare:

L Input data:

a. WeightedAverageNumberofCredit Oficers

b. WeightedAverageNumberofcredit Ope.ationsStaff'

55
 2.Outputdata;

a. Number ofl-oatN Disbursedin FiscalYear

to First-TimeBorrowersin year
b. NumberofLoansDisbursed

c. Amount Disbursedin FiscalYear

d. AverageLoan Amount Disbursedin FiscalYear

e. WeightedAverageOutstardingLoan Portfolio

f. WeightedAverageNumberofActive Loans

g. WeightedAverageNumberof OutstandingLoal Balance

3. ProductivityIndicators:

a . LoansDisbursed
PerCreditOfficerf/ear

b. AmountDisbursed
PerCreditOfficer/Year

c. ActiveLoansPerCreditOfficer

d. GrossOursranding
PrincipalPerCreditOfficer

e. ActiveLoansPerCreditOfiicer

f. GrossOutstanding
PrincipalPerCreditOfficer

c TargetGroupOrientarion

The conceptof "targetgroupoientation" is usefulasa meansof characterizingthe program

fromtheperspective
services ofthe clientgroup(IADB,1993,Myne, 1994).Thiscanbemeasured
by someindicatorsthat portraydifferentcharactedstics
ofthe loan productsfrom the perspectiveof
thetargetgroup. Thesearethefoliowing;

A. GeneralIndicatorsfor TargetGroupOrientation:

i. Typeandrangeofproductscorrespond
to clientdemand

a. lendinginethod

b. typeofloan instrument
56
 c. loanconditions

overthe loogterm
areeasilyaccessible
2. Services

a. minimalborolver transactionscost

b. availabilityoffollow-up loans

F 3. A{fordability of financialservices

B. DistributionofPortfolio,by EconomicActivity

Product/ s
C. Analysisofthe Financial

l. Descriptionofthe lendingmethod

a. individuallendingor grouplending

b. minimalistlending(creditonly)or integatedlending(credit+ non-

creditservices assistance
like trainingor technical

(for fixedassetor workingcaPital)

2. Typeofcredit instrument

D. LoanConditions:

L Loansize: minimum,maximum,average

2. Loanterm : minimum,maximum,avetage

loan
3. Averageoutstanding

4. Averagemonthly/dailyPaYnent

E. Costof Credit

1.lnterestrates: nominal,effectiveandreal

2. Fees

3. ForcedSavings

Requitements
4. Guarantee

51
 ofPoor Performance
d. Measures

The paperon "Analyzingthe EffciencyofCredit GrantingNGOs : A TechnicalGuide"(PC,

ofpoor performance,someindicatorsshouldbe
thereare consequences
no date)iodicatesthat sinc-e
usedto measurethis. Thereare two measurcofpoor performance:

index(SDI)developed
i. The subsidydependence by Yaron(1992)

ii. A measure
oldecapitalization.

An institution that is trot ableto cover its costswill under decapitalization,andwill either
fold up or will haveto rely on subsidies.Therefore,anotherway to determiningthe efficiencyof an
institution-aside from determiningits capacityto coverits costsfrom income--is to calculatedthe
degreeto whichtheyaredependent on subsidies.

Yaronpointsout that,ifone wishesto measure anNGO'Sdependence on subsidies, we must

knowhow muchit would haveto increase the returnit realizeson its portfolioin orderto replace
it receivedwith incomefrom its own operations
all ofthe subsidies (Yaron, 1992). The SDI is
computedasfollows:

Subsidies
Required
SDI=

IncomefromLendingBusiness

Tberesultingratioshowsthe percentage by whichtheinstitutionwouldhaveto increase its

incomefiom creditoperationsin orderto offsetthenecessary portion of the subsidiesit hasreceived.
It cando thisin two ways:a) by increase incomefromlending(throughanincrease in jnterestrates
or throughanincrease in thes;e ofits portfolio);andb) by reducingthelevelofnecessary subsidies
(i.e.,by achievinga higherlevelofproductivity).

The sustainability of the GrameenBank schemehas beenmeasuredusingthe SDI as

indicator.Hashemi et.al.pointout thatthefinancialsustainabilityofGrameenhasbeenimpressive.
It hasbeenon thewhole financially
viable, asreflectedby Grameen's profit levelsthroughthe years
However,Yaron(1992) suggests that in additionto financialsustainability,creditprogramsof
NGOsshouldbe assessed accordingto theactualself-sustaimbility ofthe irlstitution,
aswell asthe
level of outreachthat they achieve. This economicself-sustainability is measuredby Yaron's
SubsidyDependence Indexdiscussed above.

The calculationsof SDI for GrameenBank (Hashemiet. al.) indicatea decrease in

Grameen'ssubsidydependence over the years,
fia'J' l'70o4and 180%in 1986 and 1987,to a
drastica$lowerlevelof36Toin lessthana decade(1986andi98?). Thisfiguremeansthat ifthe

58
Bankwercto payma*et ratesfor the creditfundsthey arereceiving,they would haveto chargean
additional36% interestrate to cove! all expenses-

As GrameenborrowsmoreandmorcAom the moneymarketat coomercialratesofinterest

anddepen& lessandlesson foreignfunding(asindicatedby the decliningSDI), it would seemto
indicatea declinein dependence on donorfunds. Hashemifurther concludesthat sincedonorflrnds
are only being used for someheadoffice activitieslike trainilg, monitodng and evaluation,it is
feasiblethat tie treld ir deoliniq subsidieswould continueandmake Grameenfree of subsidies
andeconomicallyviable, in additionto beingfinanciallyviable.

Thereare two conclusionsthat call be drawnftom theseSDI figuresof Grameen.First, is

that Grameenis still being subsidized.Seoond,is that the subsidylevel hasgreatlydecreased.

8. Key Issuesand Recommendations

Recentstudieson cooperativ€s and NGOSas financialintermediades (Cordero,1994;

Llanto, Garcia and Callanta,1996, and other studies) point to the following issuesand
recomrnendations:

1. While NGOShavecharacteristicswhich suit the requiremelltsfor lendingto the poor,

the mostimportantofwhich are: weakinstitutuional
theyarefacedwith a numberof contraints,
alld
capability,subsidydependence, resource
constraints.

2. The weak institutionalcapacityof many cooperativ€s^,lGOs to Deliver Credit is

attributableto thefollowingconstraijrts:l) Outreachis sfiall dueto a) lack of legalpersonalityand
authodtyto actasrealfnancial intermediaries, thuslimitiry its capacityto o$er innovativefinancial
productsand to mobilizedeposits; b) lack of afl exteNiveandviablefinancialdeliverysysteq and
c) inabilityto absorbcostoftrainingofpotentialclients.2)Viabiliry. Manycr€ditNGOsarenot
viableand sustainable dueto a) theirsmallfinancialbase; and b) the lleedto improveintemal
financialpolicies,systemsandprocedures. 3) ResourceMobilizqtion. CreditNGOsmustraise
substantialdepositsand developvarious instruments for smallsavers,to staycompetitiveand
\iable. 4) Superl/isory and regulalory franetlort. It is necessaryto bring credit NGOs under a
supervisory and regulatory flamework, to minimizeproblemslike the absenceof performance
stardards:thelackofuniformity, anddilutior ofstandardsof credit evaluation;the lack ofportfolio
supervision, leadingto poor loanrecovery;anddeterioration of portfolioquality.

NGOStendto beveryleadership-dependent,
3. Smallandevenmedium-sized whichcould
threatenits longtermsurvival.

4. Personneltumoveris relativelyhigh,resultingfrom a poorremunerationlevels.Despite

thet strongcommitment, NGO personnel tendto give way to family pressures
andeconomic
realitiesto seekbetterpayingandmoresecurejobs elsewhere.

59
 5. lnadequatestaffdevelopment.StaffofNGOs areknown for thei. strongcofirnitmentto
work. Howevet competence or expedtisefor developmentwork maybe lacking,pa.ticularlyin the
caseof smallerNGOS. This is dueto lack ofresourcesfor trairin& personneiand management
development.

6. Crcditcooperatives
areableto mobilizehugefinancialresowceq andto provide dedit and
savi-ogsservicesto a large mass basg at a statrdardcomparableto that of formal financial
institutions.Thisis basedon criteriawhich includ€s capitaladequacyandprotection,assetquality,
rateofreturn, liquidityandsolvenoy.

7. Credit cooperativesarc viable financial intermediarieswhose developmentmust be

stronglysupported.

