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On Micro-Enterprise
By Ramon T. Ayco
August 1, 2007

I. Introduction been estimated that in 2001, 1.1 billion people

had consumption levels below $1 a day and
The Project Development Institute (PDI), 2.7 billion lived on less than $2 a day.
is a non-government organization (NGO)
working for genuine agrarian reform and * Microcredit Summit Campaign data
alternative rural development strategies
through participatory methods. Its vision is In the Philippines despite the fact that poverty
the establishment of viable, sustainable and incidence had declined from 49.3 per cent in
self-reliant communities in partnership with 1985 to 40 per cent in 2000, the number of
people’s organizations, other non-government poor people has risen from 26.2 million to
organizations and government agencies 31.3 million during the same period. Providing
undertaking genuine agrarian reform and rural employment for an increasing number of
development. job seekers is a reality which is difficult to
confront. Dramatic population increase and
Since the beginning, rural micro-enterprise the deterioration of public education have
development is always a part of PDI’s rural created a pool of unskilled workers who now
development programs. Now it is exerting account for 29.3 percent of the total labor
every effort in developing and expanding force (National Statistics Office 2003; World
its established rural micro-enterprises. We Bank Group 2001; Amante et al. 1999). Rural
are making this research paper on micro- poverty, aggravated by population growth,
enterprise development primarily as our guide. has pushed rural folk to migrate to cities. But
We hope that this will also help others. the failure of the stagnant industrial sector
to absorb them has caused many workers to
Poverty and unemployment remain unemployed (defined as lacking a job
or business and not looking for work because
There is no doubt, poverty is one of the of a belief that no work is available, temporary
biggest problem in the world today, and how illness/disability, bad weather, or pending
to solve this problem is one of the greatest job application/interview) or underemployed
task facing everyone of us. (working less than 40 hours during the
reference period and wanting additional hours
When estimating poverty worldwide, the of work). Around 30 percent of the labor force
same reference poverty line has to be used, in the Philippines has been consistently un- or
and expressed in a common unit across underemployed (National Statistics Office
countries. Therefore, for the purpose of global 2003).
aggregation and comparison, the World Bank
uses reference lines set at $1 per day for the In many cases many of the world’s poor
“poorest” or “very poor” people (or those in people cannot improve their own lives
the extreme economic poverty) and $2 per day because they have little access to the financial
for the “poor” people who are living in the products and services that help those in the
upper half of those living below their nation’s developed world bridge the gap when times
poverty line* (more precisely $1.08 and $2.15 are tough. Without life or health insurance,
in 1993 Purchasing Power Parity terms). It has diseases and illness go untreated and the death
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On Micro-Enterprise page 1
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of an income earner is a dramatic hardship
for a family. Without access to loans or
credit, shop-owners cannot buy products in
bulk and farmers cannot buy machinery or
even seeds after a natural disaster or a poor
yield the season before. Without access to
savings accounts, money is hidden in walls or
floorboards where it can be stolen or lost in a
flood or fire.
excluded from the formal banking sector.
Almost all of the borrowers do so to finance
self-employment activities, and many start
by taking loans as small as $75, repaid over
several months or a year. Only a few programs
require borrowers to put up collateral,
enabling would-be entrepreneurs with few
assets to escape positions as poorly paid wage
laborers or farmers.

In many cases local money lenders are the Some of the programs serve just a handful of
only available source of capital. They provide borrowers while others serve millions. In the
loans to smooth incomes during rough times past two decades, a diverse assortment of new
or to help individuals improve their small programs has been set up in Africa, Asia, Latin
businesses, but they do so at exorbitant annual America, Canada, and roughly 300 U.S. sites
interest rates, often from 300 percent to 3,000 from New York to San Diego (The Economist
percent. Under this system, virtually all of a 1997). Globally, there are now about 8 to 10
borrower’s financial gains are passed directly million households served by microfinance
to the money lender. Individuals are unable to programs, and some practitioners are pushing
reap the rewards of their own hard work. to expand to 100 million poor households by
2005. As James Wolfensohn, the president of
The policymakers and practitioners who the World Bank, has been quick to point out,
have been trying to improve the lives of the helping 100 million households means that as
poorest and poor people face an uphill battle. many as 500–600 million poor people could
Reports of bureaucratic sprawl and unchecked benefit.
corruption abound. And many now believe
that government assistance to the poor often The micro enterprise and small business
creates dependency and disincentives that has always played a significant role in the
make matters worse, not better. Moreover, economic development of a Country. Its
despite decades of aid, communities and role might not have been as spectacular as
families appear to be increasingly fractured, that of the large corporation involving the
offering a fragile foundation on which to deployment of enormous physical, financial
build. and human resources. However, the collective
impact of the multitude of micro enterprises
Micro-finance for micro-enterprise has been tremendous, particularly in the area
of job creation. The small business has been
Amid the dispiriting news, excitement is a major source of jobs in the United States
building about a set of unusual financial (Birch, 1987). In Canada nearly 70% and, in
institutions prospering in distant corners of some regions almost 100% of new jobs are
the world. The hope is that much poverty attributed by small business (Tang and Kutryk,
can be alleviated—and that economic 1992).
and social structures can be transformed
fundamentally—by providing financial In the Philippines: the Department of Trade
services to low-income households. These and Industry (DTI) estimates that small and
institutions, united under the banner of medium enterprises (SMEs) comprise over
microfinance for micro-enterprise, share a 90% of Philippine enterprises and are among
commitment to serving clients that have been the principal drivers of economic growth and
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development. Micro, small and medium scale
enterprises (MSMSEs), on the other hand,
comprise about 70% of the country’s labor
force in both the formal and informal sectors.
II. Definition of micro-
enterprise
The nature of entrepreneurship
Over the centuries, the notion of
‘entrepreneur’ and ‘entrepreneurship’ has
been used in various senses. Conventionally,
entrepreneurship has been considered as an
inborn trait of the individual. In the Middle
Ages entrepreneur was a ‘person who was
active and got things done’. In the 16th
Century it describes those who risked their
lives and fortunes in Wars. In 17th and 18th
century it denotes those who risked their
wealth in a business enterprise or financial
contracts (Gunning, 1992). Although the last
definition reflects the notion of entrepreneur
and entrepreneurship, as we understand today,
it doesn’t capture its characteristics. It does
not provide an answer to questions such as:
What does an entrepreneur do? What qualities
and attributes make an entrepreneur effective?
This view of entrepreneurship has induced
academicians to focus on studies of business
communities.
The very notion of entrepreneur has
changed over time. The classical economists
considered the entrepreneur, essentially in
relation to risk and profit. The entrepreneur
uses the factors of production to obtain a profit light equipment, and permanent premises.
against the risk involved in the process.
John Stewart Mill calls him ‘undertaker’ who
reaps the difference between interest and gross
profit as remuneration for his exertions and
risks.
Joseph Schumpeter stressed that the primary
importance of the entrepreneur lies in his
ability to introduce innovations. He has been
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On Micro-Enterprise
defined as “any one in any type of society
who evolves a new technical, artistic, or social
programme and puts it into practices”. So the
primary function of the entrepreneurs is to
do things in a new way, which Schumpeter
terms “the creative response”. To overcome
resistance and win the consumers is another
crucial function of the entrepreneur. The
crucial function of “setting up a new
production function” makes the entrepreneur a
concept involving a center of usual qualities.
What is a micro-enterprise?
Basically a micro-enterprise is smaller than
small and medium enterprises. It is a very
small (‘micro’), informally organized business
(‘enterprise’) undertaken by poor people. Each
micro-enterprise is different, so the size, type
of business, and legal arrangements can vary a
great deal.
To differentiate micro-enterprises to small and
medium enterprises:
Those who promote small enterprises
act out of an entrepreneurial logic that
demands know-how. Their activities are
clearly defined and these “bosses” carry
them out fully with the help of their family
members and, above all, employees and
apprentices. These enterprises are often
registered (individual enterprises), pay taxes
and occasionally participate in professional
organisations. Technology remains relatively
simple but nevertheless requires investment,
The promoters therefore need seed funds.
However, quantitative criteria are insufficient
to define this category of units that have staffs
generally ranging from three to fifty or so
people. This category can also include micro
enterprises and some medium enterprises.
A whole group of enterprises with growth
potential exists within this category and is
involved in a process of diversification and
modernisation.
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An entrepreneurial attitude (in the classic
sense of the word), a medium and long
term vision, and technical and managerial
capacities are indispensable for those who
promote medium enterprises. They have staff
with very specific functions, in specialised
and sometimes diversified activities. In
most cases, they exist legally. Technological
complexity and mass production require
appropriate production means on specialised
sites. Equity capital and sometimes
considerable working capital are therefore
necessary. Their potential for accumulation
and growth is real.
interested to see the whole objective of
assisting micro enterprise should be reduction
of poverty.
Mrs. Nancy David views micro enterprise
basically as a small undertaking run by
an individual who as proprietor takes up
responsibility of the managing the venture.
Such micro enterprise may be subsistence
level firms in the informal sector somewhat
profitable non-registered firms; registered
craft oriented small firms and registered
well-established firms, desirous of
expansion.

Now, those who create micro enterprises use
simple technical skills and sometimes receive
help from family members or apprentices.
The very small scale of their activities only
allows them to meet their needs. Their legal
status is often somewhat ambiguous but they
frequently pay taxes. Their activities require
simple technologies, small tools, and a small
amount of working capital to purchase raw
materials and renew small equipment. They
do not always require permanent premises.
Their evolution potential remains low; they
operate in a schema of reproduction rather
than of growth. Horizontal diversification is
sometimes possible.
Micro enterprises embody an impressive
array of initiatives, skills and talents,
which if effective forms of assistance can
be developed, have the potential to make
an enormous contribution to the economic
growth. Micro enterprise is not just the latest
buzzword in development assistance.
In the Philippines, REPUBLIC ACT NO.
8289 otherwise known as the MAGNA
CARTA FOR SMALL ENTERPRISES define
micro and small and medium enterprises as
follows:
“Sec. 3. Small and Medium Enterprise as
Beneficiaries. - ‘Small and Medium Enterprise’
shall be defined as any business activity or
enterprise engaged in industry, agribusiness
and/or services, whether single proprietorship,
cooperative, partnership or corporation whose
total assets, inclusive of those arising from
loans but exclusive of the land on which the
particular business entity’s office, plant and
equipment are situated, must have value falling
under the following categories:
Micro less than P 1,500,001
Small P1,500,001 P15,000,000
Medium P15,000,001 P60,000,000

Mari Nowak define micro enterprise as an

entity employing less than five persons, “The above definitions shall be subject to
generating income from non farm production, review and adjustment by the said Council
service and trade. Hernando – de – Soto moto proprio or upon recommendation of
classified micro enterprise as subgroup sectoral organization(s) taking into account
of informal sector. Muhammad Yunus of inflation and other economic indicators. The
Bangaladesh finds little scope in describing Council may use as variables the number of
the character of micro enterprise rather employees, equity capital and asset size.”
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Characteristics of micro-enterprise example, what happens if one person want to
leave the business?
Micro-enterprises aim to make money, not
to give people something to do. They are not The cost of starting a micro-enterprise
concerned with ‘getting a job’ for the sake of doesn’t need to be high. In the Philippines,
having something to do. They may (probably one can start a business with only P50 (almost
will, in fact) help people to have richer, more $1) as a starting capital provided that whatever
purposeful lives, and provide new connections happens you don’t spend the profits and add
with their communities. But these are not these up to your capital until it became bigger
the main aim. Most people with learning and bigger.
disabilities (and long-term members of other
disadvantage groups) have very little money The amount of income can vary widely - and
which is under their control. More money it partly depends on what each person want to
brings new opportunities. achieve. Some people may be very happy if
their micro-enterprise makes just a little bit of
Micro-enterprises aim to make money money - enough, for example, to save up over
by seeking out ordinary commercial a year and spend on a good summer holiday.
opportunities. They make capitalism The US experience suggests micro-enterprises
work to the benefit of people who have often create a higher level of income than
been disadvantaged. They don’t generate that, and just a few make tens of thousands of
income through donations or grants (except, pounds.
possibly, as start-up money) and almost
certainly don’t depend on the social care People with very high support needs can have
industry. Micro-enterprises, like other micro-enterprises. If a business is set up in the
ordinary businesses, aim to offer ordinary right way, it can make an income with very
citizens a product or service for which little effort in return.
they’ll be willing to pay.
Likewise, the amount of time they require
Micro-enterprises are built on an individual can vary from a few days a year to a full-
basis. They are not schemes, projects, or time occupation. They’re designed to suit
standard packages to be delivered to whole each person, and some people may want, for
groups of people. They require thinking at the example, to run their businesses at events
‘micro’ level - about this person, with these that only take place a few times a year. Some
interests, living in this community. kinds of micro-enterprise may run with very
little effort (from a business point of view,
Micro-enterprises are usually ‘owned’ by one an ideal arrangement!). All this means that
person, and are very unlikely to be shared micro-enterprises can’t be viewed as an option
between more than three. If the micro- that will necessarily provide an alternative
enterprise has been created to match one weekday occupation.
person’s requirements, then it’s probably
only right for that person. And by keeping Informal economy
the ownership to one person, there’s the best
possible chance that the person will have Most if not all micro-enterprises belongs to
real control over it. There are times when the informal economy.
two people can make a success of sharing
ownership, but these are the exceptions - and The informal economy is made up of those
three people sharing is a risky option. For individuals engaged in entrepreneurial
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On Micro-Enterprise page 5
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endeavors who have no available knowledge
of entrepreneurial and lending services
and do not fully understand the long-run
importance of interfacing their businesses with
government agencies.
In the United States, the Aspen Institutes
FIELD project has conducted studies on this
economy to provide a better picture of who
makes up this sector and what the wants/needs
are for developing these entrepreneurs. The
following studies were completed in 2003:
The FIELD program describes the informal
economy “as that component of the overall
market in which enterprises, employers and
self-employed individuals engage in legal
but unregulated activities. While they do not
comply with standard business practices,
taxation regulations and/or other business
reporting requirements, they are otherwise
not engaged in overtly criminal activity. It
includes both employed and self-employed
workers; cash is the most common medium
of exchange; and inferior work conditions are
commonplace for workers.” Micro programs,
for the most part, are serving individuals in
this sector, but it is thought the market is much
larger than the current reach.
For the most part, these individuals were not
aware of services available to businesses.
FIELD found that possibly a third of this
population would be candidates at any given
time for microenterprise services. This group
contained those who expressed ambition and
interest in growth, as well as those who would
cautiously consider it. FIELD concluded
that they would benefit from sound business
analysis and guidance that is found in high-
quality microenterprise programs. It is
important that these services could be adapted
to the specific needs and time and place
constraints of the busy entrepreneurs.
In addition, the study found that there is a role in the Philippines is rapidly expanding as a
for micro programs to assist communities in
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appreciating and supporting entrepreneurs in
their area and in helping informal economy
entrepreneurs look at their own work from
a business perspective. The study also
found a need for fully funding structures
and incentives in the state so that more
entrepreneurs can be reached.
Meanwhile in the Philippines, the official
definition (2) adopted by the National Census
and Statistical Board on November 6, 2002
characterizes the informal segment of the
Philippine economy as:
Units engaged in the production of goods
and services with the primary objective of
generating employment and incomes to the
persons concerned. It consists of household
unincorporated enterprises that are market
and non-market producers of goods as well as
market producers of services.
These enterprises are operated by own account
workers, which may employ unpaid family
workers as well as occasional, seasonally
hired workers.
These enterprises may also be owned and
operated by employers, which may employ
less than 10 employees on a continuous basis.
Excluded are corporations, quasicorporations,
units with 10 or more employees, corporate
farms, commercial livestock raising and
commercial fishing. (NSCB 2002).
As an economic and social group, the informal
sector is composed of a variety of people with
different types of work – homeworkers, micro-
entrepreneurs, street vendors and peddlers,
drivers and operators of taxicabs, jeepneys,
tricycles and other public conveyances,
petty retailers, barter traders, small-scale
construction workers, small-miners, small
farmers and fisherfolks.
As elsewhere in Asia, the informal sector
consequence of worsening unemployment
On Micro-Enterprise
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due to retrenchment of industries; declining
agricultural production; falling real wages
due to inflation; and the widening income
inequality and poverty – where women,
men and children are struggling to earn their
living through extra legal means in order to
survive. In contrast to formal wage workers,
the informal workers have grown throughout
the decades and have consistently remained a
stubborn feature of the Philippine economy,
so much so that their activities have gained
acceptance as a survival strategy of the poor.
There are an estimated 22.5 million Filipinos
belonging to the informal sector, which
represents 75 percent of the total work force,
according to the Department of Labor and
Employment (DOLE).
Many of the country’s informal sector
specifically in the cities are severely resource-
constrained small vendors operating not only
in public markets but also in the sidewalks
and streets. Their survival in business relies
heavily on access to financing. This usually
comes from the informal sector as well in
the form of informal financiers called “5-6.”
Two types of 5-6 financiers are found in the
Philippine, each with a distinctive lending
mechanism, Filipinos and Indian nationals
popularly known as “Bombay”.
Five-six (5-6) moneylenders charge a
nominal interest rate of 20 percent over
an agreed period of time. A person who
borrows 5 pesos from a 5-6 moneylender
over a period of one week repays 6
pesos, including 1 peso interest. Neither
Filipino nor Indian 5-6 moneylenders
require collateral or documents from their
borrowers. The success of a borrower’s
business and loan repayment history
provide a gauge of the borrower’s
credibility.
As data shows informal sectors comprised
the bulk of the labor force in the Philippines productive resources.
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On Micro-Enterprise
and contributing much to the economy of
the country. With this it is important for the
government to adopt a more active role in
providing them with the assistance they need
to cope with the difficulties of economic
shifts. In this regard, a number of Philippine
laws and policies have been promulgated that
either directly or indirectly seek to increase
the informal sector’s access to productive
resources, improve their working conditions
and welfare, and extend social protection.
Some of these were the result of long years
of advocacy on the part of informal workers’
groups.
To date, enacted laws and policies that
are congenial to the informal sector are:
Agriculture and Fisheries Modernization
Act (RA 8435), the Magna Carta for Small
Enterprises (RA 6977), the Cooperative
Code of the Philippines (RA 6938), the
Cooperatives Development Authority
(CDA) Law (RA 6939) and the Social
Reform and Poverty Alleviation Act (RA
8425 of 1998) which provides an entire
section on microfinance services for the
poor. Additionally, with the passage of
Executive Order 452, registered vendors
are encouraged to form an association for
empowerment. This law may in the long run
prove beneficial to women since majority
of them earn income as vendors. Under this
promulgation, the LGUs are mandated to
address vendors’ security at the workplace
by providing vending sites around the
municipal hall.
Moreover, under the Social Development
Council of NEDA (National Economic and
Development Authority), a Country Program
for “Institutionalizing Programs and Projects
for the Informal Sector through the Local
Governments” was approved in 2003 with
DOLE initiating its implementation (or
roll-out) containing strategies pertaining to
recognition, social protection and access to
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On the other hand, some pertinent laws
and policies that have been passed need
further improvement and enforcement,
most especially those with clear-cut gender
perspective, such as the Act for Women
in Micro and Cottage Business Enterprise
(RA 7882), Act Promoting the Integration
of Women as Full and Equal Partners of
Men in Development and Nation Building
(RA 7192) and the Implementing Rules on
the Employment of Homeworkers (DOLE
Department Order No 5).
III. Women in Micro-Enterprise
Development
turning to self-generated employment in
small-scale enterprise activities in the informal
sector to support their households.
Women have proven to be the best poverty
fighters. Experience and studies have shown
that they use the profits from their businesses
to send their children to school, improve their
families’ living conditions and nutrition, and
expand their businesses. As families cross the
poverty line and micro-enterprises expand,
their communities benefit. Jobs are created,
knowledge is shared, civic participation
increases, and women are recognized as
valuable members of their families and
communities.

