FROM THE MARGINS
Once touted as something of a miracle cure for global poverty, microfinance used to be a high-profile and generously-funded development intervention. In recent years, however, support for the sector has dwindled, with development finance institutions moving on to new disruptive business models of impact investment. Financial inclusion became the new headline, with donors in search of the leading edge of innovation and impact.
Does microfinance still matter? The answer is a resounding yes!
The National Strategy for Financial Inclusion (NSFI) 2022-2028 increases focus and support to the microfinance sector as integral to the government’s approach toward a more financially-included and empowered citizenry. Just last week, Finance Secretary Benjamin Diokno announced that the Marcos administration is pushing digitalization to broaden financial inclusion and improve tax administration. He reiterated plans to onboard 70 percent of the adult population to the formal financial system by 2023, a goal set during his stint as BSP governor. When the NSFI was launched last March, he explained that supporting the digital transformation and capacity-building of microfinance institutions (MFIs) is crucial to financial inclusion because a strong and technology-driven microfinance sector can provide safe and innovative financial products to its clients.
These are welcome developments. After all, microfinance pioneered the transformative vision of making financial services accessible to sectors not served by traditional banking institutions. While fintechs have facilitated financial inclusion, there is still a digital divide that deprives the poor of much-needed services financial and otherwise.
Microfinance revisited
Essentially, microfinance involves providing loans, credit, access to savings account, insurance policies and money transfers to segments of the population that are not served or are underserved by formal banking institutions.The financially excluded do not have access to accounts, thus, they are unable to get loans, insurance, and financial support for their microenterprises.
Microfinance is a way to provide poor people, small businesses, and the informal sector access to capital. MFIs provide small loans and other resources to small business owners to help them get their businesses off the ground. They also allow poor families and micro-entrepreneurs to have savings accounts with no minimum balance. MFIs also offer microinsurance to provide borrowers with insurance with simple documentary requirements, lower premiums and faster claims payment.
Why is microfinance important?
Microfinance is important because it provides resources and capital to the poor and those in the informal economy. Without microfinance, these groups will be forced to resort to moneylenders with exorbitant interest rates. Microfinance helps them invest in micro-enterprises, generating jobs and incomes. It also enables them to prepare for unforeseen risks and future needs.
MFIs do not simply provide funds, as microfinance clients are usually the poor and marginalized, who suffer different forms of deprivation. MFIs provide them not only financial products, but access to livelihood training, health and other social services. Credit discipline and financial literacy training are usually required, with clients given courses on bookkeeping and basic enterprise management. This is to ensure not just loan repayment, but the success of clients’ micro-enterprises.
Unlike traditional financial institutions, MFIs foster close relationships with clients beyond good customer service. During the pandemic, for instance, MFIs had to monitor their members’ family situations and how they were coping. They had to extend relief measures, because if they did not, they literally would lose their clients, who are the most vulnerable segment of the population. This needs-based and client focused approach defines how most MFIs operate.
National Microfinance Week
In observance of the National Microfinance Week, the Microfinance Council of the Philippines (MCPI) will be holding its 2022 Annual Conference on Aug. 22-25. The MCPI has 66 member institutions with more than 10 million active clients and total portfolio of ₱70 billion. Its members account for 90 percent of the country’s microfinance industry.
The theme of the MCPI conference is "Microfinance: Thriving through uncertainties," reflective of the industry’s concern about how service providers are thriving amid the pandemic, economic shocks, natural disasters, and other challenges.
Last mile conduit
Even as the financial ecosystem is increasingly digitalizing, microfinance remains a crucial economic conduit that facilitates inclusive finance.
Microfinance ensures that those who are marginalized even by the digital revolution are served, although there are still challenges. By operating in far-flung rural areas, microfinance opens new frontiers. MFIs pave the way for other financial players — including government regulators — to come in. They facilitate the entry of other providers, sharing the benefit of their "investments" — from data, to social capital, client training, and operational learnings.
MFIs serve populations that traditional financial institutions have little or no incentive to target. Microfinance bridges the gap between big banks and the microenterpreneur, the poor, the less educated, the informal workers and others who are financially excluded. MFIs also pursue innovations in back-end operations, paving the way for automated financial management systems, credit scoring and alternative delivery mechanisms. While not a panacea, microfinance is an important aspect of social and financial inclusion.
“Microfinance recognizes that poor people are remarkable reservoirs of energy and knowledge, posing an untapped opportunity to create markets, bring people in from the margins and give them the tools with which to help themselves.” — Kofi Annan
(Dr. Jaime Aristotle B. Alip is a poverty eradication advocate. He is the founder of the Center for Agriculture and Rural Development Mutually Reinforcing Institutions (CARD MRI), a group of 23 organizations that provide social development services to eight million economically-disadvantaged Filipinos and insure more than 27 million nationwide.)