8. Credit cooperativesoan grow into strong,self-reliaotand self-sustainting

financial
institutuions, given the proper supervisoryand rcgulatory eDvironment,efficieDtmanagement
policiesandpractices.

resultingfrompaststudiesarethefollowing:
Someofthe key recommendations

1) Trusfom creditNcOs into full-fledgedformal financialinstitutions, e.g.,privatebank,finance

company,non-stocksavingsandloan association or qedit cooperative;or alternatively, credit
NGOs may organizeor ilvest io formalfioaflcialinstitutiotrs; 2) Build up the equitybaseof
MFIs by ini.rsing more capital from edsting owneff and new iovestors; 3) Create a finatrcial
stabilizationfund that will look aflertheneedsoffinanciallydistressedcreditcooperatives.This
canbe managed by a federationor a dulyconstitutedbody; 4) Createan extemalsupervisory and
regulatory syst€m,which would conductregular examinationand review offinancial policiesand
performance andimposeprudential regulation.Althoughthe CDA is a likelycandidate for this, its
institutionaland professional expertiseneedsto be improved for the pulpose. 5) Approach
microfina.nce as a sociallyresponsible business,not as a charityor socialwelfareinstitution;6)
Diversify loans,savingsand other financialprcducts/services accordingto clieot demand;7)
Marimizedepositmobilizationopportunities;8) Promotelinkagebankingwith privatebanks; and
9) Increaseaccessofcredit for thepoot thrcughprogamsthatdeueasetransactionscost -- through
linkages and group lending,and adoptionof innovativeprogramsthat have proved effectivefor
grassroots lending,like the Grameen Bankandotherschemes.

60

i
 Annex1

IN THEPHILIPPINES
INNOVATION
FINANCIAL

the GrameenBank : ProiectDunqoanon

CaseStudy# 1 | Replicatinq

lnnovation:
ProjectDungganonin NegrosOccidentalis a aeplication of the GrameenBank", a
successfulpoverty{ocusedprcgramin Bangladesh. WhileDungganon closelyrepljcates
the GrameenBank process,other pilot projectson Glameenin the Philippineshave
addedsome innovativeelementsto the scheme,such as a guaranteesupportfund.
However,these otherprog€msare stillat an earlierstageof implementation
and have
nol beendocumented as fullyas Dungganon.

Targetclientele:
The"poorestof the poor'', mostlymarginalized
womenin seveneconomically
depressed
townsin the province.SeeTable1 for theareaprofile.

: August,l989
StartingDateof Ptojectlmplementation

Rationale:
groupslike womenin the
Thereis a need to deliverfinancialservicesto mafginalized
ruralafeaswho generallyhaveno accessto theformalcreditsyslem.

Objectivesi
To upliftthe qualityol lifeof the "poorestof the poo/' by providingbetteraccessto credit
facilities,and greateropporiunities for self-employrnent, savingsand investment,using
the GrameenBankstrategy.

lnstitutionlnvolved:
an NGObasedin Negrosoccidental,
NegrosWomenfor TomorrowFoundation(NWTF),
an islandin central
Philjppines.

Brief Description:
Closelyfollowingthe pfocessdevelopedby the GrameenBankof Bangladesh, Pfoject
Dungganon incorporatesGrameen'smainieaturcswhichincludethefollowingprinciples:

a) onlythe poofcanborrow;
b) no collate|alis requjred;
c) businesstransactions areconducted in thefieldwitha minimumof
papelworK;
d) loanrcpayments aredoneon a weeklybasisandspreadoveroneyear
or less:
e) a savingsp an is enforced:
0 womenplayan activefole;
g) technicalandsocialassistance is providedespecially withrespect
to
educaiion
nutrition, andvalueformation.

Source:Abiad,1991
 pre-determ'ned
bvthestaffusins
serected
,"di""t":Tffl515J;3?tl;""td'ffi:,:t"l[iffiT;',
small offivewithsimilar.eoconoml""",:?;"i'3"""ti"?"
sroups ?l',"tt",X"^3:XL::-1
:5il;]u3*h:".';',"n;;iff :.li,,ilhi;"::"'":lu":lrrectionorw
:"t"i"""'f$ffi
fifftqT*'#ilfr:1il"?:":#:ffiT:'.
o,"u,'3;T.0"'ll'"":1fl
"*J""#;l::fl t!
:f,l9-#l"':lH:l'i{Jil1*:"{"^:":J,ngltT:*"m,"1,i"",*
::mifi**w1*i1""*':m"":J:"i"
il'""Tf^iii*/ffi":ft
bon6w.
Forced s","s:
sroup iJ,Jli
"1-:l:-,ryT,:i!il:"Ii"iJ,[ilffJJ:,i"?'31'3tri,"t"'
:j:T"':J:[i:#!,1:]ii1,",,i!!iili,iii;;.,!member
rhe
c,uciarroprocess
i:.1F,:l::f'l;,::t1""i1",J::illi""*Tlrl?:HlT$ilf,:1
?l
ii'"-p"iJ"t
'*? i'liXJ""I"'ll'1""'i'ii"i"iiii impremented
ueins
li:",r"i*,3J""',:Xt"'f!:i;" "
Summarvof Results:
fiom-3l yt'"iBt'iL:i::'j]
a tolalof 1429 participants
g,:t"*i;i
In its first yearsof implemenialron
t"ri:ji""mfr i:"'";,ll*ry;*
ll'"rl
:[ii$:ffi:15iiiffi::"r#:f
s"uen
tn"
6o7oio-'
.$1'?13^1"H'a
i,'"",;,ii sites
irole"t
3111"i["?,til*
rhep,ojects r,narcedby?ylrs-",,l"JJ:Hj,fi#"::$:hXTl:lHl1[llij"'lfll?ii
non-
and
orasricurturar
"'"i"" ":"'oi""to;
l','.il;:?iflJ:i|!lXffit::Iili-",H?:il"''"ilJiiv"
projects(see I aDlesr i
aoricultural
pran
savinss
itsrorced toarmost
came
*r,r".,t"x,ill".l?l?]i.f^i5'1t:l"tJrtli""t'.:tf["nde'
fundtotaledP15
whileihe emergency
4 thousand'
Cumulativepersonalsavlngswas P22
thousand (Table4 )'
(ACPC' 1990) showedthe followlng
beneUciaries
A randomsampleof Dungganon's
aesults:

iq**ilil.3,f,iJ.:j":T,,,:..:ifiTf,:,:,i:."',::t"T,3
'J,'& *'"p'ot""'
na"'
t'o'illr,rv,
sf 1,'l3l
ff lffiiJfr''51
2)sevenorthe?9-,::f ji|i
::i.lY"SilE:i,F!"f1ii
:1":F",hi1"A#XiT.flff
*t k-' a/ ng
et'r
basr i;ii :#fi:l#m'"i Li"" "it'*'
*:i1'*:: ,il'1'i-;.[iii:t,
a l e s u l i o f tllelrpaftlr
a n d p i g I a ' s l n ga s
 andgroupsavingsgeneratedby the forcedsavin-gs
3) In additionto individual program,a
sionificani proportron of the samplerespondents also reported savings in non-financialform'
tiese includedland and housinqimprovements like the additionof garden soil, puttingup of a
fence.or replacement of housingmaterial
to one of greater durabilityln addition'the purchase of
consumerdurables||ke radios,clocks,flat irons and others also indicateimprovements in
beneficiary welfae. The averagevalueof the non_financialized forms of savingsrangedfrom
P100to P2.000.

4) Perceptions on the project on the whole,beneficiariesexpressedtheir satisfactjon

overthe ;rogramlsperformance. the of
availability financial madepossibleproductive
assistance
oroiects.AIaothe provisionof assistance,
technical kaining, andvalueformationwere
education
perceivedpositivelyby respondentsOne observedthat gamblingand olhervicesdecreasedin
ihe areaandthatthe vatueofwisespendingand hardworkhad beentaught

63
 €
€
en G 8 - X f
TO -A
9.! ! A E: F
E 3,8 E.9EEi
aE33 t -{d # >

o ."; .- -i 3 "-.8
'=.H; t +n :{$:
g
F Faaq
d6
E:!?
d;dii
i-s

I
- €;9p .:"
F . : s . s E d E q :FfU -
:i€Fh'F6
E *d i ^:
.9E .EEJ: i t€, $!!is"i?I ?r;a
fia; E'3ig $==i:3F35tiF
sgR-s _ E -E! Fr
:i..i. 9' E q.i
+

;;g;sg
r 6ssi
si;
='..

{,9 :!E
t gi
9Z
iz
a
6;ieg
,L -., ! ;EFE.U
<3 ielg Hsoo g
9.6 ; ,aFvuAi
3 .! ' + 2oi?PE
::E}
Ei E EiE
r- !E;F ;?g.ei3 5+"9"!