Of the estimated 1.3 billion people in the The rationale behind women becoming
world living in poverty, more than 70% economic actors has been examined by
are female (UNDP 1995: 36). The number various researchers. Income generating
of women living in poverty has increased activities are not merely viewed as a tool
disproportionately over the past decade for economic needs of women. It is equally
compared with the number of men (Platform a powerful instrument to enable women to
For Action 1995: para 48). The feminisation determine their own lives (Bennet, 1992).
of poverty is a direct consequence of women’s Women are culturally well equipped to run
unequal access to economic opportunities. their business due to skill developed through
managing households, raising children etc.
In recent years, micro-financing for women’s Therefore, shift from family management
small and micro-scale enterprises has been to enterprise management (Harper and
seen as an effective way to promote and Vyakarnam, 1988) may be easier than a shift
support women’s self-employment and from paid employment to self-employment. .
access to credit. The promotion, financing
and strengthening of micro-enterprises was Historical background
also highlighted in the Beijing Platform For
Action as an important way of increasing the The focus on the contribution of women
productive capacity of women, and breaking in direct productive work was first brought
the “cycle of poverty” (Platform For Action out in 1970 by Ester Boserup in her book
1995: paras 55, 166). Women’s Role in Economic Development.
This work of Boserup is a compilation of her
research experience in India. It also provided a
Women in local economies conceptual framework for research on Women
in Development. Around the mid 1970’s, neo-
Women entrepreneurs play an important role Marxist feminists and dependency theorists
in local economies, and a large percentage of began looking at the relationship between
micro-enterprises in developing countries are women and development rather than the
undertaken by women. Increasingly women strategies for integrating women in economic
in urban and rural areas are successfully development. However, lack of understanding
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page 8 On Micro-Enterprise
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of women’s work in developing societies, regarding opportunity costs involved in
and Western biases in development projects entrepreneurship development as opposed to
reinforced the division between public and generate causal income (Kraus- Harper, 1992).
private spheres of women lives (Ghosh R). Micro enterprises are small undertakings
Women and development (WAD) like women run by individuals or groups who take up
in development (WID) focused on productive responsibility of managing a business venture
sector, and aimed at skill development for and often involved in the family activities. The
income generation. micro enterprises suit the life style of women
because of their multiple roles and need to re-
In 1980s, the gender and development approach organise time. Originally micro enterprises for
(GAD), influenced by social feminism, post women were extension of kitchen activities.
modern and post colonial theories, took into Now women have ventured into engineering,
account the totality of women’s lives, rejecting electronics and other industries … (David,
the public / private dichotomy which serves 1992).
to devalue women’s work at home. Focus on
women perspectives on development makes Hindrances
women the ‘subjects’ rather than ‘objects’
of development, ‘change agents’ rather than But there are hindrances that needs to
‘welfare recipients’. The GAD approach is to be overcome in order for women to fully
move women from the margin to the center participate in economic development through
(Hooks, 1984) by women getting a sense of micro-enterprises.
control over their lives. Entrepreneurship
activities for women are clearly within the Rural women frequently have primary
GAD framework. Development cannot be responsibility for agricultural production,
sustained unless people for whom it is intended in addition to domestic responsibilities and
are at the center of development activities. The childcare. These responsibilities place heavy
goal of development is not merely to initiate demands on women’s time, and micro-
a process of economic growth, but also a enterprise activities can potentially increase
process, which will improve the lives of the the workload of women. Improving access
people. The concept of empowerment through to labour-saving technologies in any of these
enterprise is underlined through this thinking. areas can free up time for income generating
Micro enterprise represents an important means micro-enterprise activities.
of earning income for women in developing
countries. Limited access to productive resources
(particularly capital, labour time and
It is not easy for women to find out a job that technologies), transport constraints, lack of
will be suitable with their family responsibility market knowledge, and lack of basic literacy
and household work. Thus many women and numeracy skills can restrict the capacity
are attracted by the idea of self-employment of women to participate effectively in business
in micro enterprises adjoining their house activities.
premises with flexible hours, which allow
them to take care of both home and business. Women, who generally do not have ownership
It provides employment and income to of land or capital goods, can be disadvantaged
alleviate poverty. by the collateral-based lending policies
of financial institutions. For example,
The difference between income generation and UNDP estimates that only 5% of the credit
entrepreneurship is in the conscious decision provided by multilateral banks reaches rural
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On Micro-Enterprise page 9
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women (UNDP 1995: 39). In some places, between investment and generation of regular
government and/or institutional regulations income, and availability of local markets
require that women seeking bank loans secure (IFAD 1991: 9).
their spouse’s signature.
IV. Micro-Finance for
Social attitudes concerning the value of Micro-Enterprise
traditional women’s work activities and their
potential abilities can limit the participation The need for microfinance
rates and ultimate commercial success of
female micro-entrepreneurs. In the past, Studies in India, Kenya and the Philippines
income-generation projects for women have found that the average annual return on
frequently been for marginal activities with investments by micro-enterprise ranged from
limited marketing potential and poor return 117 to 847 per cent. If they are so lucrative,
for labour. They have often been based on why didn’t these businesses start sooner? Lack
the implicit assumption that women’s income of capital. Poor people either have no money
is supplementary to that of the male head of to get started, or have to borrow from loan
household. Loans for men are usually larger sharks who charge usurious rates that wipe out
and more long-term than those provided for profits.
women. However, much evidence indicates
that women are very good credit risks, with What is really needed here is microfinance.
many small-scale credit projects for women
reporting very high repayment rates in a range Microfinance is the supply of banking
of sectors and activities. services to micro-enterprises and poor
families. It helps people to escape poverty
Development organisations such as co- by giving them collateral-free loans and
operatives, which restrict membership to other financial services to support income-
one household member, may also exclude generating businesses. A key to microfinance
women from access to resources such as is the recycling of loan dollars. As each loan
credit. There is often the risk that in women’s is repaid—usually within six months to a
micro-enterprise schemes, the benefits of the year—the money is recycled as another loan,
activities, including income earned and assets thus multiplying the value of each dollar in
accrued, will not necessarily be controlled defeating global poverty, and changing lives
by women for expenditure on their own and and communities.
basic family needs. Training and support is
needed for micro-enterprise projects, in bothMicrofinace is not only Microcredit. The latter
the micro-financing (management of savings refers specifically to loans and the credit needs
and credit) and micro-enterprise development of clients, while microfinance covers a broader
(small business and technical training) areas.
range of financial services that create a wider
range of opportunities for success. Examples
According to the International Fund for of these additional financial services include
Agricultural Development (IFAD), there savings, insurance, housing loans and remittance
are four key criteria for micro-enterprise transfers. The local micro-finance institution
development schemes aimed at poor rural might also offer microfinance plus activities such
women, which can both improve demand for as entrepreneurial and life skills training, and
credit and reduce the risks of indebtedness. advice on topics such as health and nutrition,
These are: modest financial investment, sanitation, improving living conditions, and the
low investment risk, short gestation period importance of educating children.
______________________________________________________________________________
page 10 On Micro-Enterprise
______________________________________________________________________________
Sometimes called “banking for the poor,” given the political context, but there are
microfinance is an amazingly simple approach also good reasons for caution. Alleviating
that has been proven to empower very poor poverty through banking is an old idea with
people around the world to pull themselves a checkered past. Poverty alleviation through
out of poverty. It is sustainable and can be the provision of subsidized credit was a
implemented on the massive scale necessary centerpiece of many countries’ development
to respond to the urgent needs of those strategies from the early 1950s through the
living on less than $1 a day. Relying on their 1980s, but these experiences were nearly all
traditional skills and entrepreneurial instincts, disasters. Loan repayment rates often dropped
very poor people, mostly women, use small well below 50 percent; costs of subsidies
loans, other financial services, and support ballooned; and much credit was diverted to the
from local organizations called microfinance politically powerful, away from the intended
institutions (MFIs) to start, establish, sustain, recipients (Dale Adams, Douglas Graham, and
or expand very small, self-supporting J. D. von Pischke 1984).
businesses.
What is new? Although very few programs
From ancient slums and impoverished villages require collateral, the major new programs
in the developing world to the tired inner cities report loan repayment rates that are in almost
and frayed suburbs of America’s economic all cases above 95 percent. The programs have
fringes, millions of people, mostly women, are also proven able to reach poor individuals,
all part of a revolution. Some might call it a particularly women, that have been difficult
capitalist revolution . As little as $25 or $50 in to reach through alternative approaches.
the developing world, perhaps $500 or $5000 Nowhere is this more striking than in
in the United States, these microloans make Bangladesh, a predominantly Muslim country
huge differences in people’s lives. Many Third traditionally viewed as culturally conservative
World bankers are finding that lending to the and male-dominated. The programs there
poor is not just a good thing to do but is also together serve close to five million borrowers,
profitable. (Brill 1999) the vast majority of whom are women, and,
in addition to providing loans, some of the
Advocates who lean left highlight the programs also offer education on health
“bottom-up” aspects, attention to community, issues, gender roles, and legal rights. The
focus on women, and, most importantly, new programs also break from the past by
the aim to help the under-served. It is no eschewing heavy government involvement
coincidence that the rise of microfinance and by paying close attention to the incentives
parallels the rise of nongovernmental that drive efficient performance.
organizations (NGOs) in policy circles and
the newfound attention to “social capital” The microfinance revolution, begun with
by academics (e.g., Robert Putnam 1993). independent initiatives in Latin America
Those who lean right highlight the prospect of and South Asia starting in the 1970s, has so
alleviating poverty while providing incentives far allowed 65 million poor people around
to work, the nongovernmental leadership, the world to receive small loans without
the use of mechanisms disciplined by market collateral, build up assets, and buy insurance.
forces, and the general suspicion of ongoing
subsidization. The UN Year of Microcredit in 2005
and the Nobel Peace Prize Mohammed
There are good reasons for excitement about Yunus and Grameen Bank in 2006 have
the promise of microfinance, especially given considerable public recognition to
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On Micro-Enterprise page 11
______________________________________________________________________________
microfinance as a development tool. Christen
et al. (2004) reports an astonishing 500 million
persons served, mostly with savings accounts,
while the Microcredit Summit in their 2006-
meeting in Halifax celebrated the milestone
of 100 million borrowers. Nevertheless,
microfinance still only reaches a fraction
of the world’s poor (Christen et al., 2004,
Robinson, 2001). Hence, there is a recognized
supply challenge in the market (Helms, 2006).
Key Principles of Microfinance
These principles were developed and
endorsed by the Consultative Group to
Assist the Poor (CGAP) and its 31 member
donors, and further endorsed by the Group of
Eight leaders at the G8 Summit on 10 June
2004. CGAP is a consortium of 31 public
and private development agencies working
together to expand access to financial services
for the poor, referred to as microfinance.
1. Poor people need a variety of financial
services, not just loans. Like everyone
else, the poor need a range of financial
services that are convenient, flexible, and
affordable. Depending on circumstances,
they want not only loans, but also savings,
insurance, and cash transfer services.
2. Microfinance is a powerful tool to fight
poverty. When poor people have access
to financial services, they can earn more,
build their assets, and cushion themselves
against external shocks. Poor households
use microfinance to move from everyday
survival to planning for the future: they
invest in better nutrition, housing, health,
and education.
6. Microcredit is not always the answer.
3. Microfinance means building financial
systems that serve the poor. In most
developing countries, poor people are
the majority of the population, yet they
are the least likely to be served by banks.
Microfinance is often seen as a marginal
______________________________________________________________________________
page 12
sector—a “development” activity that
donors, governments, or social investors
might care about, but not as part of the
country’s mainstream financial system.
However, microfinance will reach the
maximum number of poor clients only
when it is integrated into the financial
sector.
4. Microfinance can pay for itself, and must
do so if it is to reach very large numbers
of poor people. Most poor people cannot
get good financial services that meet their
needs because there are not enough strong
institutions that provide such services.
Strong institutions need to charge enough
to cover their costs. Cost recovery is not an
end in itself. Rather, it is the only way to
reach scale and impact beyond the limited
levels that donors can fund. A financially
sustainable institution can continue and
expand its services over the long term.
Achieving sustainability means lowering
transaction costs, offering services that are
more useful to the clients, and finding new
ways to reach more of the unbanked poor.
5. Microfinance is about building
permanent local financial institutions.
Finance for the poor requires sound
domestic financial institutions that provide
services on a permanent basis. These
institutions need to attract domestic
savings, recycle those savings into loans,
and provide other services. As local
institutions and capital markets mature,
there will be less dependence on funding
from donors and governments, including
government development banks.
Microcredit is not the best tool for
everyone or every situation. Destitute
and hungry people with no income or
means of repayment need other kinds of
support before they can make good use
of loans. In many cases, other tools will
On Micro-Enterprise
______________________________________________________________________________
alleviate poverty better—for instance,
small grants, employment and training
programs, or infrastructure improvements.
Where possible, such services should be
coupled with building savings.
7. Interest rate ceilings hurt poor people
by making it harder for them to get
credit. It costs much more to make many
small loans than a few large loans. Unless
microlenders can charge interest rates
that are well above average bank loan
rates, they cannot cover their costs. Their
growth will be limited by the scarce and
uncertain supply soft money from donors
or governments. When governments
regulate interest rates, they usually set
them at levels so low that microcredit
cannot cover its costs, so such regulation
should be avoided. At the same time, a
microlender should not use high interest
rates to make borrowers cover the cost of
its own inefficiency.
8. The role of government is to enable
financial services, not to provide them
directly. National governments should
set policies that stimulate financial
services for poor people at the same time
as protecting deposits. Governments
need to maintain macroeconomic
stability, avoid interest rate caps, and
refrain from distorting markets with
subsidized, high-default loan programs
that cannot be sustained. They should
also clamp down on corruption and
improve the environment for micro-
businesses, including access to markets
and infrastructure. In special cases where
other funds are unavailable, government
funding may be warranted for sound and
independent microfinance institutions.
9. Donor funds should complement
private capital, not compete with it.
Donors provide grants, loans, and equity Private suppliers of microfinance are normally
for microfinance. Such support should incorporated as member based Cooperatives
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On Micro-Enterprise
be temporary. It should be used to build
the capacity of microfinance providers;
to develop supporting infrastructure like
rating agencies, credit bureaus, and audit
capacity; and to support experimentation.
In some cases, serving sparse or difficult-
to-reach populations can require longer-
term donor support. Donors should try to
integrate microfinance with the rest of the
financial system. They should use experts
with a track record of success when
designing and implementing projects.
They should set clear performance
targets that must be met before funding
is continued. Every project should have a
realistic plan for reaching a point where
the donor’s support is no longer needed.
10. The key bottleneck is the shortage
of strong institutions and managers.
Microfinance is a specialized field that
combines banking with social goals.
Skills and systems need to be built at all
levels: managers and information systems
of microfinance institutions, central
banks that regulate microfinance, other
government agencies, and donors. Public
and private investments in microfinance
should focus on building this capacity, not
just moving money.
11. Microfinance works best when
it measures—and discloses—its
performance. Accurate, standardized
performance information is imperative,
both financial information (e.g., interest
rates, loan repayment, and cost recovery)
and social information (e.g., number of
clients reached and their poverty level).
Donors, investors, banking supervisors,
and customers need this information to
judge their cost, risk, and return.
Microfinance Institutions (MFIs)
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______________________________________________________________________________
(COOP), Non Profit Organizations (NPOs) or
Shareholder Firms (SHFs). They are called
Microfinance Institutions or MFIs.
MFIs are dedicated to alleviating poverty.
These frontline organizations reach out to
the very poor and deliver microfinance
services to local clients daily. They educate
local communities about the opportunity
to improve their lives with microfinance;
make microloans and provide other financial
services such as savings accounts, micro-
insurance and money transfers; collect
weekly loan payments; and assist clients in
solving some of the life challenges they may
face. Many are also integrating other social
empowerment strategies into their operations,
including healthcare and nutrition, financial
literacy, and environmentally-friendly
technologies, such as solar energy and biogas.
Such strenuous programs and innovations
require constant growth in skills and capacity.
MFIs differ in size and reach: some serve a
few thousand clients in their immediate area,
while others serve hundreds of thousands
of very poor people through hundreds of
branches covering large regions.
MFIs that operate as non-profit foundations
traditionally obtain their funds from donors,
retained earnings and, in some cases, from
public financial institutions. With an estimated small loans and personally servicing each
expenditure rate of at least US $ 500 million
per year, development agencies remain the
most important external source of funding for
MFIs.
Grameen Bank for example provides funding
for MFIs through direct loans, grants, loan
guarantees and other innovative financing
techniques. Other funding comes from
individuals, philanthropists, foundations, and
governments and international institutions
such as the World Bank. MFIs also borrow
funds from traditional banks to loan to
their clients. Some of the more successful
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page 14
nonprofits have managed to obtain funding
from commercial banks and more and more
commercial funding is being channeled to
microfinance.
Unlike other loan programs, microfinance
clients are not required to provide collateral to
receive loans. This allows people who would
not qualify for loans at traditional financial
institutions to receive credit. MFIs are also
very client-friendly; most usually go to their
clients to provide loans and receive payments,
rather than requiring their clients to come to
them. A few of them also use focal centers
where clients gather to conduct financial
transactions and receive other social services.
Microfinance clients are excellent credit risks.
In Grameen Bank’s experience, for example,
the repayment rate is between 95 and 98
percent. In fact, it is higher than the repayment
rate of student loans and credit card debts in
the United States. They value the opportunity
to improve their lives.
Like other financial institutions,
microfinance institutions (MFIs) charge
interest for the loans they make to their
clients. The interest collected goes back
into the program wherein part of it are
used to fund more loans and other part are
used to cover the high cost of making very
client every week. It also covers the cost
of managing the “center meetings”; the
peer support group process; and providing
information on social services, personal
development, health and other critical
information that helps clients improve their
lives and the future of their families. Their
rates are also largely influenced by the rates
MFIs themselves pay for borrowing the
funds that they in turn lend to their clients.
MFI interest rates can range from 18 to 60
percent, depending on the conditions in each
MFI’s service area. Without microfinance
programs, the most common alternative
On Micro-Enterprise
______________________________________________________________________________
for very poor people is the local “money
lenders,” who regularly charge between 120
and 300 percent.
It is important to note that in many countries
the “microfinance industry” is becoming a
competitive industry, leading MFI to lower
their interest rates, therefore improving the
cost of services for micro enterprises.
One of the most attractive features of
microfinance is the goal of self-sufficiency
for both microentrepreneurs and MFIs. No
institution can survive without reaching
financial stability within a reasonable
period. Microfinance Institutions must be
built to survive without subsidies. From a
financial point of view, numerous experiences
have shown that it is possible to create a
self-sustainable microfinance institution.
In Eastern Europe , IMI (Internationale
Micro Investitionen Aktiengesellschaft),
an investment company has invested in
other 26 MFIs so far, many of them already
reaching self-sufficiency in Georgia, Bosnia &
Herzegovina, Albania, Ukraine etc. In Mexico,
Compartamos, one of the leading MFIs in
Latin America is fully self sufficient, etc, etc.
Many examples prove us that Microfinance
can be run as a self-sustainable operation.
Another example is the Grameen Foundation.
It is spearheading several initiatives to give
MFIs access to the private market financing
options available to traditional banks. By
combining access to private market financing
with more efficient management and
technology, MFIs can begin to move from
reliance on philanthropy to self-sufficiency.
Grameen Bank in Bangladesh has proven that
this can be accomplished. It is totally self-
supporting and accepts no grants or donations.
The financial viability of microfinance
organizations, depends on: 1) sufficient The idea for the Grameen Bank did not
volume of activity; 2) a satisfactory spread come down from the academy, nor from
between the interest on loans and the cost ideas that started in high-income countries
______________________________________________________________________________
On Micro-Enterprise
of funds; 3) the control of operating costs;
4) the control of outstanding payments and
misappropriations risks (involving procedures
for loan loss); 5) profit (to build reserves for
hard times ahead, and more importantly, with
which to expand the number of clients served
and range of services offered.)
Microfinance Institutions (MFIs) have
accelerated economic transformations by
encouraging banks to significantly expand
the micro-enterprises access to microfinance
services. In the Philippines, for instance, the
Micro-enterprise Access to Banking Services
(MABS) program, assists clients rural banks
to increase the financial services they provide
to the micro enterprise sector by providing
microfinance technical assistance and training
to rural banks. Trained banks in turn offer
microfinance loan and deposit services
specially tailored to micro enterprise clients.
Today, it is estimated that 500 Million people
all over the world need access to financial
services to develop income generating
activities. In our opinion, donor money will
not be enough
to reach this market, banks and financial
markets should help build financial systems
all over the developing world that serve the
majority.
Microfinance schemes
There are many microfinance schemes
practiced and developed by different groups
of people and institutions all over the world.
Some schemes have specific unique features
totally different from the others, but most of
the schemes have almost the same features.
The best examples are the following:
a. The Grameen Bank, Bangladesh
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______________________________________________________________________________
and then spread broadly.1 As the founder
Dr. Muhammad Yunus (1995) describes the
beginning:
Bangladesh had a terrible famine in 1974.
I was teaching economics in a Bangladesh
university at that time. You can guess how
difficult it is to teach the elegant theories of
economics when people are dying of hunger
all around you. Those theories appeared like
cruel jokes. I became a drop-out from formal
economics. I wanted to learn economics
from the poor in the village next door to the
university campus.
Yunus found that most villagers were unable
to obtain credit at reasonable rates, so he
began by lending them money from his own
pocket, allowing the villagers to buy materials
for projects like weaving bamboo stools
and making pots (New York Times 1997).
Ten years later, Yunus had set up the bank,
drawing on lessons from informal financial
institutions to lend exclusively to groups
of poor households. Common loan uses
include rice processing, livestock raising, and
traditional crafts.
The groups form voluntarily, and, while
loans are made to individuals, all in the group
are held responsible for loan repayment.
The groups consist of five borrowers each,
with lending first to two, then to the next
two, and then to the fifth. These groups of
five meet together weekly with seven other
groups, so that bank staff meet with forty
clients at a time. According to the rules, if
one member ever defaults, all in the group
are denied subsequent loans. The contracts
take advantage of local information and the
“social assets” that are at the heart of local
enforcement mechanisms. Those mechanisms
rely on informal insurance relationships
and threats, ranging from social isolation to
physical retribution, that facilitate borrowing
for households lacking collateral (Besley and
Coate 1995). The programs thus combine
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page 16
the scale advantages of a standard bank
with mechanisms long used in traditional,
group-based modes of informal finance, such
as rotating savings and credit associations
(Besley, Coate, and Glenn Loury 1993).2
The Grameen Bank now has over two million
borrowers, 95 percent of whom are women,
receiving loans that total $30–40 million
per month. Reported recent repayment rates
average 97–98 percent, but relevant rates
average about 92 percent and have been
substantially lower in recent years.
Most loans are for one year with a nominal
interest rate of 20 percent (roughly a 15–16
percent real rate). Calculations suggest,
however, that Grameen would have had to
charge a nominal rate of around 32 percent in
order to become fully financially sustainable
(holding the current cost structure constant).
The management argues that such an increase
would undermine the bank’s social mission
(Shahidur Khandker 1998), but there is little
solid evidence that speaks to the issue.
Grameen figures prominently as an early
innovator in microfinance and has been
particularly well studied. Programs that have
been set up in North Carolina, New York
City, Chicago, Boston, and Washington,
D.C. cite Grameen as an inspiration. In
addition, Grameen’s group lending model
has been replicated in Bolivia, Chile, China,
Ethiopia, Honduras, India, Malaysia, Mali, the
Philippines, Sri Lanka, Tanzania, Thailand, the
U.S., and Vietnam. When Bill Clinton was still
governor, it was Muhammad Yunus, founder
of the Grameen Bank (and a Vanderbilt-trained
economist), who was called on to help set up
the Good Faith Fund in Arkansas, one of the
early microfinance organizations in the U.S.
b. BancoSol, Bolivia
Banco Solidario (BancoSol) of urban Bolivia
also lends to groups but differs in many
On Micro-Enterprise
______________________________________________________________________________
ways from Grameen.3 First, its focus is
sharply on banking, not on social service.
Second, loans are made to all group members
simultaneously, and the “solidarity groups”
can be formed of three to seven members. The
bank, though, is constantly evolving, and it
has started lending to individuals as well. By
the end of 1998, 92 percent of the portfolio
was in loans made to solidarity groups and 98
percent of clients were in solidarity groups,
but it is likely that those ratios will fall over
time. By the end of 1998, 28 percent of the
portfolio had some kind of guarantee beyond
just a solidarity group.
Third, interest rates are relatively high. While
1998 inflation was below 5 percent, loans
denominated in bolivianos were made at an
annual base rate of 48 percent, plus a 2.5
percent commission charged up front. Clients
with solid performance records are offered
loans at 45 percent per year, but this is still
steep relative to Grameen (but not relative to
the typical moneylender, who may charge as
much as 10 percent per month). About 70–80
percent of loans are denominated in dollars,
however, and these loans cost clients 24–30
percent per year, with a 1 percent fee up front.
Fourth, as a result of these rates, the bank does
not rely on subsidies, making a respectable
return on lending. BancoSol reports returns on
equity of nearly 30 percent at the end of 1998
and returns on assets of about 4.5 percent,
figures that are impressive relative to Wall
Street investments—although adjustments for
risk will alter the picture. Fifth, repayment
schedules are flexible, allowing some
borrowers to make weekly repayments and
others to do so only monthly. Sixth, loan
durations are also flexible. At the end of 1998, weakening throughout the Bolivian banking
about 10 percent had durations between one
and four months, 24 percent had durations
of four to seven months, 23 percent had
durations of seven to ten months, 19 percent
had durations of ten to thirteen months, and
the balance stretched toward two years.
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On Micro-Enterprise
Seventh, borrowers are better off than in
Bangladesh and loans are larger, with average
loan balances exceeding $900, roughly nine
times larger than for Grameen (although
first loans may start as low as $100). Thus
while BancoSol serves poor clients, a recent
study finds that typical clients are among the
“richest of the poor” and are clustered just
above the poverty line (where poverty is based
on access to a set of basic needs like shelter
and education; Sergio Navajas et al. 1998).
Partly this may be due to the “maturation”
of clients from poor borrowers into less poor
borrowers, but the profile of clients also looks
very different from that of the mature clients
of typical South Asian programs.
The stress on the financial side has made
BancoSol one of the key forces in the Bolivian
banking system. The institution started as an
NGO (PRODEM) in 1987, became a bank in
1992, and, by the end of 1998, served 81,503
low-income clients. That scale gives it about
40 percent of borrowers in the entire Bolivian
banking system.
Part of the success is due to impressive
repayment performance, although difficulties
are beginning to emerge. Unlike most other
microfinance institutions, BancoSol reports
overdues using conservative standards: if a
loan repayment is overdue for one day, the
entire unpaid balance is considered at risk
(even when the planned payment was only
scheduled to be a partial repayment). By these
standards, 2.03 percent of the portfolio was at
risk at the end of 1997.
But by the end of 1998, the fraction increased
to 4.89 percent, a trend that parallels a general
system and which may signal the negative
effects of increasing competition. BancoSol’s
successes have spawned competition from
NGOs, new nonbank financial institutions, and
even formal banks with new loan windows
for low-income clients. The effect has been
page 17
______________________________________________________________________________
a rapid increase in credit supply, and a The bank has centered on achieving cost
weakening of repayment incentives that may reductions by setting up a network of
foreshadow problems to come elsewhere. branches and posts (with an average of five
staff members each) and now serves about 2
Still, BancoSol stands as a financial success, million borrowers and 16 million depositors.
and the model has been replicated— Loan officers get to know clients over time,
profitably—by nine of the eighteen other starting borrowers off with small loans and
Latin American affiliates of ACCION increasing loan size conditional on repayment
International, an NGO based in Somerville, performance. Annualized interest rates are 34
Massachusetts. ACCION also serves over percent in general and 24 percent if loans are
one thousand clients in the U.S., spread over paid with no delay (roughly 25 percent and
the six programs. Average loan sizes range 15 percent in real terms— before the recent
from $1366 in New Mexico to $3883 in financial crisis).
Chicago, and overall nearly 40 percent of
the clients are female. As of December 1996, Like BancoSol, BRI also does not see
payments past due by at least thirty days itself as a social service organization, and
averaged 15.5 percent but ranged as high as it does not provide clients with training or
21.2 percent in New York and 32.3 percent guidance—it aims to earn a profit and sees
in New Mexico.4 ACCION’s other affiliates, microfinance as good business (Marguerite
including six in the United States, have not, Robinson 1992). Indeed, in 1995, the unit
however, achieved financial sustainability. desa program of the Bank Rakyat Indonesia
The largest impediments for U.S. programs earned $175 million in profits on their loans
appear to be a mixed record of repayment, to low-income households. More striking, the
and usury laws that prevent microfinance program’s repayment rates—and profits—on
institutions from charging interest rates that loans to poor households have exceeded
cover costs (Pham 1996). the performance of loans made to corporate
clients by other parts of the bank. A recent
c. Rakyat Indonesia calculation suggests that if the BRI unit desa
program did not have to cross-subsidize the
Like BancoSol, the Bank Rakyat Indonesia rest of the bank, they could have broken even
unit desa system is financially self-sufficient in 1995 while charging a nominal interest rate
and also lends to “better off” poor and of just 17.5 percent per year on loans (around
nonpoor households, with average loan sizes a 7 percent real rate; Jacob Yaron, McDonald
of $1007 during 1996. Unlike BancoSol and Benjamin, and Stephanie Charitonenko 1998).
Grameen, however, BRI does not use a group
lending mechanism. And, unlike nearly all d. Kredit Desa, Indonesia
other programs, the bank requires individual
borrowers to put up collateral, so the very The Bank Kredit Desa system (BKDs) in rural
poorest borrowers are excluded, but operations Indonesia, a sister institution to BRI, is much
remain small-scale and “collateral” is often less well-known. The program dates back to
defined loosely, allowing staff some discretion 1929, although much of the capital was wiped
to increase loan size for reliable borrowers out by the hyper-inflation of the middle 1960s
who may not be able to fully back loans with (Don Johnston 1996). Like BRI, loans are made
assets. Even in the wake of the recent financial to individuals and the operation is financially
crisis in Indonesia, repayment rates for BRI viable. At the end of 1994, the BKDs generated
were 97.8 percent in March 1998 (Paul profits of $4.73 million on $30 million of net
McGuire 1998). loans outstanding to 765,586 borrowers.5
______________________________________________________________________________
page 18 On Micro-Enterprise
______________________________________________________________________________
Like Grameen-style programs, the BKDs lend Catholic Relief Services, Freedom from
to the poorest households, and scale is small, Hunger, and Save the Children. FINCA
with an emphasis on petty traders and an programs alone serve nearly 90,000 clients
average loan size of $71 in 1994. The term of in countries as diverse as Peru, Haiti,
loans is generally 10–12 weeks with weekly Malawi, Uganda, and Kyrgyzstan, as well
repayment and interest of 10 percent on the as in Maryland, Virginia, and Washington,
principal. Christen et al. (1995) calculate that D.C. The NGOs help set up village financial
this translates to a 55 percent nominal annual institutions in partnership with local groups,
rate and a 46 percent real rate in 1993. Loan allowing substantial local autonomy over
losses in 1994 were just under 4 percent of loan decisions and management. Freedom
loans outstanding (Johnston 1996). from Hunger, for example, then facilitates
a relationship between the village banks
Also as in most microfinance programs, loans and local commercial banks with the aim to
do not require collateral. The innovation of create sustainable institutional structures.
the BKDs is to allocate funds through village-
level management commissions led by village The village banks tend to serve a poor,
heads. This works in Indonesia since there predominantly female clientele similar to that
is a clear system of authority that stretches served by the Grameen Bank. In the standard
from Jakarta down to the villages. The model, the sponsoring agency makes an
BKDs piggy-back on this structure, and the initial loan to the village bank and its 30–50
management commissions thus build in many members. Loans are then made to members,
of the advantages of group lending (most starting at around $50 with a four month
importantly, exploiting local information term, with subsequent loan sizes tied to the
and enforcement mechanisms) while amount that members have on deposit with
retaining an individual-lending approach. the bank (they must typically have saved at
The commissions are able to exclude the least 20 percent of the loan value). The initial
worst credit risks but appear to be relatively loan from the sponsoring agency is kept in
democratic in their allocations. Through an “external account,” and interest income is
the late 1990s, most BKDs have had excess used to cover costs. The deposits of members
capital for lending and hold balances in BRI are held in an “internal account” that can be
accounts. The BKDs are now supervised by drawn down as depositors need. The original
BRI, and successful BKD borrowers can aim was to build up internal accounts so that
graduate naturally to larger-scale lending from external funding could be withdrawn within
BRI units. three years, but in practice growing credit
demands and slow savings accumulation have
e. Village Banks limited those aspirations (Candace Nelson et
al. 1995).
Prospects for replicating the BKDs outside
of Indonesia are limited, however. A more Like the Indonesian BKDs, the village banks
promising, exportable village-based structure successfully harness local information and
is provided by the network of village banks peer pressure without using small groups
started in the mid-1980s in Latin America along BancoSol or Grameen lines. And, as
by John Hatch and his associates at the with the BKDs, sustainability is an aim, with
Foundation for International Community nominal interest rates as high as 4 percent
Assistance (FINCA). The village banking per month. Most village banks, however, still
model has now been replicated in over 3000 require substantial subsidies to cover capital
sites in 25 countries by NGOs like CARE, costs. Partly, this is because many village
______________________________________________________________________________
On Micro-Enterprise page 19
______________________________________________________________________________
banks have been set up in areas that are Peer Selection
particularly difficult to serve (e.g., rural Mali
and Burkina Faso), and the focus has been Group lending has many advantages,
on outreach rather than scale. Worldwide, the beginning with mitigation of problems created
number of clients is measured in the tens of by adverse selection. The key is that group-
thousands, rather than the millions served by lending schemes provide incentives for similar
the Grameen Bank and BRI. types to group together. Ghatak (1999) shows
how this sorting process can be instrumental
Microfinance Mechanisms in improving repayment rates, allowing
for lower interest rates, and raising social
The five programs above highlight the diversity welfare. His insight is that a group-lending
of approaches spawned by the common idea contract provides a way to price discriminate
of lending to low-income households. Group that is impossible with an individual-lending
lending has taken most of the spotlight, and the contract.7
idea has had immediate appeal for economic
theorists and for policymakers with a vision of To see this, imagine two types of potential
building programs around households’ “social” investors. Both types are risk neutral, but
assets, even when physical assets are few. But one type is “risky” and the other is “safe”;
its role has been exaggerated: group lending the risky type fails more often than the
is not the only mechanism that differentiates safe type, but the risky types have higher
microfinance contracts from standard loan returns when successful. The bank knows
contracts.6 The programs described above also the fraction of each type in the population,
use dynamic incentives, regular repayment but it is unable to determine which specific
schedules, and collateral substitutes to help investors are of which type. Investors,
maintain high repayment rates. Lending to though, have perfect information about
women can also be a benefit from a financial each other.
perspective.
Both types want to invest in a project with
As shown in Table 1, just two of the five an uncertain outcome that requires one unit
use explicit group-lending contracts, but of capital. If they choose not to undertake
all lend in increasing amounts over time the project, they can earn wage income
(“progressive” lending), offer terms that are m. The risky investors have a probability
substantially better than alternative credit of success pr and net return Rr. The safe
sources, and cut off borrowers in default. investors have a probability of success ps
Most also require weekly or semi-weekly and net return Rs. When either type fails,
repayments, beginning soon after loan receipt. the return is zero. Returns are statistically
While we lack good evidence on the relative independent.
importance of these mechanisms, there is
increasing anecdotal evidence on limits to Risky types are less likely to be successful
group lending per se (e.g., the village studies (pr < ps), but they have higher returns when
from Bangladesh in Aminur Rahman 1998; they succeed. For simplicity, assume that
Imran Matin 1997; Woolcock 1999; Sanae the expected net returns are equal for both
Ito 1998; and Pankaj Jain 1996). This section safe and risky_ types: prRr = psRs = R. The
highlights what is known (or ought to be projects of both types are socially profitable
known) about the diversity of technologies in that expected returns net of the cost of
that underlie repayment rates and screening capital, ., exceed earnings from wage labor:
mechanisms. _ R -.> m.
______________________________________________________________________________
page 20 On Micro-Enterprise
 ______________________________________________________________________________
Table 1
Characteristics of Selected
Leading Micro-finance Programs

