MICROCAPITAL PAPER WRAP-UP: Innovations in Microfinance in Southeast Asia, by Gilberto M. Llanto and Ryu Fukui

Written by Gilberto M. Llanto and Ryu Fukui and based on secondary research carried out by the authors, released in July 2003 by the Philippine Institute for Development Studies as Discussion Paper No. 2003-11, 18 pages, available on November 16, 2008 at: http://econpapers.repec.org/paper/phddpaper/dp_5F2003-11.htm

Gilberto M. Llanto and Ryu Fukui describe the “emerging innovations” in microfinance observed through 2003 in Southeast Asian markets, innovations that made it possible for microfinance institutions (MFIs) to reach a greater number of poor households in a sustainable manner. These innovations help reduce MFIs’ transaction costs and risks and enabled poor households to smooth their investment and consumption patterns. While the paper also argues for government support of microfinance (p. 13-14), the rest of this paper wrap-up summarizes the nature and extent to which these three innovations have strengthened Southeast Asian microfinance.

Three Emerging Innovations

The Philippines: Credit Union Empowerment and Strengthening Project

After the “failed” production credit programs administered by the United States Agency for International Development (USAID) and other donors in the 1970s and 1980s for the purpose of financing small farms, borrowers began borrowing more external capital and moved away from the credit union model until the World Council of Credit Unions (WOCCU) began revitalizing the image of credit unions in the 1980s (p. 5). Llanto and Fukui cite one of WOCCU’s projects, the Credit Union Empowerment and Strengthening Project (CUESP) implemented from 1997 to 2002 in Mindanao, as an example of the successful credit union model. This is the first of three microfinance innovations emerging identified in the paper.

In 2003, CUESP was working with 16 partner cooperatives in Mindanao and hoped to expand its technical assistance to 29 more cooperatives from the Visayas and other conflict-prone areas in Mindanao. CUESP transferred microfinance technology to its partner cooperatives through two approaches: (1) savings and credit with education; and (2) model credit union building (p. 6). The first approach involved giving poor rural women access to financial services and teaching them the fundamentals of saving. The second approach was comprised of several components: credit union institutional strengthening, savings mobilization and marketing, credit administration, safety and soundness, and short-term technical assistance.

Llanto and Fukui supply a table detailing the effect of model credit unions on the accounting measures of CUESP’s partner cooperatives (Table 2, page 7). It is interesting to note that the delinquency ratio among all cooperatives dropped from 63 percent in December 1998 to 7.07 percent in March 2003. Non-earning assets saw a similar downward time trend, going from 20.44 percent in December 1998 to 9.27 percent in March 2003. Net institutional capital, on the other hand, grew from -16.89 percent in December 1998 to 11.38 percent in March 2003. The cooperatives’ liquidity and savings ratios also grew substantially.

Lastly, Llanto and Fukui draw attention to CUESP’s emphasis on savings mobilization and its strict credit discipline and adherence to performance standards. In particular, CUESP introduced a “cooperative branding strategy” that the authors believe was the first to be adopted in an Asian country (p. 8). The brand name Finance Organizations Achieving Certified Credit Union Standards or FOCCUS means that a cooperative has maintained certain financial ratios and other operational protocol recognized internationally as an indication of the fiscal soundness of an organization. These ratios and standards are listed in Table 3 on page 8.

The Philippines: Micro-insurance: CARD Mutual Benefit Association

The authors cite the micro-insurance program developed by the Center for Agriculture and Rural Development (CARD), a Philippine credit organization, as the second of three emerging innovations in Southeast Asian microfinance at the time of the paper’s publication. CARD’s micro-insurance product was a simple mutual fund called the Members Mutual Fund (MMF) introduced in Laguna, Philippines, to address the issues faced by CARD following a member’s death. Later, the MMF was used not only to cover death but also disability and pension benefits. In 1999, the MMF was registered with the Securities and Exchange Commission as the CARD Mutual Benefit Association (CARD MBA), and in 2001, the Office of the Insurance Commission gave CARD MBA a license to operate as a mutual benefit association.

The CARD Mutual Benefit Association is an innovation because its client-members own and manage it (p. 9). The basic infrastructure of CARD MBA is the practice of damayan, a local Philippine custom whereby community members contribute money to the family of an individual who has recently died. Everyone in the community can expect monetary support should someone in their family pass away. In essence, CARD introduced the MBA to fit a market niche particular to the Philippines that was not being served by traditional insurance companies (p. 9). Moreover, 98 percent of CARD clients are poor women who often cannot avail of traditional insurance services because of transaction costs, the insurance industry’s perception of the rural poor’s ability to pay, lack of credit information among the rural poor, and other informational obstacles.

Indonesia: Innovations on savings mobilization: Bank Rakyat Unit Desa

Bank Rakyat Indonesia (BRI) is a state-owned bank in Indonesia with 23 divisions. The Business Unit Desa (BUD) Division is one of those divisions, and the only division that is directly responsible for the Unit Desa system. Under this system, unit desas, self-contained financial service units located at sub-district capitals, lend and receive deposits while providing other subsidiary services like payments for telephone and electric bills or property taxes. From 1993 to 1996, the total supervision costs at all levels for the Unit Desa system averaged 1.2 percent of total loans outstanding (p. 11). Through its unit desas, BRI mobilizes savings from different parts of the rural economy with a mix of liquid and non-liquid savings products and levels of return that vary with the deposit amount; the host of options in terms of liquidity and return allow the BRI to better meet depositors’ demands (p. 11).

Llanto and Fukui consider the Unit Desa system a microfinance innovation because it has “enabled millions of poor Indonesians” to gain access to a savings program that provides liquidity and strong returns (p. 11). The authors provide information on the savings and loans outstanding among the BRI unit desas from 1984 until 2000 (p. 12). It is interesting to note that the number of savings accounts grew from 2,655 accounts in 1984 to 25,098,169 accounts in 2000. Similarly, the number of loan accounts grew from 640,746 in 1984 to 2,577,180 in 2000. Finally, the total savings to loan ratio grew from 38 percent in 1984 to 269 percent in 2000. Llanto and Fukui believe the unit desas to be an innovation because the savings history of their client households confirms that “the poor save and are good credit risks,” thereby shoring up support for microfinance (p. 12).

For Llanto and Fukui, the ultimate test of the sustainable presence of the BRI’s Unit Desa system was the 1997 Asian financial crisis, which crushed the Indonesian banking system. The unit desas, however, remained profitable and even attracted 1.29 million new savers during the peak of the crisis from June to August 1998 (p. 13). In fact, by June 1999 the unit desas’ 12-month loss ratio dropped below their long-term loss ratio (2.1 percent) to 1.5 percent. According to Llanto and Fukui, the Unit Desa system shows that it is possible for a formal financial intermediary to reach a large number of savers and borrowers while operating in a cost-effective manner.

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