.s$":gs€s€$ggg ,;ip :;
E
E
"=* is$s
t;:srg
! 6i$IF;!e iEF
EE-
- i .ll€ $Y;=
* i;.q E=l?
= t.!p !nn:

^ giz - E
gi::! E =
.z .9
! e: E; i
ii;i6E ! .9
= .9
. F.9I E
ziz<; J
 PROJECTDTNGGANONSUMMARYOF LOANSGRANTED
SINCEPROGRAMSTART'D * TOf,l\'D Sf,PTEMBERI99O
AMOTNT IN PESOS
No. oi Loan Weekly Weekly Loan Repayment
ProjectSite
Borow€rs Granted Due (Princjpal) Oustandins Rate%

l. Manapala 191 t95,700.00 95,',720.00 94,751.20 r00,942.80 99.0

2. Hinamaylan 194 192,100.00 88,312.00 85,004.00 107,096.00 96.2

3. S'palay t'79 176,900.00 76,940.00 14,621.80 102,278.20 9',7.0

4. Calarava 16',1 166,300.00 81,294.00 82,525.20 83,114.80 100.0

5. La Castellana 166 165,500.00 23,040.00 23,100.00 142,400.00 100.0

6. Old Escalante 51,000.00 9,000.00 8,880.00 42,t20.00 98.7

7. Cauayan 18 78,000.00 5,840.00 5,800.00 12,200.00 99.3

Total 1,038 380,146.00

1,025,500.00 314,688.20 6 5 0 , 8 1 1 . 8 09 8 . 6

Note:* August,
1989.

65
 Annex Table 1.3

TYPESoF PRoJDcrs FINANCED

SrNcEPRoGRAMSTARTEDTo ENDSEPTEMBER
1990
PRo\f.cr Srrt.'. C!*u{Y a.N
No. of
Borowers Cranted
L Agicultual-RelatedProject 4,000.00

Fishing 3 3,000.00
SwineRaisins I 1.000.00
2. Non-Agricultural Project 38 38,000.00

Sari-sadStore l3 13,000.00
Foodvending 6 6,000.00
Buy and sellofagicuhuralcropsand 5 5,000.00
otherproducts
Foodvending& riceretailing 1 1,000.00
Foodvending& eggvending I 1,000.00
Foodvending& sari'saristore I 1,000,00
Food& fishvending I 1,000,00
Fishvending I 1,000.00
Fishvending& buyandsell 2 2,000.00
Fishvending& ricehusktrading I 1,000.00
Fishandshrimpvending 2 2,000.00
Riceretailing& shrimpvending I 1,000.00
Buy andsell& sari-sarislore I 1,000.00
Breadvending 1,000.00
coffeeshop& sad-saristore 1,000.00

3 . combinaton ol Agicu\tua\ and

projecrs
Non-Agricultural 36,000.00

Swine/poultryraising& flshveDding 12 12,000.00

Swine/poulFy raising& coffe€shoP I 1,000.00
Swine/poultlyraking& lobaccovending I 1,000.00
swineraising riceretailiDg
& 2 2,000.00
Swineraising& sari-saristore 5 5,000.00
Swineraising& flsblobaccovending I 1,000.00
Swineraising& bagmaking I 1,000.00
Swinemising& manicure t 1,000.00
Swineraising& foodvending 4,000.00
Sw;neraising& vegelable vending I 1,000.00
Poultryraising& fish,/foodvending 2 2,000.00
Poultryraising& sari-sari
slore I 1,000.00
Fisbing& fisb/foodvending 2 2,000.00
Fishing& vegetable vending i 1,000.00
Duck.aisins& shrimDvending l 1.000.00
Grand Total 78 78,000.00
 99R8833
oi <i+-:.i -i .i

r;dioi.i

=€8!383
!;

3338qEc
3 s.i "i R

q.g

6 36
s z:^
- 7'_2
-. Yetl (:-
i Za p z

z O i
F

q Yl;
G e"i
f.i>
e#- no".r-vr.:e6
o

I
a 38333c3
s*eenEK
e-+"<ld)+.".l

qsaSnI
"oFij!.drrte
-i E l+: = 2 a
F
i2fi;ajo(J
 Annex l

GrouDs: A PilotProiectofCTZ-LBP-
CaseStudy#2: Project: LinkineBanksandSelf-HelD
PCRSF

lnnovation : purpose of deposit

;;-."J*, i" link banks with gasspon oreanizationsin rual areasfor the
faimers and small enterpreneurs The amountof loan is
senetationand loan disbursementamong
ieoendent on the amountof savingsdePositedby eachgiouP'

Target Clientele: Farm€rsandsmallenterpreneurs'

Starting Date ofProject Inplem€ntatioD:1991

Rational€:
where
andThailand
*,r"u a5inIndonesia project
rheLinking waspilottested,
ii ti"-ir,irippin.r, services'Fewof them
*i".-"nt,#,.n"u., und,malI farmershavevery limitedaccessto banking
| wo reasons
ia"e aepositeain an intercstbearingaccounl,nol haverec€iveda bank loarl -
cus(omers'which prevents
lhem fton tulfilling
i"iri "uer
rirt of lh+otenrial
trt.r"r"*al status
servlces
"i""
lheformalrequirements of thebank.andthehighcos!of smallscalebanlong

forms of savingsand on
ThesesrouDsthereforehave in the pastrelied largelyon ffaditional
;i;;i;;;;.;;;i;; usnoscei unasett' tr"rl However'oneofthe.shoncomins
funds"groups
generated to lhemerno€$'
offie smallSroup satisty
i.li" utum"iun"vottte intemally
needs
financial

Objectives: andsmall
ii'imorove access to bankingsewices lor self- help_ groupgof microentrepreneurs
farmeriby linkingformalandinfonnalirstitutions'

Institutions Involv€d:
zusanunenarbeh(oTz)' thetechnical of theFederal
agency
ii"rir"t 6".Jf."ft"n n" Tecblhche council
" (LBP)'
l--d BankofthePhilippines a gover nent People's
bank;
i"o"!fi"
"f-6"*""vt
onRuralSavings lnc'
andFinance,

Brief DescriPtion: _ severalkey

nuna_"ait dfz, ,ft" pif"t projectwhichis to run for a two yearperiod' involves
parilclpants:

ofiicesin all provincesin the country;

andextension
TheBank LBP,whichhasbraDches
the experienceof
The Self _ Help Promoing Institution(SHPI): PCRSF'which has
amongself- help
promotingsavingsmobilization groups;
and

savings(and credit
The Self - Help Groups,which are exisiingSHGSwith regular
act;vities

LinkaeeModch
the directlinkagemode! sHGs will
At leasttwo possrblelmKagemoq€$arepossible Under
well asextens'onand
technicalassistance^as
f'*" a;.4 *""ttto tl"f.ing service;.The SHPIwill provide asan advisorto
in"o."-g"n"'utingu"ti;;ties rhe sHPI mav also fi$ction
;:;;G;;;;;,;;u-na
68
 will d€positgroup
the bankwith respect to creditdecisionsUnderthe indirectlinkagemodel'SHGS
tkough the SHPI The SHPI therefo'eacisasa
*uinn. air*f, in ,ft" Uunf'but loanswill be channeled usedin ihe pilot projectin Indon€sia'
Theindirecrlinkagenodel hasbeen the one
i.-iiiJ,""ir"ar"ry. pilot which is scheduled to besin withinthe
;:dTil;;il; ;; oneuseain therhitippine Project

q**:ffi
project'severalprincipleshavebeenformula@d
*tue the participafisin the linkage
andarecentralto thescheme:
Workinetkoughexisting institutions;
n"*""iTnnttt.-uu,ono*i Setf- HelPGrouPs
of andpanicipating
instiru(ions;
*a NGos as semi' andinfomal instirurions:
fhancial
i-""igniti;g sHct
Promoting mobilizationl
savings
Linkingsavings credi
and
Substituting withgroupIlaDIllty;
collaleral
Usingsavings as partialcollaleral;
Financial incentivesfor timelyrePayment;
Ensuring fastservices$rough simple proced$esi
AoDlvinq marketinteresl and
ratesl
e.'.iieuiignnanclatuiauitity$,roughcostcoveragefromLh€intercsl
margin.

E@Tif,*:dii.. withseveral
asa process
beregarded financial.
dimensions:
wirhsHGsshould
rr,".n1X;ri1.'o;"1.;..gi.d#j";'""j'i|i.HTffilx?l
i,,*i*,i""':jiljiiEffip"il, i;
0t Sllu wltn
resources
a matchingof intemal
to the €ducational eflecton financjalhabits'savings
l*rui-ffiortun"" in tn" Linkingproject ln addition featureofself- helpandself
or the SHG' anda& an essential
arealsoa svmbolof strengthandautonomy
reliance.
of the- formal and informal institutions A
The institutional dimension comprisethe linkage ano
&om all sideswith tespect-toProcedures
I"^rnitr" ori""*-"iii n""e to take place,with adjustnent groups - bankers and sHPvsHG
this ii communication betw€enthe two
ff#:". " ;;;G;';i;-for
members.

