MICROCAPITAL STORY: Bangko Sentral ng Pilipinas (BSP), in Agreement with Housing and Urban Development Coordinating Council (HUDCC), Rolls Out New Housing Mircofinance Product for the Economically Active Poor

In February 2008, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) approved a new microfinance product designed specifically for housing. The new initiative was jointly proposed by the Housing and Urban Development Coordinating Council (HUDCC) and the Development Bank of the Philippines (DBP), and is part of a government-mandated initiative to provide housing solutions for the poor. The initiative is crucial as nearly 33 percent of Filipino families live below the poverty line. However, the viability of the plan is yet untested: the BSP’s close scrutiny of microfinance operations has alienated banks in the past, driving them away from offering the small, risky loans. Another such government-mandated plan might actually undermine the impact of the loan product.
In a 2006 year-end report, the Filipino government stressed that the impact of microlending could be enhanced by cooperation between the government and private banks (p 5). The BSP states that the new housing product will help banks to diversify their interests and risks, giving them incentives to add to their microfinance programs. To balance these risks, the BSP has developed additional mechanisms of insurance. For instance, banks will be provided with cash flow analysis tools to determine whether a client will be able to repay the loan. The bank can also require the client to begin collecting savings. Again, the effectiveness of the plan is yet untested, and the BSP’s tight control over microfinance regulations could likely become a roadblock.

The BSP formally recognized microfinance as a valuable banking strategy in 2000, following the mandate of the General Banking Law of 2000 (sections 40, 43, and 44). The Bank has a three-pronged approach (p 1) to microfinance: 1 – create a policy environment that is friendly to microfinance, 2 – enhance the microfinance capacity of the BSP and commercial banks through outreach and product development, and 3 – ensure that microfinance operations are sound and sustainable. The close attention and regulation of Filipino microfinance has been controversial in recent years. In a study published in 2000, one investigator asserts that the BSP’s scrutiny has biased banks against the small loans. Fear of BSP penalties made small-scale lending an unattractive option for banks, even if the client was able to provide the required amount of collateral (p 13). Since then, the BSP has tried to expand the accessibility of microfinance by hosting networking sessions for banks, and developing new initiatives such as this housing product. As of June 2006, 205 banks were providing microloans to 630,730 active clients (p 7).
The BSP’s housing microloan is unique in that it is a relatively large sum: while microloans usually range in the hundreds of dollars, the current products offers loans in the thousands. However, it is consistent with the cost of housing. Loans of maximum USD 3700 will be given for home improvement, while up to USD 7400 will be offered for the purchasing of homes or lots. Like existing microlending plans, the housing initiative will also offer a simpler documentation plan than ordinary loans, reducing strain on the borrower. Additionally, the BSP will allow banks to offer less stringent collateral requirements. However, it is important to note that even with relaxed restrictions on clients, banks are still held accountable by the BSP for failures in microlending operations.

by Priya Rajdev

Additional Resources:

BSP: Home, Microfinance Initiatives, Previously Reported

HUDCC: About

DPB: About

microLINKS: Regulation and Supervision of Microfinance Activities: The Philippines Case Study, December 2000. By Arelis Gomez, Thomas Fitzgerald, and Robert Vogel, International Management and Communications Corporation; about microLINKS.