Bank Badan
Grameen Banco-
Rakyat Kredit FINCA
Bank, Sol,
Indonesia Desa, Village
Bangladesh Bolivia
Unit Desa Indonesia banks

2 million
borrowers;
Membership 2.4 million 81,503 765,586 89,986
16 million
depositors
Average loan balance $134 $909 $1007 $71 $191
4–12 3–24
Typical loan term 1 year 3 months 4 months
months months
Percent female members 95% 61% 23% — 95%
mostly mostly
Mostly rural? Urban? rural urban rural
rural rural
Group-lending contracts? yes yes no no no
Collateral required? no no yes no no
Voluntary savings emphasized? no yes yes no yes
Progressive lending? yes yes yes yes yes
Regular repayment schedules weekly flexible flexible flexible weekly
Largely
Target clients for lending poor non-poor poor poor
non-poor
Currently financially
no yes yes yes no
sustainable?
Nominal interest rate on loans
20% 47.5– 50.5% 32–43% 55% 36–48%
(per year)
Annual consumer price
2.7% 12.4% 8.0% 8.0% __
inflation, 1996

Sources: Grameen Bank: through August 1998, www.grameen.com; loan size is from December 1996, calculated
by author. BancoSol: through December 1998, from Jean Steege, ACCION International, personal communication.
Interest rates include commission and are for loans denominated in bolivianos; base rates on dollar loans are
25–31%. BRI and BKD: through December 1994 (BKD) and December 1996 (BRI), from BRI annual data
and Don Johnston, personal communication. BRI interest rates are effective rates. FINCA: through July 1998,
www.villagebanking.org. Inflation rate: World Bank World Development Indicators 1998.

Neither type has assets to put up as collateral, the average probability of success in the
so the investors pay the bank nothing if the population. Since the bank can’t distinguish
projects fail. To break even, the bank must set between borrowers, all investors will face
the interest rate high enough to cover its per- interest rate, r. As a result, safe types have
loan capital cost, .. If both types borrow, the lower expected returns than risky types—since
equilibrium interest rate under competition R - rps < R - rpr —and the safe types will
will then be set so that rp – =., where p – is enter the market only if their expected net
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On Micro-Enterprise page 21
______________________________________________________________________________
return exceeds their fallback position: R - rps
> m. If the safe types enter, the risky types
will too.
But the safe types will stay out of the_ market
if R - rps < m, and only risky that case, the
equilibrium interest rate will rise so that rpr
= .. Risky types drive out the safe. The risky
types lose the implicit cross-subsidization
by the safe types, while the safe types lose
access to capital. This second-best scenario is
inefficient since only the risky types borrow,
even though the safe types also have socially
valuable projects.
Can a group-lending scheme improve on this
outcome? If it does, it must bring the safe
types back into the market. For simplicity,
consider groups of two people, with each
group formed voluntarily. Individuals invest
independently, but the contract is written
to create joint liability. Imagine a contract
such that each borrower pays nothing if her
project fails, and an amount r* if her project
is successful. In addition, the successful
borrower pays a joint-liability payment c*
if the other member of the group fails.8 The
expected net return of a safe type teamed with
a _ risky type is then R - ps(r*+(1 - pr)c*),
with similar calculations for exclusively safe
and exclusively risky groups.
Will the groups be homogeneous or mixed?
Since safe types are always preferred as
partners (since their probability of failure is
lower), the question becomes: will the risky
types be willing to make a large enough
transfer to the safe types such that both
risky and safe types do better together? By
comparing expected returns under alternative
scenarios, we can calculate that a safe type
will require a transfer of at least ps(ps - pr)c* Group lending may also provide benefits
to agree to form a partnership with a risky
type. Will risky types be willing to pay that
much? Their expected net gain from joining
with a safe type is as much as pr(ps - pr)c*.
But since pr < ps, the expected gains to risky
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page 22
types are always smaller than the expected
losses to safe types. Thus, there is no mutually
beneficial way for risky and safe types to
group together. Group lending thus leads to
assortative matching: all types group with like
types (Gary Becker 1991).9
How does this affect the functioning of the
credit market? Ghatak (1999) demonstrates
that the group-lending contract provides
a way to charge different effective fees
to risky and safe types—even though all
groups face exactly the same contract with
exactly the same nominal charges, r* and
c*. The result arises because risky types
will be teamed with other risky types, while
safe types team with safe types. Risky
types then receive expected net returns_
of R - pr(r*+(1 - pr)c*), while safe types
receive_ expected net returns of R - ps(r*+(1
- ps)c*). Thus, a successful risky type is
more likely to have to pay the joint-liability
payment c* than a successful safe type. If
r* and c* are set appropriately, the group-
lending contract can provide an effective
way to price discriminate that is impossible
under the standard second-best individual-
lending contract. If ps = 0.9 and pr = 0.8, for
example, the safer types can expect to pay
less than the riskier types as long as the joint
liability payment is set so that c*> 1.4r*.
Efficiency gains result if the difference is
large enough to induce the safe types back
into the market. When this happens, average
repayment rates rise, and the bank can afford
to maintain a lower interest rate r* while not
losing money.
Peer Monitoring
by inducing borrowers not to take risks that
undermine the bank’s profitability (Stiglitz
1990; Besley and Coate 1995). This can be
seen by slightly modifying the framework in
Section 3.1 to consider moral hazard. Instead,
On Micro-Enterprise
______________________________________________________________________________
consider identical risk averse borrowers with between both doing the safe activity, yielding
utility functions u(x). each borrower expected utility of ps 2u(Rs
- r*) + ps(1 - ps)u(Rs - r*- c*), or doing the
Each borrower may do either risky or safe risky activity with expected utility pr 2u(Rr
activities, and each activity again requires the - r*) + pr(1 - pr)u(Rr - r*- c*). If the joint-
same capital cost. The bank, as above, has liability payment c* is set high enough,
imperfect information about borrowers—in borrowers will always choose to do the safe
particular, here it cannot tell whether the activity (Stiglitz 1990).
borrowers have done the safe or risky activity.
Moral hazard is thus a prime concern. When This is good for the bank, but it saddles
projects fail, borrowers have a return of zero, borrowers with extra risk. The bank, though,
and a borrower’s utility level when projects knows borrowers will now do the safe activity,
fail is normalized to zero as well. and it earns extra income from the joint-
liability payments. The bank can thus afford to
We start with the standard individual-lending lower the interest rate to offset the burden.
contract. Borrowers either have expected
utility psu(Rs - r) or pru(Rr - r), depending on Thus, through exploiting the ability of
whether they do the safe or risky activity. If neighbors to enforce contracts and monitor
everyone did the safe activity, the bank could each other—even when the bank can do
charge an interest rate of r = ./ps and break neither—the group-lending contract again
even. But, since the bank cannot see which offers a way to lower equilibrium interest
activity is chosen (and thus cannot contract on rates, raise expected utility, and raise expected
it), borrowers may fare better doing the risky repayment rates.
activity and getting expected utility E[Usr]
= pru(Rr -./ps). The bank then loses money. Dynamic Incentives
Thus, the bank raises interest rates to r =
./pr. Now the borrower gets expected utility A third mechanism for securing high
of E[Urr] = pru(Rr -./pr), and she is clearly repayment rates with high monitoring costs
worse off than with a lower interest rate. In involves exploiting dynamic incentives
fact, if the borrower could somehow commit (Besley 1995, p. 2187). Programs typically
to doing the safe activity, she could be better begin by lending just small amounts and
off—with expected utility E[Uss] = psu(Rs then increasing loan size upon satisfactory
-./ps). Thus the borrower prefers E[Usr] to repayment. The repeated nature of the
E[Uss] to E[Urr], but the information problem interactions—and the credible threat to
and inability to commit means that she always cut off any future lending when loans are
gets the worst outcome, E[Urr]. not repaid—can be exploited to overcome
information problems and improve efficiency,
How can a group-lending contract improve whether lending is group-based or individual-
matters? The key is that it can create a based.10
mechanism that gives borrowers an incentive
to choose the safe activity. Again consider Incentives are enhanced further if borrowers
groups of two borrowers and group-lending can anticipate a stream of increasingly larger
contracts like those in Section 3.1 above. The loans. (Hulme and Mosley 1996 term this
borrowers in each group have the ability to “progressive lending,” and the ACCION
enforce contracts between each other, and network calls it “step lending.”) As above,
they jointly decide which types of activities keeping interest rates relatively low is critical,
to undertake. Now their problem is to choose since the advantage of microfinance programs
______________________________________________________________________________
On Micro-Enterprise page 23
______________________________________________________________________________
lies in their offering services at rates that borrowers with small loans at the start.
are more attractive than competitors’ rates. This feature allows lenders to develop
Thus, the Bank Rakyat Indonesia (BRI) and relationships with clients over time and
BancoSol charge high rates, but they keep to screen out the worst prospects before
levels well below rates that moneylenders expanding loan scale (Parikshit Ghosh and
traditionally charge. Debraj Ray 1997).

However, competition will diminish the Dynamic incentives can also help to
power of the dynamic incentives against explain advantages found in lending to
moral hazard—a problem that both the women. Credit programs like those of the
Bank Rakyat Indonesia and BancoSol are Grameen Bank and the Bangladesh Rural
starting to feel as other commercial banks Advancement Committee (BRAC) did not
see the potential profitability of their model. begin with a focus on women. In 1980–83,
In practice, though, real competition has yet women made up 39 percent and 34 percent
to be felt by most microfinance institutions of their respective memberships, but by
(perhaps because so few are actually turning 1991–92, BRAC’s membership was 74
a profit). As competition grows, the need for a percent female and Grameen’s was 94
centralized credit rating agency will also grow. percent female (Anne Marie Goetz and Rina
Sen Gupta 1995). As Table 2 shows, many
Dynamic incentives will also work better in other programs also focus on lending to
areas with relatively low mobility. In urban women, and it appears to confer financial
areas, for example, where households come advantages on the programs. At Grameen,
and go, it may not be easy to catch defaulters for example, 15.3 percent of male borrowers
who move across town and start borrowing were “struggling” in 1991 (i.e., missing
again with a clean slate at a different branch some payments before the final due date)
or program. BRI has faced greater trouble while this was true for just 1.3 percent of
securing repayments in their urban programs women (Khandker, Baqui Khalily, and
than in their rural ones, which may be due to Zahed Kahn 1995).
greater urban mobility.
The decision to focus on women has some
Relying on dynamic incentives also runs obvious advantages. The lower mobility
into problems common to all finite repeated of women may be a plus where ex post
games. If the lending relationship has a moral hazard is a problem (i.e., where
clear end, borrowers have incentives to there is a fear that clients will “take the
default in the final period. Anticipating that, money and run”). Also, where women have
the lender will not lend in the final period, fewer alternative borrowing possibilities
giving borrowers incentives to default in than men, dynamic incentives will be
the penultimate period—and so forth until heightened.11
the entire mechanism unravels. Thus, unless
there is substantial uncertainty about the end
Thus, ironically, the financial success
date—or if “graduation” from one program of many programs with a focus on
to the next is well-established (ad infinitum),
women may spring partly from the lack
dynamic incentives have limited scope on of economic access of women, while, at
their own. the same time, promotion of economic
access is a principal social objective (Syed
One quite different advantage of Hashemi, Sidney Ruth Schuler, and Ann P.
progressive lending is the ability to test Riley 1996).
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page 24 On Micro-Enterprise
 ______________________________________________________________________________
Table 2
Performance Indicators of Micro-finance Programs

Avg. loan as Average Average

Average loan
Observations % of GNP operational financial
Balance ($)
per capita sustainability sustainability
Sustainability
All microfinance 72 415 34 105 83
institutions
Fully sustainable 34 428 39 139 113
Lending method
Individual lending 30 842 76 120 92
Solidarity groups 20 451 35 103 89
Village bank 22 94 11 91 69
Target Group
Low end 37 133 13 88 72
Broad 28 564 48 122 100
High end 7 2971 359 121 76
Age
3 to 6 years 15 301 44 98 84
7 or more years 40 374 27 123 98

Avg. return Avg. percent of Avg. percent Avg. number of

on equity portfolio at risk female clients active borrowers
Sustainability
All microfinance
–8.5 3.3 65 9,035
institutions
Fully sustainable 9.3 2.6 61 12,926
Lending method
Individual lending –5.0 3.1 53 15,226
Solidarity groups –3.0 4.1 49 7,252
Village bank –17.4 2.8 92 7,833
Target Group
Low end –16.2 3.8 74 7,953
Broad 1.2 3.0 60 12,282
High end –6.2 1.9 34 1,891
Age
3 to 6 years –6.8 2.2 71 9,921
7 or more years –2.4 4.1 63 16,557

Source: Statistical appendix to MicroBanking Bulletin (1998). Village banks have a “B” data quality; all others
are graded “A”. Portfolio at risk is the amount in arrears for 90 days or more as a percentage of the loan portfolio.
Averages exclude data for the top and bottom deciles.

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On Micro-Enterprise page 25
______________________________________________________________________________
Regular Repayment Schedules
One of the least remarked upon—but most
unusual—features of most microfinance
redit contracts is that repayments must start
nearly immediately after disbursement. In a
traditional loan contract, the borrower gets
the money, invests it, and then repays in full
with interest at the end of the term. But at
Grameen-style banks, terms for a yearlong
loan are likely to be determined by adding
up the principal and interest due in total,
dividing by 50, and starting weekly collections
a couple of weeks after the disbursement.
Programs like BancoSol and BRI tend to be
more flexible in the formula, but even they do
not stray far from the idea of collecting regular
repayments in small amounts.
The advantages are several. Regular
repayment schedules screen out undisciplined
borrowers. They give early warning to loan
officers and peer group members about
emerging problems.
And they allow the bank to get hold of cash
flows before they are consumed or otherwise
diverted, a point developed by Stuart
Rutherford (1998).
More striking, because the repayment
process begins before investments bear
fruit, weekly repayments necessitate that
the household has an additional income
source on which to rely. Thus, insisting on
weekly repayments means that the bank
is effectively lending partly against the
household’s steady, diversified income
stream, not just the risky project. This
confers advantages for the bank and for
diversified households. But it means that
microfinance has yet to make real inroads
in areas focused sharply on highly seasonal
occupations like agricultural cultivation.
Seasonality thus poses one of the largest BancoSol also stresses the role of solidarity
challenges to the spread of microfinance in groups in assuring repayments, but as its
areas centered on rainfed agriculture, areas clients have prospered at varying rates,
______________________________________________________________________________
page 26
that include some of the poorest regions of
South Asia and Africa.
Collateral Substitutes
While few programs require collateral, many
have substitutes. For example, programs
following the Grameen model require that
borrowers contribute to an “emergency
fund” in the amount of 0.5 percent of every
unit borrowed (beyond a given scale). The
emergency fund provides insurance in cases
of default, death, disability, etc., in amounts
proportional to the length of membership. An
additional 5 percent of the loan is taken out
as a “group tax” that goes into a group fund
account. Up to half of the fund can be used
by group members (with unanimous consent).
Typically, it is disbursed among the group
as zero-interest loans with fixed terms. Until
October 1995, Grameen Bank members could
not withdraw these funds from the bank, even
upon leaving. These “forced savings” can now
be withdrawn upon leaving, but only after
the banks have taken out what they are owed.
Thus, in effect, the funds serve as a form of
partial collateral.
The Bank Rakyat Indonesia’s unit desa
program is one of the few programs to require
collateral explicitly. Its advocates, however,
emphasize instead the role of dynamic
incentives in generating repayments (Richard
Patten and Jay Rosengard 1991; Robinson
1992). It is impossible, though, to determine
easily which incentive mechanism is most
important in driving repayment rates. While
bank officials point out that collateral is
almost never collected, this does not signal
its lack of importance as an incentive device.
If the threat of collection is believable, there
should be few instances when collateral is
actually collected.
On Micro-Enterprise
______________________________________________________________________________
lending approaches have diversified as well. of expanding access to increasing numbers of
As noted in Section 2.2, by the end of 1998, low-income clients. Second, sustainability
28 percent of its portfolio had some kind of provides the means to expand and maintain
guarantee beyond the solidarity group. outreach. These concepts underpin the guiding
principles described here.

