[ BSP CIRCULAR NO. 272, January 30, 2001 ]
MICROFINANCING LOANS
Pursuant to Monetary Board Resolution No. 40 dated January 11, 2001, the following guidelines shall be observed in implementing the provisions of Sections 40, 43 and 44 of the General Banking Law of 2000 with respect to microfinancing loans:
1. Microfinancing loans - are small loans granted to the basic sectors, as defined in the Social Reform and Poverty Alleviation Act of 1997 (Republic Act 8425) , and other loans granted to the poor and low-income households for their microenterprises and small businesses so as to enable them to raise their income levels and improve their living standards. These loans are granted on the basis of the borrower's cash flow and are typically unsecured.
2. The maximum principal amount of microfinance loans shall not exceed P150,000. This is equivalent to the maximum capitalization of micro enterprise under R.A. 8425.
3. The schedule of loan amortization shall take into consideration the projected cash flow of the borrowers which is adopted into the terms and conditions formulated. Hence, microfinance loans may be amortized on a daily, weekly, bi-monthly or monthly basis, depending on the cash flow conditions of the borrowers.
4. Interest on such microfinancing loans shall be reasonable and just as may be determined by management to be consistent with its credit policies. The interest rate shall not be lower than the prevailing market rates to enable the lending institution to recover the financial and operational costs incidental to this type of microfinance lending.
5. In cases of microfinancing loans which meet the criteria in Items I to 3 of this Circular, a bank may not require from its credit applicants, a statement of assets and liabilities, and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue, as prescribed under Section 40 of R.A. 8791.
6. Microfinance loans shall be considered compliance with required loans to small and medium enterprises required under R.A. 6977.
7. In view of the unique characteristics of microfinance loans, i.e., small unsecured and based on cash flow or borrowers, these loans may be exempted from rules and regulations which may be issued by the Monetary Board with respect to unsecured loans under Section 41 of the General Banking Law of 2000, provided that the bank has:
8. In the implementation of this Circular, banks should be guided by the attached Notes on Microfinance.
This Circular shall take effect immediately.
Adopted: 30 Jan. 2001
(SGD.) RAFAEL B. BUENAVENTURA
Governor
NOTES ON MICROFINANCE
A. Definition of Microfinance
Microfinance is the provision of a broad range of financial services such as - deposits, loans, payment services, money transfers and insurance products - to poor and low-income households, for their microenterprises and small businesses, to enable them to raise their income levels and improve their living standards.
B. Core Principles for Microfinance
Characteristics and Features of Microfinance
C. Definition of Microfinance Loans
Microfinancing loans are small loans granted to the basic sectors, on the basis of the borrower's cash flow and other loans granted to the poor and low-income households for their microenterprises and small businesses to enable them to raise their income levels and improve their living standards. These loans are typically unsecured but may also be secured in some cases.
D. Level of Microfinance Loan
Average microfinance loan of an NGO microfinance institution or of a cooperative bank or credit union in the Philippine case is about P25,000 (from a low of P2.000 to P5.000). To be realistic, the maximum principal amount of a microfinance loan can be pegged at P150,000. This is equivalent to the maximum capitalization of a microenterprise under R.A. 8425.
E. Collaterallzation of Microfinance Loan
A microfinance borrower is not likely to be able to borrow from a large commercial, thrift or rural bank but from an NGO microfinance institution or perhaps from a small rural or cooperative bank. Thus, microfinance loans are typically unsecured, for relatively short periods of time {180 days) with monthly (or more frequent) amortizations of interest and principal, and often featuring a joint and several guarantee of one or more persons and, certainly, seldom with tangible collateral. But in some cases, they can also be secured, depending on the capacity of the borrower to offer collaterals acceptable to the lending institution.
F Interest on Microfinance Loans
Old Approach
The old (and by now highly discredited as ineffective) approach to loans for low-income borrowers emphasized subsidized interest rates. It did not recognize that subsidized below-market interest rates do not necessarily result in opening up access to financial services for low-income households and microenterprises.