TheDarticiDative dim€nsion th€needfor the instilutionsinvolvedto lvork out ther owr

represents
,".to;cat unlip.tationuf aerails.with theguidelinesandprinciplesasthe;rstaningPornt

and needsThe degreeof active

Detailshave to be adjustedto tnek specificconditions
participa;onwill feflectth€ commimenlofthe padnersinvolved'
SHPI and the banlc throughinformation'
The pilot projectinitiatesdialogueamonsthe SHGS' of a manag€ment
rnouti-tion .jnamotiuatioD of theseinstrtutionsimong the tasksarethe develoPment
trainingsystem'andevaluation ofthe project'
inl-*"rion
""u".,
lmplemenlrtion Tareets
for a periodof 24 monthsand will
Th€ linkingprojectrn tne rnuppmes will be implemented
LBP andPCRSF:
i'*f"" *tl r"rr"*i"gL iarticipantsin additiontoGTZ'

- 325self- helPgroupsnationwide;
- 27 self- heippronot;nginstitutionsNcos-
- +s iunt" op.-ting in theruralareas(mainlvLandBankfi€ld officesand RuralBanks)
69
An sHc qualifies requirements:
only;fit tulfillsthefollowing

a) hasexisting savingsand credit activities;

is a voluntary associationbas€don membership
c) membersare small farmerc/€nfepreneurs
permanentsotus
e) good organization
0 basicandfrrnctioning bookkeeping

An SHPIqualifiesonly ifit tulfills $e followingrequirements:

a) hasestablishedworkingrelationships with SHGS

hasexperienc€with savings
and credit schemes
c) hascompetence in ffaininyguidance./consukanc.t
o) hasfinancialmanagement skils
e) good organizationandsufficient field staff

Credit for m€dium4ermlivelihoodprojectsshall be providedby banksa y€ar afier pro$am

implementation. How€ver,this may be soonerdependingon the successof the savingsmobilization
programandthereadinessofthe goup. GroupsavingsofSHCSwill be acc€ptable
ascoUateral for a loan.

LBP will extendloansto coopenliveson a wholesalebasis. In areaswherethereis no LBP

extension
omc€,an accredited programwith
ruralbankshalllink up with the SHGSthrougha rediscounting
LBP.

Theprogramshallbeimplemented
nalionwide.

l0
 Allnex Table 2.1

SELF HELP PROMOTING INSTITUTIONS IN THE LINKAGE PROJECT *

LUZON Development
lnfantaCortunun;ty lnc.' (ICDAI)
Administration,
BulacanSocialAction (BUSAC)
Center
Kalipunanng mgaSamahan ng Mamamavan (KASAMA)
Reform
Aerarian and /CROSS(CARET/CROSS)
Transformation
Cen;r for

VISAYAS Development(VICTO)
VisayasCent€rfor Cooperative
for theDevelopment
PhilippinePannership ofHutnanResoucesin the
Rural Ar€as - VGayas (PHILDHRRA-VISAYAS)
FederationofFre€Farmers lnc.,(FFFCI)
Cooperative'
BantayanlntegatedMulti-Purpose Inc., (BIMCI)
Coop€rative,
BarFhanongPanaS-hiusa saKatilingban(BAPAKA)
CanlaonCity Multi-PurposeDevelopment Cooperative,IDc, (CCMPDCI)
SilimanUniversityExtensionProgam (SUEP)
Oitkdly'412:P4?4reCaary,e/t't'4.//7.'(.D/'r'r'?t72
9C93 r-i\elihatv! qa'$rddia( (EqRBLFI
Leyte-Samar RuralDev€lopment WorkersAssociation (LABRADOR)
Kauswagan Resources Foundalion Inc.,(KARFI)

MINDANAO PanaboAsro - industrialCorporation(PAICOR)

MindanaJAssocialion of Self-HelpSocieties-Southem PhjlipPines
EducationalCooperative (MASS-SPECC)
C€nter
BukidnonUnitedl.ion-Goverinrent Agencies Foundation (BUNGA)
PhiliDDine for theDeveloPment
Parlnefship oflluman Resources in
-
nrimi Areas MindanaoDevelopment Cenler (PHILDHRRA'MDc)
MawabMulti-PurPose Cooperative, Inc.,(MMPCI)
Nabunturan CooPerative,
Iniegrated lnc., (NIcl)
DavaoFederation ofFfeeFarmers,Inc , (DFFCI)
calinanMuhi_Purpose cooperative,inc.,(cMci)

lt
 Annex I

CaseStudy#3: Mimickins the PrivateMonevlend€r: The Caseof

CalabaneaR€tailers' CooDerativeCreditUnion

Innovation:
A cooperativecredit union compos€dof market vendorsmimics th€ strateg/ of privat€
mont€nders in lending to its members. The money for loans to memb€rsis sourced
ftom the capital buildup andsavingsmobilizalion oiits memb€rs.At the end ofthe y€ar,
all associationfirnds are paid out to membe$&sdividendsand capitalshares This leaves
a ?.e$ ba\arce for the stait o{ each.Jear. Collectio$ (ate io( loo$s have bee(r 100%
Fundsfiom extemal agencieshave beenoflered to the credit union, but has beenrefused
by the credit unioD,*hich prefersto rely on it5 own funds.

Target Clieotele:
Ma*et vendorsin Calabanga,a small town in Bicol, southeastempart Luzon

Starting Date ofProject lmplementation: 1986

Rational€:
To provide membersat lhe marketPiacewirh a ready source of credit other tha! the
privatemoneYlenders.

lnsfilution Involved:
calabangaRetail€.s'coopemtivecredit Union

ofone marketvendors,a creditunionwasshnedwhichwenttfuoughtwo phasesl

Underthe lead€rship

l) Startup:
Fr€shfishsection ofmarkelonly;
Savingnobilization:Pl/dayfor minimumofsixtydaysi
Loans: Eligiblefor Pl00loanafter60daysofregularpayne.

Expansioni in thefirstyear,a sihilarset-up

dueto success wasestablhhed
in others€ction
of the
market.In 1989,th€existinggoupswereintegaled intooneassociation,
nowkno\.m asthe
CalabansaRetailers'
CooDerative CreditUnion.

credit BuildupProeram:P20perdaypermember
untilP500subscribed
share
hasbeen

Prosram:Pl0/day'slal..
Mobilization
Savines

daily;onecollectorfor every15 memberst

fundsnot dhbursedaredeposjledin theruralbank
beforenoon of eachday.

Loan: LongTerm:maturity - 27 days

-
interest I 0%uponpaymentloan
Ioanceiling- according payingcapacity
to assessed
purpose- any

72
ShortTerm : maturitY-7days
inrcrest - 8% uPonPaYmentof loan
toanceiling - accordinglo assessed
payingcapaciry
purpose _ any

and Treasurer
Loans are amortizeddaily. l0% oftotal collectionsis set asideto remuneratethe Manager
who togetherreceived20, and the Colleclorswho receive80%'

Credit Union startsout with zero balanceat ihe besintine ofthe 4l!9ld!!9.+41 At lhe end oieach
yeat; dt'vt and memben capital shatet ale ?aid out, )ea'ng a zero bdatce for the shn Df the DEn
)Ear.

SummaryofResults:

I. Collection rate is I 00% The following factorshav€contributedto this high rale:

I . disciPlineof lhe membersi
2. geographicproximity; collection ofcapital contribution,savingsand loan
repalTnent is easybecauseall arevendoruin th€ samemarkgtplace
3, prissure to pay is strongerbecauseofawarenessthat moneybofiowed is
madeup ofmoney eamedby other nembers;
4. anyoutstanding loanis d€ducledfromthemember'ssucceeding loan'

2.Lowttansactioncosts.Transactionscosts(Tc)forborrowersaswellasforthelender(thecredit
union) are low.
a loan soon
Low Borrower TC: Due to sirnpleproceduresand papet work A borrow€r can hav€
dme fiom loan
after filling up the simple application form and giving this to the^heasurer'AveEge
uppiiJionlo'fo* t"f"uie is not more than 30 minutes As long as funds are available and the borro\'ver
Loansabove
haveno loanoutstandhg,the feasurercanapproveandgive a loanofless thanP100'000
thisamounthav€to be approvedby theManager'

Low LenderTC I Dueto

a) g€ographical proximilyofcollectorsandcreditors;
b) near pirfect information,sincevendorshavekno\\'neachotherfor many
years;
c) simPleforns andtransactlons;
d) the managerandtreasuer's servicesarc renderedfor only tow hours per
dayon the average.

