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Money Talk: Microfinance for Microenterprises

Money Talk: Microfinance for Microenterprises. Mr. Eduardo C. Jimenez Microfinance Consultant Bangko Sentral ng Pilipinas Business World Entrepreneurs Forum August 25, 2006 - Century Park Sheraton, Manila. Outline of Presentation. Microenterprises in the Philippines

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Money Talk: Microfinance for Microenterprises

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  1. Money Talk: Microfinance for Microenterprises Mr. Eduardo C. Jimenez Microfinance Consultant Bangko Sentral ng Pilipinas Business World Entrepreneurs Forum August 25, 2006 - Century Park Sheraton, Manila

  2. Outline of Presentation • Microenterprises in the Philippines • Definition/ Background Information of Microfinance • Myths, Misconceptions and Barriers to Microfinance Development • Principles and Success Factors of Microfinance • Best Practices and Leading Methodologies • Institutions that Provide Microfinance • BSP Initiatives For Microfinance

  3. Importance of Micro-enterprises in the Philippines • Small and medium enterprises (SMEs) comprise 99.6% of all registered business in the Philippines and employ 70% of the workforce • Of total, micro-enterprises account for 743,949 (97.1%), small enterprises 61,759 (7.6%), medium enterprises 2, 923 (.4%), and large enterprises only 2,958 (0.3%). • Micro/ cottage enterprises make up about 91% of total establishments surveyed by the National Statistics Office

  4. Invigorating MICROENTERPRISES through access to MICROFINANCE can lead to economic growth and development on the local and national level.

  5. What is Microfinance? It is a provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance products to the poor and low income households and their microenterprises

  6. Important Features of the Definition • It is not just credit • It has a target market - the poor and low income households • It is linked to the microenterprise

  7. What Microfinance is NOT • Subsidized Credit • Dole-out • Consumption/ Salary Loan • Cure-all for poverty

  8. Who are the Clients? “Entrepreneurial Poor” Near Poor E-poor Laboring Ultra Poor

  9. Features of Microfinance Loans • Fit for those who can not access “traditional” sources of financing • Innovative Product Designs • Use of collateral substitutes • Short term loans • Frequent amortizations • Inclusion of savings • Enterprise lending • Simple Documentation Requirements

  10. Benefits of Microfinance for Microenterprises • Increase economic activity and income • Generate employment • Save and invest in the future • Guard against emergencies and shocks • Better invest in health, nutrition and education

  11. Myths, Misconceptions and Barriers • Poor people can not pay market interest rates and can not save • Microfinance institutions are primarily civic-oriented, non-profit organizations that can not be sustainable and viable • Microfinance institutions can not access commercial funds

  12. Myths, Misconceptions and Barriers • High transaction costs of serving the poor • Regulatory barriers • Implementation of government directed credit programs • Poor are intimidated by formal institutions • Lack of infrastructure and physical access to formal institutions

  13. New Paradigm of Microfinance • From beneficiaries to clients • From directed credit to market approach • From evolving programs to evolving institutions • From donor dependence to financially self sufficient institutions with access to commercial funding

  14. Key Success Factors for Microfinance – 4 “C”s • Clearly identified market • Capable and committed staff • Creative methodologies and technologies • Commitment to standards and best practices

  15. Best Practices for Microfinance • Appropriate Products for Clients (flexible, accessible, simple in process and documentation, appropriately priced, and permanent) • Appropriate Delivery • Clear Organizational/ Institutional Structure (Governance) • Adequate Risk Management (Use of Portfolio-at-Risk, Zero Tolerance for Delinquency) • Subscription to Performance Standards

  16. Leading Microfinance Methodologies • Group Methodology - Microfinance services are provided in the context of a group.

  17. Some Examples of Group Methodolgy • Grameen Methodology • 7-8 groups of 5 women forming 1 center • Disbursement and collection through center • Loans are provided on a rotation basis (2-2-1) • Collateral substitute (i.e. JSS, peer support/pressure)

  18. ASA (Association for Social Advancement) • 7-8 groups of 5 women forming 1 center • Disbursement and collection through center • Simultaneous disbursement of loans • Collateral substitute (i.e. peer support/pressure)

  19. Leading Microfinance Methodologies • Individual Methodology - single client lending where repayment and schedules rely solely on the individual (cash-flow, character based lending)

  20. Some Examples of Individual Methodology • MABS approach (Microenterprise Access to Banking Service) • USAID funded technical assistance to rural banks that want to engage in microfinance • Individual loans are granted based on the character and household cashflow • Culture of zero tolerance for delinquency

  21. Where Can I Access Microfinance? • Banks (Rural, Thrift, Some Commercial • NGOs • Cooperatives

  22. BSP Initiatives • Anchored on the General Banking Law of 2000, Sections 40, 43 and 44 Recognizes the peculiar characteristics of microfinance in the requirements, terms and amortization of loans and other credit accommodations.

  23. Three-Pronged Approach • Microfinance “Friendly” Policy and Regulatory Environment • Training and Capacity Building within BSP and banking sector • Promotion and Advocacy

  24. Policy and Regulatory Environment • Issuance of 13 Circulars governing the practice of microfinance in the banking sector – provides incentives like rediscounting, recognize microfinance loans (no collateral, loan documentations, etc), allow for branching, promote best practices • Modification of Manual of Examination to include microfinance operations • Member of the Technical Working Group that established the regulatory framework and performance standards for all types of MFIs

  25. Ways How a Bank can Engage in Microfinance • Establishment of a microfinance-oriented bank • Establishment of a microfinance-oriented branch • Establishment of a microfinance unit within an existing bank

  26. Training And Capacity Building • Creation of a Microfinance Committee and Microfinance Unit • Establishment of a Core Group of BSP Microfinance Examiners • Inclusion of microfinance in the Basic Rural and Thrift Banking Courses • Conduct of training for banks on microfinance best practices

  27. Promotion And Advocacy • Regional tour to promote microfinance best practices to practitioners and potential players • BSP as Chair of the Philippine Celebration of the UN International Year of Microcredit • Microentrepreneur of the Year Awards

  28. Banking Sector Exposure to MicrofinanceAs of March 31, 2006 (in millions) Micro Loans Portfolio No. of AmountBorrowers Microfinance-oriented Banks: Thrift Banks (5 banks) 212.400 50,187 Rural Banks (4 banks) 230.992 34,984 Traditional Banks: Thrift Banks (9 banks) 144.666 Rural Banks (159 banks) 2,373.291 410,110 Cooperative Banks (27 banks) 696.803 97,899 Total (204 banks) 3,658.052 593.180

  29. Thank you. http://www.bsp.gov.ph/about/advocacies_micro.asp Microfinance Unit – (02) 523-6130

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