FROM THE MARGINS
Most of us are familiar with loan sharks or “5-6” informal lenders that the poor resort to because they have limited access to finance. Traditional financial institutions usually consider the poor risky borrowers, possessing neither the credit score nor the collateral needed to secure their loans. Unfortunately, borrowing from loan sharks only pushes poor people deeper into poverty.
Luckily, microfinance institutions (MFIs) offer alternatives that allow low-income groups to take on small loans safely, in manner that is consistent with ethical lending principles. Microfinance is mainstreamed into the Philippine banking sector. We have a dynamic industry with a growing number of providers, products, outreach and delivery channels, so I am often asked why many of our MFIs have very high repayment rates and very low portfolios-at-risk (PARs).
So what is the key to our robust microfinance industry? What makes our MFIs successful?
A conducive policy environment plays a big role, but these common practices of the most successful MFIs in in the country provide useful reference points:
- Focus on the poor. MFIs go to areas where they are needed. Their account officers (AOs) visit low-income communities and identify potential clients by looking at the houses. The poorest of the poor usually live in shanties – makeshift houses with coconut leaf roofs, bamboo slats and earthen floors. AOs engage prospective clients to find out their living standards, number of children, education, livelihood, among others. This strategy is what we call targeting and motivating the poor. Poor people are often reluctant to join microfinance programs, conditioned to believe that without collateral, they could not get loans. They are wary and risk-averse. Through the AOs, MFIs reach out, explain their products/services and build relationships with these clients.
- Targeting women. MFIs target women as clients because from experience, we know that loans given to women always benefit the family. The income from their enterprises goes to food, clothing, children’s education, house repairs, and family support. Women, especially mothers, want to break the inter-generational poverty cycle and that, to me, is the essence of development. Men share this tendency, but not to the same extent and not in all cases. We have observed that sometimes, men spend their income on entertainment and vices rather than prioritizing family.
- Small loans, small repayments. Unlike commercial financial institutions, MFIs do not just focus on repayment but on growing clients’ enterprises through trainings on financial literacy, credit discipline, cash flow management, and others. MFI clients usually start with small loans (₱3,000 to ₱5,000) for their sari-sari stores, handicrafts-making, food-vending, vegetable gardening, animal raising and other microenterprises. Amortizations are affordable, paid weekly in small installments. Loans are amortized over 25 weeks or 50 weeks. Clients are also encouraged to save small amounts weekly.
The poor value accessibility more than the cost of the loan. They have difficulty meeting banks’ credit requirements while informal lenders take advantage of their situation. MFIs (unlike moneylenders) offer affordable and reasonable interest rates, allowing them to recover their operating costs and attain sustainability. Their clients easily manage small loan payments. Completing one loan cycle gives poor women little wins that boost their confidence in running microenterprises. When they succeed in the first cycle, the MFIs provide higher loans in the next cycles so they can expand their businesses.
- Respecting, empowering clients. Recognizing clients’ dignity and innate capacity is important. Poor women are shy and self-effacing; often saying that they do not know anything about business. But through what we call the “recall technique,” skills learned from their childhood come out. Girls from poor families are usually the ones helping their mothers/grandmothers/aunts do handicrafts, weave, prepare food and other activities. These flashes of childhood memories help them realize that they possess skills that they can capitalize on. I recall that in Samar, some women told me that they were illiterate and knew nothing. But through the recall technique, they remembered long-learned knowledge that enabled them to successfully run enterprises that revived traditional foods like moron (steamed sticky rice with chocolate), tahong (mussel) chips, fermented products from oysters, and other delicacies.
Poor women may not be able to read or write, but they are very literate when it comes to numbers. In my earlier years as a young practitioner, I attended a center meeting in Mindoro where one member who could not read nor write immediately corrected her AO when she saw her inadvertently writing ₱10 on her passbook when she was actually depositing ₱100. These women manage their families’ budgets so they are wise. Never ever underestimate them.
There are other best practices that I will discuss in the next article. Let me just say that given MFIs’ proven capacity to lift people out of poverty, I hope more support for microfinance will be forthcoming. “I believe in microfinance because it isn’t just a path out of poverty. It’s the road to self-reliance.” — Queen Rania of Jordan
(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.)