3. The capitalbuiiduppaoqramresultedin a sizableamountofP85,600by February,1990 Because

orilfl" uotu,ni or intemal fun& generated'loansar€now madeconpulsory for members

4. DividendspayableeveryPl00 ofsharesin October1990wasP23898'

5. Numberofmembersgr€wfrom lJ in onemarketsectionto 243 tom all sectionsofthe Calabanga

publicmarket.At present,
ther€are16groups
with av€ragemembenhip of 15 each'

6. No extemalfunds Althoughextemalfundshavebeenofferedto the creditunion by an NGO

(CARE Philippines) and a govemlnentagency(Departmeniof Trade and lndustry), lhes€ offers
this is not
trau"b"en r"i-riea The reason:it will be hardto collectloansfiom suchtundsbecause
moneyftom its members, andthereforepressure to repay$ less-

7. therejs a high level

Thereareno problemswilh thecapitalbuildup progranofthe groupbecause
amoogmembers
of disciplineandresponsibilirv
'73
 Annex 2

CASE STUDIES OF CREDIT PROVIDERS

A. The Informel Sector

COOPERATIVES

a) Cli€nts. Cooperativ€ ABC cat€rs to a single market oi hotel and restaumntworkers while
CooperativeDEF targetsa community composedof severalmarkets (e.9. wage-eamers,tricycle
drivers,pensioners, coop DEF allows only thosewith a visible sourceof
etc.). Inter€stingly,
incometo becom€memb€rs.

Loan Packages.Cooperatives ABC andDEF bothprovideregular(or providenlial)loans,petry

cashloansandsss-MADE loans.As additionalservices, coop ABC providesa credjtlinefor its
restaurantand retail businesswhile Coop DEF prcvides emergencyloans during occudenc€of
untowardincidentsandworking capital to sari-sadstor€ownersandmarketvendors,

c) ServiceD€livery. For both cooperatives, attractingmorc employeesor resid€ntsto join their

coopemtives andto borrowis not a problem, the morepressingconcemis determining who can
a membermay borow basedon capacityto pay. This
qualiryfor a loan. For bothcooperatives,
meansthata membercanprovehe/shehasa stablesourceofincomeandthatsuchlevelof income
matchesthe loan packagesoughtafter.

Rec€ntly,securingloanshasbeconea majorconcemamongcoopemtives.In the past,

they only require promissorynotes, co-nakersand authorizationfor salary deductionand
rcmittances. Today, they are slowly adoptingthe ways oftheir counterpansin the fornal sector.
They now requireposi-daledchecks,collateml'sandofier documents especiallyfor business or
livelihoodloans.

d) Inter€stRates. Both coop€ratives chalge13%interestfor providentialloans. This is a carry-

over fom the previouslinit set by BCOD. For other loan packages, howevsr,the inlerestis
influencedby the rateschargedby its competitors
for €achsub-sector s€gment. In the caseof
cooperative DEF, each loan packagehas a different interest mte, Its "Pa-ulang sa Tindera"
packageis pricedat 5%per 40 dayssinceit competeswith the mtesof moneyienders in the area-
In the caseof cooperativeABC, it charges2.5% per monthfor its pelty cashloan sinceoiher
cooperativesbasedin hotelscharg€the samerate, cooperativesdo not also float interestrates
sincerhey do not havethe administrativecapabiliti€sand floatingmighl causeconfusionto its

of2% areimposedasservicefeeson all typesofloans.

Additionalcharges

o Delinquency. For Coop DEF, delinquentborrowersare given a maximumof threenoticesor

captainor co-makerguarantees
demandleltersbefor€a complaintis filed beforethe barangay are
calledin. In cas€sof unforeseenor reasonable circumstances,
re-structuring
is undertak€n,
and
penaltiesandintercstarewaived-

Source:Garde,EnricoO., 1995

14
 For CooDABC. accountsbecomedelinqu€ntoccasionallywhenthere is work stopPage,rcducbon
ofworking hours, or permanentclosue of comPanies Before rc_structuringis r€sorledto, other
measuresare undertalcn such as calling in the co_makerSuarantee,deduction fiom sepamtion
pays,etc.

NGO

a) Clients. Like CooperativesABC and DEF, NCO ABC also catersto the Poorer sectoruin the
urban arcas. Specifically, the NGO lists the following as its clientele; smali entepr€neus (who
employ people); intermediaries(other lenden); tricycle &ivers; urban poor womeq and: market

b) Lostr Psckrges. Eachsub-s€ctoris matchedwith a different loan Package.Having a very defned

market6nd a packageapFopriate lo eachmarketis oneiactor why the NGO hasmanag€dto lower
its past due ratesor bad debts.

c) Service Delivery. Providing very clear loan packageshascontributedin expandingthe numberof

beneficiades. Giv€n its relative success,it has establishedbranchesin nearby Provincesand
resetilementareas.

In terms of secu.ringthe loans,the NCO has employedsEicter measuresthan the above

coopentives. Except for its KabuhayanProject, it requiresail beneliciariesto issu€Post'dated
cheoks.Cuarantee mechanisms suchasJSS-Board havebeenadopted

d) InterestRates. lnterestrateis as diverueasits loanpackages.Like the lendinginvestorandthe

cooperatives,NGO ABC computesits interestmte basedon Soingmarketrate (i.e the infomal
marketrate) for eachsub-sector,lt also doesnot float its inter€strates

e) Delinquency. Re-sfitcturingis limitedto borowerswho haveactedin goodfaith and/orbecame

offoftuhousevelts Otherwise,
because
delinquent to.
litigationis resorted

AGENCY
THE GOVERNMENT

a) Clients. The targetborow€rs are intermediaryinslitutionswhich will telend the fundsto the poor.
IntemediadesincludeNGOS,Posandotherfnancialinstitutions with a trackrecordof operations
or with relevantcapabilitiesr0 implemenlingmicro_creditprograms for the €conomically
disadvantaged.

o) Loan Packag€s. The governmentagencyprovidesa credit line facility to the qualified

intermediary. This credit lin€ canbe availedofin the form ofa rcvolving fund loan, or a term loan
whosematuity mayexceedtheexpirationofthe creditline

c) S€rvice Delivery. The governmentagencytries to secur€the loansby passingthe risks lo the

conduitwho actsas guarantors
ofthe end-usersQualifications areenumerated'
of intermediari€s
Theschemeof having post-datedchebksis alsoapplied.

o.J lnterest Rates. Loansareprovidedat a fix€dmte of 10%o per annum Basedon the interview,
thisis l% belowthe netgain of I t% from th€ Prevailing T-Bill rates(theopporiunitycost) Mrile
it may incr€aseits interestrale in tbe future based on the tend of the future T-Bill yieids, it does
not intend to lloat interesttates. Moreover, it allorYsits conduits to d€termineits own interestrales
basedon themarket rates
in the arca.

75
 e) Delinquency. (No infonnationwasobtained).

THE GUARANTEE PROVIDER (GFSME)

a) Clients. As a guarantor,CFSME servesto encourageinstitulions to provide credit to small and

mediumscaleenterPrises.SmallenterPrises are defin€dto haveao assellevel of4_10 million
pesos, On the other hand, medfum scale are those with an ass€tsize of about 10-40
enterprises
million Pesos.

b) AssistancePsckages. The GFSMEprovidesb{o q?es ofassistance.The first is the guarantee

mecbanismunder which thele are two sub-classclassifications.The credit risk guarantee
which covers 85% of the loan, and the collat€fal-shortguaranteewhich cove$ 90% of th€
unsecuredportion of the loan. The secondpackageis the ljquidity mechanismwherebyGFSME
purchasesthe loans ofthe l€ndingconduitsin ord€rto improvethe liquidity ponion ofthe lender'

c) ServiceDelivery. CFSME has accreditation

Procedures which sefie to scre€nprospective
conduits. Moreover,GFSMEhasthe powerio decideuponthe loansit waDtsto extended
or
Suarantees Purchase

d) lnt€rest Rates. As a generalrule, CFSME extendsserYicesto loanswith a maximuminterestrate

of 30% per annum. th€reis no interestmte policy for the guarantee mechanism sinceit covers
ont) rhe limcipa\,li eEfl\s{eesfor $e g\aRrtees (\.8Vo of the lod\ ba\$\ce), }lowe\er, {or ils
liquidity mechanism,the policy is as follows; fi$t GFSMEpuchase loanswith a fixed interestrate
only (it does not buy loanswith a floating interestrate); second,it varies (not float) the range of
ilterestrates ofloans it wantsto purcbase. Thisrangeis established quarterly

e) Delinquency. In cas€sof delinqu€ncy,CFSME relies on the lending conduit for lhe re-
of assets
collectionand/orforeclosure
structurinS,

B. !!.e.-EarE8!!e!&r

The CommercialBank

a) Clients. Commercialbanks are risk-averse. Their primary clients belong to th€ top 1000
corporations,Thereis, however,a segment whichdealswith consumer loansbut thesearelimited
to individual borro\rers with monthly incomesof at least P 35,000. However, there are laws
mandating a proportionatesharefor agicultural loans(25olo)or smallscale enterprises.But there
areloopholesthat allowbanksto circumvent thisrequirement.

b) Loan Packages. The banksprovide a variety ofloan packagesto different marketsegmentofrbe

high-end market. There is a movement,however,towardspenetnting the "middle-class" market
via "consumerloans"suchascarorhousingloans.