New Approach
The new approach which has been demonstrated by global experience is characterized by a market-based interest rate regime which permits the institution providing microfinance services to cover administrative costs, provisions for loan losses and intermediation/funding costs. This basis is consistent with financially sustainable rural finance and microfinance. Invariably, the global experience continues to validate the proposition that what matters most to the poor and undeserved segments is access to financial services rather than their interest rate cost - most especially because microenterprise and small business borrowers will take a microfinance loan whose repayment periods match the additional cash flows they hope to generate.
Therefore, interest on such microfinancing loans shall be reasonable but shall not be tower than the prevailing market rates. This is to enable the lending institution not only to recover the financial and operational costs incidental to this type of microfinance lending but also to realize some bottom line gains.
G. Segments of Demand for Micro-credit
1. The landless who are engaged in agricultural work on a seasonal basis and manual laborers in forestry, mining, household industries, construction and transport; requires credit for consumption needs and also for acquiring small productive assets, such as livestock.
2. Small and marginal farmers, rural artisans, weavers and those self-employed in the urban informal sector as hawkers, vendors and workers in household micro-enterprises: requires credit for working capital, including a small part for consumption needs. This segment largely comprises the poor but not the poorest.
3. Medium farmers/small entrepreneurs who have gone in for commercial crops and others engaged in dairy, poultry . . . Among non-farm activities, this segment includes those in villages and slums engaged in processing or manufacturing activity. These persons live barely above the poverty line and also suffer from inadequate access to formal credit.
1. Microfinancing loans - are small loans granted to the basic sectors, as defined in the Social Reform and Poverty Alleviation Act of 1997 (Republic Act 8425) , and other loans granted to the poor and low-income households for their microenterprises and small businesses so as to enable them to raise their income levels and improve their living standards. These loans are granted on the basis of the borrower's cash flow and are typically unsecured.
2. The maximum principal amount of microfinance loans shall not exceed P150,000. This is equivalent to the maximum capitalization of micro enterprise under R.A. 8425.
3. The schedule of loan amortization shall take into consideration the projected cash flow of the borrowers which is adopted into the terms and conditions formulated. Hence, microfinance loans may be amortized on a daily, weekly, bi-monthly or monthly basis, depending on the cash flow conditions of the borrowers.
4. Interest on such microfinancing loans shall be reasonable and just as may be determined by management to be consistent with its credit policies. The interest rate shall not be lower than the prevailing market rates to enable the lending institution to recover the financial and operational costs incidental to this type of microfinance lending.
5. In cases of microfinancing loans which meet the criteria in Items I to 3 of this Circular, a bank may not require from its credit applicants, a statement of assets and liabilities, and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue, as prescribed under Section 40 of R.A. 8791.
6. Microfinance loans shall be considered compliance with required loans to small and medium enterprises required under R.A. 6977.
7. In view of the unique characteristics of microfinance loans, i.e., small unsecured and based on cash flow or borrowers, these loans may be exempted from rules and regulations which may be issued by the Monetary Board with respect to unsecured loans under Section 41 of the General Banking Law of 2000, provided that the bank has:
1. well-defined standards, credit policies and procedures for microfinance loans which are in conformity with microfinance international best practices;
2. specific measures to be undertaken to ensure collections such as close supervision of borrower's projects and operations; and
3. Loan Portfolio and Other Risk Assets Review System required under X302 of the Manual of Regulations for Banks which would serve as:
a. An adequate loan lacking system that allows daily monitoring of the status of loan releases, collection and arrearages, any restructuring or refinancing;
b. A regular monitoring of past due loans and portfolio at risk.
8. In the implementation of this Circular, banks should be guided by the attached Notes on Microfinance.
This Circular shall take effect immediately.
Adopted: 30 Jan. 2001
Governor
A. Definition of Microfinance
Microfinance is the provision of a broad range of financial services such as - deposits, loans, payment services, money transfers and insurance products - to poor and low-income households, for their microenterprises and small businesses, to enable them to raise their income levels and improve their living standards.
