PAPER WRAP-UP: Benchmarking Philippine Microfinance 2005, By Allan Robert I. Sicat and Scott B. Gaul

By Allan Robert I. Sicat, and Scott B. Gaul. Published by Microfinance Information Exchange, Inc. November 2006. 12 pages, Available at http://www.microfinancegateway.org/files/41747_file_05.pdf

This paper is a report on the performance of the Microfinance Institutions (MFIs) within the Philippines, as accessed from a sample of 45 MFIs surveyed by the Microfinance Information Exchange, Inc. (MIX) and the Microfinance Council of the Philippines, Inc. (MCPI). It begins by providing a background to the Microfinance sector within the country, such as policies and government regulations that affect its performance. One such example would be the implementation of Executive Order No. 138 (EO 138) in 1999. EO 138 brought about a set of reforms to correct policy distortions in the financial markets such as subsidized interest rates and concessional loan funds. EO 138 also “rationalized government-directed programs and channeled their lending to financial institutions from government agencies.” This was repealed in 2006, which the author of the article states could potentially harm successful microfinance practices from the private sector, despite the government’s intention of reaching out to those who presently have not been served by MFIs.

The report goes on to outline the performance of the respective MFIs under the categories of Scale and Outreach, Financing Structure, Revenue and Profitability, Productivity, and Risk and Liquidity. In terms of Scale and Outreach, the aggregate outreach of participants of the survey, according to the report, increased by 22% while gross loan portfolio grew by 30% in comparison to last year’s report. Philippine MFIs remained among the top in the world in terms of depth of outreach (outreach to the poorest of the poor), with an average loan balance per borrower of USD 201. NGOs, which tend to have a narrower focus on the lowest income clientele, have a median average loan balance per borrower of USD 75, while rural bank loan portfolios often combine a broader range of products, including salary loans, agricultural loans, commercial loans, and housing loans that reach a broader range of clientele, bringing their average loan balance per borrower to USD 444.

The report analyzes the financing patterns of the 45 MFIs, stating that Rural banks in the Philippines lead in terms of leverage, as evidenced by debt to equity ratios that are almost four times higher than for NGOs. 100 percent of their loan portfolio from commercial debt, the vast majority of which consists of customer deposits. Facing fewer legal constraints than other types of institutions, rural banks gathered significant customer deposits with almost 100 percent of disbursed loans financed by savings, while a significant share of NGO portfolios are still funded from subsidized sources, primarily from concessional loans or grants from foreign donors, as they are not allowed to receive deposits from the public. As a result, many of them have opened up formal financial institutions alongside their organization in order to bypass this constraint.

The survey also revealed that Philippine MFIs saw declines in profitability compared to the previous year—slightly below break-even levels in 2005 for NGOs, although many institutions saw an improvement from 2004 results. The report also indicated that overall decline in profitability of Philippine MFIs is more pronounced within the rural bank participants, adjustments for standardized write-offs and loan loss provisioning being a highlighting factor, since past due loans are collateralized at different levels.

In conclusion, the authors believe that while MFIs in the Philippines generate high portfolio yields “the challenge remains to achieve profitability by lowering the cost of delivering microfinance services.” A further challenge for NGO MFIs remains to attract to commercial lenders for future sources of funds, in order to tap into new resources for future growth.

–Monica Sharma, Research Assistant

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