C) Service Delivery. To attractborro\yers,banls resortto variousmeaDs.These include: special

inter€st rates for "prime" bonowers ad derived by computingthe total businessgeneratedby a
particularcli€ntadvedisements; fie,dingof marketrepresentatives;
designingattractivefinancing
packages suchaslow dotrnpayments, and;puttingup morebranches.

l6
 Securingloansis strictly observ€d Banks require numerousdocumentationsand employ
a variety of secu ty measrres such as promissory notes, collatemls' insurances,guarantees'
mortgag;s.deedofassignment, etc Thesemeasures compelborowersto paydiligenrlyresulling
ro verv low Dailduemtesanda baddebt provisionof2_3% only

d) Interest Rrt€s. In pricing their loans,the commercialbanksconsiderseveralfactors. Essentially'

while each bank may have different formulateto anive at the interest rates for the day, they all
considercos! ofmoney, adminisFationcost,sFeads for risk, Profiq and budgettargeB. Thesear€
then comparcalto the risk-ftee investrnentoPtion (the T-bill ratO and the higher ofthe two shall
Drevail. Becauseof the fluctuationof the opportunity cost (the T_Bill rate), banksmay chooseto
hx lnt€restfor only a shonperiodof time(e.g oneyearfor consumer loans),andfloat subs€quent
interest rat€son a quarte Y basis.

Application or processingfeesare chargedin addition to the intercst ln many instances,

this is at leasl500pesosperapPlication

e) Delinquency. The entte unpaidportionofa loanbecomesdue and demaddable if a bor'ower

defaulis on any installment when il becomes due. Restructuring is often reson€d to since
foreclosure on collateEls is a long process. The rcstructured loans mean higher inlerest rates,
shorter amortizationperiods, penalli€s,stricter secuity measures and difficulty in accessing future
loans,ID addition,resFucrured loansaretreatedasnew loans

LsndBa[k

Nore: LandBankoperations canbedividedinto2 sectors: sectorandth€agariansector'The

ttiecommercial
sectoris iimilarro $e
iornrnercial jllusralion
sbove.Thusth€subsequent relatemainly!o theagrdrian
discussions
sector)

a) Clients.LandBankhasshiftedawayfromdirectlendingto famersto providingloanstfuough

cooperative
cooPeftltives,
it targets
conduits.Specifically, ruralbank (CRBS),andrumlbanks
(RBs)which,in tum,areexpecledto to smallfisherfolk,
rel€nd ftisers'
famers,andliv€stock

b) Loan Packages. Therearc two generalpackages beiry ofreredby Land Bank Th€.fustis the
capitalloan. The secondis the fixed ass€Vmedium_and
productior,/oieration/opemting long_t€rm
ioans.The formeris payableaftereachcropcycleor one year at the most. The latterhas malurity
p€riodsoftwo yearsormoredepending on thet)?e ofassetacquired.

c) ServicsDelivery. The previousLand BanI leadership had embarkedon an aggressive-lending

stratery to the ioint that the bank engagedin orgarizing cooperativesto createoutletsfor their
fundsi'This apiroach, however,has beendiscardedby the presentmanagementThe b:tnk is now
setting up standards/minirnum requirementsthat cooperativeshave to meet before qualiting for

LandBankchargesa 12%inter€stratefor productior/operating

Int€r€siRates. For cooperatives,
cost'
capitalloansandl4% for fixedassetloans.Botharechargedan additional2%assupervision

On the otherhand,lendingto CRBSandRBs is in the form of purchases of p'omissory

notes (rediscounting).For CRBS, the re-discountrates are 6% for cooperative PNs, 'nd
PNsare
12% for individual PNs. For RBs, the cooperative alsoat 6% while individual
Panr
havea l5% rediscount rate.

11
 lntercst ratesaredeterminedby getting the weightedaYerageinterestrate of ten leading
the two nies
banksand comparingit with the t2% rate for ils lending program The lower of
Bank floats its interest rate in the conrmercial sector but follows a
shall prevail.' Land
fixed interest rate policy for its agrarianoperations
pay lnterest
e) Delinquency. Loan re'sfuchuing is undertakenin casesof conduitsare unableto
ratesrernainthesameforeacht)?eofloanandborrower'Atpr€sent,however'therestructung
policy is undergoinga review in ihe light ofthe high past dueralesit is facedwith'

Tbe LendingInvestor
or of
a) Clients. Th€ inErviewed ledin8 investor targetsemployeesof rnultinational corPorations
siableFiliDi[o companies.Eamingbetw€enP3,500 to P15,000 per month, these€mPloyees
usuallyhavesecured ;obs.
loan and
b) Lotn Pacl(ages. the lending investor provid€s two loan q1t$j-s' namelyi^ salary
loans, On the avemge,moreborrowers apply for a P10,000 to cr€dit
P15,000 for salary
business
loanwhilea f€w applyforabusiness loanwonh P100,000'

are
c)
-' ServiceD€livery. The lending investorputs uP brancheswhere businessestablishmenb
much one can bonow and how much is to be paid
T;bles that cleart showhow
"on""nt "t"d.
everyamortization tirneis fasterihan
perioais providedin readilyavailablebrochurcsProcessing
bank assuming all docum€nts hav€been properlyacconplishedandsubmitted

In termssecuringloans,the l€ndinginvestoris as strict as the cortunercialbanks lt

checks As a r€suh, while the l€nding operalions €xperiencean
relies heavily on post-dated
averagetOTopastduerates, the lendinginve$or is abie io collectin due time' V€ry few cases
hav€everbeen broughtto andresoiv€din the coults'

-d) lnierest Rates. The lendinginvesto.doesnot go throughcomputations a ceftarnnieresl

to anlv^e
been only one changein the rate over a decade of operations(ftom
;; In reality,therehad
S%olmo. to 4o/"j. The lendinginvestotsimplymonitorsthe goingrateofother lendinginvestorsin
the ureaofoperationandadjustsonly whenthereis a potentiallossof clients And unlikebanks'
the lendinginvestordoesnot floa!its inLerest
rates'

Aoan ftom the lnterestrate, the lendhg investoralso chargesother fees'these

feeof 6 pesosPerthousand
andan insurance
includea piocessingfeeof10 pesosper thousand
p€rdayuntil
el Delinquencv. All checksthatbouncearechargeda flal rateof50 pesosplus 5 Pesos
tt'eamorrntdueissettled'tfabonowerfailstopaylor3consecutivePaydays'th€enhreloan
becomesdueandlitigationorre-stnrcijringispuisued'Thelendinginvestorprovidesincentlvesto
The penaliiesarewaivedifth€ bonowercanpay30%ofthe
$e borrowerin caseof restructuring.
balanceandissuesnew post-dated
checksto repaytheremainingbalanceovera s-monlhperiod

18
 ArnexTable 2,2

DATA ON TIIE PHILIPPINE LINKAGE PROJECT

Table2.2A
BssicInformationon Pa
Typeof self No,ofCroups AverageNo. AverageNo. of No.of Groups
HelDGroup ReDortine ofMembeB WomenMembers Registered
24 2t (380/.\ 24 (100o/oJ
CooDerative
Informal SHG t41 23 13 (s6o/o) 49(33Yr)
All sHGs t7r 28 14 (50o/o\ 13(43%\

Table 2,2.8
tionofCroupMembers
TypeofOccupation Coop€rative Infomal SHG Groups
All Self-Help
l5 8l 96 (56%\
Fanning
4 20 24 (l4o/o)
Micro-€nterprise
Salaried 2 17 t9 (t t"/.)
I I3 l9 (11%)
Services 'l
Fishing 2 9 (5"/o)
Others 9 9 (s%)
TOTAL t41 1710007")

Trble2.2C
ac onsof G with FinancialInstitutions,1992
BankDeposits SHPVCoopDeposit
Typeof SHG
(P) No.' (%)** P/qroup Amount(P)
Amount No.* io/o)44 P/goup
4',79,233 l 8 15% 26,624 49s.79 3 t 3 % r6s,263
loopemtive
2,288,354 75 5t% 30,511 4,625,136 29% 107,561
lnformalSHO
All SHGS 2,16't,s81 93 54% 29,'t59 5,t20,926 46 21% 1\,324
{unber ofsrouDswith transaction oflhis t?e
..Ratio of n;*r of sroups*ilh transactionro totalnumbe'olgoupsreponrng
(cooDerativ€s=24;
non-cooperative SHCS=147; all groupFtTl)'

19
 T^ble 2.2D
Credit Transactiors f G with FinancialInstitutions'
1992
Tlp€ of SHC Bank Loans SHPVCoopLoans
Nor e/o\,* P/Group No.* (o/o)r+ P/Group
168.381
,7 29% 24.054
cooperatiY€ 2,398,680 5 2l%o 419,',t36
lnformal SHC 1,t19,343 2\ 14% 53.102 5,291,t28 3',7 250/0 143,166
.Numberofgroupswith tmsaction oflhis tvp€
**Ratioofnumb€rofgoups with fdsaction to toialnrmberofgrouPsrepott'ng
=24i non cooPerative
(coop€mlives SHGS=147i all groups=l7l).

