MFP

Microfinance in the Philippines: Learning from the Past to Expand New Frontiers*
Prof. Ronald T. Chua

Asian Institute of Management Highlights from: Delivering to the Poor: Search for Successful Practices in Philippine Microfinance Ronald T. Chua, Antoinette Bolanos & Marcia Feria Miranda
Presentation Outline
Part I: Part II: The Philippine Microfinance Industry: Growing Pains? Learning from Experience
Part III: New Frontiers and Future Challenges
The Philippine Microfinance Industry: Growing Rapidly

Made remarkable progress the past ten years Reached a large number of the poor Market has grown Large unmet demand for microfinance services among the poor
Philippine Microfinance: Outreach

At end 2002, 25% of 4.3 million poor households reached Mostly married women MF clients clustered around the poverty threshold, including the vulnerable non-poor Estimated leakage to non-poor clients was 20%
PCFC: Outreach through Conduits

Wholesale portfolio grew by 60% per year (P1.982B) Small loan amounts: 50% were less than P10,000, 80% less than P20,000 Extensive national coverage Worked with range of MFI types
Microfinance: Going Mainstream?

Private sector players fueled growth of sector RBs entered sector on a commercial basis 119 RBs are in Microfinance with 363 branches, reaching 400,000 borrowers and portfolio of P2.2B RBs accounted for 50% of MF institutions At least 3 NGOs have become rural or thrift banks
Phil. MF Growth Patterns

Few large players account for bulk of clients and loan portfolio 10-15 NGOs accounted for 400,000 of total outreach Less than 20 rural banks had outreach of over 10,000 clients
Laying the Groundwork for Growth

Developing a Conducive Policy Environment Mobilizing Resources for MF Building Retail Capacity
Conducive Policy Environment

Social Reform and Poverty Alleviation Act (RA 8425) New Banking Act of 2000 BSP Policies and Guidelines EO 138: Capitalizing on Competencies USAID funded projects on policy:
Microfinance Standards Project Credit Policy Improvement Project
Mobilizing Resources
Wholesale Resources
PCFC received an ADB/IFAD loan under the Rural Microenterprise Finance Project Land Bank and DBP
Creation of the Peoples Development Trust Fund Funding/TA from Bilateral/Multilateral Sources for Capability Building
Building Retail Capacity

Local Institutions providing services Practitioner Networks: Philnet, APPEND/OI Phil Microfinance Council Punla sa Tao Foundation Academic Institutions Training centers of MFIs
Is it a supply-led expansion? Effective rates lower than informal sector but still high Competition, a tempering factor Impact
Learning from Experience: Microfinances Reason for Being
IMPACT
Poverty Alleviation Poverty Reduction
OUTREACH
Depth & Breadth
SUSTAINABILITY
Financial & Institutional
MFI Outreach
80,000 Active Clients/Borrow ers 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 CARD HIGHLANDS RB MALLIG RB PRODUCERS BANK NWTF BANSALAN COOP UPLIFT
1999
2000 Year
2001
2002
M FI Outreach
600
Loans Outstanding (Php M illio
500
400
CARD HIGHLANDS RB MALLIG RB PRODUCER S BANK NWTF BANSALAN
300
200
100
0 1999 2000 2001 2002
Year
MFI Client Outreach Growth Rate

140.0% CARD 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% 2000 2001 2002 NWTF HIGHLANDS RB MALLIG RB PRODUCERS BANK BANSALAN COOP UPLIFT All MFIs
MFI PORTFOLIO GROWTH RATE

250.0%
200.0%
CARD HIGHLAND S RB MALLIG RB PRODUCE RS BANK NWTF BANSALA N COOP UPLIFT 2000 2001 2002 All MFIs
150.0%
100.0%
50.0%
0.0%
-50.0%
MFI PORTFOLIO QUALITY

MFI CARD May-03 HIGHLANDS 2002 2001 MALLIG 2002 2001 PRODU CE RS May-03 NWTF 2002 2001 BANS ALAN 2002 2001 U PLIFT 2002 at maturity After 1 year 80.70% 2002 at maturity After 1 year 94.50% 0.11% 0.38% 6.72% 6.60% 5.22% 10.28% 2.09% 98.41% 95.40% 99.20% 100% 100% 86.40% 96.00% 26.48% 34.44% 99.40% 99.20% PAR > 30 days 0.73% Repayment Rates 97.47% Operating Cos t Ratio 19.54%
MFI PROFITABILITY
MFI CARD 2002 2001 HIG HLA NDS* 2002 2001 MALLIG * 2002 2001 NEG ROS W OMEN 2002 UPLIFT 2002 2001 ROA 5.20% 4% 4% 4% 1.9 2.8 ROE 18.80% 27.50% 26% 24%
6.90% -9.59 -6.95
20.50% -32.13 -10.44
Lessons from Experience: Building Blocks for Success Delivery Systems

