MFIs should think out of the box

Today’s complex and competitive markets offer many opportunities for innovation. Two Sundays ago, the Inquirer’s Talk of the Town featured ways to produce consumer products from three coconut byproducts—candies and desserts with coco sugar, buko juice and sports drink from coconut water, and various food preparations using coconut oil. Such innovative products not only present alternative income-generating opportunities for the small coconut farmer, but offer healthful options to consumers as well. These are indeed delightful prospects to a sector where most coconuts simply end up as copra or coconut oil.

It is no different with microfinance. After more than 20 years of the industry in the country, microfinance institutions (MFIs) continually challenged by the twin issues of financial sustainability and social performance are forced to innovate.

Microfinance in the Philippines started out with Grameen Bank replicators like Tulay sa Pag-unlad Inc., Negros Women for Tomorrow Foundation, and Ahon sa Hirap Inc., which have grown to be solid financial service providers for low-income earners in their areas. Their success has inspired the government and private groups to get involved with microfinance and be counted among those who reach out to the poor and marginalized in society. The government supports the industry through an enabling policy environment. It formed the National Credit Council, tasked primarily to rationalize various government lending programs and encourage more private-sector participation. Through Administrative Order 148 issued in 1994, it also established the People’s Credit and Finance Corp. to provide wholesale credit funds to MFIs. Bangko Sentral ng Pilipinas lent its support as well. Even if it discouraged bank expansion through its no-branching policy in early 2000, BSP permitted the opening of new banks only if these were microfinance-oriented. It also offered a rediscounting window to help MFIs leverage their funds.

The private sector was equally motivated for financial and social reasons. More MFIs were established in different parts of the country. With available funds, rural banks retooled their plans toward strengthening the microfinance nature of their operations. Out of almost 800 rural banks, around 200 have officially engaged in microfinance. Cooperatives, on the other hand, profess that they have long been into microfinance, and were in fact ahead of the MFIs in granting small loans to the poor. Not wanting to be left out and realizing the market opportunities in microfinance, large commercial banks apportioned a slice of their resources to the industry, whether as wholesaler of credit funds, depository bank, or facilitator of mobile banking.

This burgeoning of MFIs favors small borrowers who now have more options to source their financing needs in production and consumption. But it has also meant increased competition for the MFIs, often resulting in credit pollution or multiple borrowing leading to clients’ repayment problems. This consequently threatens their financial operations and sustainability, especially the small-sized ones. Many of these MFIs also concentrate their lending operations in urban areas, even as there are sectors in the agricultural and other remote areas waiting to be served.

It is in this context that the Microfinance Council of the Philippines Inc. (MCPI) embarked on a program on product development called the Financial Product Innovations Fund (FPIF) back in 2007. Collectively steered by the MCPI, Interchurch Organization for Development Cooperation (which provided the funding), Oikocredit Philippines and National Confederation of Cooperatives, the program has as its objective to “stimulate product and service innovations that will improve microfinance delivery in agricultural and hard-to-reach communities.”

The intention was to make MFIs get out of their “comfort zone” of offering traditional loan products and/or operating in the capital city or urban areas, and open their doors to financing the many other needs of agricultural or rural households, or those situated in hard-to-reach areas. This was to be done through a systematic and scientific way of product development. The FPIF has suggested sample products like “pre-need savings product appropriate for education, marriage, burial expenses and other life cycle events, index-based crop insurance and pension fund schemes, credit products for housing improvements…”

Eight MFIs participated in the program. Four are nongovernment organizations or foundations organized as MFIs (Eclof Philippines, Center for Agriculture and Rural Development, South Cotabato Foundation Inc. and Aksyon Kalinga para sa Masa Inc.); two are cooperatives (First Lipute Multipurpose Cooperative Inc. and Lunsad Multipurpose Cooperative Inc.); and another two are networks, each with about 100 member-organizations nationwide (Federation of People’s Sustainable Development Cooperative Inc. and SeedFinance Corp.). The innovations these MFIs have introduced are credit offered to unserved sectors or areas, financing of integrated farming, and ATM/mobile banking.

Small borrowers will always have need for traditional microfinance products. But other than the usual working capital loans, an urban poor or rural household has a whole range of financial needs from production to consumption. MFIs need only to tap their resources, study their market more scientifically, and think “out of the box” to respond to these needs and opportunities. The likes of the homeless urban poor and small coconut farmer, on the other hand, are just waiting to be their clients.