V. Guiding Principles for Different types of micro and small

Selecting and Supporting
Intermediaries
These guiding principles are joint product
of the Donors’ Working Group on Financial
Sector Development and the Committee
of Donor Agencies for Small Enterprise
Development of the World Bank. It was
inspired by and is largely consistent with
the recommended standards for support set
out by a UN expert group of leading small
and microenterprise practitioners convened
by Women’s World Banking in January
1994. The donor committees adopted the
principles in their current form in June 1995,
following consultations with key donor
agencies involved in small and microfinance.
This document is intended for use by
project officers in donor and implementing
organizations, managers, and policy makers.
enterprise clients have different
characteristics and demand different
services. Hence it is desirable to encourage
a range of institutions that use specialized
methods to serve their particular market
niches. These can include commercial
and development banks, credit unions,
mutual or community banks, non-
governmental organizations (NGOs),
finance companies, cooperatives, savings
and credit associations, and other
specialized intermediaries. At the same
time, however, this document is based on
the premise that fundamental principles of
finance apply widely and must be observed
by all institutions if they are to succeed.
Moreover, donors must design their support
mechanisms in ways that are consistent with
best international practices and long-run
development of a sound financial system.

The purpose of these principles is to establish This statement of guiding principles first
common standards for donor agencies to identifies characteristics donors should seek
apply in supporting broader access to financial in selecting institutions to support. It then
services for micro and small enterprises12. describes appropriate forms of donor support.
Such enterprises have historically lacked An annex lists reporting standards on outreach
access to the formal financial system, but the and financial performance.
growing success of many institutions provides
confidence that access can be provided
sustainably in many settings. It has now Institutional Performance Standards
become possible to identify and agree upon and Plans
the basic principles that support successful
micro-level finance, so that donors can work Intermediaries seeking support should be able
in concert to ensure that lessons of success are
to demonstrate the following characteristics,
translated to the institutions they support. either in current operations or through credible
plans underpinned by concrete measures.
The framework for donor support to micro Since institutions are at different stages of
and small enterprise finance centers on development, it may be appropriate in some
two equally important and complementary cases to adopt modified standards for limited
objectives. First, outreach embodies the aim support to new or transforming institutions.
______________________________________________________________________________
On Micro-Enterprise page 27
______________________________________________________________________________
Institutional Strengths
1. Institutional culture, structures,
capacities, and operating systems that
can support sustained service delivery
to a significant and growing number
of low income clients. Requirements
include a sound governing structure,
freedom from political interference,
good fit to local context, competent
and stable staff, a strong business
plan for expansion and sustainability,
and mission and vision which create
a sense of purpose, ownership, and
accountability.
2. Accurate management information
systems that are actively used to make
decisions, motivate performance and
provide accountability for funds. Such
systems are essential for effective and
efficient management.
3. Operations that manage small
transactions efficiently, with high
productivity, as measured by variables
such as loans per staff and operating
costs as a percentage of average annual
portfolio (while maintaining portfolio
soundness).
4. Meaningful, transparent financial
reporting that conforms to international
standards and allows prospective funders
to evaluate performance adequately. At a
minimum, the raw data listed in the Annex
should be reported, and institutions should
regularly monitor financial condition
using appropriate financial ratios derived
from such data.
Quality of Services and Outreach
1. Focus on the poor: evidence of service
to low-income clients, women and men,
especially clients lacking access to other
financial institutions. The focus need not
______________________________________________________________________________
page 28
be exclusive, as mainstream institutions
such as banks are encouraged to become
providers, but it must entail a distinct
commitment to reaching the poor.
2. Client-appropriate lending: for
example, quick, simple and convenient
access to small loans, often short-term,
that are renewed or increased based on
excellent repayments. Use of collateral
substitutes (e.g., peer guarantees or
repayment incentives) or alternative
forms of collateral to motivate repayment.
Emphasis on character-based lending for
smaller loans, with simple cashflow and
project appraisal for larger and longer term
loans.
3. Savings services: savings mobilization
services, where legally possible and
economically feasible, that facilitate
small deposits, convenient collections,
safety, and ready access to funds either
independently or with another institution.
4. Growth of outreach: significant progress
in expanding client reach and market
penetration, demonstrating both strong
client response to services offered
and competence in service delivery
management.
Financial Performance
1. Appropriate pricing policies: offering
loans at rates sufficient eventually to
cover the full costs of efficient lending
on a sustainable basis (after a reasonable
start-up period), recognizing that poor
entrepreneurs are able and willing to
pay what it costs an efficient lender to
provide sustainable financial services.
Interest charges by the retail unit should
be set to cover the costs of capital (at the
opportunity cost, including inflation),
administration, loan losses and a minimum
return on equity13.
On Micro-Enterprise
______________________________________________________________________________
2. Portfolio quality: maintaining a portfolio
with arrears low enough that late payments
and defaults do not threaten the ongoing
viability of the institution. For example,
organizations with loans in arrears
over 30 days below 10 percent of loans
outstanding and annual loan losses under
4 percent of loans outstanding satisfy this
condition.
3. Self-sufficiency: steadily reducing
dependence on subsidies in order to
move toward financial self-sufficiency.
Achieving operational efficiency
[defined as covering all administrative
costs and loan losses with client
revenues] within a reasonable time
period, given local conditions.
International experience shows that
successful intermediaries have achieved
operational efficiency in three to seven
years, and financial self-sufficiency
[defined as covering all administrative
costs, loan losses, and financing costs
at non-subsidized rates from client
revenues] within five to ten years.
4. Movement toward financial
independence: building a solid and
growing funding base with clear
business plans, backed by operational
capacities, that lead to mobilization of
commercial funds from depositors and the
financial system, and eventually to full
independence from donor support.
Financial performance standards apply only to
activities that are an integral part of providing
financial services. If programs also provide
non-financial services, such as business
advisory services, health, or education, they
should account for such services separately
from financial services. Standards for financial
self-sufficiency do not apply to such services,
and defining appropriate standards for non-
financial services is beyond the scope of this
document.
______________________________________________________________________________
On Micro-Enterprise
Strategies for Donor Support
Funding based on large, ongoing subsidies
with a charity rationale has failed. Such
programs have drained resources without
becoming sustainable, and have contributed
to the mistaken notion that the poor are
unbankable. Funders should provide financial
and other support in such a way to ensure the
quality of services provided and the widest
outreach, as well as to foster the movement
to scale, financial self-sufficiency, and
independence from donor support, taking
into account the particular characteristics
of different types of institutions. Donors
should ensure that institutions, in their effort
to become sustainable, maintain a focus on
offering appropriate services to the poor.
Appropriate Uses for Grants
1. Institutional development. Support for
institutional development is appropriate
at all stages of an institution’s life, and
for a wide range of institutions, although
the nature and extent of such support
should evolve with the institution. Such
support should become more selective, as
institutions become able to meet more of
their organizational development needs
from within. It should also become more
specialized, as institutions tackle more
difficult problems.
2. Capitalization. Grants for equity are
of strategic importance in enabling
organizations to build a capital base.
Capitalization can be used to generate
investment income, build the loan
portfolio, and leverage funds from
local banks. One of the key purposes of
providing capital funding is to enable
institutions to mix costs of grant funds
with commercial sources during the period
it takes to build efficient operations and
scale. Externally-financed capitalization
should be used as a catalyst and
page 29
______________________________________________________________________________
complement to domestic mobilization of
funds by local institutions. Grant equity
contributions can also help institutions
seeking to become formal financial
intermediaries to meet minimum capital
requirements.
3. Operating losses. Donors should
avoid covering operating losses except
during a clear, time-limited start-up
or expansion phase. By the nature of
the small loan business every program
will take some time to reach a break
even point. Donors should be willing
to provide support during that time.
Afterwards, however, such support
becomes counterproductive.
4. Fixed assets. Donors may wish to
support purchase of fixed assets, such as
computers, vehicles or premises. Such
funding may be seen as contributions to
the equity base of the institution.
Appropriate Uses of Loans
Donor support through loans is appropriate
for lending-based institutions that meet
performance standards. However, loan capital
from local and commercial sources should
be sought as early as possible, even at start-
up. Care should be taken to avoid burdening
young institutions with foreign exchange risk
in loans denominated in foreign currency,
unless adequate precautions are taken.
Donors are also advised to be careful not to
undermine savings mobilization efforts of
savings-based institutions, such as savings and
credit associations, by making loans available
to them below the cost of mobilizing funds
locally.
Commercial Sourcing of Funds
The transition to fully commercial sources
of funding requires special forms of support
that help introduce institutions to the financial or adjustments for subsidy or inflation.
______________________________________________________________________________
page 30
system. Donors can act as catalysts to effect
this transition through means such as:
1. Investor equity, from both official and
private sources. Donor support can help
leverage private investment.
2. Second-tier operations, which raise funds
from commercial sources and on-lend to
microenterprise finance institutions.
3. Partial guarantees of loans made by
commercial banks to NGOs.
Coherence of Donor Policies
Institutions following sound principles for
sustainability must not be undermined by
others providing competing services below
cost or in ways that cannot be sustained.
When providing subsidies (grant or loan)
to small and microenterprise institutions,
donors should ensure that they coordinate
that support with other funders, such that
institutions are given clear incentives to
become financially viable. In particular,
donors need to consult each other regarding
appropriate interest rates and other terms
on which assistance to any given institution
is supplied. Donors should also coordinate
institutional support with sectoral policies
such that financial institutions, including
informal and semi-formal sectors, find
enabling conditions for institutional
development and growth.
Annex: Minimum Reporting
Information14
Donors should require regular reporting
on institutional performance and should
base funding decisions on achievement
of performance targets. The following
tables cover the minimum raw data that
should be reported, but do not include
analytic indicators, such as financial ratios
On Micro-Enterprise
______________________________________________________________________________
The intent is to ensure the quality and comparability of data so that financial analysis can
be conducted in a way that both donors and programs can interpret. Meaningful analysis
requires a firm base of data. These indicators are intended to furnish such a base.

Portfolio and Outreach

1. Number and amount of loans outstanding at beginning and
end of reporting period
2. Number and amount of loans disbursed during reporting
period.
3. Number and amount of small saver deposit accounts at
beginning and end of reporting period. Show compulsory
and voluntary savings separately15.
4. Arrears (on a loans outstanding basis). Unpaid balance of
loans with payments overdue more than 30 days. There
should also be an aging of arrears report, covering, for
example, 60 and 90 days and one year.
5. Percentage of female clients.
6. Number of staff (only those involved with savings and credit
activities).

Interest Rate Policy

7. Effective annual interest rate paid by clients (incorporating
all required fees, and calculated on a declining balance
basis), both nominal and real. Effective rate paid to savers.
8. Local annualized interbank lending rate and 90-day CD rate.
9. Local annual inflation rate (give source).

Income and Expense Information

Income
10. Interest and fee income from loans (excluding accrued
uncollected interest on non-performing loans)
11. Income from investments
12. Other operating income from financial services
13. Total income
Expenses
14. Staff expenses (salaries and benefits)16
15. Other administrative expenses (includes depreciation)
16. Loan losses. All loans over one year in arrears should be
written off, as far as local rules permit. Institutions should
describe their criteria in recording loan losses.
17. Interest and fee expenses (itemized by source of funds)
18. Total expenses
19. Net operating profit
Other Income and Expenses
20. Non-operating income (if any)
21. Non-operating expenses (if any)
22. Donations:
22a. For operating expenses
22b. Capital contribution (identify purpose, e.g., loan fund,
equity, fixed assets)
______________________________________________________________________________
On Micro-Enterprise page 31
______________________________________________________________________________
Balance Sheet Information
Assets
23. Cash on hand and in banks
24. Mandatory reserves
25. Short term investments
26. Loans outstanding (must match indicator 1, above)
27. Less: Loan loss provisions
28. Net portfolio outstanding
29. Long term investments
30. Fixed assets (after depreciation)
31. Other assets
32. Total Assets
Liabilities
33. Savings and time deposits from target group clients
34. Other deposits
35. Loans from central bank
36. Loans from other banks
37. Other short term liabilities
38. Other long term liabilities
Equity
39. Paid-in equity (shareholders)
40. Donated equity
41. Retained earnings
42. Other capital accounts
43. Current year profit or loss
44. Total Liabilities and Equity

