MICROCAPITAL STORY: Philippine Government Advocates Lowering Interest Rates for Microenterprises

Philippine government has directed microfinance lending agencies to look into the possibility of lowering interest rates to micro and small businesses. The government believes this will make microfinance more attractive and increase activity within the sector. The directive came from Cerge Remonde, the oversight official for the government’s micro, small, and medium enterprise (MSME) program, but is not an obligation nor did it specify if or when it would require MFIs to do so.

The directive was particularly targeted at People’s Credit and Finance Corp. (PCFC) and the Small Business Corporation (SB). The PCFC is a government entity to support the development of microfinance by providing loans to MFIs, has total assets of PHP 3.2 billion, equivalent to USD 79.1 million, and covers all 80 provinces. Similarly, SB, which has a microfinance-lending program, is the national government’s third largest provider of small and medium enterprise financing with over PHP 3 billion loan portfolio or USD 73.2 million.

Neither the PCFC nor SB have committed to lowering rates, citing”serious ramifications”. The PCFC charges 10-14 percent interest rate, while SB’s microfinance program lists rates between 9-12 percent. In comparison, the central bank lists an overnight rate of 5 percent, while the 91-day T-bills rate is at roughly 3.6 percent.

A 2005 MixMarket report regarding microfinance in the Philippines showed that microcredit interest rates had not reduced despite increased competition. However, the paper also emphasized that one contributor to microfinance growth was reforms such as removing subsidized interest rates. In addition, a paper by the Asian Development Bank (ADB) entitled “Understanding and Dealing with High Interest Rates on Microcredit” demonstrated that while there is much to be gained by lower interest rates, the best means to do so is by reducing operational costs through improved market competition, innovation, and efficiency. Furthermore, policymakers can help by improving the financial infrastructure and creating an enabling environment for MFIs, as opposed to regulating interest rates. For further information on the ADB paper, please see the following MicroCapital write-up.

The push to lower interest rates is in hopes of increasing the number of small businesses and is part of President Gloria Macapagal-Arroyo’s pump-priming program to combat the effects of a U.S. economic slowdown. Remonde noted that MSMEs are considered the backbone of economic activity in the countryside, comprising 99.6 percent of the registered companies. Between 2004 and 2007, 203.6 billion Philippine Pesos (PHP), roughly USD 5.0 billion, was distributed to 3.7 million microfinance clients and SME accounts, generating 2.1 million jobs. Finally, the trade department reported that MSMEs contribute 30 percent to the economy, compared to the 40 percent target by 2010.

By Jennifer Lee

Additional Resources:

Small Business Corp.: Home, Microfinancing Program, Interest Rates

People’s Credit and Finance Corp: Home
SunStar: “Palace Wants Cuts in Interest Rates for Microbusinesses”, February 8, 2008.

MicroCapital article: “Why are Microfinance Interest Rates so High? Asian Development Bank Paper Explains”, July 11, 2006.

MixMarket: “Benchmarking Philippine Microfinance 2005”, November 2006.

Currency Conversion: Bloomberg