T^blez.2E
Loanslo DepositRatio
TYDeofS€lf-HelpGroup Bank SHPI
CooDemtive 5.0 0.3
InformalSHG 0.5 l:l
All SHGs 1.3 1.1

80
 Annex3

LESSONLEARNED FROM TIIE INDONESIANEXPERIENCE

A. Chatreesin the PolicvEnvironment

and
The experience of Indonesia with deregulation,fmancial systems develoPment
experimental. Since 1983 the financial system of Indon€sia has
microfmanceh; been litemlly
prud€ntialtyderegulated Banksill Indonesia are ftee to set their own interest
beensadually and
*"li"p""Jlg *'*t", risk andprofitexpectations sound!g*s.ma{ -1t^eaffin.fol€'gn
ut nou-ti"etut"". Since thederegulationactPAKTO 27 ofoctober 1988'it is relatively
"*"hunnJ
i"* r"'i"i ro aod baDk bmn;hes, alsoin ruml areas As of February1990'most
sutsiaized """"1"* p.ogru*swilhtheirhigbdefault ratesweredismanlled
"rralt
Derequlation in Indonesia wssneitherhaPhazard nor anover'nightevent lt Proceeded
lnerr
in severalstaies, ALeadybefore1983,privatebank weregivenautonomyln deterrnmrng private
This hadimrnediarc ;fects onthemobilizationofresouces from the
;;;,;4.4".
rJoi-a tft" positionofprivatebantGin thefbancialsystem lt alsodemonstrated
coiuincing$ "r"ngtftan"a
trti't aot".tic iesourcemobilizationis Possible a5a resultofpolicy measures'

endFin.ncialInnovations
B. tr3titutionalAdiustments

Sincethe onsetof deregulation, fnancial institutionsin Indonesiahave excelledm

privatebanking
financiaiinnovationsrangiagfrom novelproductsto doorstepservices The
;;;;;;-;; i""" paniculailv-irurovative*et, when exposed ro fierce comled on governmenl
and reacled to the daily challenge wilh
Lantsquicttv liamedto copewith marketforces
li"""tj,r* Jr ii"it own tn'rural and microfinance,there have been num€rous institutional
iniovationsasa resuttoffinancial thatareofrelevance
deregulation to microfinance'

l. Thelegalframework whichhasresulted:
der€gulation

of largenumbers
i) in theestablishment of newruralbaDks(BPR)'
iii theconversion particulatlytheso-called
ofsemifomalfinancialinstitutions,
secondarybanks,intofull'fledgedruralbanb' and
iii) $leestabiishmentofruralbanks by SHGS andNCOS seibel 1989;19-24)' among
themBankMahaBhoga Ma€a in Denpasar in 1990asthe fi$t suchventure

doorstep
amongprivatebankssuchas dailydepositcoliection'
2. A waveof innovations
productreciprocity, lilkage
municking, banking,etc Aprominentexampl€N
services.
BankDagang vinually
Baliwhichhasadopted allof these

in which
-3. The linkagebankingproject(PHBK) of Bank Indonesiasupportedby ^GTZ
pil""t" -_a gou".;"nt-o*n"a banks, NGos, privat€ cooperativesand SHGS establish
iutono.nousi rsin"ssrelationsat mark€tterms' tying togetherformal and nonformal
finance (seibell99lc; Seibel 1992;Foundation
& Parhusip for DevelopmentCooperatjon
1993:I l7-128)

Source:Seibel,1996

8l
 and
4. P4K, a credit programofthe Deparin€nt ofAgicultwe with BRI supporiedby IFAD
300'000 familiesbelow the povertyline'
UN6P. Frorr 1989to 1994it hasleachedabout
%
organizing them in some30'000 grouPsof 8-16 members Th€ tepaydenl mte of 99
programsin oth€r countries where repayment mtes
-are apart tom similar
sea ttris prograrn
below 50'% noiuncommon Therearethreemajor factorswhich explain its successin
Indonesiai

commercialratesof interestto the groups(thoughnot from goups to members)

which conveya messageofserious bankinglo bank staff;
ii) BRI'S insistenceon repayment(basedon efective monitoring), .barring whol€
villages anddisficts from fufther qedit ifarears exceedl0 %; and
iii) tie qualityof guidanceand suPervision ftom Department of Agricultur€field
extension stafl,whichis in tom sub.l"ctto eff€ctive trainin& supervisionand
groups are
incentive systems.In cooperationwith Bank Indonesia'sPHBK, the
novr 1994)95)-m*IB Processol e\o\'mg ]fio se${c\$sf' $rgtsivdrs\s'

5, The spectacularcas€ of reorienting and restructwing a goverffnent-ownedag cult 'al

bank. In only sevenyears,staning in 1984,Bank RacyatIndonesia(BRl) changedfrom
an agency channelinggovemmeDtfunds at a gigantic loss to a profitable commercial
Uanf. fVnite its ruml lendingsch€me,KUPEDES,€xpandedat a phenomenal rate, its
savingsmobilization tlLrough village units ge\v faster' proving beyond doubt $at rural
savinis exist! l$ Dece$bcr \989, \i\tage uni! sa'tir\glspassed ths 100 % malk o{ fund
mobiiizationfor rural crediq by December 1990 they stood at 1243 percent of loans
grantedthroughvillageunits. ln D€cemberl99O(endofyear! savingsin viffageumis
(Rp 850 bn)'
i.ountea to i 7z tri ;on Rupiah:double|he amountof December1989
of th€set.Ol billion RuPiahw€remobilized$rough the famed lottery savingp scheme
iMpeofs h p"""rnUir 1990the numberof savers at village units was 5 28 million'
of
i.it mittion oetnernsnaPEDESsavers The suestway to ensurea continuingflow
to generate lhe funds from wilhin'
fundsis to makeit in the interestofthe credltProvid€r
(with)' a largepositivesPread betweentheloanrateofinter€stand the cost ot tundsl
fiom subordjnate
ithis also;- riquked the villag€ Ll,1itslo lransform themselves
concludes one of the architectsof the
ioi"uu"."iia unitt ,o p.ont_maxi.irizingbusinesses,
program(Snodglass & Patten1991;361)

Outstandings in December1990amounted to 1 38 triliion Rupiah;38 7 percentabovethe

Decembei1989outitandings ofRp. 843bn. ln December1990,1 89 million bonowershad loans
Portfolio
n" 731,000,c;mparedto 1.64 miilioD borowers in Dec€mber1989
"t"r""itt" fr* U.* .*"elleni. In December i990 thelong term lossratio (including
repaynents
,".foi.u',)*
'anei
*re wrte-off oatel was2 64 percent BRl has also Ploten lhat cledit al hdket rates rs more
effective than subsidizedlending. Unde! the subsidizedBIMAS credit program,Rp 2 55 trillion
(in 1989pri€es)wer€ tent ov€r a 14 yearperiodRp. 182billion perJear)[cumulative-figures]
ijnder BRI's nonsubsidized KUPEDESschemes, Rp 3 ?5 trillionwer€lent in 6 years(625biilion
Der vear) until D€cember 1989 (in 1989 prices) IcumulativefiSuresl By D€cember'lg90
cumulativeKUPEDES l€ndingduring lhe seven-year period stood at 528 trillion Rupiah,
averaging 753.9billion Rupiah p€r year' BRI hasnow stafted to moveinto urbanmicro-finance,
mobi)izing savings and extendlngcredir \o urbaninforma\ sEctor enleDrisEs (Sdrbe\\989'31-4q,
tss26)
8l
 There arc seveml lessonro be leamed ftom the BRI experiencewhich are of relevancE
beyondthe Indonesiancontext,

i) that the useoicommercial rermswill provide wider accessto institutionalcrediri

ii) that it is possibleto persuadea bar* to dealwith small-scaleborrowers(and to
mobilize savings;
iii) that lending to individual businessmenand*om€n is feasible;andthat
iv) politicaUy,reforning rulal credit in Indonesiaproved lessdifrcult tbanexpected.
(Snodgrass & Patlenl99l;cf Patren& Rosengard 199t. 1992)

83
 Amex Table 4 l

GRAMEEN BANK : T.INANCIAL PERFORMANCf,

1985 1986 1987

U.S,$?.4nillion U.S.$10.9milion million
U.S.$15.23

% pordolio grolvth 39.0% 35.O% 95.O%

Capital-to-assetIatio 5.9o/o 4.20/o 3.6%
Retunron assets 0.1% 0.o% 0.o%
Rehlm on capilal t.4% 0.9% r.0%

3\,0% 27.6% 25.8%

-mtqcst:mcme

Inv€sfoedf rnleresfncothe 14.20,4 14.tot t2.3%

Otherincome 0.0% 0.1% 0.1%

Totalcosts' 30.8% 27.5% 25.',I%

9.5% 't.t%
Flnancialcosts t4.0%
PersoDnelcosts t2,2% 13,4% 134%
Othercosts 4.00/o 4.6% 5.2o/o

Loan porlfolio interest

incomelessinterestexpense 2.6% 3s% 5.7%

Total inlerestincome
lessintereslexpense 17.0% 18.0% 18.6%
Loanportfoliointerest
incomelesstotal costs -t4.0% -14.5% -12.9%
Totalincomelesstolal costs 0,2% 0.ta/o 0.10/o

'Expr€sseda! a percentageof averageassets.

