In last week’s column, I discussed how investing in education can make a profound difference in the progress of the nation. Another area that needs attention is the cost of credit to the poor. Along with education and public health, this is another advocacy that I ardently espouse.
My father, Albino Z. SyCip, co-founded China Bank and had a reputation for extending loans to young and penniless entrepreneurs. He must have been a good judge of character as he would sometimes just rely on the borrower’s word of honor. John Gokongwei and Jobo Fernandez were both recipients of my father’s good will. However, bankers in general would not risk lending to the poor who have no collateral whatsoever; it just does not make business sense. Or does it?
In the last few years, microfinance has been gaining ground in the Philippines as a viable source of credit for the poor. The Bangko Sentral ng Pilipinas (BSP) defines microfinance to include “financial services such as deposits, loans, payment services, money transfers and insurance products to the poor and low-income households and their microenterprises.” It should be emphasized that microfinance is not engaged in charity, subsidized credit or dole outs nor is it the only remedy for poverty.
In the past dozen years, microfinance activities in the Philippines have greatly increased. In 2010, total loans amounted to USD632.1 million with 3 million active borrowers. Deposits in 2010 totaled USD454.4 million with 3.7 million borrowers. What do these numbers tell us?
Generally, they speak positively about the capacity of the poor to save and repay their debts when they are given access to credit. The figures also suggest that microfinance institutions (MFIs) — rural and thrift banks, nongovernment organizations or NGOs, and cooperatives — can be profitable institutions.
The key to microfinance is in small, unsecured loans (as low as Php5, 000) with very frequent amortizations also in small amounts. The risk of an unsecured loan is built into the price. Most MFIs would charge from 2.5% to 3.5% interest per month which, to some may be considered high, but this is so much lower than the outrageous 20% interest rate charged by the informal “5-6” lenders.
However, I believe that the real secret behind the success of MFIs is the credit discipline instilled in their clients. MFIs normally meet their clients (mostly women) every week when they pay their loans, report on their business, and bond with their fellow borrowers. The typical collection rate for good MFIs is about 98% while the industry standard is at 94%. This clearly demonstrates — against conventional wisdom — that the poor have integrity. That given the opportunity, they can rise above their misfortune. Most of them do not need charity; what they need is our confidence in them.
Besides the soundness of the MFI business model, the more essential dimension of microfinance is its tremendous impact on the poor. A Php5, 000 loan may seem small, but to a family of five (the average Filipino family), it means a potential daily income of Php200-300 per day that the mother earns from her sari-sari store. This can spell the difference between having three square meals a day instead of the typical one or two.
I will continue to incessantly promote microfinance in the Philippines as a means of alleviating poverty. The late President Cory Aquino was a leading advocate of MFIs through her involvement with the PinoyMe Foundation. I have also been working closely with Dr. Aris Alip, founder and president of the Center for Agriculture and Rural Development (CARD) Inc. (CARD NGO).
CARD NGO started in 1986 as an NGO and has evolved into an outstanding MFI. Several organizations were set up subsequently to support CARD NGO. These organizations, together with CARD NGO, are collectively called CARD Mutually Reinforcing Institutions (CARD MRI). CARD MRI’s major organizations are CARD NGO, CARD Bank, Inc., CARD Mutual Benefit Association, Inc., CARD SME Bank and CARD MRI Development Institute (CMDI).
CARD MRI’s microfinance program comprises credit programs (providing loans to small businesses), Flexible Capital Build Up (a savings mobilization program), micro insurance, Credit with Education (training modules on business, insurance, etc.) and a Microfinance and Health Protection Program.
As of November 2011, CARD MRI already had over 1, 300 offices all over the Philippines, 1.4 million active clients and 7.1 million insured persons. As of same date, MRI boasts a total loan portfolio of Php5.9 billion and a remarkable repayment rate of 99.43% while total deposits/capital buildup amounted to Php4.1 billion. Its total assets are at Php11.7 billion and total equity/fund balance is at Php2.6 billion.
On my 90th birthday last June, an American investor and philanthropist, Paul Kazarian, generously donated a fund to expand services in basic education and microfinance. The Kazarian Foundation also set aside a second fund for research, education, and training on microfinance to see how their studies can benefit our microfinance industry and to assess how CARD MRI can also help other microfinance organizations abroad.
MFIs like CARD MRI have been contributing to the growth of microfinance in the country. Just last October, a study conducted by the Economist Intelligence Unit ranked the Philippines second overall in having a good microfinance environment (against 54 other developing economies around the world). The Philippine Government was cited for encouraging the “establishment of microfinance banks and the commercialization of the microfinance sector, and has specifically promoted the upgrading of NGOs.”
This is good news indeed, but the real challenge for all of us is how — as a society — we can increase the number of those who are able to expand their microenterprises and become integrated into the mainstream economy. Let us not belittle the financial power of the poor. Their absolute number could make a significant improvement in our economy. To my mind, the real value of microfinance is that it gives hope to many in the midst of despair.
Let me sum up my thoughts on microfinance with this Chinese saying: “Flowers leave some of their fragrance in the hand that bestows them.”
Lending a hand to the poor and encouraging entrepreneurship though microfinance are not just a good deeds; they have an enduring effect on their lives. Perhaps, this can be your New Year’s resolution in 2012.
Guest Columnist Washington SyCip is a retired Partner and the Founder of SGV & Co.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.