Analytic Performance Indicators analytic indicators to monitor the institution’s

financial condition.
The items listed here provide information in
a raw form. In order to evaluate and compare VI. Micro-Enterprise
performance, the raw data will have to be Development in the
analyzed, through computation of ratios and Philippines
other indicators. Informed opinions differ
on which indicators are most important. The following is the Interim Evaluation
Therefore, this document makes no attempt to Executive Summary of the Rural Micro-
specify those indicators. Rather, it provides for Enterprise Finance Project implemented by
an information base to allow the calculation the Government of the Philippines.
of a range of key ratios. Examples include:
net profit, average loan and savings account The Rural Micro-enterprise Finance Project
size, adjustments for subsidy and inflation, (RMFP) was supported by the Government
operational and full self-sufficiency, return of The Philippines through the Department
on assets and equity, administrative costs as of Finance (DoF) and Land Bank of the
a percentage of portfolio (required spread), Philippines (LBP) and executed by the
portfolio yield, and staff productivity. People’s Credit and Finance Corporation
(PCFC). Of the total cost of US$ 65
It is expected that every institution and the million, Asian Development Bank (ADB)
donors that support it will actively use such and International Fund for Agricultural
______________________________________________________________________________
page 32 On Micro-Enterprise
______________________________________________________________________________
Development (IFAD) financed US$ 20
million and 14.7 million, respectively. The
project became effective in April 1996; all
funds were disbursed by June 2002; the
closing date was extended from July to
December 2002 in order to process all the
withdrawal applications.
Evaluation mission. For the preparation
of a second project phase requested by the
Government of the Philippines (GOP), ADB
fielded a mission in mid-2002. IFAD carried
out an interim evaluation in July 2002. The
evaluation follows the standard approach of
the Office of Evaluation and Studies (OE)
and its new impact evaluation methodological
framework. Preliminary conclusions were
presented during a wrap-up meeting on 1
August 2002 and finalized in a workshop on
24 January 2003.
MAIN DESIGN FEATURES AND
IMPLEMENTATION RESULTS
The project rationale was based on the
assumption that “access by the poor to
adequate and appropriate financial services of the Philippines, borrowed from ADB and
is a critical factor in helping to break the IFAD, assumed the foreign exchange risk
poverty cycle” and that such services
had been successfully provided in The
Philippines through the Grameen Bank
Approach (GBA), with “significant income, and trustee bank of the RMFP funds. It would
employment and other social benefits.”
At the same time, the Agricultural Credit
Policy Council, a government agency
which had replicated Grameen banking
in The Philippines since 1990, had found
that the costs of the donor-driven program
were very high and outreach was low.
Despite warnings of IFAD team members
at earlier missions, Grameen banking, with
its emphasis on credit channelling through
joint liability groups of five women was
selected as the sole methodology. This
made RMFP a risky project – yet the actual
results have exceeded expectations by a
wide margin.
______________________________________________________________________________
On Micro-Enterprise
Project objectives and target group. The
Project aimed at poverty reduction, the
creation of employment opportunities and the
enhancement of rural incomes of the bottom
30 percent of the rural population, i.e., the
poorest of the poor. The project supported
two components: an MFI-support component
comprising the establishment and strengthening
of Grameen replicators, through an institutional
development loan of US$ 7.4 million; and
a credit component of US$ 34.1 million for
on-lending to final borrowers through NGOs,
cooperatives and local banks. By supporting
conduit institutions that employ the GBA,
the project sought to provide 300,000 people,
90% of them women, with access to credit
for income and employment generating
microenterprise activities. Emphasis was to
be given to the 20 poorest provinces. RMFP’s
target impact was to increase rural family
incomes by at least 40%.
Implementation partners and arrangements.
At the national level, three agencies were
involved in project implementation: DoF, LBP
and PCFC. DoF, on behalf of the Government
and on-lent to LBP. LBP, an agricultural
development bank created in 1963 to support
agrarian reforms, was the official depository
act as a fund manager for PCFC, provide
transfer services, and assist in monitoring
and auditing. PCFC, the executing agency
of the project, was established in 1995 as the
country’s bank for the poor, with the mandate
of providing credit through conduit partners
to the rural population below the poverty
level; its main business has been RMFP. At
the local level, the Grameen Bank Approach
Replicators (GBARs) provide loans to the
final borrowers at their own risk and at interest
rates of their own, but not lower than 24% per
annum. RMFP was to be implemented with full
recovery of costs and as a profitable activity for
PCFC and the participating GBARs.
page 33
______________________________________________________________________________
Changes in microfinance policy and
institutions. The project has profited from
improved macroeconomic stability, a legal
framework conducive to the development of
a differentiated rural banking infrastructure,
and favourable attitudes to microfinance
among the financial authorities. Issuance of
a national microfinance strategy in 1997,
recognition of microfinance in the Banking
Act of 2000, exemption from BSP regulation
regarding unsecured loans and the lifting of
the moratorium on branching out for banks
engaged in microfinance in 1/2001 have
created powerful incentives for rural banks
to engage in GBA as a commercial activity
with rapidly increasing outreach to the poor.
This has led to a shift in project emphasis
from NGOs and cooperatives to rural banks.
Based on the approval in July 2002 by the
National Credit Council of a policy document
on the regulation of microfinance, steps are
now being taken to bring cooperatives under
effective supervision, to transform deposit-
taking NGOs into banks, and to establish a
credit rating agency for microfinance.
Design changes. A prominent feature of
the project has been its ability to learn from
experience and leave leeway to participating
institutions for experimentation and
adjustment. Some freedom to modify the
design in line with lessons learned has been
important to allow the methodology to be
adapted to the organisational culture of each
MFI and the characteristics of local clients.
In the process, GBA has moved from creed to
financial product, adopted by rural banks in
increasing numbers. Among the modifications
are product diversity, variability in interest NWTF and by PCFC. These are now joined
rates and loan terms, group size and rules of spontaneously by increasing numbers of rural
loan release, meeting cycle, and the role of
groups vs. centres.
Implementation results. PCFC has
successfully marketed microfinance for the
poor through GBA, using both liquidity and
training in the methodology as the two crucial organised strengthening. With ADB technical
______________________________________________________________________________
page 34
selling factors. In the process, increasing
numbers of MFIs have adopted GBA and
adhered to the solidarity group approach of
financial intermediation. But they have not
done so out of compliance with government
instructions, but because of the tested and
proven advantages of that approach: credit
discipline and profitability. In the process and
in contrast to the original focus on NGOs and
cooperatives, an increasing number of banks
– particularly rural banks - have turned into
GBARs, accounting for 54% of all actively
involved replicators, 57% of clients and 61.5%
of loans outstanding.
Compared with targets. The project has
exceeded all key performance targets such
as 435,654 micro-enterprise clients (only
cumulative figures are available!) with
increased employment (target 300,000);
98% of which are women (target 90%),
establishment or expansion of 92,504 self-
help groups (target 50,000) in 14,828 centres
and 447 branches (target 305); establishment
of three training centres and an additional
three in process (target three); 10.8% savings
mobilisation in relation to loan releases
(target 10%); and disbursement of US$
34.1 million investment loan and US$ 7.4
million institutional loan (fully complied
with). Recorded collection rates are high (on
average, 98% from MFIs to PCFC, 96.2%
and past due rate 6% from final borrowers to
MFIs).
Training, MIS and institutional
development. Most training has been
effectively provided by two MFIs, CARD,
banks and other institutions providing training
and exposure opportunities to new replicators.
Training in microenterprise and social
development to SHGs has been scanty; in a
number of cases, its place has been taken by
mutual monitoring, which could benefit from
On Micro-Enterprise
______________________________________________________________________________
assistance, a MIS has been installed in a time period; nor do they take inflation into
number of institutions, but is not found useful account.
by most of them, as it is not integrated into
regular banking software. Its privatisation, Assets. Increase in assets (average of 25%
for which no pronounced demand was found from commencement) is less pronounced than
during the field visits, is still under discussion. increase in income. Assets are also used as
savings and may be sold as income levelling
RURAL POVERTY IMPACT strategies, particularly livestock. Assets are
also kept as loan protection insurance, to be
Targeting. As per the loan agreement, sold to repay the loan in times of hardship.
PCFC requires MFIs to conduct a means Increase in assets is more pronounced at
test or client-profiling index of each sub- higher loan cycles, but cannot be attributed
client to determine eligibility. The rigorous solely to the project. Growth in savings and
GBA discipline (i.e., small loan amounts, diversification of saving strategies within the
regular weekly meetings and instalments, household is an important impact, not only in
joint liability, strict centre discipline and improved asset base but also in terms of asset
mandatory savings) has shown to favour poor management. There were numerous examples
clients and serious microentrepreneurs. In where borrowers had been able to sustain
terms of leakage, it is estimated that about their market fluctuations due to the buffer of
20% of clients were above the means test accumulated savings. During the first phase
criteria at the time of joining the program of the project, the overall volume of savings
(yet they belonged to the non-poor vulnerable mobilisation has been limited. Some MFIs,
population). In actual fact, the MFIs have particularly cooperatives, have been more
mostly targeted the enterprising poor around effective in encouraging voluntary savings
the basic food threshold although, in several and financial asset growth – as proof that the
instances, the poorest households (chronically poor can save. It is important that a savings
below the food threshold) have been served. habit has been instilled, with the prospect of
Out of the 23 MFIs interviewed by the continual saving over time.
IFAD mission, only two rural banks and
one cooperative (and none of the 4 NGOs Micro-enterprise development. The
surveyed) reported concentrating on the “ultra project followed a minimalist approach
poor” as their main clients. to microenterprise development, focusing
mainly on finance. There was no provision for
Income. Impact assessments of different non-financial services and market linkages.
origins have shown that there are increases in The increased access to microfinance has
income, assets and employment generation. A stimulated microenterprise growth and
28% income differential between borrowers diversification. An estimated 75% of centres
and non-borrowers was identified by the with borrowers on the third loan cycle engage
ADB impact survey. A steadily rising rate of in three or more income generating activities.
income increase was noted with successive This is a major risk minimisation strategy
loan cycles in most households. However, for the household and greatly contributes to
in the absence of a baseline survey and food and livelihood security. It was found
given the methodological problems with that seasonality has a major effect on the
income data in the informal sector, these capability of the borrowers to repay their
data are of limited validity. Moreover, such loans but that by diversification of their
data are rarely presented on the basis of household livelihood portfolio, household
annual increases or for a precisely specified income fluctuations can be levelled. Further
______________________________________________________________________________
On Micro-Enterprise page 35
______________________________________________________________________________
graduation of microenterprise into small
enterprises calls for graduation to individual
loans, further training and access to medium-
term credit (the current framework provides
short-term credit only).
Employment Generation. The increase in
employment was found to be significant.
According to the ADB survey, 8% of the
responding members employed on average
three workers from outside their household
(the survey does not provide information on
household members working in the enterprises
in addition to the owner-borrower). 40% of
these workers were hired full time, 38% part-
time, 6% irregularly and 17% seasonally.
Empowerment of women. 98% of GBAR
clients are women and are to some extent
creators of GBA social capital in the
Philippines. All positive and negative impact
dimensions presented concern women and
their families. This includes the recognised
benefits and risks of microentrepreneurship.
Women face additional risks of disapproval
of husband and lack of time to attend
weekly meetings. These are main reasons
for dropping out. However, among those
who stay on, there is evidence of women
having greater determination of their own
lives and livelihoods, plus stronger family
bonds through joint economic activities,
shared household chores and social benefits.
Ultimately, it is women, as much as PCFC
and MFIs that made this project a successful
experience.
Social capital. The project has substantially
contributed to the formation of social capital, a client-household spends P760 (+23%)
embedded in Grameen banking in The
Philippines, as the shared normative system
of a group or organisation which shapes
the capacity of people to work together and
produce results according to the group’s
or organisation’s purpose. Most GBARs
involved have passed the “performance test”
for the worth of social capital in MFIs, based extent, the issuance of a national microfinance
______________________________________________________________________________
page 36
on viability, sustainability and outreach.
Successful replicators share the original core
social capital of Grameen banking:
• High moral commitment of leaders
based on values enforced through
training;
• Peer selection and peer
enforcement, precluding adverse
selection and moral hazard;
• Credit discipline, but have added
new social capital dimensions
of Grameen banking in the
Philippines;
• Bank status (rural);
• Deposit mobilisation through
differentiated products;
• Differentiated loan and insurance
products which cover all costs and
yield a profit; and
• Client differentiation through
larger-size loan and deposit
products for poor and non-poor
members (generating additional
loan capital to serve the poor) and
graduation opportunities for the
poor.
Food security. Profits from the enterprise
are spent for daily household expenses. The
impact survey did not collect anthropometric
data on children but shows that, on average,
more on food per month than a non-client
household.
Policies and the regulatory framework.
PCFC has been actively involved in the
policy dialogue on microfinance legislation
and banking with the poor. To a considerable
On Micro-Enterprise
______________________________________________________________________________
strategy, its recognition in the Banking Act of
2000, the opening of a central bank window
for microfinance, the lifting of the moratorium
on branching out for banks engaged in
microfinance, their exemption from regulation
regarding unsecured loans and the resulting
expansion the branch network of some rural
banks are due to PCFC’s active participation
and the weight of the underlying ADB/IFAD
program. This also includes the recent increase
in numbers of NGOs establishing banks.
Institutions. The promotion of Grameen
banking has enabled MFIs to significantly
expand their operations and reach out to
the poor. The early emphasis on NGOs and
cooperatives has shifted to rural, cooperative
banks and thrift banks. Of the total number
of 189 GBARs which joined the project,
162 were actively involved by June 2002.
Formal financial institutions account for 56%
of actively participating GBARs, 58% of
clients and 63% of PCFC loans outstanding.
In terms of repayment performance, with
a global average past-due rate of 6% and a
collection rate of 96% across all GBARs,
rural banks and thrift banks did best,
cooperative banks worst, with NGOs and
cooperatives in between. The mission visited
23 MFIs and three PCFC retail sites. Among
them, the rural banks are emerging as GBA
market leaders, including NGOs which have
established rural banks. Each MFI has its
own story to tell, among them:
• CARD, with 56,400 Grameen
borrowers, the first NGO
establishing a rural bank and a
seminal trainer of new entrants;
• Producers Rural Bank Corporation,
with 12,500 GBA borrowers (72%)
out of a total of 17,300, which
found GBA highly profitable and
proposes a Grameen franchising/ • Lagawe Highlands Rural Bank,
Build-Operate -Transfer business
on a commercial basis as a rapid
______________________________________________________________________________
On Micro-Enterprise
expansion strategy across the
country;
• Enterprise Bank, with 14,500
Grameen borrowers (69%) out
of a total of 21,000, which as
also experimented with USAID-
supported individual lending
(MABS), but finds GBA far more
profitable and its growth potential
exponential;
• New Rural Bank of Victorias,
which abandoned the GBAR as
a failure and found individual
lending under MABS profitable,
but with an outreach of a mere 342;
• People’s Bank for Caraga, with
6,422 Grameen borrowers (56%)
out of a total of 11,543, originating
from a failed NGO and a distressed
rural bank, now a new rural bank
with broad ownership deriving
most of its profit from Grameen
banking;
• ASKI, an NGO with 10,626
Grameen borrowers (79%) out of a
total of 13,729, which almost failed
with both group and individual
lending, but is now recovering,
though still in the red, and will turn
over its portfolio to a new thrift
bank in co-ownership with five
other NGOs;
• Cebu People’s Multi-purpose
Cooperative, which has graduated,
since 1997, some 55% out of 3,840
Grameen clients to individual
borrowers with full cooperative
membership;
established by an NGO in 2000,
with 1,078 Grameen and 673
page 37
______________________________________________________________________________
individual borrowers, which is
struggling to survive - calling into
question the suitability of GBA in
marginal areas; and
• Sinpangabong Multi-Purpose
Cooperative, which is turning into
a sole Grameen replicator with
1,336 Grameen borrowers, but
finds it difficult to mobilise funds
from poor clients in a marginal
area and has little prospect of self-
reliance.
Savings and the safety of savings. The main
deposit products in GBA are compulsory
savings as a part of instalments. Voluntary
savings in this initial phase are negligible.
In most of the financial institutions visited,
Grameen deposits account for 30-50%
of Grameen loans outstanding. Savings
mobilisation by NGOs is tolerated by the
financial authorities if it does not exceed the
volume of their loans outstanding. In contrast
to banks, cooperatives and NGOs are not
effectively regulated and supervised and have
no deposit insurance. PCFC, as a custodian
of the GBA program, has to take special
care in the selection of conduits and has an
important role to play in the ongoing policy
dialogue on regulation and supervision of
NGOs and co-operatives.
The mainstreaming of Grameen replication
in the Philippines. There are several
important conclusions from the case studies
which are, in contrast to earlier findings, of
great relevance to the international debate
over group vs. individual technologies and of
sustainability vs. outreach:
• Mainstreaming GBA as a product
of regulated financial institutions is
feasible;
• GBA as a product of healthy
financial institutions can be
______________________________________________________________________________
page 38
highly profitable and produce a
share in profit far in excess of its
share in the loan portfolio; but in
weak institutions, both Grameen
and non-Grameen banking does
not pay off, neither in terms
of outreach nor in terms of
profitability;
• Compared to 1993, the cost per
Peso lent has gone down: from
47% (ACPC 1995) to 35% and
34% in CARD and NWTF,
respectively, and 12.3% in
Producers Bank’s GBAR program
(IFAD mission);
• The high profitability is due to the
high repayment of women and to
very high interest rates;
• Outreach could be substantially
increased by stronger support to
branching out through institutional
loans;
• The restriction of loans to
productive purposes and
microenterprises (e.g., excluding
agricultural and educational
loans) interferes with institutional
autonomy;
• GBA as a group lending
methodology is flexible: clients
may stay in the groups, graduate to
individual lending, or do both;
• Institutional sustainability and
rapid increase in outreach to the
poor are not only compatible, but
also mutually reinforcing;
•
Not every methodology is for
every bank: non-collateralised
group lending works in some,
collateralised individual lending in
On Micro-Enterprise
______________________________________________________________________________
others: for reasons of management
preference or others; and
• In either case, sound banking
practices and adequate monitoring,
guidance and staff training are
necessary.
Project policy. Converges with IFAD and
ADB rural and microfinance policies, with
the exception of its exclusive focus on GBA;
choice of approach should be left to the
institutions and not imposed.
Sustainability. Given the high profitability of
GBA among several of the participating banks
and cooperatives, combined with access to
sources of refinance, sustainability for them is
no issue. With assistance from PCFC, NGOs
may establish banks to make their financial
operations sustainable. While the Grameen
operations of MFIs, refinanced at market rates,
are on principle viable, self-reliance remains a
distant goal; rapid expansion by existing and
new institutions will require continued access to
liquidity – and perhaps more vigorous savings
mobilisation from the poor and non-poor.
Innovation and replicability. The most
fundamental innovation of the project
lies in its commercial approach and the
mainstreaming of microfinance. Rural banks
and NGOs-turned-rural bank have played a
crucial role in the process: as autonomous
partners which have adapted GBA as a
financial product in innovative ways (see par.
7). In the process, franchising Grameen has
emerged as a commercial proposition.
Overall impact assessment. The project
has had a notable impact on income and
asset formation among the enterprising
poor, including a number of the very poor –
sometimes within the very first cycle of credit. the approach; and to leave it to the MFIs
It has empowered poor women to organise
themselves in groups and expand or start their
own microenterprises. Its far more significant
______________________________________________________________________________
On Micro-Enterprise
impact has been on financial institutions,
which have adopted and adapted Grameen
banking as a highly profitable outreach
strategy to the poor and very poor as a new
market segment. In its first phase, the project
has thus laid the foundation for sustainable
banking with the poor and its expansion
throughout the country.
The risks of success. The project’s success
will breed failure if it comes under political
pressure to expand at a pace exceeding the
existing human and organisational capacities.
Development takes time -the evolution of
microfinance in some of the now developed
countries (albeit without donor support) has
been measured in half-centuries, rather than
decades. Rural banks in the Philippines have
just completed their first half-century of
development – and are just at the beginning
of profitable banking with the vast numbers of
rural poor.
Performance of the project
Relevance of objectives. The poor have
proven to be bankable, the MFIs have
adopted Grameen banking as a profitable
outreach strategy to the poor, targets have
been over-fulfilled, there are virtually
unlimited prospects for further expansion
– provided MFIs continue to be given room
for experimentation and innovation, including
the adoption of methodologies other than
Grameen, particularly for graduating clients.
Two objectives are unrealistic if interpreted
rigidly: the sole focus on the ultra poor (as
this would exclude a number of rural poor and
raise portfolio risks and costs); and, with a
view to the future, the sole focus on Grameen
banking. There are two suggestions for the
next phase: to respect the autonomy of strong
and healthy MFIs in selecting and modifying
whether they start with the ultra poor and
work their way up to the enterprising poor;
or whether they start with the poor and work
page 39
______________________________________________________________________________
their way down to the ultra poor, who are
IFAD’s target group.
Effectiveness and efficiency. Grameen
banking has proven to be cost-effective; and
the project has proven to effectively reach its
objectives. Reporting requirements are a relic
of targeted subsidised credit programs and are
unnecessarily onerous and costly. Reporting
should be adjusted to, and integrated into, the
banks regular reporting to BSP.
and participating in microfinance policy
dialogue. Its own experimental GBA
retail lending sites are being turned over
to MFIs. Under political pressure, PCFC
needs to be strict in the selection of MFIs as
autonomous replicators and not just conduits
for government funds. Documentation
requirements need to be greatly reduced.
Institutional loans need to be used more
constructively for the expansion of the
microfinance infrastructure.

The partners NGOs and community-based

IFAD. IFAD’s identification reports (1993)
had suggested to start with the enterprising
poor; and to be more open-ended with regard
to the choice of methodology; but this was not
incorporated in the final project documents.
IFAD’s involvement in the project after
approval was weak, as no representative
participated in review missions and related
briefings until 2002.
ADB. ADB duly emphasised policy reforms
in rural and microfinance and the role of
PCFC in policy dialogue. ADB carried out
project reviews in 1998, 2000, 2001 and
2002 and funded an impact survey in 2002.
It also provided a technical assistance grant
(USD 600,000) for the development of a MIS
system and other support activities to MFIs.
Reportedly, the RMG-MIS system found
little sympathy among GBARs, while other
activities such as “best practices” workshop
were instrumental to exposing MFIs to
successful business cases. Interagency
coordination between ADB and IFAD could
be substantially improved through greater
and constant communication, undertaking
joint work programmes, missions and issuing
common project documents.
PCFC. PCFC, an apex financial institution
for microfinance, has been effective, after a compromising the economic viability and
slow start, in selecting and preparing MFI
conduits, establishing a viable program,
______________________________________________________________________________
page 40
organisations.
The 15 largest MFIs account for 51% of
GBA clients; PCFC should focus on the
selection of strong MFIs and phase out weak
and unsustainable ones. Some NGOs have
been seminal in GBA training and exposure;
in the future, this role will be increasingly
shared with banks. Under new legislation
under preparation, deposit-taking NGOs
have to establish banks. PCFC should
directly support the existing trend among
