Microfinance gains ground

BY MIA FRANCES AGCAOILI and JACKSON UBIAS

Microfinance gains ground

When the poor and the underserved need to borrow money, they often turn to informal lenders who slap them with exorbitant interest rates.

As an alternative, microfinance is starting to get noticed. Aside from the poor and low-income earners, small household-based entrepreneurs have begun to tap microfinance to cover the short-term needs of their enterprises.

Unknown to many, the Philippines has actually had a longer history of microfinance. More than 400 years ago, the Spanish colonizers granted some form of loans to local farmers to prop up production of exportable goods such as tobacco.

The American colonizers also provided similar lending programs to support various social and economic goals

Direct credit programs such as these were formally institutionalized in the country in the 1970s via government-subsidized loans to the poor. Serious loan recovery problems, however, led to the decline of the program in the mid-1980s.

The subsidies were also cornered mostly by the more affluent borrowers, thereby defeating the purpose of targeting poor and deserving recipients. Still, it was not totally stamped out, and it persisted even through the 1990s.

These days, the government is not the only source of microfinance. Rural cooperative banks, non-government organizations, and credit unions or cooperatives all provide some form of micro-lending programs.

This is perhaps inspired by the success of Grameen Bank in Bangladesh, which underscores the capacity of microfinance to help the poor progress out of poverty.
Still, microfinance is not a cure-all approach to poverty.

In fact, even if it aims to target the less privileged, beneficiaries still have to satisfy certain criteria. The entrepreneurial poor, for example, will need to demonstrate adequately their capacity in managing a successful business.
Ultimately, and just like the bigger, more established lending channels, the success of microfinance depends on ensuring that the loans it gives out are also repaid.
The market for such loans exists and, unfortunately, persists in the Philippines.
Data from the 2006 Family Income and Expenditure Survey showed that about 33% of Filipinos (or about 27% of households) live under poverty. In addition, over 40% of families in rural areas in the country are poor.

There clearly is much room for microfinance to serve the rural poor, but its success entails significant risks or even prerequisites. The productivity of these potential beneficiaries are highly dependent on agriculture.

Unless support infrastructure such as irrigation and farm-to-market roads are provided adequately, their incomes, and thus capacities to repay their loans, will remain impaired.

That is, microfinance and infrastructure can result in increased agricultural production and productivity, and one without the other seems inadequate in addressing rural poverty.

At any rate, it may take some time before the country reaps the full rewards of microfinance. As it is, microfinance appears to be a short-term strategy to address poverty.

What it needs are complementary strategies -- specifically, those aimed at improving the capacities of beneficiaries to earn incomes and repay their obligations -- to ensure its effectiveness and sustainability in the long run.

The Institute for Development and Econometric Analysis, Inc. (IDEA) is an economic think-tank based in the University of the Philippines - Diliman. For inquiries on IDEA, please contact Eduard Robleza at edjrobleza@idea.org.ph

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