B. Core Principles for Microfinance
- The poor needs access to appropriate financial services
- The poor has the capability to repay loans, pay the real cost of loans and generate savings
- Microfinance is an effective tool for poverty alleviation
- Microfinance institutions must aim to provide financial services to an increasing number of disadvantaged people
- Microfinance can and should be undertaken on a sustainable basis
- Microfinance NIGOs and progam must develop performance standards that will help define and govern the microfinance industry toward greater reach and sustainability
- The poor has the capability to repay loans, pay the real cost of loans and generate savings
- Microfinance is an effective tool for poverty alleviation
- Microfinance institutions must aim to provide financial services to an increasing number of disadvantaged people
- Microfinance can and should be undertaken on a sustainable basis
- Microfinance NIGOs and progam must develop performance standards that will help define and govern the microfinance industry toward greater reach and sustainability
Characteristics and Features of Microfinance
Characteristics |
Distinguishing Features |
Type of client |
- Low income |
- Employment in informal sector; low wage bracket |
|
- Lack of physical collateral |
|
- Closely interlinked household/business activities |
|
Lending Technology |
- Prompt approval and disbursement of micro loans |
- Lack of extensive loan records |
|
- Collateral substitutes; group-based guarantees |
|
- Conditional access to further micro-credits |
|
- Information-intensive character-based lending linked to cash flow analysis and group-based borrower selection |
|
Loan Portfolio |
- Highly volatile |
- Risk heavily dependent on portfolio management skills |
|
Organizational Ideology |
- Remote from/non-dependent on government |
- Cost recovery objective vs. profit maximizing |
|
Institutional Structure |
- Decentralized |
- Insufficient external control and regulation |
|
- Capital base is quasi-equity (grants, soft loans) |
C. Definition of Microfinance Loans
Microfinancing loans are small loans granted to the basic sectors, on the basis of the borrower's cash flow and other loans granted to the poor and low-income households for their microenterprises and small businesses to enable them to raise their income levels and improve their living standards. These loans are typically unsecured but may also be secured in some cases.
D. Level of Microfinance Loan
Average microfinance loan of an NGO microfinance institution or of a cooperative bank or credit union in the Philippine case is about P25,000 (from a low of P2.000 to P5.000). To be realistic, the maximum principal amount of a microfinance loan can be pegged at P150,000. This is equivalent to the maximum capitalization of a microenterprise under R.A. 8425.
E. Collaterallzation of Microfinance Loan
A microfinance borrower is not likely to be able to borrow from a large commercial, thrift or rural bank but from an NGO microfinance institution or perhaps from a small rural or cooperative bank. Thus, microfinance loans are typically unsecured, for relatively short periods of time {180 days) with monthly (or more frequent) amortizations of interest and principal, and often featuring a joint and several guarantee of one or more persons and, certainly, seldom with tangible collateral. But in some cases, they can also be secured, depending on the capacity of the borrower to offer collaterals acceptable to the lending institution.
F Interest on Microfinance Loans
Old Approach
The old (and by now highly discredited as ineffective) approach to loans for low-income borrowers emphasized subsidized interest rates. It did not recognize that subsidized below-market interest rates do not necessarily result in opening up access to financial services for low-income households and microenterprises.
New Approach
The new approach which has been demonstrated by global experience is characterized by a market-based interest rate regime which permits the institution providing microfinance services to cover administrative costs, provisions for loan losses and intermediation/funding costs. This basis is consistent with financially sustainable rural finance and microfinance. Invariably, the global experience continues to validate the proposition that what matters most to the poor and undeserved segments is access to financial services rather than their interest rate cost - most especially because microenterprise and small business borrowers will take a microfinance loan whose repayment periods match the additional cash flows they hope to generate.
Therefore, interest on such microfinancing loans shall be reasonable but shall not be tower than the prevailing market rates. This is to enable the lending institution not only to recover the financial and operational costs incidental to this type of microfinance lending but also to realize some bottom line gains.
G. Segments of Demand for Micro-credit
1. The landless who are engaged in agricultural work on a seasonal basis and manual laborers in forestry, mining, household industries, construction and transport; requires credit for consumption needs and also for acquiring small productive assets, such as livestock.
2. Small and marginal farmers, rural artisans, weavers and those self-employed in the urban informal sector as hawkers, vendors and workers in household micro-enterprises: requires credit for working capital, including a small part for consumption needs. This segment largely comprises the poor but not the poorest.
3. Medium farmers/small entrepreneurs who have gone in for commercial crops and others engaged in dairy, poultry . . . Among non-farm activities, this segment includes those in villages and slums engaged in processing or manufacturing activity. These persons live barely above the poverty line and also suffer from inadequate access to formal credit.