participating NGOs to establish banks.
Co-financiers. DoF represents the government
in the project, on-lending the ADB and IFAD
funds through LBP to PCFC. With LBP,
it co-chairs the Natio nal Credit Council
as credit policymaker, with the intention
of bringing non-financial institution under
effective regulation and supervision. LBP, the
government’s agricultural development bank,
has expressed an interest in a stronger role in
microfinance.
Overall assessment and conclusions
Issues. In spite of the success of the project,
there are also open areas of improvement
for the future. These include an increased
coverage of the ultra-poor, without
sustainability of the MFIs and the project,
effective regulation and supervision of MFIs;
On Micro-Enterprise
______________________________________________________________________________
support for institutional development and
branching out through equity vs. credit-
only; participation in the policy dialogue
on regulation and supervision of MFIs;
avoiding onerous and distorting reporting
requirements which differ from those of the
central bank; reducing the length of the chain
of intermediaries; and multiple approaches
vs. a single one to microfinance for the poor.
Insights:
• The project has achieved success
and momentum in social capital
formation, empowerment and
poverty alleviation during the five
years of implementation;
• The GBA methodology has been
effective in replication and up-
scaling, but requires flexibility of
in the hands of autonomous MFIs
to adapt to local and organisational
culture;
• The exclusive focus on GBA
has enabled PCFC to market
a product that is simple to
identify and install. Nonetheless
there is demand from PCFC
for pilot-testing alternative and
complementary methodologies (for
example testing of ASA and non-
Grameen savings-based Self Help
Groups);
• Pathways of graduation to
individual credit and loan terms
are crucial to impact sustainability;sector and policy reform in
they need to be further explored;
and the role of GBA centres in loan covenant sections; strengthening
assessment redefined; and
• Access to micro-enterprise skill
training requires a stronger
emphasis on linkages with
competent support agencies.
______________________________________________________________________________
On Micro-Enterprise
Recommendations:
• Supporting expansion with
different technologies to poorest
areas and people; through strong
rural financial institutions,
branching out and microfinance
franchising/BOT (Build-Operate-
Transfer); with institutional loans,
equity investments and technical
assistance;
• Supporting capacity building
and training services to new
entering MFIs by rural banks
and other GBARs, linkages
with microenterprise support
organisations, and microbanking
training for PCFC staff;
• Strengthening impact on borrowers
through capacity building,
comprising leadership and
microenterprise training of center
chiefs;
• Improving operations by abolishing
onerous and distorting reporting
requirements and adjusting PCFC
interest rates to market rates;
• Improving co-operation between
ADB and IFAD through joint
missions, product documents and
working schedules and by speeding
up the flow of IFAD funds;
•
Supporting microfinance
accordance with the reform
the capacity of PCFC to
participate in policy dialogue;
emphasising effective regulation
and supervision for all MFIs
through a delegated system of
supervision; and reviewing the
page 41
______________________________________________________________________________
feasibility of the microcredit
rating system proposed by NCC;
• Support the local, national and
international dissemination by
sharing experience at quarterly
PCFC meetings; packaging and
distributing the adapted Grameen
technology through the Rural
Bankers Association of the
Philippines; and participating in
the Micro Credit Summit in New
York , presenting the experience of
rural banks as Grameen replicators;
and
• Support systematic studies
in cooperation with research
institutes, among them a study of
sustainability and outreach to the
poor among rural banks and NGOs
as Grameen replicators.
VII. NGOs in Micro-Enterprise
Development in the
Philippines
In 1993, research showed that the lack of
credit funds was not the issue in micro-
enterprise development. The Philippine
private sector and government institutions
have funds to lend in those times. The
problem were: (1) lack of strong institutions, a year,17 of which 40 percent was foreign
NGOs, cooperatives or banks, which could
capably deliver credit and savings services
to micro-entrepreneurs and poor households;
(2) the view among many traditional sectors
that the poor could not pay back loans or be
good clients of microfinance programs; and
(3) lack of national policies in support of
microfinance.
There is a long history of NGO involvement
in livelihood programs in the Philippines,
based originally on grant assistance from
bilateral donors, international NGOs, and
even the private corporate sector (through
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page 42
the Philippine Business for Social Progress.)
However, in the 1980s government agencies
also became increasingly involved through
direct lending to beneficiaries. The most
salient of the earlier government programs
was the KKK launched in 1981. It fell into
some disrepute when it became overly
politicized in the selection of beneficiaries and
had a very low repayment rate.
The Philippines has recently undertaken
a major devolution of functions and
resources to the local governments under
the Local Government Code. However,
the interests of the poor are expected to be
better protected in future local-government
implemented programs by the statutorily
granted representation of NGO representatives
on provincial and municipal governments
(of unto 25 percent of the strength of their
legislative bodies).
Livelihood programs were revived under the
Aquino administration as a major component
of the anti-poverty program and proliferated
until as many as 154 programs, according
to one count, were being run by nine line-
agencies, some of them lending directly to
borrowers. Together with several government
financial institutions and corporations also
financing livelihood programs, they are
reported to have been spending P2.3 billion
funded. While various agencies attempted
to specialize in their clientele, in practice
there was a large measure of overlap,
and possibilities of complementation and
exploiting economies of scale remained
unutilized. One evaluation of several
programs being run by different bureaus of the
same agency, the Department of Labour and
Employment (DOLE), found that most of the
programs had the same sort of beneficiaries
and were too small to be cost-effective (Bot
1990). On an average, a loan of P10,000 had
generated about P23,000 of income a year,
as well as 0.9 jobs, divided almost equally
On Micro-Enterprise
______________________________________________________________________________
between self and wage employment. About framework, and a series of comprehensive
one third of the projects financed were a main evaluations of individual programs has been
source of income for the household. There was initiated, similar to that of the DILP.
a close relationship between the success of
the enterprise and the repayment rate. Overall One of the larger livelihood programs was the
the payment rate was 68 percent, although Tulong sa Tao being run by the Department
less than 20 percent of the enterprises failed of Trade and Industry (DTI), which was
entirely, 15 percent earning insufficient assisted with an initial loan of US$8 million
income to make full repayment. There was by the Asian Development Bank (ADB)
no observable association between the in 1988 for the first NGO Micro-Credit
success rate and the size of the loan. Trading Project. Utilization was much faster than
enterprises were on average more profitable anticipated, and a second loan of US$30
than manufacturing and services, and “agro- million was released to DTI in 1991. About
industrial” enterprises (such as hog-raising) 20,000 beneficiaries were assisted through
the least profitable. the first loan, through about 200 NGOs, with
typical loan size being 10,000 to 15,000
In response to growing unease with some of pesos (US$400 to 600) and 61 percent of the
the problems of the program, and in keeping borrowers women.
with the new (1986) constitution that required
the state “to encourage non-governmental and Finally, it is worth noting that the channeling
community-base sectoral organizations”, as of funds for the expansion of micro-enterprise
well as with the medium-term development programs through NGOs and cooperatives
plan (1987-92) which recognized NGOs as is not linkage building in the usual sense of
“essential partners in the development effort”, linking the formal financial sector with the
a decision was taken that by the end of 1989 informal, or in this case the semi-formal
all line-agencies should discontinue direct sector. The funds in this case come mostly
lending and channel future assistance through from government and aid agencies, bilateral
financial institutions or NGOs. At the same and multilateral. Indeed one of the major
time a large number of the smaller programs issues with these programs is whether they can
were merged with each other (for example, be taken over by the formal financial sector, a
the various programs under DOLE into the question we will return to below in connection
DOLE Integrated Livelihood Program, or with sustainability.
DILP). NEDA, the planning agency, became
the coordinating and monitoring agency at theAn interesting question is what explains the
national level, through its Subcommittee on general shift in emphasis from financing
Livelihood. crop production in the sixties to financing
urban micro-enterprises in the eighties. The
However, in 1992 there were still reported answer has partly to do with the growing
to be 56 programs in existence, and data on realization of the importance of the urban
annual flows, target beneficiaries, lending informal sector and the extent of urban as well
terms and repayment rates remained hard to as rural poverty. In the Philippines, however,
come by. The greater decentralization of the the bulk of livelihood program activity is
program and use of NGOs, cooperatives and in the rural areas and small towns. Even for
credit unions as conduits has, it anything, households whose main source of income is
made the monitoring task more difficult. crop production, fishing or wage labor, non-
NEDA has initiated a review of livelihood farm activities constitute a vital supplementary
programs to come up with a new policy source of income.
______________________________________________________________________________
On Micro-Enterprise page 43
______________________________________________________________________________
The first few projects were started by NGOs in
1989 (the “pioneer NGOs” as they are referred
to) working closely with the Asia Pacific
Development Council in Kuala Lumpur as
part of an effort to replicate the Grameen
bank model in several Asian countries. In
1990 a government agency, the Agriculture
Credit Policy Council (ACPC), launched
the Grameen Bank Replication Program,
funded until recently partly by counterparts
funds from the Dutch Rural Development
Assistance Program. The two dozen or so
ACPC participants (most of which are still
very small) consist not only of NGOs but
also of credit unions and cooperative rural
banks. In all about 12,000 borrowers have
been covered by the end of 1992, P4 billion
saved (more than 10 percent of the total loans
disbursed) and valuable experience gained.
The repayment rate was about 95 percent for
the ACPC project and ranged from the low to
the high nineties for the pioneer NGOs.
Sustainability
Two related developments in the last decade
have cleared the way to the large-scale use
of NGOs and cooperatives as intermediaries
for lending to micro enterprises. The first
has to do with changes in the willingness
and legal ability of these institutions to
assume credit risk, a role many of them were
new to. Livelihood programs in the past
were financed largely by grants or highly
subsidized loans, repayable at convenience,
if at all. The dole-out mentality engendered
is a handicap the program has to contend
with today in achieving satisfactory loan
repayment rates. In order for NGOs to
assume credit risk they must possess legal
personality. The number of NGOs registered
as foundations with the Securities and
Exchange Commission has grown rapidly in
recent years to over 21,000, although only an
estimated 4,000 of these are developmental
NGOs, and even fewer are involved in
credit activities. Similarly, over 12,000
______________________________________________________________________________
page 44
cooperatives were registered between 1987
and 1992, from less than 4,000 prior to this
period.18
The other development was the lifting of
interest rate restrictions on lending and
on deposits in the early eighties. Thus the
intermediaries can now recover, in principle
at least, the extremely high transaction costs
of lending to the poor, and their cost of funds,
through interest rate spreads. The first ADB
loan, for instance, had DTI lending to NGOs
at 7 percent and NGOs on-lending at anything
from 12 to 25 percent (which means that the
minimum margin was 5 percent). The second
loan has raised the rate of interest at which
DTI lends to NGOs to 12 percent, which is
closer to market rates.
There are no restrictions on the on-lending
rate, except the general guideline that they
should not exceed commercial bank rates.
Since commercial banks do not make this
type of loan and it can be conjectured that
it would be pretty high if they did, this still
leaves a large measure of flexibility to the
on-lenders. Many NGOs have, in fact, left
their nominal rates unchanged in deference
to nominal-interest rate illusion, a leaf they
have borrowed out of the informal lenders’
book, while increasing their effective
rates through such devices as charging a
service fee which is invariant to the size
and duration of the loan. Unfortunately, this
serves as an unhealthy incentive to turn over
loans too frequently for longer gestation
activities with fixed asset investment.
Weekly amortization is another frequent
practice (although desirable in itself) that
greatly increases the effective rate of
interest. While it is hard to pinpoint current
effective rates, they are clearly below rates
of many informal lenders and there is little
evidence of consumer resistance setting in.
A more interesting question is what rate
NGOs should charge in order to cover their
On Micro-Enterprise
______________________________________________________________________________
costs, one which most NGOs themselves
find hard to answer. Estimates vary from
30 to 60 percent per year, except for credit
unions, for which they are much lower.
Costs are lower for credit unions because
their beneficiaries tend to be much more
homogeneous and conveniently located than
those of foundation-type NGOs. Most credit
unions are either based on public markets
or institutions where peer group pressure is
much stronger, and where the engagement of
collectors who do the rounds of stallholders
every week, or payroll deduction, is
relatively cheap and easy. Most important,
loans are made in a fixed ratio (from two
to five) of fixed deposits or shares, which
are liable to be forfeited in the event of
default, and all members stand to gain from
repayment discipline in the form of dividends
and patronage refunds. Most credit unions
have been functioning viably for many years
and are likely to continue to do so after the
infusion of DTI funds, although these can
create some distortions.
A great deal depends, of course, on the level
of beneficiaries the NGO is seeking to assist,
which determines whether collateral can
be sought. Some NGOs are very flexible
about the type of collateral they will accept,
even utensils, small appliances such as
table fans and radios, and fixtures such as
wooden shelves. They see this as a way of
familiarizing borrowers with the concept
of collateral in preparation for when they
graduate to banks. The transactions-cost
saving advantage of such collateral is not
very high. One NGO had a bodega full of
such equipment collecting dust. At the other
extreme in the cost savings advantage is the
insistence by at least one well-known NGO
on post-dated cheques as collateral, another
instance of mimicry of the informal sector.
Where collateral cannot be sought, NGOs
have to put a great deal of effort into social the standard soft loan term of 35 years, with a
preparation or “value formation” as it is
______________________________________________________________________________
On Micro-Enterprise
commonly referred to in the Philippines. One
of the values sought to be engendered is the
obligation to repay, an instance of a collateral-
substitute. Week-long training costs for new
borrowers followed by a test are particularly
high, but seem to be more than offset by the
high repayment rate of about 95 percent.
Costs also depend on loan disbursement and
collection mechanisms, which are minimized
through lending to groups organized in
centers, following the example of the Grameen
Bank. A great deal of further research is
needed into what NGO costs actually are
under the program, and as important, what
they would be were NGOs doing all the things
they should to make the credit they provide
productive, filling gaps in the support services
infrastructure, providing non-credit inputs
etc. A program of case studies would be very
useful.
The ADB Project Experience
The coverage of operational costs is only one,
although the major aspect of sustainability.
There is also the requirement that the
revolving loan fund available for lending
and on-lending does not suffer erosion from
defaults in repayment, or through inflation.
Defaults can occur at two stages: from
borrowers to NGOs and from NGOs to
the government. In the first ADB loan, for
instance, the repayment rate was as high as 85
to 90 percent from beneficiaries to NGOs in
the first project and between 97 to 99 percent
from NGOs to DTI.
However, some NGO repayments had not
become due yet, since DTI loans can be for a
maximum of five years. The average maturity
of NGO loans to borrowers is much shorter,
which gives NGOs a chance to turn their loans
over from DTI more than once. Since the
amortization period of the ADB loan to DTI is
grace period of 10 years, DTI is in a position
page 45
______________________________________________________________________________
to revolve the loan for a much longer period.
The lending rate of 12 percent is designed to
cover both inflation and defaults, apart from
DTIs own costs. It will be interesting to see to
what it extent it actually does.
It will also be interesting to see how strong
the relationship turns out to be between
the repayment rate to an NGO and the
repayment rate of that particular NGO
to DTI. Mismanagement on the part of
some NGOs could lead to the diversion of
repayments to other activities, not to speak
of outright default by “fly-by-night” NGOs,
the possibility of which can not be totally
discounted in a program as large as this. As
a safeguard, and in order to ensure that other
NGOs with unsatisfactory loan recovery rates
are in a position to absorb the defaults, or
in other words that they do in fact bear the
credit risk, the program guidelines require an
NGO to have a networth of P100,000 and a
risk asset to networth ratio of not more than
1:5. In order to encourage the participation
of smaller NGOs of high standing, however,
the minimum networth criterion can be
waived, in which case borrowing by such an
NGO under the program is limited to three
times its networth. Requirements such as this
necessarily entail external audit requirements,
and the danger of making it more difficult for
NGOs to remain the kind of small, flexible
and dynamic institutions which gives them
their comparative advantage in reaching
the poor. Finding the right balance between
prudential concerns and informality is one of
the issues the program will have to resolve.
Even if the real value of the funds the
program now has at its disposal is preserved,
the third crucial aspect of the question of
sustainability needs to addressed: where will
funds come from in the future for expansion
of the program? Expand it must, for two
reasons. The first has to do with making a
critical minimum impact on poverty. There Exercises have been done for the Philippines
are over six million families in poverty in projecting how many years it would take to
______________________________________________________________________________
page 46
the Philippines. Reaching even 10 percent
of these, implies a target of about 650,000
borrowers, although it can be assumed at
least one million belong to the poorest of
the poor, however defined. The other reason
is a practical one, and is tied up with the
economics of poverty lending. The only hope
of covering operational costs at anywhere
a reasonable rate of interest is to achieve
economies of scale. This will be illustrated
with reference to the Grameen bank approach.
The Grameen Bank Approach
Unit costs in the standard Grameen-type
operation organized around branches depend
in the steady state on the number of field
assistants per branch, and on the number of
centers per field assistant. A center consists of
five to six groups of five borrowers each. The
two together yield the number of borrowers
per branch. The experience in the Philippines
has been that seven field assistants per branch
are about optimal. The number of borrowers
per field assistant, on the other hand, tends
to vary with population density, which
determines travel time, and therefore how
many centers a field assistant can cover. Given
the fixed cost nature of a branch office for the
entire operation within a branch, and of field
assistants for loans to all borrowers in the
centers under the field assistant, Grameen-type
operation exhibits strong economies of scale.
Given these economies of scale, unit costs in
the start-up and expansion phase depend on
the pace of expansion. We believe that it is
necessary to set up one or more branches at
the very commencement of operations. If the
number of centers and groups within centers
grows denser with the demonstration effect
of a successful program, the cost of a field
assistant is spread over an increasing number
of loans.
On Micro-Enterprise
______________________________________________________________________________
reach viability by a GB replication program
designed to reach 650,000 borrowers by the
end of the century, or about a quarter of the
poorest of the poor households with a per
capita income below even the subsistence
level. The projections assume the adoption
of a decentralized model, taking into account
the existence of a number of NGOs in the
Philippines with valuable accumulated
experience of Grameen methodology, the
island nature of the Philippines, and the
greater risk of things going wrong in a
monolithic organization. The projections
assume a fairly conservative first-year member
strength per branch of only 120 borrowers,
building up to 600, 900, 1,400 and 1,500 in
subsequent years. Other factors determining
viability are loan size, branch salary costs,
interest payable on borrowed loan funds
for on-lending, the repayment rate, and the
interest rate charged to borrowers.
The projections assume an average first loan
size of P1,500, followed by successive loans
of P3,000, P5,000, P7,500, and thereafter
P10,000. Salaries are assumed to be at levels
competitive with those offered by the rural
banks. The interest rate on borrowed funds is
assumed to be 10 percent, the repayment rate
90 percent, and interest charged to borrowers
a nominal 30 percent. Since repayment is
weekly, an average of only half the principal is
outstanding over the term of the loan and the
effective rate is double.
While this may seem high, the largest
Grameen project with over 6,000 borrowers,
Project Dungannon, is already charging it.
It is assumed, moreover, that 20 percent of
borrowers drop out at each successive loan
after repaying these loans. In order to replace
these borrowers, the branches go on recruiting
new members to maintain a full complement
of 1,500 borrowers.
On these assumptions the program begins to
yield a positive net income in the seventh year, the Grameen Bank model which does not rely
______________________________________________________________________________
On Micro-Enterprise
and a cash surplus in the eighth, after which
it becomes possible for the NGO to start
repaying loans in year nine. These projections
are very sensitive to assumptions regarding
the pace of branch expansion and number of
members recruited per branch, which will
require validation in the context of further
experience. The largest branch in the country
so far has about 1,200 members, in Project
Dungannon. Operational costs in year one are
as high as 470 percent of the loan amount,
a reflection of the very small number of
members recruited in the first year, but decline
to 42 percent in year five and 11 percent by
year nine.19
While they are very approximate, the
projections show that a Grameen Bank
replication on a large scale can be made
viable, and is in a position to repay loans if
extended on suitably long terms with adequate
grace periods. Moreover, they show that in
the standard GB operation with full time staff
there is a trade off, or inverse relationship,
between the start-up costs the program incurs
and the pace at which it expands. The faster it
expands and commensurate with loan quality
and the training of groups and staff, the lower
unit costs and accumulated losses are, and
the shorter the period of time it takes for the
project to start earning them back.
If loans can not be extended on suitably
long grace-periods however, during which
operational costs come down to a level that
yields cash surpluses, the NGO would need to
be supported with grants for the crucial first
two to three years while it goes through the
painstaking process of social preparation of
beneficiaries and training of its own staff. The
ACPC-launched GB replication program does,
in fact, provide for an operational subsidy for
two years limited to half of total operating
costs.
There is an alternative approach to replicating
page 47
______________________________________________________________________________
on the standard branch-based organizational
structure, whether the branches are part of a
unified “bank” as in Bangladesh, or stand-
alone “unit” branches as is being envisaged
in the Philippines, and that is to economize
on operational costs by utilizing the part-
time services of existing staff of NGOs or
cooperatives to handle the cash and book-
keeping entailed. Where the overhead
represented by the branch manager and senior
assistant in the standard Grameen branch can
be shared in this way, it becomes possible then
to start with less than the full complement
of field assistants, and to build their strength
up more gradually than recruiting them all in
the first year as the macro-projections above
assume.
There is a need to experiment with this
economizing approach through further action
research. The concept essentially is to treat
the Grameen Bank approach as an add-on to
existing activities, a financial “technology” for
reaching the poorest of the poor through group
lending, rather than a discrete organization in
itself. While it may not be possible to reach
the same numbers in as short a period of time,
the long-run reach through this approach may
be as great, at lower cost.
the Grameen replicators themselves, which
would on-lend to qualified replicators, each
implementing the program in a decentralized
manner to encourage creativity and new
approaches. The foundation would charge
a service fee to cover its costs which would
include those incurred on a strong monitoring,
evaluation, and research capability. However,
in order to give participating NGOs more
room to cover their operational costs, the
foundation could on-lend its cheap funds on
soft terms to the NGOs,21 instead of it going
to the government to cover the exchange risk,
as in the case of the ADB-financed micro-
credit project loans to DTI. With the benefit
of soft loans it should also be possible for
the foundation to access commercial loans,
and mix them with the soft loans to come
up with a composite rate of interest of about
10 percent, the rate used in the projections
above. While it would not be possible to
base the program entirely on loans from the
commercial banks, which are not prepared to
“wholesale” to NGOs without guarantees, this
pooling of commercial and donor funds could
be thought of as a weak form of linkage, an
intermediate step in the direction of linking
the formal and semi-formal financial sectors,
the Grameen movement in this case.

