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Philippines and an increasing number of financial in-

stitutions have engaged in retail microfinance opera-

tions. While this sector has been traditionally domi-

nated by rural banks, non-governmental organizations

(NGOs) and finance cooperatives, in 2009 a number

of commercial banks sought entrance into the retail

microfinance market. This Asia Focus report reviews

the growth of the Philippines microfinance industry

and discusses the implications of commercial banks

entering this market.

uring the last few years, the volume of microfi-

nance activity has grown considerably in the

What is Microfinance? What is Microfinance?

The Philippines central bank, Bangko Sentral ng

Pilipinas (BSP), defines microfinance as the provision

of a broad range of financial services such as deposits,

loans, payment services, money transfers and insur-

ance products to the poor and low-income households

and their microenterprises.i The financial service most

commonly provided is microcredit, which is typically

issued in the form of a specific business loan for mi-

croenterprise purposes. A key defining characteristic

of a microfinance loan is the ability to secure credit

without collateral. In the Philippines, microfinance

loans cannot exceed PhP 150,000 (US$3,218).ii Mi-

crofinance providers in the Philippines often employ a

group lending approach, whereby each person within

Development of Microfinance in the Philip-

pines pines

Development of Microfinance in the Philip-

The Philippines’ microfinance sector is credited as

one of the oldest and most active in the world.v While

the roots of microfinance activity date back to the

early 1900s through cooperatives, microfinance, as

described today, surfaced in the 1980s and was codi-

fied into national law in 1997 with the signing of the

Social Reform and Poverty Alleviation Act (RA

8425), and the establishment of both the National

Anti-Poverty Commission and the National Strategy

for Microfinance. With approximately 33% of the

country’s 92 million population considered to be liv-

ing below the poverty threshold, poverty alleviation is

one of the government’s top priorities and microfi-

nance is a primary tool to address this The

ultimate goal of the government’s National Strategy

for Microfinance is to create a sustainable private mi-

crofinance market, where the private sector drives

market dynamics, such as products and pricing, and

the government’s role is limited to providing an envi-

ronment which enables the market to thrive.

The General Banking Law of 2000, which mandated

the recognition of microfinance as a legitimate bank-

ing activity, is one of the primary catalysts for acceler-

ated growth and commercialization of microfinance

over the last several years. The law empowered the

BSP to create measures recognizing microfinance pro-

viders as banking institutions and to provide regula-

tory guidelines specific to the microfinance portfolios

for institutions falling under the BSP’s purview. Fur-

thermore, banks engaging in microfinance activities

were given certain allowances and relieved of certain

restrictions; for example, they were granted exemption

from a moratorium on branch licensing. Today, the

BSP defines its commitment to the development of

microfinance in the Philippines in three specific ways:

i) providing an enabling policy and regulatory envi-

ronment, ii) increasing the capacity of the BSP and

banking sector with respect to microfinance opera-

tions, and iii) promoting and advocating the develop-

ment of sound and sustainable microfinance opera-


Historically, the provision of retail microfinance ser-

vices in the Philippines was achieved through rural

and thrift banking organizations, as well as NGOs and

finance cooperatives. Government financing programs

also participated in the retail market. The BSP reports


Microfinance in the Philippines

Nkechi Carroll

Asia Focus is a periodic newsletter issued by the Country Analysis Unit of the Federal Reserve Bank of San Francisco. The information contained in this

newsletter is meant to provide useful context and insight into current economic and financial sector developments in the Asia Pacific region. The views

expressed in this publication are solely that of the author and do

not necessarily represent the position of the Federal Reserve System.

Page 2

that government financing programs are transitioning

away from direct retail business activities and toward

providing wholesale funding for private microfinance

institutions. Transitioning away from direct retail micro-

finance activity brings the government closer to achiev-

ing the ultimate goal of having a limited role in the mi-

crofinance market, as outlined in the National Strategy

for Microfinance. Meanwhile, the private banking sector

is playing an increasing role in the provision of mi-

croloans. Microfinance activity across the Philippines

banking sector, as measured by the size of microloan

portfolios at thrift, rural and cooperative banks, nearly

doubled between 2005 and 2008 alone (see Chart 1).

During the same time period, the number of microfi-

nance borrowers grew by 40%.

In fact, a recent study by the Economist Intelligence

Unit (EIU) assessing the microfinance environment

within countriesviii ranked the Philippines first in Asia

and third overall on its microfinance index, after Peru

and Bolivia. The EIU microfinance index categorized its

indicators into three main groups: i) regulatory frame-

work, ii) investment climate, and iii) institutional devel-

opment. EIU awarded the Philippines a perfect score for

its regulation of microfinance activities at financial insti-

tutions, adding that “the government has promoted a

regulatory environment conducive to microfinance op-

erations.”ix While the Philippines also received a perfect

score for the legal environment surrounding the forma-

tion and operation of specialized microfinance institu-

tions, the EIU study highlighted a need to increase the

diversity of microfinance products and services avail-

able to customers. Until recently, the microfinance in-

dustry in the Philippines has been primarily focused on

microcredit products. Lately, there has been a broaden-

ing of services to include savings and microinsurance,

but the portion of microfinance providers in the Philip-

pines that are offering such services remains small.

The Changing Role of Commercial Banks in

Microfinance Microfinance

The Changing Role of Commercial Banks in

Traditionally, commercial banks’ role in the Philip-

pines microfinance market has been exclusively

through wholesale lending, by providing funds to mi-

crofinance institutions which then re-lend the funds in

the form of microcredit, and the provision of general

financial services to microfinance institutions. How-

ever, in the face of heightened competition and a chal-

lenging operating environment due to the global finan-

cial and economic crisis, commercial banks are seek-

ing new viable revenue options. As a result, some

commercial banks recently have entered into the retail

microfinance market. For example, Rizal Commercial

Banking Corporation, the nation’s seventh largest

lender, acquired JP Laurel Rural Bank in February

2009 and issued its first microfinance loan in July

through JP Laurel Rural Bank’s branches.x This

marked the first microfinance retail operation by a

large commercial bank in the Philippines. Since then,

Asia United Bank, ranked twentieth by asset size, ac-

quired Rural Bank of Angeles to take advantage of its

microfinance network.xi In addition, Bank of the Phil-

ippine Islands, the nation’s third largest lender and the

first privately owned commercial bank to engage in

wholesale microfinance lending, was granted permis-

sion to launch the country’s first mobile microfinance


Demand for microfinance loans is expected to increase

considerably over the next year as a key part of the

rebuilding of Metro Manila, which was severely dam-

aged by typhoon Ketsana in September 2009. Further

demand is anticipated from displaced overseas Fili-

pino workers, as a result of the global crisis, as these

workers and their families turn to microenterprise

business activities as a means to supplement family

income. These increases in demand for microfinance

loans, coupled with the reduced supply of microfi-

nance providers resulting from the high rural bank

closures in the last 18 months,xiii provide additional

incentive for commercial banks, as well as other play-

ers, to enter the retail microfinance sector.

Risks and Benefits Associated with the Retail

Microfinance Market Microfinance Market

Category: Payday loans

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