Souce : Rbne, Elizabeth,Aom OteroM.,1994.

84
 Annex Table 4 2

SELECTEDPERFORMANCEINDICATORS FOR THREE ACCION

INIERNAfiONAT AIFILIATES AS OF DECEMBER 3I, 1991.

PerformanceIndicator Bolivia Colombia Guatemala

Client Characteristics
TlYo 49% 35Yo
commerce /seftrce 66% 650/0 63%
Manufaciudng 34% 35% 3',7%

Loan Features
Averagebeginningloan size s87 $176 $205
Interestrate (annual) 48% 42% 45%

Borrowels Reached
TotaLactivemembers i9,901 33,81r
Annual membershipgouth rate 52% 62% 40%

Loan Funds
ActivePorfolio 54,561,'175 53,979,515 5t,426,',7t4
4.2 2.9 5.0
Growthraleofportfolio 1991'91 87% 31% 55%

RepaymentPerformance
% arrears30 days 0.2% 4.00/o 8.00/"
0.0002% 0.18% 0,680/0
% default
' Dala ar€ derivedfom AccloN ( l99l )
biu-over is aen'ea as tolal loan frmds disbu$ed ov€r the averaseloe ponfolio'
AveEselom ponfoliois @lculat€d asI Oeai-beg$nng-)eat-erd
Pordolio)2'
Souce: Rlrre, from
Elizabetb, ol*o M. l99a
 Annex 5

FINANCIAL PERFORMANCEINDICATORS FOR

SPECIALIZED FINANCIAL NGOSAND FOR MLT_TIprrttpOSE
NGOS

Th€.mostcomprehensive approachto anaryzingthe financialsoundness

compareatl incomederiv€dfrom income-g€nerating of an instiruuon,, ro
O;Jfonnine)ass; ;;rr
costsexprcssed dt apercentaged of perJormingassets.Tle calciiationmeas.re,
"p*"t""i'*a
to efficientlymturage ir" in.rlriion" ""pi
utilry"r
its assers.

This approachis appliedto FoNDoEMpREsAandtheresultsarepresented

in thetabreberow:

PERI'ORMING FINANCIAL
ASSETS EX?ENSES
231,7
50

fortherastnscar p.og"m
yearwere p/6r2,000.
T::.,:::^t:!"":*:::.Lliiil,^l:lh:_:^"
/,1^":3_"^1"jil1IT,h"se assets rotars*p/23i,750. yi"rj-" ;.;t;;i;#;i:,:fi
"p,"i"ri"i
ff:X.":._l1:T:_1":inuestmentsrFnaniiat
assets. rhe sross
Lpin",,
fina"it"r
"
;ap%i&;,"p;:;;,:
.*ei" ir,. p,"-era^i.
ffi;:il:,
".:;:li-
lL:lt::"j:,r.
!6.lo/0
= 31,8%.?:**ins
It is imponant "r ""ri ii'.lrii. ,r.r*
to noterihatur;sculculattoriaoes n; i;:1fie"ft;'ir ncomederivedfrom
grants.

- .- .- - -9perutional.xperserincludeall admmistrativeandloanlossprovisioncosrs,Thetotat of
P243,885 represents
anoperarionarcostratioofJg l"u.orperrormingassJts.ir.,i airi*"*" il"*."" ,1"
goss financialmarsinandth€ oDeratine costsratto^yi"tatl" netfre.attni ,"re_;ilili;/,"- :s.sx =
!8:1"19,, yhigh cor€sponds ro the secJndleverol cosrcoverag€. This calcularion indjcates
FONDOEMPRISA is not covedng thar
acrualcoslswithincorne deried fromif,"l""alrg
severity.of the8.t% deficiris norimned.arety ff,"
appur.nt;n*,e in*irution;,iru;;;;j r;.";;;"
"p"*1"r.
oftheaddirionalP/50.000, or 8.2d6.
received;sglants. "..""..
In orderro calculared
thethirdandfiral ievelofcostcoverage,
it is necessary
ecoiomiccostcapitar to impurcmenet
treating
it asa realcostassociared
withthemanigeme"f ir,-"ii""""i"ii"orari"".
This€nalysis
consisrsofa catculatedofrheimputed costsofcapitaana'itre "i
propefiy imprr"Ji"r"?n'i"r*O U",
assets,
Thetablebelowdemonslrates thecalculation
forthecaseorosmm

Economic
(cosT)tsENEFIT
Capital
Concessional
loans 300,000 (45,000)
Equity i64,535

Property

s o uL e : l n r d r o F / i n , , n p
u ,eo e c 'c o n s , ; a i l l e l c r nod e
'r.ranrolc h f l . t u eo n l yl o . C o s lS u u , r _ rA
tr\en r nxr\.1
 The imputed cost ofcapital is included in the financial analysisto compensatefor the economic
costsof mainlainingthe realvalueof equityandquasi-equity sourc€sof capital. Siucethecriticalbsues
is that the institution maintain the ecorcmic puchasing power of its capital, the inflarion raie should be
used as the measue of economic value. ln tbe case FONDOEMPRESA,the 15% inflarion rat€ is
appli€d to the institutions avemgeequity and concessionalloansfor the last fiscal year. The institution
actually paid P/17,000 in intercst on the concessionalloans and the diff€rence betweenthat and the
economiccostofthat con€essional loanis impuied(P45,000-P/17,000=P,28,000). AII ecoDomic costsof
maintainingthe real value ofthe equity baseare imputed. It is importantto note that th€reis no cost of
maintairingthe real valueof savingsdeposits, sincethe depositors accepted thesavingsratells adequare
compensaLion for theeffectofinflationon lheirsavrngs.

Justasthereare€conomiccostsassociated with the liabilitiesandcapitalofan institution,tbere

may also be economicbenefitsassociatedwith the institution's assetsthat are not capturedin the profit
and Loss Statement. For example,the institution has inv€stedP/175,000ofits capital in property. It is
realistic to assumethat the prop€rty assetis increasingin value at tbe samerate as inflation and thus an
@eeffi".xfr.tr"-?4{-2€4.t-4aa'6v'iijE422-' 4.-+-" e* -

benefit of prop€rty must therefore also be included in the calculation. In the example of the case
program,neteconomiccostsequalto P/56,430,

PROFITABILITY ANALYSIS
Income 3't.9%
ActualFinancialCosts 6.10/o
GrossFinancjalMargin 31,8o/o Level I
OperatingCosts 39.9%
NetOperatingMargin (8 17") Level 2
Caoitalcosts
ImDuted 92%
TOTAL (11.3o/o) Level3
SubsidvInd€x 45.7%

with a CreditProsram
Institutlons
2. Multi-puroose

ITEM PORTFOLIO INCOME FINANC]AL OPEMTIONAL IMPUTED

EXPENSES EXPENSES cAP COSTS
CALCULATION 542,000 215,750 3?,000 t99.524 60.560
PERCENTACE 40% 6.8% 36.8 % 11.2%

In th€ caseof a multlpurposeinslitution,the only performingassetrelevantio the lending

oDerationis the portfolio itself. In this example,the al,enge oulslandingpot{oli, for tbe last fiscal year
was P/542,000. Likewise,only incomederivedfrom lhe podfolio shouldbe includedin the income
calculation.The P2I 6,750is comprised of interestincome Grossyieldon theponfolio is 40 %

Wter allocatingthe fiiancial costsofthe instihrtion,it is easi€stto assume thatany borrow€d

fundsare investedin tbe loan ponfolio. As long as liabilities are l€ss than or equal to 120%of the
averageoutstandingportfotio, all ofthe institutionsfinancial costscan be allocated to the credit program.
that the institutionmust mobilize enough capitat to maintain at least20% of the
Ge;it is assumed
amountof the portfolio in cashreserves.)Under these assumptions, FONDOEMPRESA'S average
liabilitieswer€ P490,?33,90% of the averageoutstanding Portfolio of P542,000 Therefore all oflhe
actualfinancialcoslsofP17,000,6.8%ofthe portfolio,can be allocaled to the creditprogram. The gross
'
frnancialmarginfor th€ creditprogram;s thus40% 6 8oA=33.2%.

plus a percentage
ope tiond $penses canb€ calculatedby allocatingall directexpenses ot
In thisexample,14ofthe institution's
ov€rheadexpenses. 22 operational (64%)
enployees areinvolved