Key Organizational Elements Managing Growth
Delivery Systems and Outreach: Key Components and Characteristics
MF Delivery Systems and Outreach
IMPACT
OUTREACH
Depth & Breadth
Site & Client Selection Sense of Mission Client Preparation
Design of Product/ Delivery Systems
Loan Policy & Eligibility
SUSTAINABILITY
Responsiveness to Clients
Delivery Systems and Sustainability: Key Components and Characteristics
MF Delivery Systems and Sustainability

Strategies to Hasten Viability
IMPACT
OUTREACH
Depth & Breadth
Efficiency & Productivity
Mitigating Risks to Lending and Vulnerability Strict Credit Discipline Portfolio Quality Design of Product/ Delivery Systems
Internal Control
Delinquency Management & Loan Recovery
SUSTAINABILITY
MF Delivery Systems
IMPACT
OUTREACH
Depth & Breadth
Strategies to Hasten Viability Sense of Mission Efficiency & Productivity
Site & Client Selection
Mitigating Risks to Lending and Vulnerability Strict Credit Discipline Portfolio Quality Design of Product/ Delivery Systems
Client Preparation
Internal Control
SUSTAINABILITY
Lessons from Experience: Building Blocks for Success

Delivery Systems
Key Organizational Elements

Managing Growth
The Organizational Building Blocks
The MFI: Driver of MF Delivery Systems
IMPACT
OUTREACH
Depth & Breadth Sense of Mission
MFI
Mitigating Risks to Lending & Vulnerability Strict Credit Discipline
Portfolio Quality
SUSTAINABILITY

Board of Directors Top Management show commitment and support Clear policies & procedures in operations manual
IMPACT
OUTREACH
Leadership
Restructuring: Added Microfinance Dept. Focus Coordinate Interface backroom Hands-on management Close monitoring On-ground
MFI
Portfolio Quality
SUSTAINABILITY

Top Management themselves trained Plan along strategic goals Succession Planning
IMPACT
OUTREACH
FIELD S T A F Human Resources F
Emphasis on training field staff: Frontliners On expansion: Development of Middle management Top management Board of Directors
Leadership
MFI
Portfolio Quality
SUSTAINABILITY

Apply sound practices: Financial planning, analysis and management Separate financial statements to track MF products Loan loss policies and provision
IMPACT
OUTREACH
Includes resource mobilization Leverage vs use/build-up of equity Savings mobilization
Leadership Human Resources Financial Management
MFI
Portfolio Quality
SUSTAINABILITY

Tracking vital information Loan tracking Collection efficiency Delinquent accounts Operational efficiency
IMPACT
OUTREACH
Automation Challenge of integration Information Manual systems Automated systems
Leadership Human Resources Financial Management
MFI
MIS
Portfolio Quality
SUSTAINABILITY
IMPACT
OUTREACH
Leadership Internal Control MIS

MFI
Human Resources Financial Management
Portfolio Quality
SUSTAINABILITY
IMPACT
OUTREACH
Leadership Internal Control MIS

MFI
Human Resources Financial Management
Portfolio Quality
SUSTAINABILITY
The MFI and the MF Delivery Systems

Strategies to Hasten Viability S Efficiency & Productivity S T E M Internal Control
IMPACT
OUTREACH
Depth & Breadth
S Y
Sense of Mission Leadership
FIELD S T A F Human Resources Financial Management Design of Product/ Delivery Systems F
Site & Client Selection
Client Preparation
MFI
Mitigating Risks to Lending & Vulnerability Delinquency Management & Loan Recovery Strict Credit Discipline
MIS
Portfolio Quality
SUSTAINABILITY
Lessons from Experience: Building Blocks for Success

Delivery Systems Key Organizational Elements
Managing Growth
Managing Growth:
Crawling, Walking, Running, Flying (?)
Managing Growth
Starting Up Stabilizing Expanding Transforming
Start-up Phase
New Approach New Product Research -based Training at all levels Set-up systems
Loans Savings
Delinquency Management & Loan Recovery S S T E M Internal Control S Y
IMPACT
OUTREACH
Depth & Breadth
Pilot-test
FIELD S T A F Human Resources F Client Preparation Site & Client Selection
MFI
MIS
Financial Management
Portfolio Quality
SUSTAINABILITY
Stabilization Phase
Setting the stage for consolidated growth
Strategies to Hasten Viability S Efficiency & Productivity S T E M Internal Control S Y
IMPACT
OUTREACH
Depth & Breadth
Standardized replication Well-paced Growth Monitoring tools

FIELD S T A F Human Resources F Client Preparation Site & Client Selection
MFI
Other Loans Savings Mutual benefit funds Microinsurance
MIS
Financial Management Design of Product/ Delivery Systems Loan Policy & Eligibility
Portfolio Quality
SUSTAINABILITY
Evaluate Refine
Expansion Phase
Rapid consolidated growth Pace at MFI capacity to grow
Strategies to Hasten Viability S Efficiency & Productivity S T E M Internal Control S Y
IMPACT
Doing more of the same Roll-out after pilot-test

Site & Client Selection S T A F Human Resources F Client Preparation
OUTREACH
Depth & Breadth
FIELD
Adhere to policies, standards & procedures
MFI
MIS
Financial Management Design of Product/ Delivery Systems
Adhere to policies, standards & procedures