The approach of the Grameen Bank has made

It should be possible for the government to
a good start in the Philippines, reaching the
agree to direct loans to the foundation if it
poorest of the poor with repayment rateswere not expected to furnish a guarantee.
that are much higher than any previous The ADB lends at present to the private
program on a comparable scale, yielding sector without government guarantee.
significant increases in household incomes
Direct lending would entail, of course, the
for beneficiaries. However, the movementADB accepting the risk of depreciation of
is constrained from achieving economies the peso since the loans would have to be
of scale because of the shortage of funds.
denominated in pesos, unlike loans to the
Managers of Grameen Bank-like NGOs private sector. This is a change of policy the
spend a disproportionate amount of their time
donors of soft loan funds would have to agree
looking for funds, available from bilateral
on. The scheme would have the advantage,
donors, international NGOs and multilaterals,
however, of pooling the resources of all
like IFAD20. donors, and of exploiting economies of scale
and expertise, while making a direct impact
One way for these managers to save time on poverty, which is what soft loan funds are
would be to fund a foundation set up by meant for.
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page 48 On Micro-Enterprise
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VIII. PDI’s Rural Micro-
enterprise Development
As pointed out in the beginning of this
paper, rural micro-enterprise development
was always a part of Project Development
Institute’s rural development programs.
Early Programs
Early programs implemented by PDI includes:
the Bulawen Resettlement and Reconstruction
Program; and the Laur Resettlement and
Reconstruction Program.
When Mt. Pinatubo erupted in 1991, PDI
entered into negotiations with the Department
of Agrarian Reform (DAR) Region III for
a resettlement project for the victims of the
disaster. Their focus was on establishing a
new community for the farmers who were
affected by the eruption, where DAR would
give certificates of ownership on farmlands
to the project beneficiaries. PDI’s role was to
provide a long-term and medium-term support
services plan to the settlers, as well as to
organize the people and transform them into a
viable people’s organization.
In August 1992, the DAR Region III formed
a land search team made up of representatives
of PDI and DAR Region III for the purpose
of scouting suitable areas for the resettlement of Agrarian Reform Region III and PDI
project of PDI. With the help of the Provincial referred to this program as MARC or model
Agrarian Reform Officers (PAROs) within
the region, the provinces of Bataan, Tarlac,
Zambales, and Nueva Ecija were deemed
suitable for the project.
Criteria were created for these possible
resettlement sites. Among the criteria
were questions of the qualification of the
landholdings for CARP (Comprehensive
Agrarian Reform Program) coverage, the
availability or accessibility to transport
services, etc. For some reasons, Tarlac and
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On Micro-Enterprise
Bataan were not able to match the criteria.
In Zambales, the DAR presented some
voluntary-offer-to-sell (VOS) and compulsory
acquisition (CA) landholdings in barangays
Salaza and Bulawen in the municipality of
Palauig. In Laur, Nueva Ecija, the area offered
was the 3, 100 hectares that was once part
of the Fort Magsaysay Military Reservation
(FMMR).
The area in Zambales was chosen by PDI and
DAR Region III, and named as the Bulawen
Resettlement and Reconstruction Project.
Although it had focused on Zambales, PDI
maintained its openness and willingness to do
another resettlement program in Laur.
The Bulawen Resettlement and
Reconstruction Project:
An Integrated Response to the Problems
Caused by
the Mount Pinatubo Eruption, 1991-1998.
Historical Context
The PDI program in Zambales began
in 1991 as a long-term response to the
needs of the Mt. Pinatubo victims. Using
the concept of genuine agrarian reform
as conceptual framework, PDI together
with partner organizations instituted a
resettlement program for farmer-victims of
the volcanic eruption. Both the Department
agrarian reform community. DAR Region
III replicated the resettlement concept. The
DAR National Office adopted the concept
but revised the operational design. It then
launched the Agrarian Reform Community
(ARC) Program the following year. This
led to the identification and formations of
several ARCs in the province of Zambales.
Potential beneficiaries were first identified
and then relocated to designated arable
lands. They were also provided support
services.
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______________________________________________________________________________
PDI program was different from other
resettlement sites, mostly initiated by
government agencies, in such a manner
that it provided land to the victims. The
problem after the eruption was the total loss
of the land and not merely landlessness.
The program responded according to these
situations. Under the program each family
received a 240 square meter homelot and
a 1.3-hectare farmlot. The program also
provided other support services from,
housing to food production assistance,
necessary to sustain the people through the
long and arduous process of resettlement in a
new place.
When the program completed its resettlement
phase, Sibol, the name given by the people
to their new home, became a new community.
The problems and aspirations of the people
were already beyond the Mt. Pinatubo
eruption. The Sibol Agrarian Reform
Beneficiaries Multi-Purpose Cooperative
Inc. (SARBMPCI) was one of the few
remaining cooperatives in Zambales. The
women’s organization in the area, Samahan
ng Kababaihang Magbubukid ng Sibol
((SKMSI) has also initiated several projects
on its own. PDI also expanded its program
reach by initiating LEISA (low external
input sustainable agriculture) programs in
Barangays Bulawen, Salaza and Sto. Niño.
PDI also helped in the reorganization of the
people’s organizations in the above mentioned 1. Cashew production and processing.
barangays. The unique situation in each area
nonetheless suggests that new and creative
approaches be used. Instead of reviving
the cooperatives in each of the barangays,
PDI organized associations of LEISA/SA
practitioners. The LEISA practitioners in each
area were the direct beneficiaries of the PDI
marketing program.
For its effort for developing and putting into
practice such a concept, PDI was given world
recognition in the Basic Needs category at the
World Expo 2000 held in Hannover, Germany.
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page 50
Micro-enterprise projects
As response to the need of the communities
in Zambales for support, PDI set up several
community enterprises in eight different
sites within the province. The first part of
the preparation phase focuses on resource
generation through savings. Participating
organizations have undertaken problem
focused group discussions and resource
mapping exercises to make them fully aware of
their needs and wants as well as their strengths
and weaknesses. Skills training and values
formation seminar have been undertaken
as a necessary part of the social preparation
process.
These activities were made as a preparation
for the next stage of the program, which was
the actual identification and implementation
of community enterprises based on the
available resources and skills. Immediately
after the said activities, four community
enterprises have been identified as additional
to the already stablished four other groups
in Masinloc, Palauig, Botolan and Iba. PDI
conducted an immersion work in four more
groups identified in the southern municipalities
of Zambales.
The following were the enterprises put-up by
PDI and the peoples organizations (POs):
The participants of this enterprise
were mainly the women’s groups of
Sibol and Bulawen. Cashew is the
second major product of Zambales
next to mangoes. The women
purchased cashew nuts and processed
them into glazed, honey-roasted,
salted and even sugar-coated flavors.
The finish product were more
sellable and had longer shelf life.
Processed cashew has more value
added than plainly roasted cashew
products.
On Micro-Enterprise
______________________________________________________________________________
2. Rare plants collection. The aetas of
Pangolingan have started their rare
plant collection and propagation
project. This project did not only
helped in the propagation of rare
plant varieties; it also helped in
generating additional income for
the aetas displaced by the Mt.
Pinatubo eruption. This was one
activity that made used of their
skills and natural talents. The PDI
Alternative Development Center
housed the rare plant collection. It
also transformed into a community
nursery maintained by both the aeta
association and PDI.
3. Mango production. Mango remains
the major product of Zambales.
PDI supported two cooperatives
engaged in mango production. PDI
helped in identifying direct market
links for the cooperatives in Metro
Manila and nearby provinces.
Together with the coops, PDI
also put up a mango processing
plant which absorbed surplus
mangoes. Processed mangoes rere
very popular both in foreign and
domestic markets.
4. Stick-making. Forest trees like
the bamboo were being used to
produce barbecue sticks which were
transported on a regular basis to
Metro Manila and Bulacan. The
estimated barbecue stick production
in the Palauig area then was
almost two tons per month. Stick
production in the municipality
became a major industry. PDI
provided consumption and
production support to the families
of these forest gatherers/stick
producers. PDI also helped in
providing direct market links to the raised or built up by the people. One of the
stick producers of Palauig.
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On Micro-Enterprise
Micro-enterprise development scheme
The Community Enterprise Development
Program in Zambales (CEDZ) was an
alternative approach to enterprise development
for the people of Zambales. The program
made used of the talents, skills and creativity
of community organizers in convincing the
people to raise their own social and financial
capital before the actual implementation of
the livelihood program. Through savings, the
people raised capital to be used as counterpart
for the program. The very act of saving
developed an important value-something
that was lost from the Filipino value system,
throughout the years. One of the objectives
of the program was to re-educate the people
with regard the positive end point of the act
of saving. The very act of saving was in fact
became a success indicator itself.
The capital build up process also became a
learning process for the people. Through
meeting and regular consultation among the
members of the savings group or association,
the people learned more about themselves
and their co-members that created an
atmosphere of mutual trust among the
members of the group. Capital, raised from
the saving associations were also used by the
people for several other enterprises or other
uses. The people had many options as soon
as a substantial amount, of both social and
financial capital, had been raised. Enterprise
development were only initiated after the
people raised their counterpart. No counterpart
means no enterprise. This policy was strictly
enforced.
This also changed the complexion of
development funding being funneled through,
by other institutions, in the form of grants or
aids, in the province of Zambales. Access to
development funding became competitive and
only used to support in part the social capital
objectives of the program in Zambales was to
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______________________________________________________________________________
support or invest in the social capital of self- The Igorots were also aware of the Bulawen
help groups and other poor communities in the Resettlement and Reconstruction Program
province. of PDI and met up with representatives
of the NGO, asking to be included in the
The Laur Resettlement and Reconstruction resettlement program in Laur. Later, PDI
Program and DAR agreed to take the Igorots as
part of the resettlement project. When
The Laur Resettlement and Reconstruction representatives of the Igorots in Carranglan
Program (LRRP) was a response to the visited the PDI office in 1993, PDI had just
clamor of the Igorot victims of the July-16 completed the resettlement of more than 100
(1990) earthquake that struck Northern and families, victims of the Pinatubo eruption in
Central Luzon. Victims of the earthquake Zambales.
live desperately along the hillsides of the
Caraballo Mountains, neglected for more In November 1993, PDI and DAR signed
than four years. There were other disasters a memorandum of agreement jointly
that came before and after the July-16 undertaking the Laur Resettlement and
earthquake, like the Ormoc Flashflood and Reconstruction Program (LRRP) in Lot 29
the Mount Pinatubo eruption. The victims of the 3, 100 hectares of the CARP land. The
of the earthquake, much less those living in LRRP was patterned after the genuine agrarian
far-flung areas were totally neglected by the reform framework used in the Bulawen
government. Resettlement and Reconstruction Program.
The components of the program was similar,
Historical Context but a different organizing approach was used
since there was no urgency to resettle the
In 1993, after announcing of the release people, in the absence of any imminent danger
of the FMMR’s 3, 100 hectares and it in their places of origin.
being ready for CARP coverage, the DAR
offered a portion of this area to PDI for Under the LRRP, PDI shall extend assistance
another resettlement program just like to DAR in identifying and processing farmer-
that of Bulawen. Around the same time, a beneficiaries (FBs) for them to qualify as
group of Igorots from Carranglan, Nueva CARP beneficiaries in Lot 29. Other tasks of
Ecija, were searching for new lands where the NGO are to mobilize the beneficiaries and
they would settle down. This group had turn them into a viable people’s organization,
petitioned to various government line and develop immediate and long-term support
agencies and LGUs and has asked for services and projects for the FBs’ sustainable
new farmlands, for the 1990 earthquake development. DAR’s role in the program is to
destroyed their previous farmlands. That process the applications of the FBs as CARP
same year, a representative from the Good beneficiaries and generate individual CLOAs
Shepherd accompanied these Igorots to (Certificate of Land Ownership Awards) to
the Office of the Secretary-DARPO and their farm lots.
inquired on any resettlement programs
of the DAR in which these people could While DARPO was processing the segregation
be involved in. They were referred to the of the 3, 100 hectares into areas which will
South Nueva Ecija PARO, who said that be divided for the Mt. Pinatubo victims, the
there was a possibility that they would be pioneer settlers, private and public lands,
included in program involving the 3,100 and the generation of collective CLOAs in
hectare reverted base lands. these landholdings, DARCO requested the
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page 52 On Micro-Enterprise
______________________________________________________________________________
provincial PAROs to come up with their
respective provinces’ areas for DAR’s ARCs.
In June 1994, the Laur ARC, composed of the
four barangays, was launched. The CARPable
area in San Josef and San Isidro totaled 3, 354
hectares, while Sagana and Pinagbayanan had
445 hectares.
The 3, 100 hectares that was released is
located within the barangyas of Sagana, San
Josef and San Isidro. PDI is currently working
on a resettlement project in the 750-hectare
Lot 29, which is part of the 3, 100 hectares.
PDI and some of the earthquake victims
immediately set out to integrate with some of
the settlers in the nearest sitio site, Buracc.
They discovered that there were already
farmers in the areas that have cultivated
the upland fields since 1990, fields that
were intended for the Mt. Pinatubo victims.
DARPO explained that the number of these
pioneer settlers were small when they first
documented the area. It was unintentional that
their area was included for the Mt. Pinatubo
Commission (MPC) area. They were hoping
that the MPC would include these pioneer
settlers in their projects.
These pioneer settlers sought the assistance
of PDI and asked to be included in the LRRP.
After several talks and negotiations, PDI
finally included them in the project. Both the
Igorot migrants and the original farmer-settlers
received their land titles in 1996. Each Igorot
family resettled in Laur received a two-hectare
farmlot and a 500-square-meter homelot. The
farmers in the lowland portions were provided
with logistical support in the surveying and
titling of their home and farm lots. The
people in the barangay have recognized the
effort of PDI. PDI became a member of the
barangay council and one of the three member
organizations of the Land Tenure Improvement
(LTI) Committee, which was organized to settle
land problems within the military reservation.
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On Micro-Enterprise
Micro-enterprise projects
Reconstruction began side by side with the land
transfer work. The whole area was practically
undeveloped. Whatever developments the
original settlers had introduced were minimal.
The farmers began work in the area. The test
of the political will of the people had been
surmounted but the test of organizational
strength has just begun. The immediate
concerns were food, housing and clothing for
the people.
Through the LRRP, PDI provided a package
of support and basic services to the people to
address these needs. These includes: housing;
production assistance and carabao dispersal;
food for work; reforestation; health; daycare;
and water supply.
PDI begun its micro-enterprise development
work through hog dispersal and goat dispersal
projects.
1. Hog Dispersal. In 1997, the
women started to organize
themselves and formed their own
women’s organization. The women
realize the need to empower their
ranks and expand their roles in
community building. In search of a
project, they decided to raise pigs.
So PDI started a hog dispersal
project which started in Buracc. At
the start five pigs were dispersed.
Each pig dispersed had to be repaid
by two female piglets, three if the
dispersal included feeds for the
pig. The piglets, in turn would be
dispersed to other members of the
organization. In 1998, it started in
Manganese, located in Lot 29, with
six pigs. The pigs are “screened”
by their health, weigh, and the like.
By June 1999, there were already
44 hogs dispersed under the
program.
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2. Goat Dispersal. Since Buracc
is an upland area, it is a natural
environment for goats. The goat
dispersal program started in June
1997 with 18 heads (15 females
and 3 males). By September, the
number of goats had been increased
to 32. Eight of the goats were
dispersed to farmers. The rest were
maintained in a one-hectare pasture
enclosed by hog wire. Inside the
pasture, a shed was constructed to
house the goats at night.
PDI started planting napier,
flamingia, rensonii and kakawate
as feed for the goats. A
veterinarian from the Bureau of
Animal Industry visits the goats
regularly. To improve the stock,
three Anglo-Nubian goats were
acquired in 1998 and two Saanen
goats in 1999. However, the
hybrids goats, save for one, did not
survive the harsh environment of
upland Laur.
On its sixth year of implementation, the
program covers a larger area of operation
and has a wider beneficiary reach. PDI covers
the whole of Laur, Nueva Ecija for policy
advocacy and focuses on Laur Poblacion, the
sitios of Buracc, Manganese, Casa Rijal and
the barangay proper of San Isidro, and the
adjacent barangay of Sagana for its impact
program. In Laur Poblacion, PDI supports a
LEISA practitioners group, who grows rice
and onions in lowland, irrigated areas. The
LEISA group, composed of 25 individuals, has
had 100% repayment record for the past four
cropping seasons.
Meanwhile, PDI’s goat dispersal project
developes into Goat’s Meat and Milk
Production Program. PDI’s objective is for After the land has been acquired, economic
Laur to become a new center for goat raising support services are critical for the peasants
in South Nueva Ecija. The area in barangay to be sustainable under an increasingly
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page 54
San Isidro will become a primary source of
upgraded goats as well as milk and meat. PDI
has Anglo-Nubian and Bower goats in its
demonstration farm. The program has also
dispersed several local goats. The imported
goats are thoroughly being acclimatized in
the area and being used to upgrade the local
breeds. Goat’s meat and milk became the -
products of this program.
PDI has dispersed hogs and carabaos to
deserving farmer-beneficiaries. Together with
the goat dispersal program, family income
has substantially improved over the last year.
In particular, the carabaos are most needed
in making the land productive. Aside from
working on their own land, farmers rent out
their carabaos to nearby farms, providing
additional income to farmers. Backyard hog
raising is handled by the women. Piglets are
sold to nearby markets and become another
good source of income for the Igorot farmers
as well as the lowlanders.
PDI’s New Programs
The first programs of PDI in Zambales and
Nueva Ecija were successively followed
by the following programs: 1) Sustainable
Rural Development Program (SRDP); 2)
Rural Empowerment through Agrarian
Asset / Development (READ) Program;
and 3) Central Luzon – Sustainable Rural
Development Program (CL-SRDP).
Under these programs, PDI continue its
agrarian reform and rural development
activities. Even if PDI was quite successful
in its effort in LTI, the next problem have
to be confronted: how to help the agrarian
reform beneficiaries in their obligations to
continuously pay their land amortization and
uplift their economic status.
On Micro-Enterprise
______________________________________________________________________________
unfavorable production environment due to
erratic rainfall caused by global warming,
the decline of soil fertility due to increased
application of agrochemical inputs, the high
cost of production inputs, inadequate technical
and managerial capacity of the farmers and
the insufficient support of the government to
post harvest facilities, credit, marketing and
extension.
On top of these, the peasants have to compete
with well-organized, well-financed and
technologically advanced corporate and
large-scale farms of developed economies
courtesy of World Trade Organizations
(WTO). All of these have contributed to
the decline of farm productivity that has
resulted in the further impoverishment of the
peasants. They are comparatively in the same
state as when they were tenants and farm
workers. Those who are helpless in the face
of poverty resorted to illegal selling of land
rights and mortgaging. The situation leads to
a new cycle of land concentration among the
financial elites.
PDI, together with the Nagkakaisang
Magsasaka ng Gitnang Luzon (NMGL) and
Pagkakaisa ng mga Samahan ng Magsasakang
Kababaihan – Gitnang Luzon (PASAMAKA-
GL), embarked on supporting livelihood
opportunities for the different people’s
organizations and members of the peasants’
and women’s federation.
In this context, activities that support skills
upgrading and the development of income-
generating activities for the rural poor
are being conducted such as small-scale
livelihood projects that can be done at home
or allow for processing at the household level.
Sustainable Rural Development Program
(2000)
The Sustainable Rural Development “ Training on Candle Making”.
Program (SRDP) is a Block Grant provided was conducted by one of PDI’s board of
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On Micro-Enterprise
by 11.11.11-Pilipinas 2000 Mini Project/
Philippines. Under this program, PDI
pursues the implementation of genuine
agrarian reform and rural development.
Together with Institutional and Organizational
Strengthening; Capability Building for
People’s Organizations; and Research and
Policy Advocacy, SRDP has a component of
Livelihood Support for POs which includes
rural micro-enterprise development.
Under this Livelihood Support for POs, as
PDI develops the already stablished and put
up new micro-enterprises, it also conducted
skills training on enterprise development.
The training aims to provide the farmers
with the necessary knowledge and skills,
which they could apply on their own, as a
group or as individuals. The participants
of these trainings are from the different PO
partners of PDI. Preparatory activities were
undertaken before the training to identify
indigenous knowledge and resources
available in the community. Skills training
was a vital part of the capability building of
people’s organizations.
“ Training on Paper Making”.
Making The training
was attended by more than 30 participants,
composed of women and youth. During the
training, women from Bataan learned the
process of converting raw materials from the
environment into paper.
“Hog Management Training”.
Training Hog raising
remains the main alternative source of
livelihood of women. The hog dispersal
program has a dual purpose of providing
an additional livelihood to the family while
offering an alternative savings scheme. This is
why PDI continues to conduct training on Hog
Management in the expansion area of PDI’s
rural development work.
Making The training
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______________________________________________________________________________
directors. The women from Bataan learned
how to make candles that can be used for
decorative and functional purposes.
“Training
Training on agriculture and farming
techniques”. PDI conducts and also
techniques
coordinates with the municipal agriculturist
in providing trainings on agriculture and
farming techniques. Farmers should be able to
maximize the used of their land. One way of
doing this through proper farming techniques.
PDI aslo provides assistance for off-farm and
extra farm enterprises to qualified people’s
organizations. Women’s organizations
established rice and feeds retailing outlets in
their respective areas. The women have put up
a counterpart fund, labor nd structure for the
program.
Planning and Assemblies/Orientation
Seminar on Livelihood. This orientation
seminar is given to all the recipients
of the livelihood assistance program.
The recipient POs are provided with
the principle behind the assistance. It is
explained to the POs that the assistance is
composed of a grant and a loan that will be
repaid on easy terms. The grant will come
in the form of training, technical assistance
and social preparation activities. The loan
component will be the responsibility of
the PO based on an agreement with PDI.
The loan component will also require a
counterpart fund from the recipient PO.
The orientation seminar on livelihood is
one of the social preparation activities
under the grant component.
Simple Bookkeeping. The training on
bookkeeping and financial management
provides practical training for the POs
engaged in livelihood activities. This is a
necessary preparatory activity for each PO
who will be receiving assistance from PDI.
The training is also useful in the day to day PDI also provided direct assistance to farmers
operation of the POs.
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page 56
Rural Empowerment through
Agrarian / Asset Development (READ
Program) 2001-2004
The program “Rural Empowerment through
Agrarian / Asset Development (READ
Program)” became the main program of
PDI in this period wherein PDI enlarged the
area of operation from the first provinces of
Zambales and Nueva Ecija to other provinces
and covers entire Central Luzon. The READ
Program was supported by the German
Protestant Church Development Service
(EED/EZE) with funds from the Federal
Ministry for Economic Cooperation and
Development (BMZ). This 3-year program
aims:
• to build autonomous rural people’s
organizations that can undertake
critical engagement with the
state on agrarian matters through
institution building.
• to promote and develop
sustainable economic activities that
meet the most urgent or priority
needs of the farmers and Aeta
indigenous people, to integrate
backward and forward linkages
and close the production-market
finance-organization loop.
• to develop agrarian reform
participatory paralegal and policy
research, advocacy and lobby work
with the people’s organizations.
Economic Support Measure
The READ program rightly emphasizes the
importance of the development of agricultural
production in the post-land-transfer phase and
its pre- and post-production linkages.
in their socio-economic initiatives by micro-
On Micro-Enterprise
______________________________________________________________________________
finance and through capacity building of
the people’s organizations and program
beneficiaries and facilitating access to other
productive resources (e.g. planting materials,
market links).
The micro-finance were given through a Small
Project Fund (SPF) with the total budget of
PHP 500,000 (7,500 Euro) per year which is
the main budget item of the Economic Support
System (ESS) program component. Most of
the individual loans for POs amount to 5,000
to 25,000 PHP (75 to 375 Euro) which are
really “small” projects.
Major aspects of PDI’s ESS and SPF
• PDI encourages and equips the
POs with knowledge and skills
to grasp opportunities to take up
economic development in their
hands rather than providing a
“package of economic measures”
• Beside the direct economic
benefits, the main objective of
the ESS is to provide a forum in
particular for women to organize
themselves and to develop
management capacities (holding
meetings, bookkeeping, etc.) and
provide a room to gain experiences
in entrepreneurship.
• Through ESS, economic endeavors
of the POs are supported.
• PDI has developed reasonable
“Guidelines for SPF” in 2001 in
accordance with the respective
guidelines by EED/EZE. After
submission of a proposal, usually
intensive discussions with the
applying organizations are
conducted before the proposal is
submitted by the PO for approval
to the board of PDI.
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On Micro-Enterprise
• The PO is carefully prepared to
develop capacities to carry out the
economic endeavors professionally
before providing loans. This
includes project development
and management, financial
management and technical
trainings when needed.
• PDI emphasizes the importance of
creating own savings and makes
own capital build-up a condition
for approving projects from the
SPF.
• PDI wants to support farmers in a
way that they become “bankable”
farmers.
• Because of the primarily
educational and capacity building
function of the ESS and the small
amount of the fund, a substantial
contribution to broad-based
poverty alleviation cannot be
expected.
• For the beneficiaries capacity
development, other agencies are
tapped for providing trainings
and other inputs (e.g. planting
materials, infrastructure).
• Linking with private business is
also encouraged and sometimes
facilitated by PDI.
• The monitoring of the
economic projects is done by
the Livelihood Officer of PDI.
The projects are additionally
monitored by the Program
Coordinator of PDI.
• Economic ventures supported
through the SPF
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The actual activities financed from the SPF
in many places were new projects added to
the already stablished hog and goat dispersal
program. Most of the support is directed to
women. From the present SPF between 2001
to 2003, 55% of the available funds of 4,600
Euro have been used for hog and goat raising
projects (PHP 307,000 out of PHP 561,000).
The new projects of women POs are, for
example, dressmaking, meat processing, candy
making, communal variety stores. Farmers
organizations have received support, for
example for water buffaloes and water pumps,
nursery or agro-forestry measures.
The most encouraging successes exist
with hog dispersal which is also the most
widespread activity of the ESS. The pigs
are raised and individually owned by the
women. They also benefit from the income
when piglets are sold. The calculations
show the profitability of the activity which
was confirmed by all the discussion partners
during the evaluation. The benefit of about
5,000 to 10,000 PHP (750 to 150 Euro) a
year is comparable to the income that could
be earned from simple farm labor for the time
invested.
However, in pig raising risk is also
involved, but the advantage for the
women is that the work can be done
alongside all the other activities. This
same advantage also applies to other ESS
activities.

Table 3. PDI Enterprises in Central Luzon and Palawan

( July 2002-October 2003)

PROJECTS PRINCIPAL LOAN INTEREST REPAYMENT Bal. w/ %

ZAMBALES
1. NKAP
-Carinderia 5,000.00 750.00 1,583.33 4,666.67
-Local Trading 12,000.00 1,800.00 4,036.00 9,764.00
-Hog Dispersal 42,500.00 18,700.00
(17 Hogs)

2. SKAB
-Carabao & Cart 18,000.00 2,700.00 9,000.00 11,700.00
-Handicraft
Making 9,000.00 1,150.00 300.00 9,850.00
-Sari-sari Store 50,000.00 7,800.00 36,061.75
(Upgrading &
Relocation)

3. SKP-ARC
-Stick Marketing 12,000.00 1,740.00 9,260.00 4,480.00
-Variety Store & 20,000.00 3,000.00 23,000.00
Rice Marketing 3,175.00
-Hog Dispersal 10,000.00 10,800.00
( 5 Hogs )

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page 58 On Micro-Enterprise
______________________________________________________________________________
4. SKT-ARC
-Micro Finance 25,000.00 16,280.00
-Hog Dispersal 25,000.00 11,000.00 4,800.00 31,200.00
-Botica sa Brgy. 5,000.00 1,050.00 6,050.00

5. SARBMPCI
-Transport Jeepney 300,000.00 49,500.00 250,000.00
-Hog Dispersal 30,000.00

6.SKP
-Hog Dispersal 12,500.00 5,500.00
( 5 Piglets )

7. SKKP
-Hog Dispersal 12,500.00 5,500.00 3,600.00 14,800.00
( 5 Piglets )

8. LAKAS
-Greeting Card 4,000.00 480.00 4,480.00

INDIVIDUAL
1. Footwear Making 10,000.00 1,500.00 5,808.52 5,691.68
( Grace Lasala )
2. Wood/Aluminum 12,000.00 1,800.00 7,900.00 5,600.00
Framing
Note: All Hog
Dispersal c/o READ

PAMPANGA
1. NAGSIKAP
-Hog Dispersal 25,000.00 11,000.00 10,800.00 25,000.00
(10 Piglets)
2. SMSR
( Sto. Rosario )
-Carabao Loan 27,000.00 3,240.00 800.00 29,400.00
-Irrigation Pump 20,000.00 2,400.00 600.00 21,800.00

TARLAC
1. SINTA
( Victoria )
-Hog Dispersal 24,000.00 1,000.00 36,000.00
( 10 Piglets )

NUEVA ECIJA
-Laur Womens
Fed’n ( 8 Org. )
a) Hog Dispersal 50,400.00 100,800.00
( 42 Hogs )
b) Goat Dispersal 4,200.00 8,400.00
( 7 Goats )

______________________________________________________________________________
On Micro-Enterprise page 59
______________________________________________________________________________
-Gabaldon
Womens Asso.
( 8 Org )
Hog Dispersal 15,600.00 31,200.00
(13 Hogs)

PALAWAN
1. Samahan ng
Kababaihan ng
Luac
-Hog Dispersal 25,000.00 11,000.00 36,000.00
( 10 Piglets )

2. Samahan ng
Kababaihan ng
Baloc
-Hog Dispersal 12,500.00 5,500.00 18,000.00
( 5 Piglets )

3. Samahan ng
Magsasaka ng
Patag
-Seed Dispersal
a) 3 Sacks of Fert. 2,400.00
25 kg. (800/sack)
b) 15 Bags of Org. 2,250.00
Fert. ( 150/bag)
c) 15 Bags of Inorg. 6,000.00
Fert. ( 400/bag)
1,278.00 11,928.00

4. SAMACA
-Seed Dispersal 636.12.00 5,938.12
( 4 Sacks of Cert.
seeds 50 kg )

5. SMB (Burabod)
-Seed Dispersal 795.12 7,421.12
( 5 Sacks of Cert.
seeds 50 kg )

6. Seed Grower
-Coron
a) 3 Sacks 800 @
b) 15 Sacks Org.
250 @
c) 17 Sacks Inorg.
500 @
-1 Sack Seed 1,794.00 16,744.00
Foundation
______________________________________________________________________________
page 60 On Micro-Enterprise
______________________________________________________________________________
From July to December, 2004, various small specifically in the provinces of Bulacan,
projects have been initiated in the target areas Nueva Ecija, Zambales, Bataan and Palawan.
of Central Luzon and Northern Palawan, The Small Projects grants are as follows:

Table 4. Enterprise Development Under the SPF

In Central Luzon and Northern Palawan
For the Period July-December, 2004

Amount
Approved (Php)
Date Area Small Project PO and Signatory

TUFA,
July 3 Nueva Ecija Goat Dispersal 64,000.00
Freddie Segundo
Burabod, BFARMC,
5 Palawan Seaweed Prod. 20,000.00
Ruben Duldig
Burabod Women’s Asso
.
6 Palawan Hog Dispersal 20,000.00
Alma Inoc
Galoc BFARMC
7 Palawan Seaweeds Prod. 20,000.00
Francisco Glimao
Galoc Fisheries Asso
8 Palawan Hog Dispersal 17,500.00
Rafael Selestial
Luac Women Asso.
10 Palawan Hog Dispersal 25,000.00
Monila
10 Zambales Hog Dispersal SKP, Violeta Vidal 2,500.00
SKT, Josephine
10 Zambales Hog Dispersal 2,500.00
Elamparo
SKT, Pat Amir
10 Zambales Hog dispesal 2,500.00
10 Zambales Hog Dispersal SKT, Salvacion Canno 2,500.00
14 Zambales Hog dispersal SKKP, Elsa Novo 2,500.00
Hog dispersal; NAKAP, excelencio
14 Zambales 2,500.00
Canno
14 Zambales Hog Dispersal SKBA, Josephine Elan 2,500.00
LAKAS, Nenita
14 Zambales Hog Dispersal 2,500.00
Dumulot
PASAMBOT,
15 Zambales Pasambot Nursery 18,000.00
Carlito Dumulot
Manggahan Proje
16 Zambales PASAMBOT 14,400.00
ct
______________________________________________________________________________
On Micro-Enterprise page 61
______________________________________________________________________________
Freddie Segundo
16 Nueva Ecija Carabao Loan 25,000.00
Aug 4 Nueva Ecija Mango Seedlings TUFA, Freddie S 100,000.00
12 Zambales Local Trading NAKAP, Mary Balinay 10,000.00
Rice Trading Canimango Women’s
16 Palawan 15,000.00
Asso
Balisungan Seaweeds
Sept 6 Palawan Seaweeds Prod 24,000.00
Asso, Lucas Paguia
Cabugao Seaweeds Asso
9 Palawan Seaweeds Prod 28,000.00
Licas Paguia
SKT, Pat Amir
15 Zambales Wetmarket 25,000.00
20
Zambales Handicraft SKAB< rolly dela Cruz 15,000.00

Honey Prod @
SAKANEKAN, Belen
23 Bataan 18,500.00
proces Restum
sing
Samahan Ng Magsasaka
.
Oct 1 Bulacan Pina Production 144,000.00
Ng Kaybanban, Eddie
Ibabao
LAKAS, Carlito
2 Zambales Various Forest Prod. 70,000.00
Dumulot
4 Nueva Ecija Pina Production TUFA, Pablo Bocabe 150,000.00
14 Zambales Local Trading SKAB, Rolly dela Cruz 50,000.00
Card Making LAKAS, Carlito
20 Zambales 10,000.00
Dumulot

TOTAL …………………………………………………………………………… Php 903,400.00

============

The Central Luzon – Sustainable Rural people’s organizations assisted by PDI-

Development Program (CL-SRDP) NMGL-PASAMAKA have taken a foothold.
Intervention has been on upgrading these
The land tenure struggle launched by initiatives into a more productive cooperation
organizations within Luzon in PDI coverage that would provide additional income and self-
areas resulted in the transfer of ownership of help economic activities such as collective
thousands of hectares to peasants and IPs. In sweet potato production, goat raising and
order to sustain gains from the land tenurial pineapple production: CLOA is the first
struggle, the question of productivity needs step towards developing an alternative
immediate attention. economic self-reliant agenda. The formation
of “communal farms” are good signs of
In realizing the importance of self- advancing community-oriented values for
sufficiency, growing initiatives from the economic self-sufficiency.
______________________________________________________________________________
page 62 On Micro-Enterprise
______________________________________________________________________________
The ESS component of the CL-SRDP is
designed to develop PO capacity in enterprise
development and business management.
Taking root from the gains of agrarian
reform, this initiative would have the long-
term perspective of capital generation and
accumulation to promote agro-industrial
development with the active participation
of ARBs and other asset holders like IPs
and women. Within the CL-SRDP (five-
year consolidation program), the immediate
objectives are to scale up viable enterprises in
at least three focused crops or commodities
in every province, link producers to markets,
develop off-farm and non-farm enterprises,
promote value-adding technology and assist
producers in product development.
Up to the interim evaluation of CL-SRDP on
December 2006, PDI has already provided
PhP 2.86 million in loans to 39 Pos engaged
in 11 types of enterprises (see Table 5). One
PO, PASAMBOT, was provided a grant of
PHP 150,000 to establish a multi-purpose
bodega (see Table 6). Overall, PO economic
projects aimed to benefit 3,506 members.
Seventy percent of the loans were released in
2005 after a methodical preparation for the
POs to establish basic foundations for their
economic projects. PDI provided a mentoring
role in feasibility studies, developing project
designs and loan proposals.
The 11 types of enterprises have been selected
either due to their market potential or due
to compelling livelihood needs of the PO
and its community. The major enterprise
clusters supported by the ESS (in terms of
loan volume) are seaweed production (PHP
598,000), livestock production (PHP 591,750)
and pineapple production (PHP 498,000).
The next major items are agro-forestry (PHP
350,000) and palay seed dispersal (PHP
200,000).

