The Rural Micro-enterprise Finance Project (RMFP) was supported by the Government of The Philippines through the Department of Finance and Land Bank of the Philippines (LBP) and executed by the People's Finance and Credit Corporation (PCFC). Of the total cost of USD 65m, Asian Development Bank (ADB) and International Fund for Agricultural Development (IFAD) financed USD 20m and 14.7m, 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 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 is a critical factor in helping to break the poverty cycle and that such services had been successfully provided in The Philippines through the Grameen Bank Approach (GBA), with significant income, 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.
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 USD 7.4m; and a credit component of USD 34.1m 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. RMFPs 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 of the Philippines, borrowed from ADB and IFAD, assumed the foreign exchange risk and on-lent to LBP. LBP, an agricultural development bank created in 1963 to support agrarian reforms, was the official depository and trustee bank of the RMFP funds. It would 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 countrys 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.
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 rates and loan terms, group size and rules of 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 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$ 34.1m investment loan and US$7.4 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, NWTF and by PCFC. These are now joined spontaneously by increasing numbers of rural 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 organised strengthening. With ADB technical assistance, a MIS has been installed in a number of institutions, but is not found useful by most of them, as it is not integrated into regular banking software. PCFC has actively participated in the policy dialogue described in par. 6. Its privatisation, for which no pronounced demand was found during the field visits, is still under discussion.
Rural poverty impact
Targeting. As per the loan agreement, PCFC requires MFIs to conduct a means test or client-profiling index of each sub-client to determine eligibility. The rigorous GBA discipline (i.e. small loan amounts, regular weekly meetings and instalments, joint liability, strict centre discipline and mandatory savings) has shown to favour poor clients and serious microentrepreneurs. In terms of leakage, it is estimated that about 20% of clients were above the means test criteria at the time of joining the program (yet they belonged to the non-poor vulnerable population). In actual fact, the MFIs have mostly targeted the enterprising poor around the basic food threshold although, in several instances, the poorest households (chronically below the food threshold) have been served. Out of the 23 MFIs interviewed by the IFAD mission, only two rural banks and one cooperative (and none of the 4 NGOs surveyed) reported concentrating on the ultra poor as their main clients.
Income. Impact assessments of different origins have shown that there are increases in income, assets and employment generation. A 28% income differential between borrowers and non-borrowers was identified by the ADB impact survey. A steadily rising rate of income increase was noted with successive loan cycles in most households. However, in the absence of a baseline survey and given the methodological problems with income data in the informal sector, these data are of limited validity. Moreover, such data are rarely presented on the basis of annual increases or for a precisely specified time period; nor do they take inflation into account.
Assets. Increase in assets (average of 25% from commencement) is less pronounced than increase in income. Assets are also used as savings and may be sold as income levelling strategies, particularly livestock. Assets are also kept as loan protection insurance, to be sold to repay the loan in times of hardship. Increase in assets is more pronounced at higher loan cycles, but cannot be attributed solely to the project. Growth in savings and diversification of saving strategies within the household is an important impact, not only in improved asset base but also in terms of asset management. There were numerous examples where borrowers had been able to sustain their market fluctuations due to the buffer of accumulated savings. During the first phase of the project, the overall volume of savings mobilisation has been limited. Some MFIs, particularly cooperatives, have been more effective in encouraging voluntary savings and financial asset growth as proof that the poor can save. It is important that a savings habit has been instilled, with the prospect of continual saving over time.
Micro-enterprise development. The project followed a minimalist approach to microenterprise development, focusing mainly on finance. There was no provision for non-financial services and market linkages. The increased access to microfinance has stimulated microenterprise growth and diversification. An estimated 75% of centres with borrowers on the third loan cycle engage in three or more income generating activities. This is a major risk minimisation strategy for the household and greatly contributes to food and livelihood security. It was found that seasonality has a major effect on the capability of the borrowers to repay their loans but that by diversification of their household livelihood portfolio, household income fluctuations can be levelled. Further 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, 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 groups or organisations purpose. Most GBARs involved have passed the "performance test" for the worth of social capital in MFIs, based 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, a client-household spends P760 (+23%) 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 extent, the issuance of a national microfinance 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 PCFCs 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;
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 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 Banks 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 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. It has empowered poor women to organise themselves in groups and expand or start their own microenterprises. Its far more significant 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 projects 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 the approach; and to leave it to the MFIs 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 their way down to the ultra poor, who are IFADs 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.
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. IFADs 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 slow start, in selecting and preparing MFI conduits, establishing a viable program, 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.
NGOs and community-based 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 National Credit Council as credit policymaker, with the intention of bringing non-financial institution under effective regulation and supervision. LBP, the governments 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 compromising the economic viability and sustainability of the MFIs and the project, effective regulation and supervision of MFIs; 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.
- 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; they need to be further explored; and the role of GBA centres in loan assessment redefined; and
- Access to micro-enterprise skill training requires a stronger emphasis on linkages with competent support agencies.
- 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 sector and policy reform in accordance with the reform covenant sections; strengthening 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 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.
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