Portfolio Quality
SUSTAINABILITY
Monitor Assess
Expansion Strategies Factors affecting Growth

Legal framework limits options to expansion Creative equity building strategies versus over-leverage Deceleration due to liquidity crunch and delinquencies Internal systems capability/ preparedness for growth Expanding in too many fronts too soon
Transformation
Change in legal form Preserving social mission with pressure on viability Familiarity with market-orientation Enhancing competencies of staff Dealing with regulators and reportorial requirements
MF Sector Capability Building Needs and Gaps

2 Main Areas
Skills Systems
3 Categories
General Management of Financial Institutions Technology / Methodology Specific Institution Type Issues
Categories Areas General management Technology/ methodology MFI type
Skills
Systems
Capacity Building by Position in Organization

Gaps in: Middle level management Senior level management Members of the Board
* Has to be skills based
The Poor as Market

The Poor: Clients or Beneficiaries? Poverty and Vulnerability: Risk or Opportunity?
Microfinance Redefined:
Provision of Financial Services to help the poor better manage their risks, take advantage of opportunities, and build up their assets
Market Opportunities
Reaching More of the Poor Reaching Down to Poorer and Poorest Groups Help the Poor Manage their Risks
Microinsurance Health and Hospitalization
Market Opportunities
Help the Poor Build Up their Assets
Housing Childrens Education Pension
Help the Poor Capitalize on Economic Opportunities and Grow

Enterprise Loans Training Market Links
Spring from trade-offs, go for innovation
Previous Thinking Loan provision to the poor is high risk and costly
Previous Thinking
Microfinance shift
Loan provision to the poor is Instead of collateral-based lending: high risk and costly -Group Based -Client cash flow based
Microfinance models have demonstrated outreach growth and profitability Introducing new ways of doing things.
Model Building and Dissemination

Industry level initiatives to manage replicable model building Shared cost in development of models Accelerated industry growth
The continuing challenge:

PUSH FRONTIERS REACH MORE VULNERABLE GROUPS
Thank you!
Microfinance in the Philippines: Learning from the Past to Expand New Frontiers*
Prof. Ronald T. Chua
Asian Institute of Management Highlights from: Delivering to the Poor: Search for Successful Practices in Philippine Microfinance Ronald T. Chua, Antoinette Bolanos & Marcia Feria Miranda

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Microfinance in the Philippines: Learning from the Past to Expand New Frontiers*

Prof. Ronald T. Chua

Part III: New Frontiers and Future Challenges

The Philippine Microfinance Industry: Growing Rapidly

Philippine Microfinance: Outreach

PCFC: Outreach through Conduits

Microfinance: Going Mainstream?

Phil. MF Growth Patterns

Laying the Groundwork for Growth

Conducive Policy Environment

Building Retail Capacity

Learning from Experience: Microfinances Reason for Being

Loans Outstanding (Php M illio

CARD HIGHLANDS RB MALLIG RB PRODUCER S BANK NWTF BANSALAN

0 1999 2000 2001 2002

MFI Client Outreach Growth Rate

MFI PORTFOLIO GROWTH RATE

MFI PORTFOLIO QUALITY

6.90% -9.59 -6.95

20.50% -32.13 -10.44

Lessons from Experience: Building Blocks for Success Delivery Systems

Delivery Systems and Outreach: Key Components and Characteristics

MF Delivery Systems and Outreach

Site & Client Selection Sense of Mission Client Preparation

Design of Product/ Delivery Systems

Loan Policy & Eligibility

Delivery Systems and Sustainability: Key Components and Characteristics

MF Delivery Systems and Sustainability

Efficiency & Productivity

Delinquency Management & Loan Recovery

Strategies to Hasten Viability Sense of Mission Efficiency & Productivity

Site & Client Selection

Loan Policy & Eligibility

Delinquency Management & Loan Recovery

Lessons from Experience: Building Blocks for Success

Key Organizational Elements

The Organizational Building Blocks

The MFI: Driver of MF Delivery Systems

Design of Product/ Delivery Systems

The MFI: Driver of MF Delivery Systems

The MFI: Driver of MF Delivery Systems

FIELD S T A F Human Resources F

Design of Product/ Delivery Systems

The MFI: Driver of MF Delivery Systems

Includes resource mobilization Leverage vs use/build-up of equity Savings mobilization

Leadership Human Resources Financial Management

Design of Product/ Delivery Systems

The MFI: Driver of MF Delivery Systems

Automation Challenge of integration Information Manual systems Automated systems

Leadership Human Resources Financial Management

Design of Product/ Delivery Systems

The MFI: Driver of MF Delivery Systems

Leadership Internal Control MIS

Human Resources Financial Management

Design of Product/ Delivery Systems

The MFI: Driver of MF Delivery Systems

Leadership Internal Control MIS

Human Resources Financial Management

Design of Product/ Delivery Systems

The MFI and the MF Delivery Systems

Sense of Mission Leadership

FIELD S T A F Human Resources Financial Management Design of Product/ Delivery Systems F