Table 5. Starting aid, by cluster of economic activity and volume of loan,

(as of June 2006)

Economic Activity Amount of Loan Cumulative Rate of

Repayment Repayment
2005 2006 Total
Nursery (4) 150,000 150,000
Agro-Forestry (4) 350,000 350,000
Forest Trees (1) 100,000 100,000
Seaweed production (6) 598,000 598,000 87,000 14.5%
Livestock (goat, carabao, hog) 196,750 395,000 591,750 101,400 17.1%
(12)
Pineapple Production (4) 444,000 54,000 498,000 28,500 5.7%
Honey Production and 30,000 65,000 95,000 39,500 41.5%
Processing (3)
Water Sprinkler (1) 135,000 135,000 45,000 33.3%
Virgin Coconut Oil (1) 87,070 87,070
Palay seed dispersal (2) 200,000 200,000
Sweet potato production (1) 60,000 60,000
Total 2,003,750 861,070 2,864,820 301,400 10.5%

Source: PDI, Summary Report for Starting Aid, December 2006

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On Micro-Enterprise page 63
______________________________________________________________________________
Table 6. Starting aid, by cluster of economic activity
and volume of loan,
(as of June 2006)

Amount of Loan Number

Number of
Economic Activity of Loans/
2005 2006 Total Beneficiaries
Grants
Multi Purpose Bodega 150,000 150,000 1 351
Nursery 150,000 150,000 4 1,100
Agro-Forestry 350,000 350,000 4 1,100
Forest Trees 100,000 100,000 1 25
Seaweed production 598,000 598,000 6 120
Livestock
196,750 395,000 591,750 12 323
(goat, carabao, hog)
Pineapple Production 444,000 54,000 498,000 4 117
Honey Production and
30,000 65,000 95,000 3 264
Processing
Water Sprinkler 135,000 135,000 1 13
Virgin Coconut Oil 87,070 87,070 1 25
Palay seed dispersal 200,000 200,000 2 42
Sweet potato production 60,000 60,000 1 26
Total 2,153,750 861,070 3,014,820 40 3506

Source: PDI, Summary Report for Starting Aid, December 2006

The overall repayment performance (during •

the last two years) is 10.5 percent. Of the
eleven clusters, five show movement in
amortization payments, the highest being
41.5% of the honey producers and processors
and 33.3% (for repayment of the water
sprinkler loan). Pineapple production has
been found to be very viable financially
and economically and, in Bulacan, in fact,
the provincial government has provided
additional capital of half a million pesos to
the POs. However, the initial good yields
are not translated to loan repayment as the
PO immediately recycles the revenues for
expansion.
Effects on Productivity and Income
Most of the enterprises capitalized by PDI
loans are in their early stages of development. 74,000. They started repaying the
Some examples are the following:
______________________________________________________________________________
page 64
PASAMA Sweet Corn Project
in Pampanga - PASAMA
members are ARBs cultivating a
section of their newly acquired
land for sweet corn production.
They availed of a PHP 135,000
loan from PDI to irrigate the farm
using a water sprinkler. With this
input, production increased to
an average 15,000 ears of corn
(from a previous 10,000 ears)
and, correspondingly, gross sales
increased to PHP 75,000 (from
PHP 38,000 previously). The
added benefit of the project is that
the ARBs are now able to harvest
twice a year, thus doubling the
sales to PHP 150,000 per year.
This earns them a net profit of PHP
loan in December 2005. As of
On Micro-Enterprise
______________________________________________________________________________
Table 7. Comparative Income Statement
Pampanga

w/o PDI Intervention

Prod’n. Average Cropping Production Gross

Crop Profit
Area Harvest in a Year Cost Sales

Sweet Corn 6 has 10,000 ears 1 cropping 38,000/ha 50,000/ha 12,000/ha

6,000 kls. X
Field Corn 5 has 6 tonnes 1 21,000 27,000/ha
48,000/ha

Palay 15 has 58 cavans/ha 1 18,000/ha 29,000/ha 11,000

25,000 prod., 73,500 20,500/

Sugarcane 10 has. 70 tonnes/ha 1
28,000 post prod. price 1,050 has
w/ PDI Intervention
Water Pump / Water Sprinkler
15,000 ears/ 37,000/ha
Sweet Corn 6 has 2 38,000/ha 75,000/ha
ha x2
8,000 x 9, 72,000 /ha 51,000/ha
Field Corn 5 has 8-10 tonnes 2
10,000 x 9 90,000/ha 69,000/ha
40,000/ha
Palay 15 has 80 cavans/ha 2 18,000/has 25,000/ha
43,000/ha
100-110 tonnes/ 25,000 prod., 110,000/ 41,000/
Sugarcane 10 has. 1
ha 44,000 post prod. ha has

December 2006, they have repaid
PHP 45,000 or 33 percent of the
loan amount. This repayment
represents 45 percent of their
operating profit for the year. The
thirteen (13) project participants
share 25 percent of the operating
profit while another 5 percent of
the profit accrues to the PO.
• LAKAS Honey Production
in Zambales – LAKAS is a
130-member organization of
indigenous people (Aetas) and
is a recipient of a PHP 15,000
loan acquired in June 2006. Only
5 members of the organization
are directly involved in the
project, hence, 5 is the basis for
equity distribution and incentive
structure. The project is about
______________________________________________________________________________
On Micro-Enterprise
buying and processing raw honey
(i.e. bottling). The loan was
used to cover labor costs and
buying capital. With the loan, the
participants were able to increase
their production from a previous
650 bottles to 1,300 bottles with
a gross value of PHP 143,000.
The cost of acquiring raw honey
is PHP 70 per bottle and the
selling price (after processing and
bottling) is PHP 110. Less cost
of raw honey and other costs, the
operating profit per cycle is PHP
39,400. The income distribution
structure indicates that the loan
is immediately deducted from the
gross income. The net income is
structured three ways: 10 percent
goes to the Scholarship Fund of
the PO, PHP 15,000 is retained
page 65
______________________________________________________________________________
Table 8. Honey Production
Comparative Income Statement
Zambales

w/o PDI Intervention w/ PDI Intervention

Particulars Price of Product per kilo Price of product per kilo
from other buyer TOTAL from NAGSIKAP TOTAL
Sales 650 bottles P100/btl. 65,000 120 71,500
Cost of Goods Sold 650 bottles P70 45,500 75 48,750
Gross Sales 19,500 22,750
Less: Operating Expenses
- Labor Cost (200 x 3
2,400 2,400
persons x 4 cycle)
- Empty bottles (650
650 650
x P1)
- Supplies 500 500
- Transportation (200/
cycle x 4 cycles) 800 800

- Food (150/cycle x 4
600 600
cycles)
Total Operating Expenses P4,950 P4,950
Net Income P14,550 P17,800
Less: Principal Capital P10,000 P10,000
Net Income
After the deduction of P4,550 P7,800
Principal Capital

as revolving capital and the rest
is distributed among the five
participants.
• Pineapple Production of
PASAMA-Laur, Nueva Ecija
– Pineapple production has long
been proven to be a high income
earning cash crop. In Mindanao,
big plantations like Dole and Del
Monte, export the commodity to
international markets. In Cavite,
rich farming families manage 2-3
hectare pineapple farms with high
return on investments. PASAMA-
Laur aimed to introduce pineapple
production in Nueva Ecija. In
November 2005, it took up a
PHP 150,000 loan from PDI for
______________________________________________________________________________
page 66
the enterprise. For the December
2005-October 2006, PASAMA
reported that its first cycle sales
reached PHP 100,000. Less
production cost of PHP 42,200,
it earned an operating income of
PHP 57,800. Further deducting
loan amortization payment of
PHP 13,500, the PO earned a net
income of PHP 44,300. The net
income structure indicates that
30 percent goes to the PO and 70
percent (i.e. PhP 31,010) does to
the 20 participants of the project.
In sum, the net benefit to each
participant during the first cycle is
PhP 1,550. Up to December 2006,
the PO has repaid less than 10
percent of its loan from PDI.
On Micro-Enterprise
______________________________________________________________________________
• Pineapple Production of
SAMAKA-SJDM, Bulacan –
SAMAKA-SJDM is a 32-member
Municipal PO. In October 2005,
it availed of a PHP 144,000 loan
from PDI to engage in pineapple
production. Lessons learned
from exposure trips in Cavite and
application of sloping agriculture
land technology in Bulacan proved
beneficial not only to the PO
but to the larger community. In
fact, the Provincial Government
offered half a million in credit
assistance for similar initiatives in
the province. SAMAKA-SJDM
accounts indicate that the capital
infusion from PDI enhanced their
capacity to provide adequate inputs
on the land. Experimenting on a
1.2-hectare area, the PO could
make 2 croppings on the primary
and another 2 croppings on the
crowns thus earning total sales of
PHP 388,500. Less production
cost of PHP 140,000, the PO could
theoretically earn a net income of
PHP 248,000.
sales of PHP 400,000 (for 2
croppings). Less production cost
of PHP 12,000 per hectare (@
2 croppings = PHP 120,000),
the PO earned an operating
income of PHP 280,000. The
net income structure is not clear.
Records show, however, that
PHP 61,800 was allocated as
revolving capital, PHP 1,800
accrued to the PO as share of the
organization and PHP 216,400
accrued to the 15 participants
(or a per capita income of PHP
14,426).
• Hog Dispersal Project in
Palawan - After a series of
consultation and workshops to
the POs, PDI-PAMT (Palawan
Area Management Team) acted
upon the request of POs to
sponsor viable livelihood projects
in the area. PDI-PAMT dispersed
female 15 high breed piglets
to women’s organization in
Barangay Galoc and Barangay
Luac.

• Sweet Potato Production of This is how the hog dispersal

NASAKA-Kinaragan, Bataan
- NASAKA-Kinaragan availed
a PHP 60,000 production loan
from PDI in May 2006 for
sweet potato production in 5
hectares of land involving 15
participants. The loan was used
to cover production cost. For the
period June to October 2006,
the PO consisting of 15 Aeta
project participants have been
able increased their production
to 50 sacks per hectare from 20
sack previously or a total of 250
sacks. With good market access,
they were able to sell each sack
for PHP 800 thus earning total
______________________________________________________________________________
On Micro-Enterprise
program works. Each of the
swine that is dispersed and is
successfully bred by the members
of the women’s organization, will
be repaid in turn with 3 female
piglets. These piglet repayments
will also be dispersed to other
members of the organization until
all of the members have their own
hog/swine.
A number of issues and lessons can be inferred
from the preceding data:
• The loans are covered by formal
contracts indicating loan maturity
and terms of
page 67
______________________________________________________________________________
Table 9. Sweet Potatoes
Comparative Income Statement
Bataan

w/o PDI Intervention

Projects Area Average Cropping in Production
Sales Profit
Harvest a Year Cost
2,000 x 5 50,000 – 10,000
Sweet Potatoes 5 has. 20/has = 100 1 500/sack
= 10,000 = 40,000
w/ PDI Intervention
12,000/has P800/sack 140,000
50 sacks/has 2
Sweet Potatoes 5 has = 60,000 X 250 sack x2
= 250 cropping
= 120,000 = 200,000 = 280,000

payment. Each contract is skills as well as capital from

differentiated by type of enterprise where they would be in a better
or agricultural production. Loans position to access formal credit
for pineapple production, for from government or private
example, would have a maturity financial institutions.
of 18-20 months representing
the total production cycle. While • The PO assumes the
some POs have structured their responsibility of fulfilling the
revenues to include allocation for loan obligations. While the
loan repayment, others have yet projects are actually operated
to map this out in their revenue by selected participants, the
structures. PO retains supervisory and
managerial authority in the
• Agricultural credit is generally internal distribution of capital
considered high risk by formal and definition of the revenue
financial institutions. PDI, structure. This set up strengthens
however, has to respond to the PDI-PO partnership in
agricultural credit needs of program implementation
ARBs and CADT/CADC through NMGL, BUKAL and
holders in view of constraints PASAMAKA-Luzon.
in securitizing these ownership
instruments and generating Trading Capital
capital therein. In short, PDI
transitionally absorbs the Another aspect of ESS is Trading Capital.
risk with the estimation that Like Starting Aid, it was designed to develop
the ARBs and CADT/CADC POs capacity in business management but
holders or their organizations this time focused on trading enterprises. The
will be able to accumulate trading capital was given in the 2nd quarter of
enterprise knowledge and 2006.
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page 68 On Micro-Enterprise
______________________________________________________________________________

Table 10. TRADING CAPITAL, by volume

As of June 30, 2006

Activity Amount Beneficiary Location

Buy & sell of various local products PhP 150,000.00 PASAMA Nueva Ecija
Buy & sell of various local products PhP 500,000.00 NAGSIKAP Zambales
Buy & sell of cashew nuts PhP 30,000.00 SAMMARU Palawan
Total PhP 680,000.00

- END –

References:

1. The Microfinance Promise by Jonathan Morduch; Journal of Economic Literature; Vol.

XXXVII (December 1999), pp. 1569–1614

2. International Labour Organization; South-East Asia and the Pacific Multidisciplinary

Advisory Team (SEAPAT); ILO/SEAPAT’s OnLine Gender Learning & Information Module;
Unit 2: Gender issues in the world of work; Labour market gender issues by country;
Philippines; ILO’s Philippine Country Objectives (1996-1998)

3. Financing for Micro-Enterprises, Small and Medium-sized Business and Poor Households in
the Philippines by Mario B. Lamberte, President of the Philippine Institute for Development
Studies. This paper was presented at the ESCAPADB Joint Workshop on Mobilizing
Domestic Finance for Development: Reassessment of Bank Finance and Debt Markets in
Asia and the Pacific held at Bangkok, on 22-23 November 2001.

4. Development of Small Enterprises for Women with Disabilities in the Philippines: The
KAMPI Experience; by Venus M. Ilagan - President, KAMPI

5. Empowering Filipino Women in the Informal Economy through Persistent Policy Advocacy;
by Josephine C. Parilla and Phoebe O. Cabanilla; This is a summary of a long paper entitled
“Legal Policies and the Situation of Women in the Informal Sector In the Philippines”
prepared for a workshop convened by the Committee on Asian Women in Bangkok, January
2004

6. The “Bombay 5-6”: Last Resource Informal Financiers for Philippine Micro-Enterprises; by
Mari Kondo
______________________________________________________________________________
On Micro-Enterprise page 69
______________________________________________________________________________
7. The Year Of Microcredit By Larry Baum

8. Entreprises: a basic typology; by MAE- février 2002

9. Credit Needs of Women Micro Entrepreneurs in Urban Area - Problems & Perspective;
Project Report; A Project Sponsored by KRPLLD, TRIVANDRUM ; by M. Ramanunny,
Programme Officer, KUDUMBASHREE, November 2003

10. The NDT Initiative With Micro-Enterprises; NDT Website

11. Micro-enterprise Development – UNDP Gender Division of Labour; pepared for the
Australian Agency for International Development, 1997.

12. Promoting Entrepreneurship: A Focus on 4 Industry Clusters; Policy Center forum

discusses policy issues and strategies in the tourism, furniture, fine jewelry, and footwear
industries; By the AIM Policy Center

13. The State of the Microfinance Industry: An interview with Arnaud Ventura, Planet Finance;
produced by Ellen Olafsen, July 9, 2004

14. The Economics of Microfinance by Beatriz Armendáriz and Jonathan Morduch

15. The cost of ownership in microfinance organization; by Roy Mersland; Agder University
College, Kristiansand, Norway; 15. January 2007

16. Micro and Small Enterprise Finance: Guiding Principles for Selecting and Supporting
Intermediaries; Committee of Donor Agencies for Small Enterprise Development; Donors’
Working Group on Financial Sector Development, October 1995; Committee of Donor
Agencies for Small Enterprise Development; Secretariat, World Bank

17. Lending to Micro Enterprises Through NGOs in the Philippines by Prabhu B. Ghate

18. Asset Development and Sustainable Livelihoods for the Rural Poor: An Interim Review
of the PDI’s Central Luzon Sustainable Rural Development Programme; by Eddie L.
Quitoriano; December 2006

-o0o-

______________________________________________________________________________
page 70 On Micro-Enterprise
______________________________________________________________________________
(Footnotes)

1
Part of the inspiration came from observing credit cooperatives in Bangladesh, and, interestingly,
these had European roots. The late nineteenth century in Europe saw the blossoming of credit
cooperatives designed to help low-income households save and get credit. The cooperatives started
by Frederick Raiffeisen grew to serve 1.4 million in Germany by 1910, with replications in Ireland
and northern Italy (Guinnane 1994 and 1997; Aidan Hollis and Arthur Sweetman 1997). In the
1880s the government of Madras in South India, then under British rule, looked to the German
experiences for solutions in addressing poverty in India. By 1912, over four hundred thousand poor
Indians belonged to the new credit cooperatives, and by 1946 membership exceeded 9 million (R.
Bedi 1992, cited in Michael Woolcock 1998). The cooperatives took hold in the State of Bengal,
the eastern part of which became East Pakistan at independence in 1947 and is now Bangladesh.
In the early 1900s, the credit cooperatives of Bengal were so well-known that Edward Filene, the
Boston merchant whose department stores still bear his name, spent time in India, learning about
the cooperatives in order to later set up similar programs in Boston, New York, and Providence
(Shelly Tenenbaum 1993). The credit cooperatives eventually lost steam in Bangladesh, but the
notion of group-lending had established itself and, after experimentation and modification, became
one basis for the Grameen model.

2
In a rotating savings and credit association, a group of participants puts contributions into a pot that is given
to a single member. This is repeated over time until each member has had a turn, with order determined by list,
lottery, or auction. Most microfinance contracts build on the use of groups but mobilize capital from outside the
area. ROSCA participants are often women, and in the U.S. involvement is active in new immigrant communities,
including among Koreans, Vietnamese, Mexicans, Salvadorans, Guatemalans, Trinidadians, Jamaicans,
Barbadans, and Ethiopians. Involvement had been active earlier in the century among Japanese and Chinese
Americans, but it is not common now (Light and Pham 1998). Rutherford (1998) and Armendariz and Morduch
(1998) describe links of ROSCAs and icrofinance mechanisms.

3
The financial information is from Jean Steege, ACCION International, personal communication,
January 1999. Claudio Gonzalez-Vega et al. (1997) provide more detail on BancoSol. Further
information can also be found at http://www.accion.org.

4
Data are from ACCION (1997) and hold as of December 1996. Five of the six U.S. affiliates have only been
operating since 1994, and the group as a whole serves only 1,695 clients (but with capital secured for expansion).
A range of microfinance institutions operate in the U.S. Among the oldest and best-established are Chicago’s
South Shore Bank and Boston’s Working Capital. The Cal-Meadow Foundation has recently provided funding for
several microfinance programs in Canada. Microfinance participation in the U.S. is heavily minority-based, with a
high ethnic concentration. For example, 90 percent of the urban clients of Boston’s Working Capital are minorities
(and 66 percent are female). Loans start at $500. Clients tend to be better educated and have more job experience
than average welfare recipients, and just 29 percent of Working Capital’s borrowers were below the poverty line
(Working Capital 1997).

5
Figures are calculated from Johnston (1996) and data provided by BRI in August 1996.

6
Ghatak and Guinnane (1999) provide an excellent review of group-lending contracts. Monica Huppi and
Gershon Feder (1990) provide an early perspective. Armendariz and Morduch (1998) describe the functioning of
alternative mechanisms.
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7
Armendariz and Gollier (1997) also describe types might be left in the market. In this mechanism in
parallel work.

8
In typical contracts, group members are responsible for helping to pay off the loan in difficulty, rather than having
to pay a fixed penalty for a group member’s default. While clients lack collateral, they are assumed to have a large
enough income flow to cover these costs if needed. In practice this may impose a constraint on loan size since
individuals may have increasing difficulty paying c* + r* when loan sizes grow large.

9
Ghatak (1998) extends the results to groups larger than 2, a continuum of types, and preferences against risk. See
also Varian (1990) and Armendariz and Gollier 1997) on related issues of efficiency and sorting.

10
See the general theoretical treatment in Bolton and Scharfstein (1990) and the application to microfinance
contracts in Armendariz and Morduch (1998).

11
Rahman (1998) describes complementary cultural forces based on women’s “culturally patterned behavior.”
Female Grameen Bank borrowers in Rahman’s study area, for example, are found to be much more sensitive to
verbal hostility heaped on by fellow members and bank workers when repayment difficulties arise. The stigma is
exacerbated by the public collection of payments at weekly group meetings. According to Rahman (1998), women
are especially sensitive since their misfortune reflects poorly on the entire household (and lineage), while men
have an easier time shaking it off.

12
Included in the term micro and small enterprises are a wide range of enterprises (industry, transport,
commerce, services, agriculture, etc.) ranging in size from part time, seasonal activities of a single
person to small, formal enterprises employing several non-family members.

13
It should be understood that the costs of non-financial assistance provided to entrepreneurs may
continue to be subsidized. However, it is crucial that these costs be separated from the costs of lending
operations, so that the financial viability of lending operations can be assessed.

14
For institutions that offer a full spectrum of financial services, information should apply only to that
portion of the institution’s activities and overheads focused on small and microenterprises.

15
Many programs require clients to deposit minimum amounts or pay into savings funds in order to be
eligible for loans.

16
Staff and administrative expenses should be those that relate to the provision of financial services. If an
institution has significant non-financial activities, it should account for those costs separately, including
the proportion of overhead expenses needed to support those activities. Costs paid directly by donors,
such as expatriate salaries, should be included.

17
25 Philippine pesos is approximately 1 US dollar (1993).

18
The reasons have to do with the de-politicization of the movement after the Marcos years, but also
no doubt with the decision of the Land Bank (the main provider of crop production loans) to get out
of retail lending directly to farmers and into wholesale lending only through cooperatives. Thus what
is happening on the non-farm side (lending through semi-formal intermediaries) is happening in a
much bigger way on the crop production loan side. Land Bank lending has expanded dramatically as a
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result and fears are being expressed that the country is about to go through boom and bust cycle. The
cooperative movement is also split between the old cooperatives and the new, or “government” ones.

19
There have not been any careful studies yet on actual operating costs of Grameen NGOs, partly because they are
in a state of flux, attempting to expand coverage of borrowers as fast as possible in order to achieve economies
of scale. One estimate, however, of cumulative costs incurred till the end of 1992 for 12 of the ACPC replication
projects on which data is available, including program expenditure by the ACPC itself, is about 45 percent of
loans disbursed. Some of the better participants, with higher than average repayment rates, rate of expansion of
orrowers, and savings, which are ploughed back into the loan fund such as BINHI, had brought operational costs
down much faster, to 19 percent in the second year.

20
The International Fund for Agricultural Development (IFAD), a specialized agency of the United Nations, was
established as an international financial institution in 1977 as one of the major outcomes of the 1974 World
Food Conference. In April 1996, IFAD approved a loan in the amount of approximately US $ 14.7 million to the
Government of the Philippines to co-finance, together with the Asian Development Bank (ADB), the Rural Micro-
Enterprise Finance Project in the Philippines.

21
This strategy is not without dangers. For critical debates on the impact of cheap credit and easy money
policies: see Seibel, chapter 2; Adams and Von Pischke, chapter 9; Abugre, chapter 10.

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